The COVID-19 pandemic was catastrophic to some industries, but it didn’t slow growth in the legal US cannabis market, according to a new report by BDSA. The Colorado-based cannabis research firm showed 46% growth in marijuana sales from $12.1 billion in 2019 to a record $17.5 billion in 2020. Thanks in part to the outset of new “Cannabis 2.0” laws going into effect late in 2019, sales in Canada grew +61% year-over-year to $2.6 billion.
With the Democrats taking control of the White House and Congress in the November elections, chatter is growing louder about the potential for federal legalization of marijuana, which could blow the lid off the market. In a recent press release, Allied Corp. (OTCQB: ALID) provided a succinct overview of active action on Capitol Hill today that could catalyze the market by ending cannabis prohibition.
Many consumers are already transitioning to approved retail locations instead of the black market, which remains the biggest obstacle to legal businesses because of significantly lower prices. For instance, in Q4 2019, the price of a gram a legal marijuana in Canada was CAD$10.30 compared to CAD$5.73 from illicit sources. A -40-50% savings could be typical in the US, according to a recent Bangor Daily News article that showed the average price for standard-grade recreational marijuana of $440 per ounce (28.3 grams = $15.54/gram) versus $230 ($8.10/gram) on the black market.
Most legal supply chains have squeezed margins exponentially to try and lure in more consumers with the promise of high-quality product with proven safety profiles. During Q2 of Fiscal 2021 ended December 31, 2020, Aurora Cannabis (TSX: ACB)(NYSE: ACB) reported an average net selling price of dried cannabis at CA$4.00 per gram, up from CA$3.72 in Q1, but down from CA$4.69 a year earlier.
Cannabis companies are going to constantly be challenged by the black market that doesn’t have to abide by important or stringent government safety and health regulations.
For Allied Corp. (OTCQB: ALID), the key to success lies in using a tried-and-true business model to dramatically reduce production costs. In the way that Starbucks (NASDAQ: SBUX) relies upon Colombia for coffee beans because of the ideal climate, Allied has set up shop for its supply chain much in the same way as Starbucks.
Colombia provides a year-round harvest, 70% humidity, 25°C (77°F) average temperature, 12 hours of sun each day and all the necessary infrastructure for a country with a deep understanding of the agriculture market. In other words, a perfect environment to grow cannabis at scale, not much unlike growing coffee. This is the perfect environment.
Allied Colombia Facility; Source: ALID Corp.
Allied has quietly spent years completing all the necessary work to move into the revenue stage from its Colombian operations where it is licensed to produce, extract, import/export psychoactive and non-psychoactive (CBD) cannabis. Mother plant and vegetative greenhouses are complete, and one hectare of outdoor production space is fully engaged on a weekly rolling harvest model. Expanding to three hectares will be completed by the end of Q2 and 10 hectares by the end of Q3.
The first harvest was completed in July 2020 for Ministry of Agriculture approval, which was granted in October. Most recently, Allied Colombia SAS received approval from the Colombian Institute of Agriculture (ICA) for the cultivation of 10 of its proprietary psychoactive cannabis strains in a controlled environment. Allied will now apply for a psychoactive export quota under the Colombian regime.
Production costs are just $0.05-$0.10 per gram, giving Allied a huge competitive edge over nearly all peers. In its investigation of the entire cannabis growing market, Statista found the absolute cheapest cultivation method in the US was outdoor growing at a median average cost of US$100 per pound (453.6 grams), or US$0.22 per gram. Obviously, the US climate isn’t ideal or supportive of rolling, year-round harvests, like Colombia either.
There is a big difference between South American production costs of just US$0.05 - 0.10 per gram VS US$0.22 cents found elsewhere in North America. This is an enormous cost advantage for Allied and its customers.
In Canada, the average cost for a gram of legal cannabis is about CA$1.52. This Canadian price per gram average is extremely high. The future of cannabis production costs will be measured on a worldwide basis moving forward...
