International Cannabis Corporation (ICC.V) (“ICC”) maneuvered to get into the Canadian market when the company announced today that it had entered into an importation agreement with Avanti Rx Analytics, a licensed dealer under the Controlled Drugs and Substances Act (Canada).
According to the news release, the agreement creates a non-exclusive business relationship where Avanti will act as the import agent for ICC for its cannabis products and distributor to customers identified by ICC from time to time.
Avanti has also agreed to act as a Health Canada GMP approved contract analytical lab in Canada for ICC’s CBD oil.
The agreement is still subject to regulatory approval from the TSX Venture Exchange, the the Instituto de Regulación y Control del Cannabis (“IRCCA”), the Uruguayan Ministry of Livestock, Agriculture and Fishery and Health Canada.
Guillermo Delmonte, ICC Chief Executive Officer, commented on the deal, “We are pleased to enter into the Importation Agreement with Avanti with a view to working together to provide Canadians with a broader supply of cannabidiol (‘CBD’) oil and cannabis extract oils, and other related products from our Uruguayan operations at competitive price points.”
He went on, “In addition, Avanti brings to the table extensive knowledge and expertise in the field of quality control, cannabis extraction, and CBD purification. The business relationship with Avanti is expected to allow ICC to leverage Avanti’s dealer license and laboratory facilities in order to facilitate sales in Canada, and represents a positive next step in ICC’s strategy to export to global markets where lawful.”
ICC became the talk of the town back in November 2016 when the company went public on the TSX Venture Exchange.
The company was operating in Uruguay and was the first licensed producer in South America to hit the Exchange. In fact, it had 100 kilograms of the leafy stuff all ready to go and fully expected it would begin sales in Uruguay’s recreational marijuana market.
ICC had worked hard and taken advantage of available cheap labour to produce cannabis for about $0.60 per gram, which it thought it could produce for less once it invested in expanding its facilities and infrastructure.
It was fully intended for ICC to become a dominant player in the South American market and with its first mover advantage, it would become the defacto supplier of recreational marijuana, hemp products and CBD-based products for the region. From there, the world!
Unfortunately, this is where the wheels start to come off this ride.
First off, the company is producing and selling in Uruguay. We’ve all dreamed about leaving the rat race, taking our savings and living like royalty in a beautiful, but economically less fortunate country. Most of us sober up when we realize it’s a one-way ticket, because there’s no way to make enough money in paradise to return to our first world life.
As of 2016, Uruguay had a population of approximately 3.4 million. Recent findings put the number of regular marijuana users in Uruguay at 150,000. The State of Washington determined that the average pot user in the state smoked approximately 123 joints per year. A joint is about half a gram, so that’s 61.5 grams. At 52 weeks a year, that’s a little over a gram a week per user.
Taking that into account, Uruguay has the potential for an annual $11.99 million-dollar domestic market under the country’s $1.30 per gram ceiling. Remember that it costs ICC $0.60 per gram to produce, then you have to work in the cut pharmacies will take when selling it to their customers as they are the only sanctioned outlets for marijuana in Uruguay.
For the sake of argument, let’s just say the pharmacies take $0.20 per gram as their piece. That leaves ICC with a gross profit of $9.59 million if they capture the entire market – which isn’t going to happen. Then you have taxes and any other costs that weren’t included in the production estimate.
Here’s a further problem, as of July 2016, only 16 out of 1,200 pharmacies have signed onto the government weed dispensary program. Pharmacists are afraid of upsetting customers who do not support the movement, but many more are terrified of being killed for their inventory.
So, it is of little surprise that ICC’s inventory continues to sit. Uruguay is NOT a sustainable market presently and it will be some time before it can organize the infrastructure necessary to make its legalization more than just a political promise.
This, all by itself, knocks the wind out of ICC’s sails. The company has a $145.0 million-dollar market cap and it maybe has the ability to pull in $9.0 million dollars in gross profit per year in Uruguay if the sector ever gets off the ground. Where is the value in this?
Okay, ICC has sensed that the water is hot and is trying to get out of the tub. This is evidenced by the importation deal with Avanti Rx Analytics. However, this isn’t the home run the company would have you believe it is.
Let’s just go through the press release dated April 18, 2017.
Everything sounds amazing if all you read is Delmonte’s quote, but it’s the paragraph afterward that tells the real story. Let’s do this in three parts:
Part 1
“The Importation Agreement establishes a non-exclusive contractual business relationship between ICC and Avanti where Avanti agrees to act as a Canadian importing agent for ICC for its cannabis products and distributor to customers identified by ICC from time to time.”
The relationship isn’t exclusive. What this means to me is that neither company values the transaction enough to make it exclusive. If you read carefully, Avanti has only agreed to act as an importing agent for ICC, they aren’t selling it. ICC with all its North American connections, please note a sarcastic tone, is going to develop a sales network that will have its product sailing out the door.
Which brings us to Part 2…
“Avanti has also agreed to act as a Health Canada GMP approved contract analytical lab in Canada for ICC’s CBD oil.”
ICC still has to get Health Canada to approve its product for sale in Canada. The regulatory framework for cultivating and selling marijuana in Uruguay isn’t like what it is in Canada. Just getting the product to Canada, doesn’t mean it will be approved for sale.
Then there’s Part 3.
“The activities contemplated by the Importation Agreement remain subject to applicable regulatory approvals, including those from the TSX Venture Exchange, the Instituto de Regulación y Control del Cannabis (“IRCCA”), the Uruguayan Ministry of Livestock, Agriculture and Fishery and Health Canada.”
All of this still has to be approved as a deal. The exchanges I’m not too worried about, but the governmental regulatory bodies could throw a massive wrench into the works.
Okay, you can say the MOU with Emblem Corp (EMC.V) is the driver in this company’s worth, but this isn’t definitive. From what I can see, Emblem has no commitment here. ICC has to come up with the CBD oil and then sell a 10% taster of its inventory to Emblem in 2018 at what is most likely going to be an unprofitable price.
And that’s only if Emblem needs it. There are so many domestic LPs and late-stage applicants across North America that I can pretty well guarantee product won’t be a problem. Nobody is going to Uruguay for their weed supply unless they live in Uruguay.
ICC is smoke and mirrors at this point, and not the good kind of smoke. Its valuation is wildly distorted and sector driven.
Now, the company has settled itself in Uruguay and as first mover, it may just dominate the Uruguayan market. Then, if the company can spread across South America, it will justify its current market cap, but as it stands, ICC is a paper tiger and on the verge of imploding. I wouldn’t go near it until SP matches performance.
–Gaalen Engen
http://twitter.com/gaalenengen
FULL DISCLOSURE: International Cannabis Corporation is NOT an EQUITY.GURU client.