Is the Colombian cannabis industry leading Latin America, or just leading investors on a wild goose chase?

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Every Colombian cannabis company attempts to impress investors and journalists with bombastic rhetoric, claiming to have the largest swath of hectares, the largest amount of registered strains, the highest quality cannabis, the ear of the government, and charitable or social justice initiatives aligned with millennial values.

The reality is most Colombian-based cannabis companies are still struggling to find their footing while being built out and many are making misleading claims in the cannabis space.

Taking the example of Khiron Life Sciences Corp (TVE: KHRN) (OTCMKTS: KHRNF), which positions itself as ahead of its pack of competitors merely due to the fact it already has a CBD-based cosmeceutical (skincare) line called Khiron Kuida available at select retailers. Farmatodo, provides premium product placement on retail drugstore shelves in Bogota, Colombia, alongside globally recognized skincare brands such as Neutrogena.

According to the company's CEO, Alvaro Torres, the CBD contained in the company's skincare line is imported from Europe, not produced at Khiron's local facilities.

Khiron's President Chris Naprawa says the company's "skin creams contain enough CBD to be effective. It's not how much is in there, it's how much is absorbed. And, we can make product claims re: hydration and anti-inflammatory." 

Sources familiar with the products claim the CBD content (at the time of testing in January 2019) was very close to zero. 

The author inspecting a marijuana grow facility in Latin America

Sara Brittany Somerset inspects the Khiron greenhouse in Ibague, Colombia on Feb, 21, 2019. (Image Source: Sara Brittany Somerset)

CBD Skincare Raises Eyebrows

However, considering CBD in skincare only passes through superficial layers of skin, its therapeutic value is limited to anti-bacterial. CBD skincare of this type is primarily a marketing tool, not an efficacious product in its own right. Putting a drop of CBD in just about anything will sell these days.

"You definitely need CBD in the product to be efficacious. And more than nearly nothing," said Zoe Sigman, researcher at think tank Project CBD. "CBD binds to TRPV1 receptors, which capsaicin also activates. Its activation can have anti-inflammatory and painkilling effects. There's also some evidence to suggest that CBD binds to some other TRP receptors involved in regulating the life cycle of the cells. So CBD can be effective for some things applied topically."

(Pharmacies in Colombia sell consumer health products containing CBD, but not any CBD-specific oils to date.)

Consumers who purchase regulated products like cosmetics, foods, and drugs are entitled to a certain level of supply chain transparency, including, at a minimum, product ingredients and labeling accuracy. Various agencies are specifically responsible for protecting customers and their purchases; for example, in the U.S., the Food and Drug Administration is responsible for ensuring that products meet specific quality standards and labeling requirements, while the Federal Trade Commission is responsible for making sure advertisements are not dangerously misleading.

The dangers of unregulated products is that these standards either aren't required or aren't properly enforced, which leaves millions of consumers without basic protections and vulnerable to misleading claims and inaccurate labels. Industries aren't allowed to self-regulate for a reason; there has to be a checks and balances system put in place to ensure that customers get what they pay for.

In Colombia, this responsibility belongs to Instituto Nacional de Vigilancia de Medicamentos y Alimentos (INVIMA). Meanwhile, the Colombian government has yet to allow for cannabis exports except for research and development purposes into Canada. 

Avicanna (TSE: AVCN) CEO Aras Azadian said it also recently attained import permits into Chile and Canada.

"They key however is to first register the cultivars, which only three companies have done so far," said Azadian. 

The use of locally cultivated cannabis products within the country's borders is not allowed either -- which is convenient for the Colombian cannabis companies for now, as they are scrambling to play catch up, build out their facilities, and raise a viable cannabis crop, while the government takes its time implementing regulation and a working framework or export cap. 

"As with any national government, there is a careful path undertaken with deep scrutiny of every step. We certainly would like to see everything move more quickly on both the domestic and international level, as it would clarify the needs of the import markets essential to operators like us," said David Gordon, Chief Corporate Officer of PharmaCielo (OTCMKTS: PHCEF). 

PharmaCielo's co-founder and former CEO of Colombian operations, Federico Cock-Correa brought more than 30 years of experience in the cut flower industry in Colombia. In that space, he also developed natural extracts from the flower sector used in a variety of areas, including, most importantly, natural pest deterrents. He decided to turn his chrysanthemum farm into a cannabis farm when the cut flower export market faced an economic downturn. 

However, he soon discovered, ironically, that growing weed is not as easy as growing flowers. He then brought in outside cultivars, who focus on different aspects of cultivation -- such as horticultural expertise in the development of new strains through day-to-day cultivation.

As of Monday, Cock-Correa is moving away from day-to-day operations to focus on market development and regulatory relations, while the company appointed a new COO for Colombian operations: Andres Botero.

Talk to any CEO of any Colombian-based cannabis company (nearly all male) and they'll be quick to shoot down or eviscerate their competitors including political opponents -- oblivious to how this weakens their position. Taking the high road seems to be mostly lost on representatives of Colombian cannabis companies.

Whether it is PharmaCielo, Clever Leaves, or another budding Colombian-based cannabis company, representatives boast about how many hectares of land they have. However, only a small fraction -- minuscule by California production standards-- of that land is currently being utilized for growing plants in pots in tarp-covered greenhouses, rather than acres of sun-grown outdoor cannabis. 

