Anthony Durkacz has a unique perspective on Canada’s emerging cannabis industry. Through his First Republic Capital, he has financed FSD Pharma (C.HUGE), Canntab Therapeutics (C.PILL), Cannara Biotech (C.LOVE) and, now, World-Class Extractions (C.PUMP). In each case Durkacz has been looking for business models which go well beyond the simple cultivation of cannabis.
“A lot of people were counting on the end of prohibition to lead to a boom,” said Durkacz. “However, for the licenced product, the recreational market missed expectations. It really didn’t set a precedent for success. In fact, one brokerage is reporting that recreational sales actually shrank between January and February.”
Those following the cannabis story are not surprised. The federal government, through Health Canada, has been very slow on the licencing front and this has led to shortages of licenced cannabis. The fact that edibles – which make up nearly 50% of the cannabis market in the US – are not even legal as yet in Canada has also hurt the regulated market. Plus, the price and quality of what is being referred to as “government pot” are not meeting customer expectations. Add to that the federal government’s prohibition of any sort of “branding” and the reluctance of police forces to shut down grey and black market pot operations and it is no wonder that the Canadian recreational cannabis sector is off to a slow start.
“All of this has led to an industry rethink,” said Durkacz. “Now you have to focus on margin. The price of cannabis will go down so you need to really pay attention to generating the highest revenue and focus on costs.”
In all of Durkacz’s cannabis ventures, there is an emphasis on adding top line value and scale.
“You’ll have boutique growers. The equivalent of fine wine,” said Durkacz. “But what about box wine?”
Getting the product mix right and, most importantly, being able to scale has driven companies like FSD Pharma. “Our theory is that you have to go big and you have to have consistent above average quality.”
It is a theory which has also driven World-Class Extractions.
“In the black market, the extraction business was tiny,” said Durkacz. “In the legal business, it is going to be huge. With hemp for example, now that it’s legal in the USA, you will need the capacity to process 1,000 to 10,000 kilograms per day, not per year.”
To make edibles, pharma and vap oil products you need to extract the active ingredients from cannabis reliably, consistently and at scale. Which is important as those products, when they are legal, are likely to make up a huge fraction of the cannabis market and, perhaps more critically, the most valuable segment of that market. While people are price sensitive in the smokable flower end of the market, they are much less concerned with price when it comes to edibles, pharma or vape juice. Which means that, if you can control the costs of the input cannabis and the costs of the extraction process, you are able to increase the margins for these cannabis products.
“With World-Class Extractions, we wanted to have large scale, ideally mobile, extraction technology more or less immediately,” said Durkacz.
Which explains World-Class Extraction’s merger with Quadron Cannatech (C.QCC) announced April 16.
“Quadron already has excellent extraction technology with excellent operators,” said Durkacz. “They have a CO2 driven, turn key machine they call “The Boss” which is fully operational and has been sold to cannabis producers. And they are working on “The Beast” which is a much larger extraction system in line with the focus on scale of World-Class.”
“Quadron has a lot of operating experience in the extraction business,” said Durkacz. “Experience in large scale extraction is something which is difficult to find in the cannabis industry generally and it is very valuable. At the same time, Quadron had limited marketing and finance experience which is where World-Class comes in. It is a perfect marriage.”
Quadron also has a key asset in its CEO, Rosy Mondin. “Rosy has a very good reputation in the cannabis industry,” said Durkacz. “Very good at operations and structuring agreements and very much the sort of CEO I look for.”
Under the terms of the merger, Ms. Mondin will become CEO of the combined companies which will trade under the name World-Class Extractions. In the press release announcing the merger, Ms. Mondin states, “There is no doubt that the extraction and processing of cannabis oils will become an incredibly important facet of the overall cannabis industry. By bringing together Quadron and World Class, two complementary businesses, we are creating a stronger enterprise to achieve long-term growth and value creation for our shareholders. Strengthing production and operations as key competitive factors and enhancing our prospects to innovate and lead, we are tightly aligned in our goal of becoming a global leader in the emerging, and rapidly growing, cannabis oils market.”
“Acquiring Quadron catapults World-Class Extraction’s growth plans and pushes us way up the learning curve,” said Durkacz.
In fact, by bringing in Quadron’s technology, experience and executive team, Durkacz has positioned PUMP as the premier Canadian cannabis extraction company just in time to ramp up for the expected October 2019 legalization of edibles in Canada.