Marijuana Investing Update – Here Comes the Judge!
To be a good investor you have to know about the company, the industry, the macro-economics, and the legal context in which the investees operate.
If you’ve been following the MMPR (Marihuana for Medical Purposes Regulations) licencing story, you know it’s been a confounding morass of stumbling fits and starts. No jurisdiction in the world has gotten it right from the beginning, and we can add Canada to that list. Investments in public MMPR applicants or licence holders have been frustrating at best, a shocking loss of capital at worse.
A large part of the blame falls on over-enthusiastic investors, smoke-blowing promoters, and investment banking firms interested in inflated valuations and their next commission. That’s the same as with every bubble. What made it different this time was The Federal Court.
Most of you reading this don’t know that Canada has an institution called The Federal Court. Over the next few weeks, for your investing dollar, its appeals division is the most important court in Canada.
This link shows the docket for the Federal Court of Appeal’s next sitting. Allard vs. Her Majesty the Queen is scheduled to be heard in Vancouver, starting Feb 23 at 9:30 am, with fifteen days set aside for the appeal.
The quick facts: Mr. Allard had a licence to grow his own medical marijuana – he was what was called a MMAR. Under the new MMPR system, his MMAR licence would have been cancelled, and he would have had to buy his medical marijuana from a MMPR. The problem was, he argued, it was much cheaper to grow his own and he would not be able to afford medical marijuana from those licensed producers. This was, he argued, a government-sponsored attack on his health. It became a constitutional fight, under the Charter of Rights and Freedoms.
Justice Manson issued a last-minute injunction against the government, pending a full trial of the issues. That meant the former MMAR system of “grow your own” was still in place, AND the MMPR system was still being implemented. (From a legal perspective, I have no problem with Justice Manson’s decision. It was the right decision at the right time, preserving everyone’s rights until a full hearing on the merits could be held.)
The federal government appealed. It’s that appeal on the FCA’s docket.
The FCA won’t issue a decision immediately. I’d estimate at least two and up to eight months will follow the appeal before the FCA releases its decision.
The MMAR holders can’t be too happy about their prospects. They’re looking at paying more through a more complicated transaction process, and possibly not getting from the MMPR’s the strain of marijuana needed for their particular ailment. Health Canada’s simple mandate is, “to help Canadians maintain and improve their health”, but until the FCA releases its decision, Health Canada can’t do anything to help the MMPR’s or MMAR’s. The feds are in a most uncomfortable spot.
So are the MMPR applicants and their investors. Most of the applicants have sunk significant amounts of money into the application process. Some have already spent capital on renovating the real estate where they want to grow their marijuana. If the feds don’t issue new licences until the Allard appeal is released, then those applicants have no choice but sit around thumb-twiddling, while the cash drains out of the treasury for working capital. Can’t go forward, can’t retreat, can’t go sideways. That’s a hard way to run a business, and some of them won’t be able to carry on.
And what makes it even more painful is, no matter how Allard turns out, there is no guarantee that Health Canada will issue any of those applicants a licence! That would mean a total loss of your investment.
Management of the MMPR’s have tough decisions ahead. As the applicants run out of money, a grey market in MMPR applicants will evolve, and other MMPR’s will not last to licencing.
On Friday, the last business day before Allard ‘s court date, The Peace Naturals Project Inc. announced that it was acquiring MedCannAccess, an MMPR applicant. The press release has all the expected wording about “building a strong platform for future growth, comprising strong business fundamentals, a differentiated client acquisition strategy, a national branding strategy, scalable production, and best in class R&D”.
While all that may be true, the real reason behind the acquisition was that MedCanAccess couldn’t take the financial uncertainty any longer. Management made a decision to sell now while selling was possible, before the company’s financial position deteriorated and before a dilutive “treading water” financing was needed.
This will be a tough market for the next several months as the legal issues get sorted out. Watch for other takeover announcements.
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Mr. Clausi is an experienced investment banker, executive and director. A graduate of Osgoode Hall Law School called to Ontario's bar in 1990, Mr. Clausi ... <Read more about Peter Clausi>