Here's what marijuana stocks must do to sell pot from Colombia

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As more investors in marijuana stocks turn to Latin America, Colombia has churned out more than 200 cultivation licenses to marijuana companies doing business there. But those companies need to make their way through a labyrinthine approval process before they can legally sell any product domestically or abroad.

After that, the process of actually exporting cannabis requires a lot of changes to meet requirements of regulators and authorities on both ends of the deal, and even the airline flying the products itself.

Big Canadian pot producers like Canopy Growth (CGC), Tilray (TLRY) and Aurora Cannabis (ACB) have scattered their investments across Colombia and the rest of the region. Many marijuana companies there already have licenses for cultivation, processing or other activities. However, companies that want to grow and sell their own cannabis also have to get their strains registered by the government.

"It is not the same as having a license in Canada," Alfredo Pascual, international analyst at the industry publication Marijuana Business Daily, said in an interview. "Having a license in Colombia is like, 'OK, you're good to play the game now. But now comes the hard part.' "

License, Registration, Ph.D. Defense

Marijuana companies can pursue licensing and registration simultaneously. But to get a strain registered, those companies first have to register a seed bank, or, essentially, a collection of seeds. The company then selects a strain from that seed bank to go through a government review process. In that process the government evaluates whether a company can grow that strain consistently. It can take around six months.

"As one of my team members described it, it's like defending my Ph.D. thesis all over again," said David Gordon, chief corporate officer of PharmaCielo, a cannabis producer that operates in Colombia. "You had a stack of paper and six months' growing of each one. It had probably taken two or three years to develop each one."

If a company passes the government's review, it gets clearance to register the strain in a national database. Once a company registers a strain, following a few minor, administrative steps, it receives a resolution from regulators that permits them to grow and sell cannabis products based on that strain.

However, companies still have to follow a quota if they want to make and sell psychoactive cannabis products, defined as those that carry more than 1% THC. What's more, the retail framework for selling cannabis products still isn't fully defined.

Even though companies play up their licensing in news releases, as of Sept. 18 only eight marijuana companies operating in Colombia have strains registered, according to Colombian government data. Among those companies are PharmaCielo, Clever Leaves, Khiron Life Sciences and Santa Marta Golden Hemp, which is majority owned by Avicanna, headquartered in Canada.

'Biggest Hurdle' For Marijuana Stocks In Colombia

"It's the biggest hurdle by far to be a real player in the country," GMP Securities analyst Robert Fagan said of the requirements to get a business fully up and running. "The cost to get these licenses is meaningless. Once you're producing, there's thousands and thousands of hectares of available land that can be readily converted."

Colombia also mandates that any licensed cannabis business source at least 10% of its dried THC flower material, or dry buds, from small-to-midsize cultivators. That is, farms with up to half an hectare of land.

Colombia legalized cannabis partly to lift smaller farmers and indigenous communities out of the illegal drug market. That market had helped fund the nation's 50-year conflict between communist guerrillas and the government.

But materials from small cultivators don't always meet the standards required to sell in a region like the EU. That can make using those materials more complicated for bigger producers.

"I've heard companies saying to me one of the easiest things to do is to buy that 10% ... to comply with the law and burn it," Pascual said. "Because I don't have a headache if I do that."

Julian Wilches, Clever Leaves' co-founder and a onetime drug policy director with Colombia's justice ministry, said he'd never heard of that practice. PharmaCielo said it had heard "rumor" of it but would never do it itself. Avicanna did not respond to a request for comment.

Pascual also noted that Colombia's industry is young. Few companies are fully operating. Bringing smaller farmers into the fold could take time. But it's also not uncommon for speculators to swoop in and apply for licenses, then flip their company and that license to bigger investors for a quick buck, he said.

Acrobatics, Aerobatics To Export Cannabis

Clever Leaves in February said it received the OK to export cannabis into Canada from Colombia for scientific analysis. Wilches said that on Aug. 1, Clever Leaves had shipped hemp oil to the United Kingdom for commercial purposes. Also in August, PharmaCielo said it made its first commercial shipment of CBD to the Switzerland headquarters of Creso Pharma, a cannabis company. PharmaCielo agreed to acquire Creso in June.

But those shipments out of Colombia required some logistical acrobatics, executives say.

Wilches said they required assurances that Clever Leaves had the quality standards, compliance and production capacity to fly anything to another country at all. For its first export to the U.K.— part of a larger planned shipment of 5,000 small bottles of its hemp oil, in 10 to 30 milligram doses, boxed up and on pallets — it also required several months of meetings. Meetings took place with the minister of international trade, Colombia's tax authorities and narcotics police, with the airlines and police at the airport from which the airline would depart, he said.

Vacations, Layovers

Then, after all that effort, when the departure date arrived for its first shipment, the official in charge of the airport was on vacation, he said. While she was away, another senior official there told them he wouldn't sign off on the shipment unless trade authorities confirmed it had the right tax classification. So the company had to go back to the international trade ministry for confirmation, then back to the airport.

Wilches said that shipment to the U.K. had stopped in a different country on the way. He wouldn't disclose where. The airline, he said, wanted to keep a low profile.

"They don't want to have everybody knocking on the door asking for exports before knowing the clients," he said in a phone interview.

Wilches said Clever Leaves considers both direct flights and flights with layovers for exports. "In any case, we have opted for airlines with experience in the transportation of controlled substances and we transport in compliance with applicable law," he said over email.

EU Certification

For the shipment to Canada, Clever Leaves flew its cannabis over on a single plane, Kyle Detwiler, CEO of Northern Swan Holdings, said earlier this year. Northern Swan is a majority owner of Clever Leaves.

Detwiler declined to offer further details. But he likened the task to shipping a substance like morphine. He said there are different protocols for cargo manifests, and plans to be ironed out with customs and regulators.

Gordon said PharmaCielo sent its CBD over to Switzerland via plane as well. Switzerland permits the purchase of some low-THC products. But he also said flight arrangements were far more complicated than expected.

"They had to determine, 'What is the shipping route?'" Gordon said. "Does it ship through a country that accepts the legality, if you will, of the product or not?"

To sell in the EU, any facilities producing cannabis need certification that it meets the bloc's standards for so-called good manufacturing practices. Only a handful of marijuana companies are able to do that right now.

Marijuana Stocks Give Peace A Chance

Meanwhile, Colombia's peace process, Pascual said, was still very much a process. Both sides of the former war vs. insurgents accuse the other of failing to stick to the agreement. The ELN guerrilla group is still active in the nation. FARC laid down their weapons following the 2016 peace deal. But a former leader late last month issued a call to return to arms.

Some observers downplayed the provocation, saying most FARC soldiers are abiding by the peace agreement. Others say investors might not consider some pockets of the nation safe for investment. As with the U.S. — where the illicit market and a cash-based legal market present their own risks — security is essential. The Colombian government requires the cannabis industry to keep security tight at facilities, Gordon said.

At PharmaCielo's plant nursery, security officers inspect vehicles on the way in and the way out. The perimeter is fenced and monitored by staff around the clock. The facility has a drone, which Gordon said was not a routine part, but still a part, of surveillance.

"It gets used," Gordon said, adding: "It's in the tool kit."

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