“Many companies thought about Colombia, but we were a first mover and one of the only companies that took all the necessary steps in a lengthy process to make it happen,” said Allied CEO Calum Hughes in a phone conversation with Baystreet.ca. “As such, we now find ourselves in a very enviable position to be disruptive with pricing, while still offering extremely high-quality cannabis.”
Considering the psychoactive seed evaluation approval process alone takes in excess of one year, this presents a barrier to entry for other companies trying to jump into this supply chain. In fact, getting the approvals in the fashion Allied did is a monumental accomplishment, as explained by Dr. Joanna Dossmann, Head of Agronomy and Genetics at Allied:
“In all of my years of experience working in the field of agronomy and plant genetics with many different seed families, this is the first time that I have seen 10 strains approved out of the 10 strains that were submitted. Having done this twice is just an astonishing record. To the best of my knowledge, our team is the first to attain such a record in their careers.”
Allied Shareholders Are Ready to Embark on a Significant Journey
The US is hands down the largest cannabis market in the world at $17.5 billion. Demand is robust, to say the least. Allied has been aligning to address this market opportunity for its entire portfolio of cannabinoid and psilocybin health and wellness applications with an initial focus on PTSD (post-traumatic stress disorder), depression and anxiety. Psilocybin is the active ingredient in “magic” mushrooms leading a renaissance in psychedelic research.
In both fields, Allied is fully integrated across the value chain with expertise in cultivation, processing, R&D and distribution. The company is an anomaly as a pure play with near-term and long-term revenue opportunities in both cannabis and psilocybin.
In the case of its Tactical Relief, Equilibrium and MaXXa brands, “near-term” revenue is effectively “now.” The Tactical Relief™ product, Liberty, is a CBD-based PTSD product made by veterans for veterans, test-marketed positively in 2019/2020 and began booking revenue in Q4 both through direct sales and also via a distribution partner, Hollister Biosciences. Sales of Equilibrium, a CBD-based recovery brand for athletes and veterans has recently been initiated. After a year-long pause owing to the coronavirus pandemic, Allied is ready to move forward again with MaXXa, a CBD-infused cosmetics line for sale in Asia, with revenue expected to commence again in the coming months.
The company also has Bud’s Pure Naturals, a catalogue of nine cannabinoid-based natural health products already registered with Health Canada it intends to sell upon being awarded the requisite licensing.
On Tuesday, Allied (OTCQB: ALID) met a milestone towards selling cannabinoid (CBD) products in the US Executing on a letter of intent signed in February, Allied’s wholly owned subsidiary Tactical Relief, LLC has signed a 25-year land lease in the Las Vegas area.
The land will become home to a 9,000 square foot GMP-compliant facility that Allied spent $3.5 million and 18 months on building in a Las Vegas construction facility. The purpose-built facility includes space for cannabis cultivation, R&D and large-scale product packaging and fulfillment. Part of the building is dedicated to storing imported Colombian produced medical products for fulfillment into the US.
The company plans to penetrate multiple states, but is focused first on the Las Vegas area and its 40+ million annual visitors.
Furthermore, another of Allied’s subsidiaries, Allied US Products LLC, entered into an asset purchase agreement for the purchase of a Nevada State US-based cannabis license. This is a huge value add to Allied because Nevada is no longer issuing any new cannabis licenses and it is part-and-parcel to an American footprint for Allied’s international vertically integrated supply chain.
Rounding out the recent big developments, Allied US Products LLC signed a master services agreement with a Nevada registered company that has the required licenses to operate the new facility and will manage all activities that involve touching the plant. The new partner will take care of operating and managing the new facility and equipment, along with performing all cannabis cultivation, production, sales and distribution activities.
As a public company, finding a qualified partner to take care of operations involving touching the plant puts the onus of following all applicable laws and regulations on the partner, a significant de-risking factor.
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