FSD Pharma Stock Appears to Have Enormous Potential

FSD Pharma Inc.’s (CSE:HUGE) mission is to transform a former Kraft food plant into the largest hydroponic indoor cannabis facility in the world

SmallCapPower | July 20, 2018: FSD Pharma Inc. (CSE:HUGE) is a cannabis company that holds a license to cultivate cannabis under Access to Cannabis for Medical Purposes Regulations (ACMPR) through its subsidiary FV Pharma Inc. Headquartered at the former Kraft plant in Cobourg, Ontario, the Company originally received its cultivation license on October 13, 2017. FSD Pharma Inc.’s mission is to transform the facility into the largest hydroponic indoor cannabis facility in the world. The Company aims to target all aspects of the cannabis industry – cultivation, processing, manufacturing, extracts and research and development.

FSD Pharma is not only planning to build the world’s largest hydroponic marijuana facility, it is also expected to enter into strategic partnerships with other companies to expand its business operations. The Company’s stock currently trades at a market capitalization of $224.3 million on the Canadian Securities Exchange (CSE). FSD Pharma’s valuation could rise, driven by the implementation of recreational marijuana in Canada by mid-October 2018.

Investment Thesis

  • Building the largest hydroponic indoor facility
  • Significant strategic alliances

Building the largest hydroponic indoor facility

FSD Pharma is transforming a large facility, formerly Kraft Foods’ plant, in Cobourg, Ontario, into what could be the largest hydroponic indoor cannabis production and processing facility in the world, with multiple business units co-supporting each other, operating under a single roof to exploit economies of scale and operational efficiencies. Being a former food-grade facility, the Cobourg plant could require less CAPEX than usual to convert it into a cannabis growing operation.

FSD Pharma’s JV partner, Auxly Cannabis Group (TSXV:XLY), formerly Cannabis Wheaton Income Corp., is retrofitting the facility. XLY is aiming to develop ~3.9 million square feet of cultivation space. Furthermore, Auxly agreed to provide operational advisory services, and will actively manage FV Pharma to ensure the project’s completion. The building has an on-site electrical substation that provides enough power for 9,000 1,000-watts grow bulbs, multiple natural gas lines, 26 loading docks and a 24-inch main sewage pipe.

The centralization of operations should result in greater economies of scale for FV Pharma with the leverage to reduce costs. The proximity to Toronto provides a location benefit that is another cost-saving advantage.

Significant strategic alliances

FSD Pharma has entered into strategic relationships with several cannabis companies for business growth. The relationships would be in the form of joint venture, strategic investment, or collaboration and profit-sharing agreement.

After acquiring the former Kraft (NASDAQ:KHC) production plant in Cobourg, Ontario, the Company is converting it for marijuana cultivation through its joint venture with Auxly Cannabis Group Inc. By joining forces with Auxly Cannabis, FSD Pharma aims to build the world’s largest hydroponic indoor growing operation. As part of the joint venture agreement, Auxly will design and develop all aspects of the facility in staged phases and will receive 49.9% of all cannabis produced at the facility. In a recent development, Auxly will contribute $55 million to build the first phase of the facility.

FSD Pharma made a strategic investment in High Tide Ventures, a privately-held, Alberta-based, fully integrated retail distribution company that has applied for 31 retail cannabis permits in Alberta and 16 in Saskatchewan, with its application expected to be submitted for British Columbia shortly.

High Tide owns Canada’s most prominent retail cannabis accessories brands – Famous Brandz, RGR Canada, Smoker’s Corner and Canna Cabana. These brands should take maximum advantage of the legalization of recreational cannabis in Canada.

At present, FV Pharma owns 25% of Cannara Biotech, which plans to be the largest indoor cultivation facility in Quebec and recently bought a modern 625,000 square feet facility on 27 acres of land, located near Montreal. Both FV Pharma and Cannara Biotech have signed a further agreement through which FV Pharma will lease over 105,000 square feet of Cannara’s facility for the purpose of cultivating and/or selling cannabis and cannabis-derived products. Currently, FV Pharma and Cannara Biotech have a combined floor space of over 1.245 million square feet of indoor growing capacity.

Through its strategic relationship with SciCann Therapeutics, FV Pharma will receive premium access to the cannabinoid scientific research platform developed by a Canadian-Israeli specialty pharmaceutical company in Israel, which includes a network of leading researchers, academic institutions and medical centers.

In a collaboration and profit-sharing agreement, FSD Pharma will help Canntab Therapeutics to get a license to process and sell cannabis products and will provide Canntab with space at its 620,000 square foot facility, which is located in Cobourg, Ontario. In consideration of FSD Pharma’s services, Canntab will grant FSD Pharma certain royalty and profit sharing rights in connection with the sale of the Canntab Products.

FSD Pharma is also set to purchase 51% of Atlantic Island Cannabis Inc. (to be renamed FSD Atlantic Pharma Inc.) via a strategic investment of $40 million to drive production and sales of legal cannabis in the province of Newfoundland. In the first phase of the project, an indoor, high-quality 45,000 square foot cannabis production facility will be set up in Freshwater, Carbonear, Newfoundland. In the second phase of the project, further expansion of the indoor grow facility up to approximately 300,000 square feet is planned.

The Company has tied up with First Republic Capital, which focuses on public Canadian and U.S. micro-cap companies, for exploring financing options as well as advisory on business and capital structure.

Outlook and Valuation

In terms of valuation, FSD Pharma trades at a market capitalization of $224.3 million. Ongoing construction of its large hydroponic cannabis facility and strategic alliances with other companies for business growth reflects positively on FSD Pharma. The real differentiator for FSD Pharma could be in its hydroponic growing operations. Hydroponic has been known for its faster growth rate and larger yields, with a lesser possibility of contaminants, such as insects, than has been experienced by soil growers. For the frequent recreational users, hydroponic-grown cannabis is preferred for its strength and quality as it is easier for the plant’s root to absorb nutrients through water alone than through soil mixed with water. FSD Pharma’s valuation could rise, driven by the implementation of recreational marijuana in Canada by mid-October 2018.

Disclosure: Neither the author nor his family own shares in the company mentioned above.

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