I have been touring businesses for 30 plus years. I have been through several very advanced vehicle assembly facilities. Dr. Michael Ravensdale, VP of Operations and Quality, took Cyto and myself on a 3.5 hour tour. I have never had a 3.5 hour plant tour, EVER! And it flew by.

Michael is a rare dude. PhD in Plant Pathology from University of Dundee who also spent a couple of years options trading. To have financial chops in the space he fills can only be seen as a benefit. TRST is about halfway through the retrofit of a previous flower GH in Niagara. Margins on those flowers were a VERY lean 3%. They kept a handful of Balfour Flowers employees that knew the facilities and knew the intricacies of optimizing the operation.

Their original operation is in Vaughan. An indoor grow that produces an industry leading 350 grams/sq ft (range from 300-400 grams/sq ft). 10,000 sqft Grow with 2,000 sqft vegetation. Vaughan is also where their oil production presently resides. Given they are also an industry leader in oil in the sales mix, we will certainly take them up on the invitation to tour Vaughan at a later date. The Niagara facility was 8 months into the retrofit at $85/sq ft, security included, when they started planting in Oct/17 in Phase 1. Phase 1 is cultivating and was harvesting when we were there. But they are waiting on sales license from HC and a few more Grow rooms still have to come online. Phase 1 is 170,000 sq ft of grow plus the 80,000 sq ft “backbone” of supporting infrastructure.

Phase 2 is slated to come on in Oct 2018. This will also have a co-Gen station to help reduce energy costs. Phase 2 is 180,000 sq ft of grow, bringing the all in to 430,000 sq ft. Michael brought up an interesting point when we were discussing the “arms race” currently underway. That being, GH contractors in Canada are stretched to the limit, and to expect many of the target dates (that all seem to be before the magical 18 month target of supply-demand equilibrium) to slip. While we toured the GH, TRST also has within the fence line and camera/security footprint a sizeable 50,000 sq ft plot to build a vineyard sized grow should Health Canada allow that box to be checked. They also have a 12-acre cherry orchard that could be developed. Cyto and Michael talked about the need to develop seeds and plant structure (think the shape of a harvestable plant) to make a field crop harvestable by traditional mechanized harvest equipment. The time frame for development is 3-5 years.

TRST is hoping that the industry develops standards such that they can comfortably purchase cannabis for their extraction requirements from other producers. Michael spoke of using an ethanol based extractor for Niagara as possibility to an additional CO2 extractor to complement existing supercritical CO2 at Vaughan, as the product flows (versus being like solid pellets) more easily into next stage processes. Extraction technology presently available is such that you might purchase extractors to “make do” for a year or so before settling into the right technology in the future: No need to purchase a “NASA Space Station” when you don’t need it and it might not be the best throughput technology. CannTrust has scaled technologies already in use, so they will “make do” while the scaled technologies are adapted and mature. We also briefly spoke of Apotex relationship. This allows Apotex to develop formulations, using TRST cannabis, and share profits with TRST for non ACMPR (think exports) transactions. And where ACMPR, TRST would process and share with Apotex. (I am hoping to peel this onion further in dialogue with their c-suite.) One thing I look for when touring facility is the interaction between the person giving tour and the facility staff. I was not disappointed as Michael interacted with the staff of the facility very comfortably. Good teams are important, especially in growth companies.

TRST has some 200 employees with 60 at Niagara and are growing 5-6 per week. Michael could only remember one Niagara employee not working out and being let go. Cameron, his operations manager, is a lurker on TheCannalysts, which speaks to his good judgement. Brady, in charge of the Grow, also interacted well with his team. A total of 20,000 plants were initially shipped in four loads from Vaughan to kick start Niagara, and full scale harvests have been completed. Vaughan used to produce a greater number of strains (circa Q1 2016) but they have reduced that to their best 5. They also produce 3 oil types and two milled flower products. When 60% plus of your sales is coming from three standardized Oil products… that’s where gross margins and EBITDA come from. Mothers give up 35+ clippings a week. 2500 cuttings a week are produced from the Niagara Moms. They then grade the cuttings and only use the best. If they need 2300 clippings the rest are destroyed. Very Darwinian. We observed the Moms and the Veg rooms from the doorway. Some plants in early veg are under domes while some are wrapped.

And we went deep into the flower room to observe the ease of which the container benches move along the rail system. A double lattice support with a heavy trim promote air flow and avoid micro climates. And did the plants ever smell good.

At Niagara:

Cutting to clone: 7 – 10 days

Clone to starter: 4 – 5 weeks

Starter to flower: 8 – 10 weeks

Harvest to dry: 7 – 10 days

QC: 3 – 5 days

At Vaughan:

Bulk to finished product package: 2-3 days

QC: 1 – 2 weeks

Michael is shooting for 175 grams/sq ft from this facility. He seems pretty confidant (so it may be more). Now I’ll turn it over to someone that speaks Michael’s language… for the deep dive part of the tour.

Cyto… do your thing.

