The flood of mining companies petitioning Health Canada for a license has petered down to a trickle in recent weeks after Canadian Securities Administors issued a warning to investors questioning the ability of the would-be licensed producers to legally produce a single plant. Since the issuance of a grand total of 12 licenses in 2014, the process appears to have come to a grinding halt, and no more licenses appear to be forthcoming in the immediate term.
What does this mean for investors left holding the empty baggie?
As usual, it comes down to supply and demand.
On the demand side, the requirement for licensed medical marijuana users in Canada to source their bud from Marihuana for Medical Purposes-licensed producers has hit a snag with the granting by Judge Manson in the Supreme Court of Canada of an ‘interlocutory injunction’ to a group of plaintiffs. The plaintiffs argued that they would not be able to afford medical marijuana from licensed producers, who were expecting an average price of between $8 and $12 per gram.
At this point, those who were licensed to grow under the precursor to the Marijuana for Medical Purposes, the Medical Marihuana Access Regulations, can still grow their own, or have someone grow it for them.
On the supply side, there has yet to materialize any evidence to suggest that the 12 currently producing licensees are facing anything resembling a shortage. And in terms of demand from investors for medical marijuana companies who are actually growing and shipping medical marijuana, there remains but one choice.
Tweed Marijuana Inc (TSX:TWD)’s valuation seems to be holding steady in the $100 – 120 million range, which would be a reflection as much of its last financing price ($3.20 a share) as the fact that it remains the country’s only publicly traded licensed marijuana grower. The financial statements released by the company for its first quarter of 2014 ended March 31 reported no revenue as they hadn’t shipped any marijuana at that point, so we still don’t know whether or not the company is actually making money.
The company paid $3.6 million in total cash plus half a million shares for a 350,000 square foot facility in Niagara-on-the-Lake, Ontario in the second quarter, so that will certainly negatively impact 2nd quarter results. The acquisition consists of the building plus a ‘license application in progress’, which is a ballsy move on the company’s part.
Mettrum, another licensed producer, is now in the process of becoming pubic by way of a reverse takeover into Capital Pool Company Cinaport Acquisition Corp. (TSXV: CPQ.H), concurrently with a $35 million financing.
And eagerly anticipated Bedrocan Canada should soon be publicly traded. Bedrocan is a Canadian subsidiary of Bedrocan based in the Netherlands, who is the only company that legally ships marijuana for medical use across international borders.
The raft of CSE, TSX Venture and OTC companies who are cashed up but license-free have more or less reached a point of zombie-ism as they can’t move one way or the other without the prized licenses.
Ivan Ross Vrána, principle of Aslan Ross Consulting and a former Health Canada consultant who now assists would-be growers through the license application process, doesn’t think there will be any movement on licenses before the end of summer, as according to him the government ‘shuts down for the summer’.
And there is growing reason to believe there may be no more licenses issued until the outcome of Health Canada’s appeal of the injunction allowing the licensed users of medical marijuana in Canada to continue growing it themselves or having someone grow it for them.
Health Canada Appeal of the ‘Allard Decision’
At this point, it seems likely resumption of the issuance of licenses to marijuana producers in Canada will not likely resume until the outcome of Health Canada’s appeal of what has come to be known as the ‘Allard Decision’ is heard on Februrary 23rd, 2015. I imagine it will likely be up to another 3 months before a judgement is rendered, at which time, assuming the court rejects the plaintiff’s claims and enshrines the MMPR as law, licensing for medical marijuana facilities might resume.
This adds an extra layer of nervousness for investors who bought into the myriad mining companies who are/were ‘in the final stages of the licensing process’. Between now and March 2015 is a lot of G&A to be asking investors to finance.
For many companies, this means they will have to go back to the markets to raise more money before they find out if they’re going to be one of the few lucky companies from the still more than 450 in process seeking to become licensed producers.
The rationale in assuming no further licenses will be granted until after the appeal stems from the idea of the exposure to liability that might arise should Health Canada continue to issue licenses before it can determined that the right of licensed users to grow at home can legally be subordinated to the requirement for them to source their weed from LP’s.
While it is true that there may be challenges and lawsuits mounted by unlicensed applicants seeking to mitigate investor losses, the numbers of publicly traded entities in Canada at one point or another in the application process is still under 100. If they were to start issuing licenses while the uncertainty of the court case remains, exposure to litigation would likely be enhanced.
Government Victory Not Assured
While Health Canada has launched an appeal arguing that Judge Manson acted improperly in granting an appeal to the plaintiffs, whose original complaints stemmed from the added expense of buying marijuana from government licensed growers which they would not be able to afford (citing, as their cost of production at home, a rate of $0.50 per gram versus $8 – 12 per gram targeted by licensed growers), the plaintiffs have also filed a ‘cross-appeal’.
