Labat Africa has entered into a partnership with California company Continental Extracts to set up a distillate extraction facility at Kenton-on-Sea in the Eastern Cape.  The JSE-listed company announced on SENS on 15 September 2022 that Continental would be the technical partner in establishing the facility at Labat’s Sweetwater Aquaponics cannabis farm.

The 50/50 joint venture will be between the group’s wholly-owned subsidiary, Labat Healthcare Propriety (LHP) and Continental Extracts, which is majority-owned by Caliboyz Holdings, a product development and facility design company based in California.

The JV will establish a “distillate extraction facility for Tetrahydrocannabinol
(known as THC) and other cannabinoids at the Sweet Waters facility in the Eastern Cape, according to the Sens report.

Continental will be responsible for 100% of the offtake agreement and will be the technical partner, “shipping all extraction equipment and machinery from California to South Africa, as its contribution to the JV on an exclusive basis. Staff from California will be relocated by Continental from California to set up and operate the facility.”

Labat says it hopes to start construction in November 2022. It says that at full capacity, the extraction facility will be capable of processing 50 000kg of dry cannabis flower per annum, making it one of South Africa’s largest licenced extractors.

While the paperwork is being tidied up, this is the deal landscape:

· Sweetwaters SAHPRA license has been amended to allow the JV to take it over (this was granted by SAHPRA in May 2022);

• Sweetwaters will provide the required working capital which will be reflected as a loan to the JV;

• The value of Continental’s equipment and machinery has been agreed on at R9 million and will be secured against Labat shares for three months after the JV begins;

• Sweet Waters will have the first right to supply the biomass for the JV, subject to competitive pricing;

• Sweet Waters will construct a Good Manufacturing Practices extraction laboratory on its land for use by the JV

• The JV will be liable to each party for its specific contributions;

“By enabling higher margins, new revenue channels and faster product development times, in-house extraction operations will likely fuel some of South Africa and Lesotho’s most successful Cannabis companies. Even still,cannabis extraction will play a crucial role in the coming years, especially as new cannabis opportunities continue to open up around the world” says Labat.

The Sens report says “Caliboyz holds 70% of Continental and is equally owned by MN Paruk, T Ki-Yun and TS Coyle. The balance of shares is held by Motion Assets, which is 100% owned by M Soni. “Continental and its shareholders are not related parties to Labat as defined in the JSE Listings Requirements”.

Labat says “a formal agreement will be concluded to give effect to the JV based on the signed term sheet. In addition, a Shareholders Agreement will also be concluded. The JV will set up a Board comprised of representatives from Continental and Sweet Waters, to manage and oversee the overall project. Once operational, Continental will execute a management contract with Newco for the day-to-day operations of the plant. The Shareholders Agreement will elaborate in detail the management obligations, roles, and responsibilities of the parties.”

It says” “the facility is designed to include Research and Development, processing, extraction, in-house testing, manufacturing, and order fulfillment and LHC expects that the plant should be completed by January 2023. This will provide LHC with ample time to refine its portfolio of Cannabis derivative products. The scope of the project will initially process up to 2 tons of biomass per month. The primary market will be exported through the JV under the existing Sweet Waters export license. The plant will be able to offer a variety of services to generate multiple revenue streams, including white labelling and contract manufacturing services for raw extract and distillation.”

The joint venture is categorised as a Category 2 transaction in accordance with the JSE Listings Requirements due to Labat having to initially secure the acquisition of the equipment and machinery for the JV.

Labat says it is cementing its position as a leader in the SA cannabis market as a vertically-integrated company. It says the pace of expansion does not seem to be slowing down.

“Not only did Labat close two of its acquisitions recently, namely Echo Life and Sweet Waters, but it also opened its first two corporate owned retail outlets in Ballito and Springs under the Cannafrica brand.”

Caliboyz product range will become available through Cannafrica.

Labat says “as previously announced, LHC has a secured offtake agreement with buyers in Australia and Europe, particularly Switzerland and Germany, for the supply of cannabis products. Since the dual listing of Labat in Frankfurt in December 2021, Labat has been regularly approached by brokers and international buyers of cannabis flower, for the supply of high-quality THC flower from South Africa.

“As per the standard Sweet Waters operating procedure, and in compliance to the SAHPRA
conventions for a licenced cultivation facility, Labat wishes to inform all shareholders that the THC potency of the current Sweet Waters harvest is in excess of 26% as per the verified results of National Analytical Forensic Services (NAFS), *TM006.3 Test Method (Potency Cannabis HPLC). NAFS is a SAHPRA accredited testing facility. The test results are available on request from Mr David Roque at david@labathealthcare.co.za."

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