Cultivation of cannabis on an industrial scale is challenging due to the lack of reference. Cannabis is different from other plants, providing a unique challenge to companies when building their growth models. Canntrust has overcome this obstacle by building a team of people from a wide range of backgrounds. By valuing the unique perspective of each employee, they’re able to see, account for, and fix seemingly mundane inefficiencies in cultivating and processing cannabis. By offering share-based compensation to employees and contractors, everyone benefits as the company grows. Throughout the tour it became apparent that Canntrust has built their facilities with two concepts at the forefront. The first is sustainability; the second is uniform plant growth.

Sustainability refers to Canntrust cutting input costs of growth through logistical considerations. A spring-fed water supply onsite provides water to grow their cannabis, with fertilizer leachate being recycled and reused. They pump the carbon dioxide exhaust from one process into their greenhouses for a free gas supply that increases plant yields. Sunny Niagara provides ample free light for your greenhouses. Contamination is minimized by having the plants move around on moving container benches. One cycle of plants is grown from cuttings to harvest on benches, with benches being washed between cycles in a dedicated, semi-automated sanitation bay. Using moving container benches reduces the onsite cleaning in each greenhouse and limits the places biological contamination can hide and grow.

Growing every single plant in a large greenhouse in uniform conditions is easier said than done. Canntrust has taken several steps to ensure every square foot of grow space will have the same tight range of humidity, temperature, light and air flow within the same greenhouse. They’ve built layers of redundancy in several of their systems to prevent crop loss if one of their environmental regulatory processes fail. They use rockwool media fed liquid by tubes for growing plants, allowing for nutrients and water to be kept within a controlled range during different stages in the grow process. Sensors in the liquid within the rockwool media enable real time tracking of nutrient and water uptake by the plant and automated changes in nutrient ratios, something that cannot be replicated in soil. However, the growing medium is not as forgiving as soil, and as such, Canntrust must control the process even tighter using their analytics based approach gleaned through their experiences in Vaughan. This assault on inefficiency has them shooting for 5 or more turns a year from Niagara with weekly rolling harvest. Canntrust has chosen to use a drying process that preserves of the wonderful range of terpenes we smell in dried cannabis. Terpenes are volatile, if you use heat in the drying process the terpenes are released during the process. By using salt desiccation with circulating cool air, the cannabis dries with the terpenes preserved within. When you pinch cannabis you want a fresh waft of terpenes to excite your mind. Using heat to dry cannabis gives it a distinct hay smell.

Canntrust’s impressive QoQ growth in oil sales provides an opportunity to evaluate a hypothetical scenario. If Canntrust dedicated their new greenhouse to oil production to meet the ever-growing demand, how much oil could that facility produce? Some assumptions will be made and pointed out so you can recalculate in any way. For example, we’re assuming the infrastructure and logistics would have been developed to handle the flow-through from plant to oil at maximum capacity. We will be using phase 2 grow space for this hypothetical scenario. ⅔ of Canntrust’s sales are CBD oil ⅓ are THC oil, we are assuming the production of only their two single-cannabinoid dominant oils. Their hybrid oil contains exactly 25 mg/mL of cannabinoids instead of their other oils which contain 25 mg/mL of the major cannabinoid in addition to the minor cannabinoid listed.

Phase 1 Grow Space: 170,000 sqft

Phase 2 Grow Space: 180,000 sqft

Yield: 0.175 kg/sqft/year

Since we only want the most THC or CBD, we’re assuming only 2 of Canntrust’s strains will be grown: Cannatonic (24% CBD, <2% THC) and OG Kush (22% THC, 0.9% CBD). The following will give us an approx 34% THC and 66% CBD production by mass of each cannabinoid.

Cannatonic: 115,000 sqft

OG Kush: 65,000 sqft

Cannatonic produced per year = (115,000 sqft)(0.175 kg/sqft/year) = 20,125 kg/year

OG Kush produced per year = (65,000 sqft)(0.175 kg/sqft/year) = 11,375 kg/year

Canntrust currently extracts cannabinoids using supercritical CO2 with 90% extraction efficiency. We will be assuming their post-extraction purification has a 95% extraction efficiency.

Total extraction efficiency = (0.9)(0.95) = 0.855

Mass of CBD extract = (20,125 kg/year)(24% CBD)(0.855) = 4,129.65 kg/year CBD

Mass of THC extract = (11,375 kg/year)(22% THC)(0.855) = 2,139.64 kg/year THC

Total mass of cannabinoids = 6,269.29 kg/year of major cannabinoids

At 1g of major cannabinoids per bottle, that’s 6,269,290 bottles of oil produced a year. At the current $90 price tag, this scenario would gross ~$564.2 million a year.

In closing… Blue…

Community, touring this facility reminded me of the Toyota Production System. Lean manufacturing, repeatable processes, and a facility so sparklingly clean you could eat off the floors. Michael even spoke in Six Sigma and kaizen terms, and they are heavy into analytics to optimize cultivation…. that is music to these ears. This type of approach on cultivation is imperative to gross margin contribution and EBITDA, as well as properly staged growth. If you do not track it and cannot measure it… how do you improve it??

Canntrust under promises and over delivers, which in an industry with so much present hype and froth, should be refreshing to the educated investor.

We’d like to thank Canntrust for welcoming TheCannalysts to their new greenhouse.

A CytochromeP and GoBlue joint.