The cross-appeal seeks generally to strengthen the injunctive relief granted by Judge Manson, which was only a partial granting of injunctive relief, and argues that the Judge erred in not granting full protection to former MMAR licensees from prosecution under the Canadian Drugs and Controlled Substances Act.
As for Health Canada’s position, it is based on the idea that the mandatory implementation of the new MMPR regime will mitigate certain threats to public safety observed during the MMAR era.
According to the Government’s Factum registered with the Supreme Court of Canada:
“Health Canada’s program to supply marihuana to patients cost $16.8 million for the three years ending on March 31, 2013. Finally, Health Canada has received solicited and unsolicited feedback from municipalities and first responders, homeowners, and program participants about unanticipated problems with the MMAR regime. These include violence, presence of firearms, diversion to the illicit market, production over the limits authorized, the presence of mold, fire and electrical hazards, toxic chemicals, the emission of noxious odours, and various risks to children living in or near the residential growing operations.”
And in respect to Judge Manson’s finding that the plaintiffs represented by Allard et al would experience financial hardship as a result of having to purchase marijuana from government-licensed grow ops, the Government’s factum had this to say:
“With respect to the plaintiffs’ asserted lack of financial means to purchase medical marihuana from licensed producers, the evidence before the Judge was incomplete and proviced an inadequate basis for establishing that the plaintiffs would experience ‘sudden poverty’ of the magnitude contemplated in the Elsipogtog. The Judge had before him only basic, bare-bones information about each individual plaintiff’s monthly income and expenses. The plaintiffs did not provide specific evidence regarding their current financial situations, nor did they explain why they apparently could afford the costs associated with their current production of marihuana, including capital costs in relation to home ownership and maintenance, growing facilities and equipment, fertilizers, pesticides, electricity, home security, etc., but would allegedly not have the funds to buy marihuana directly. The Judge did not consider these significant gaps in the plaintiffs’ evidence, and instead, simply accepted at face-value their bare assertions of financial hardship.”
This clause represents a sharply focused light on just how weak the governments’ argument is in the context of constitutionally guaranteeing access to medical marijuana, which in and of itself implies a certain affordability. If you’re going to ask a bunch of people who have been growing their own medical marijuana to come up with more evidence of the economic hardship a price of $12 a gram would force, and especially under the tutelage of their lawyer John Conroy, its safe to expect a renewed vigour in assembling such data on their part.
Also, the government’s assertion that a contradiction exists in the comparison of prices for marijuana on the ‘black’ market versus prices from licensed producers, it appears either a breakdown in government mathematical competency has occurred, or the input assumptions have been skewed.
“The Judge also failed to consider the inherent contradiction in the plaintiffs’ claims that on the one hand they could not afford to purchase their medical marihuana from licensed producers, yet on the other, they would turn to the black market to purchase their marihuana. If, as the plaintiffs’ claim, they could not afford to buy from a licensed producer, they certainly could not have afforded to buy marihuana on the black market. On the plaintiffs’ own evidence, the cost of purchasing marihuana on the black market was far more expensive than purchasing from a licensed producer. The Judge did not reconcile these contradictory claims when he accepted that the plaintiffs would suffer irreparable harm in the form of loss of enjoyment of life and avoidable suffering if they were required to purchase from licensed producers.”
The average street price in BC, according to my own informal survey, is around $200 an ounce, or $7 per gram. The stated average price in most medical marijuana companies currently licensed to produce is $8 – 12 per gram. Where is the contradiction? Medical marijuana from licensed producers will be anywhere from 15 to 78 percent higher. The testimony of the plaintiffs referred to in the above paragraph is that wherein the plaintiffs compared buying marijuana on the black market to buying off of licensed producers under the MMAR regime, not MMPR. Therefore, this glaring misinterpretation of the testimony of the plaintiffs will likely not score any points in favour of the government.
Overall, the governments case, from a strictly legal interpretation point of view, does not appear all that strong, whereas the plaintiffs case, which will definitely be strengthened over the course of time and the additional evidence gathering it affords, looks stronger – especially in view of the cross-appeal.
Possible Outcomes Do Not Favour Investors
There are three ways this could go. 1. The court finds in favour of the government, and MMPR replaces MMAR without further legal challenges. 2. The court denies aspects of the governments’ appeal, aspects of the plaintiffs’ cross-appeal, and the limbo continues. 3. The court finds in favour of the plaintiffs overwhelmingly and MMPR is ordered to a process of revision, thus extending the limbo extant in the world of would-be medical marijuana producers, and their investors.
Unless number 1 is the outcome, investors in Canadian medical marijuana deals that don’t yet have a license are likely going to be stuck holding the baggie. The lesson for investors, in the short term, would be that if you insist on gambling on the future of the Canadian Medical Marijuana industry, at least do so with a company that has a license to grow.
