Complete Guide To The Cannabis Industry #2: Production Capacity … – Seeking Alpha

All amounts in C$ unless otherwise noted.

Welcome to Part II of our Cannabis Series. In Part I of the Series – Product Cost, we compared cash cost and all-in cost among the top 4 largest publicly traded cannabis companies in Canada. We found that Aphria (OTCQB:APHQF) is the lowest cost producer while Aurora (OTCQX:ACBFF) has the highest cash cost among the top 4 producers. In Part II of the series, we will continue our discussion using same 4 companies to understand how companies report capacity and implications for investing in the sector. Before we dive in, let’s understand why production capacity matters:

Currently, there is a strong indication that most companies are valued and traded based on capacity, rather than cash flow or earnings. One possible explanation is that because of the upcoming legalization in Canada and investors focusing on market potential rather than current earnings, which are purely based on medical marijuana market (“MMJ”), a much smaller market compared to the recreational market (“RMJ”) Licensed capacity determines a company’s ability to expand and represents a significant barrier of entry. Applicants have to commit significant resources in order to pass a stringent set of rules and reviews before receiving a licence from Health Canada to produce and sell marijuana Licensing Process Overview

In Canada, to become a licensed producer of marijuana, the applicant must go through a stringent set of rules, coupled with lengthy reviews and inspections. The current application process involves the following steps:

Intake and Initial Screening Detailed Review and Initiation of Security Clearance Process Issuance of Licence to Produce Introductory Inspection (as cultivation begins) Pre-Sales Inspection Issuance of Licence to Sell

According to Health Canada, as of May 2017 (most recent data), only 25% of the applications remain in progress with the rest being refused, withdrawn

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