After a March 2 short-seller report sent shares of PharmaCielo Ltd. (TSX-V: PCLO) tanking for nearly two months, the valuation of Colombia’s largest cannabis grower rebounded 36 per cent this week as it posted promising fourth-quarter results.
On Thursday, the Toronto-headquartered company said it generated a modest $657K in revenues during Q4, which ranks low among Canada’s publicly-traded licensed producers.
But the parent company of PharmaCielo Colombia Holdings also reported an all-in production cost for dried cannabis of $0.04 per gram at its Colombian operations. That’s the lowest production cost recorded in the legal worldwide weed industry, according to the company.
“We have a unique and defensible position in bulk cultivation, processing and extraction,” CEO David Attard said on an investor call Thursday. “We have the international cost advantage for the production of top-quality medicinal cannabis extracts and a sales pipeline that we expect will drive significant growth this year.”
Attard said the last several months have been challenging overall for the cannabis sector, from a capital and stock market perspective. Making matters worse for PharmaCielo, the Hindenburg short-seller piece further damaged its share price. The company still faces multiple class-action lawsuits because of the claims made in the report.
We are short PharmaCielo: We see 100% Downside on Co-Founder’s History of Securities Fraud Allegations, Numerous Undisclosed Related Party Transactions and Operational Failureshttps://t.co/J28vEGkrU9$PCLO.CN / $PCLOF
— Hindenburg Research (@HindenburgRes) March 2, 2020
But after the company released an independent audit report in March refuting the numerous, damning claims — including the allegation of a self-enrichment scheme involving at least two of the company’s co-founders — Attard said PharmaCielo is moving into 2020 on solid footing.
While PharmaCielo booked a net loss of $8.4 million in Q4, and a net loss of $34.7 million in fiscal 2019, Attard said building their low-cost production in South America last year will pay off in 2020.
Robert Fagan, cannabis analyst with Stifel Financial Corp., asked executives if they expect to stay on track of reaching their goal of 2,500 kilograms of cannabis oil per month in the near term.
Attard noted how the COVID-19 pandemic is causing delays in equipment shipments from China, and the previously cited production target won’t likely materialize until June.
“Basically, the machines are just sitting in Colombian customs; they’ve just arrived today,” Attard told the analysts. “They’ll spend a couple of weeks getting cleared through customs.”
Once production is in full swing, Attard told the analysts production costs will be reduced to between $700 and $900 per kilogram of oil. According to a January report published by ASC Laboratory, a kilogram of CBD isolate oil has has a market value above $4,400.
Attard said the company is evolving its product strategy from mostly CBD isolate to include broad spectrum, full spectrum, and eventually water soluble products.
Turning low-cost cannabis production into global deals
The company said the key to 2020 is building more global sales relationships and generating revenue growth to match supply as production accelerates.
In January, the company signed a three-year deal to distribute CBD isolate across the European Union through GMP-certified lab owner, CBD Export Global, with a minimum target of 2,000 kilograms in the first year.
PharmaCielo then swung a larger three-year deal later in the month with XPhyto Therapeutics (CSE: XPHY). Attard said the 30,000-kilogram deal inside Germany’s medical cannabis market will start in the third quarter 2020.
For now, Attard said COVID-19 is disrupting the number of cargo flights leaving Colombia, which has impacted the company’s ability to send out sample products to prospective clients and generate new contracts. This issue has also hampered the company’s ability to fulfill order shipments, he added.
But Attard expects those issues will be resolved by the end of May and new contracts will follow in the coming months.
From a jurisdictional point of view, Europe remains the company’s top priority this year, followed by the U.S. And then Latin America.
“From our short-term perspective, countries like German are facing a shortage of narcotics in the COVID-19 environment, are looking at making it easier to import cannabinoids as a substitute where possible,” Attard noted.
While pain medicine shortages present a short-term catalyst for growth, Attard said the company is bullish long-term on getting more deals signed in Germany, which he calls the world’s third largest cannabis market behind the U.S. and Canada.
Brazil and Mexico could be growth catalysts
Stifel analyst Fagan asked if PharmaCielo is keeping an eye out for deals in Brazil and Mexico. That’s because the former just set up a regulated medical market last December, and the latter is looking to establish a legal framework for a recreational market this year.
“In Brazil, we are currently in discussions with some key partners obviously in that market,” Attard said. “Nothing firm yet, but we’re in constant conversations and we’re hoping to lock something down in the latter part of this year.”
While Attard expects to lock down a deal with a Brazilian partner in the third quarter, he said COVID-19 slowed down legalization in Mexico last month to likely Q4 of this year.
The company has a 50/50 joint venture with Mino Labs, a Mexico City-based pharmaceutical distributor, which it plans on using to sell cannabis oil inside the country once it legalizes.
To further boost global deals, Attard told analysts on the call the PharmaCielo’s goal is to be GMP compliant by Q3 at its Colombian operations, and get certification by Q4. The next step is EU-GMP certification by 2021, he added.
In the meantime, PharmCielo said they closed a financing deal of approximately $8 million to ensure they have enough capital to get us through COVID-19. Currently, extraction facility workers are staying home until shelter-in-place orders are lifted by the Colombian government, Attard said.
At the end of the fourth quarter, the company held $13.7 million in cash and cash equivalents.
For CFO Scott Laitinen, once the company is running at full capacity and more deals come in, the low-cost production means becoming cash flow positive is a realistic goal in 2020.
“It really doesn’t take a massive amount of quarterly revenue to turn this business profitable as well as cash flow positive,” Laitinen told analysts.
Attard added that PharmaCielo has positioned themselves towards a level of commercial production where they will become EBITDA positive by year end.
Top image via PharmaCielo