Cannabis cannot be planted in the ground in certain areas because parts of Colombia contain soil contaminated with heavy metals due to decades of guerrilla warfare. Planting hemp would go a long way toward replenishing and purifying the soil if it were planted solely for that purpose rather than for an immediate profit margin or photo op for investors. However, Colombian cannabis companies would have to be willing to play the long game to benefit their environment and its inhabitants, rather than focusing primarily on the rat race to claim the title of dominating the industry in Colombia. 

After touring several Colombian licensed producers' facilities, at first glance, Avicanna, which is based in Santa Marta, appears to be the most accomplished facility in terms of growth and production. This is partially due to its master cultivators, Sergio Puerta, Carlos Vives Jr., and José Rafael López. Puerta has decades of experience growing cannabis while Rafael is from Santa Marta and has experience in seed production and breeding. 

Another company, Clever Leaves, rescinded an invitation to tour its facility while sending another journalist unauthenticated renderings of the facility in lieu of genuine photographs. Although, these practices are not unique to this cannabis company. Companies that are trying to "fake it until they make it," are damaging the reputation of the cannabis industry.

While Khiron was the first-to-market with a cosmeceutical skincare line, Avicanna is also in the process of developing a nutraceutical line, called Pura Earth. The company is part of Johnson & Johnson's (NYSE:JNJ) Jlabs life science incubator. 

Avicanna started trading on Thursday of last week at $8, then fell approximately 35% on the first day after a former board member sold stock. The stock recuperated to $15 and is now trading at $6.15. Most of that is related to the initial drop and the fact that Canadian markets are not doing well so far this year. Perhaps the company revalued its assets at a more realistic valuation of $140 million instead of $170 million. 

While Khiron is already publicly traded, construction on its facilities were temporarily stalled several months ago due to a lack of access to safe banking. They were unable to receive funds earmarked for construction from their Canadian investors when they ran out of money, according to a source on-site at the facility in Ibague, in February. 

Despite the logistical hiccup, the company announced on June 4 the completion of construction at their Ibague facilities. 

Presidential Pot?

Enter Vicente Fox: Khiron welcomed the former president of Mexico, Vicente Fox Quesada to its board of directors, effective July 17, 2018. Fox serves as a strategic advisor and brand ambassador for the company. 

Fox, who was CEO of Coca-Cola Latin America (NYSE:KO), prior to being Mexico's 55th president, is experiencing a career resurgence as a cannabis brand ambassador and legalization advocate. He's in favor of decriminalizing all drugs, a purview shared by the current UN Secretary-General, Antonio Guterres. 

Fox raised quite a few eyebrows when he joined the Board of stoner culture company High Times. Critics opined it was beneath the dignity of a former President to align himself with the brand. Fox seems to have leveled up by representing Khiron and admits with a wry smile "both companies have their uses," during an interview alongside a Khiron-hosted brunch for current and potential investors, in Toronto, Canada. 

In addition to Fox hawking Khiron, Panama-based venture capitalist Raymond Harari, who founded cannabis advisory company and merchant bank Canalis Capital, is a Khiron investor. Harari is a young, keen, and early investor and advisor of the highly curated Canadian cannabis accouterment retailers Tokyo Smoke. Incidentally, the chain was acquired by Canopy Growth (NYSE:CGC) under the stewardship of former Co-CEO Bruce Linton, who was abruptly terminated, rumored partly due to his unbridled acquisition spree.

Harari is a former deputy director at the Chamber of Commerce, Industry and Agriculture of Panama. He's humble and deliberately less high profile than his Colombian counterparts; however, he is still "fiercely competitive" by his own admission. He quickly differentiates his personal investment into Khiron from his family's investments. He candidly admits he has not seen the facilities in Colombia, but he believes they are fully operational (despite the lab, cannabis sorting and curing stations and outbuildings being under construction in February) and places his faith in Khiron President Naprawa, who is a former banker at Sprott Capital Partners, when the private equity firm led one of Avicanna's rounds.

"Naprawa was the lead banker on one of Avicanna's financings for Sprott. He quit the investment bank to take on the role of president of Khiron during Avicanna's financing. Quite unethical, especially with access to Khiron's internal information," said a source with knowledge of the deal. "However, Avicanna completed its raise and is now listing on the TSX as a pharma issuer." 

While Khiron has mature and healthy plants, unsurprisingly, an Avicanna employee disputes Naprawa's claims that Khiron's facility "is producing." 

Forward looking statements to attract investors are the name of the game in the cannabis sector. 

As a former banker turned investor and entrepreneur, through a serendipitous early investment in the cannabis space, Harari is quite passionate about Khiron.

"I look to surround myself with unique and outstanding people, who share my vision of making a positive impact in the world," he said in a phone interview. "Since my first cannabis investment in 2016, I have made investments in 10+ businesses in the space. I also advise multiple companies." 

According to Latin American expert journalist Javier Hasse, other large, publicly traded companies including Aphria (NYSE:APHA), Wayland Group Corp (OTCMKTS: MRRCF), Chemesis International Inc (OTCMKTS: CADMF), Cronos Group (NASDAQ:CRON), and Aurora Cannabis (NYSE:ACB) have also made multi-million dollar investments in the country. Colombian cannabis company Spectrum sold to Canopy Growth.

Despite Harari's warm-hearted enthusiasm for Khiron, cannabis cognoscenti cautiously continue to evaluate whether Colombia's cannabis industry is disruptive, productive or just braggadocious. Therefore, investors who want to play it safe should keep a closely conservative eye on Colombia. Riskier investors may want to bet on the potential for Colombia's cannabis companies to produce low-cost Active Pharmaceutical Ingredients (APIs).

Despite all the macho posturing and competitive backstabbing, the fruits of Colombian's other flower industry remain to be seen. 

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