CannTrust Establishes U.S. Operations

Published: June 20, 2019

CannTrust Establishes U.S. Operations

CannTrust Holdings Inc., a federally regulated licensed producer, announced has established operations in the U.S., starting in the State of California. CannTrust has signed a non-binding letter of intent (“LOI”) that will provide access to over 3,000 acres of farmland for hemp production with Elk Grove Farming Company, a diversified farming company with operations in the State of California, to secure low-cost hemp with high cannabidiol (“CBD”) content. CannTrust and Elk Grove will each have 50% ownership of a new entity (the “Joint Venture”).

The opportunity in the U.S. for CannTrust is to become a trusted supplier of consistent, standardized and high-quality hemp-derived CBD formulations at scale. The Company believes there will be increasing demand for hemp-derived CBD formulations from international retailers and product manufacturers, and those organizations require expertise in genetics and value-add processing to ensure products are desirable and meet the highest safety standards.

CannTrust will guarantee the off-take of biomass produced by the Joint Venture, and will use its expertise to process, formulate and sell hemp-derived CBD products in U.S. markets where such sales are lawful. As an experienced operator meeting rigorous regulatory standards, CannTrust is well positioned to execute on this cultivation, processing and formulation strategy with the goal of becoming a leading supplier of hemp-derived CBD products in the U.S.

“This agreement represents another bold move for CannTrust. Our U.S. operation is expected to deliver a significant increase in low-cost production capacity, which will leverage our expertise in standardized CBD-based product formulation, and will give the Company a foothold in the largest international CBD market in the world with an experienced and knowledgeable partner,” said Peter Aceto, Chief Executive Officer. “Following our successful equity offering, we have the liquidity we need to fund our ambitious growth plans including our greenhouse expansion in Niagara, our outdoor cultivation operation in British Columbia, our global footprint expansion and now our U.S. operation. We continue to focus on delivering on our vision of becoming a global provider of innovative cannabis-based and hemp-derived products.”

Elk Grove has multi-generational experience in farming across a wide variety of commodities and value-added expertise in leading crop protection products, application and input supply with operations throughout the State of California. The team at Elk Grove specializes in consulting on agricultural development and has unique knowledge of farming in California, one of the most prolific agricultural regions in the world.

“We are thrilled to be partnering with CannTrust. Our knowledge of farming operations in California coupled with CannTrust’s expertise in developing award-winning formulations is the perfect match to become a trusted supplier of CBD products in the U.S,” said Morgan Houchin of Elk Grove Farming Company, LLC.

CannTrust U.S. Operations
This initiative is the first step in CannTrust’s development of full-scale U.S. operations. Upon establishment of the Joint Venture in California, CannTrust will have secured a long-term source of significant supply of low-cost industrial hemp from a trusted and proven partner. Prior to commercial scale cultivation from the Joint Venture in 2020, the Company plans to execute on (1) its processing strategy from the biomass produced from the Joint Venture, and (2) its product development strategy.

CannTrust is well positioned to use extracted product from its U.S. operations in proprietary products that have already been developed and that are ready for commercial production (e.g., CannTrust’s patented single-serve beverage pods), products currently under development with existing partners, and in formulations required by future partners.

Investment in the U.S. operation is expected to be up to $20 million through to the end of 2020. This capital investment includes the Company’s share of cultivation, harvest and post-harvest processing for the Joint Venture, as well as extraction and processing investments that will be funded by CannTrust. This level of capital investment assumes starting with up to 300 acres for cultivation in 2020.

Details of the LOI
The Joint Venture will secure a long-term lease for over 3,000 acres of farmland designated for hemp production in Southern California, which is currently wholly-owned by the Houchin family or through partnership investment. CannTrust will provide its expertise in grow methodology, drying techniques, and experience in extraction, as well as provide genetics that are legal under state and federal law. Elk Grove will lead operations, farm management services, packaging and transportation, and provide suitable land area and warehouse space for drying and value-added handling of the hemp biomass produced.

Both parties will provide equal contribution of capital to finance operations of the Joint Venture, including capital investments, operating expenditures and working capital. All profits will be distributed based on ownership percentage of the Joint Venture.

Upon execution of a binding agreement, commercial operation of the Joint Venture is targeted to begin in 2020, subject to local regulatory approval.

Regulatory Framework
The California Industrial Hemp Farming Act became effective in January 2017. The federal Agricultural Improvement Act of 2018 became effective January 2019, removing hemp from Schedule I of the Federal Controlled Substances Act, thereby removing industrial hemp, which is defined as having less than 0.3% THC content, as a federally regulated controlled substance.

In the State of California, growers of industrial hemp for commercial purposes must register with the county agricultural commissioner prior to cultivation; there is currently no state registration required to grow industrial hemp.

CannTrust, Elk Grove and the Joint Venture intend to develop its cultivation and processing operations according to both federal and state laws.

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