What’s Up in Weed
June 10, 2019
By: Andrea Hill
I am pleased to bring you this instalment of my blog, rounding up what’s currently happening in the cannabis industry in Canada and abroad.
Lift Expo Roundup: Consumer Experience Reigns
- Toronto’s fourth Lift Expo happened over the weekend. A signature Canadian cannabis event, the Expo featured 250 exhibitors and more than 100 speakers representing some of the industry’s biggest movers and shakers.
- No cannabis was on offer, of course, but from science-fair-esque extraction machines at Vitalis and other extractor booths, to shelves of slick black leather wares at Humble + Fume, to a gorgeous Cronos Group collection of booths which drew visitors through mountain scenery into a dreamy white-draped centre with a terpene bar, the Expo was as visually spectacular as it was innovative. Health Canada even sent some licensing representatives (who were extremely popular) as did the CRA (not so popular).
- I moderated a panel at the Expo called Cannabis Investing 2.0: Advanced Tips on What’s Hot. My panelists were Erich Mauff, ex-Deutsche Bank power banker and Co-Founder and current President of Jushi Inc., a US licenceholder and investor; Craig Wiggins, Managing Director of The Cannalysts, an online community for thoughtful due diligence of publicly traded cannabis companies; and Rosy Mondin, an industry trailblazer and CEO of Quadron Cannatech Labs, a Vancouver-based CSE-listed issuer providing extraction and processing solutions for the cannabis industry. Here’s what they had to say:
- Where’s your money today? Rosy: extraction. Erich: the US. Craig: I have an overweighted cannabis portfolio, but my next big investment will likely be into a blue chip stock.
- When can investors expect to see edible products on shelves? Consensus was January-February 2020, not October 2019 as many believe. That’s just the government’s self-imposed deadline for edibles regulations and it still takes two months to certify a new product even if the research and production is down pat.
- How does the legacy market impact cannabis investors? Rosy: the legacy market can be an attractive investment because of its huge accumulation of experience in skilled technical aspects of the business, like cultivation and edibles formulations. But the barriers to entry for legacy market participants are in some ways much higher than they are for someone with no cannabis background at all: Health Canada’s stringent new application rules (see details below) will hit some legacy market participants hard.
- How do the 2020 elections factor into an investor’s outlook? Craig convincingly posited that President Trump may well throw legalization into his 2020 platform – but only as a last resort, if he’s losing in the polls. To throw his weight behind it before that could backfire because legalization is seen as more of a Democrat initiative.
- What’s a red flag that many investors miss? Erich: due diligence. Just because they say they have that licence, or that new product, or that supply chain, doesn’t mean they do. Out of dozens of investing opportunities, you might get one that is real. Craig: failed promises by management. Management is like the jockey and the company is like a horse. Towards the end of the race, the horse matters, but at the beginning, the jockey is the one who maneuvers the horse into a winning position. A company will rarely announced broken promises by management, so it’s on the investor to keep track of what people promise to deliver, when, and whether it happens.
- What are the single most important things for a cannabis investor to keep in mind? Rosy and Craig: abandon the fantasy of a quick buck. Resist the Fear Of Missing Out that so often comes with big stock promotions and investor peer pressure. Big success stories in this industry take time, and investors should be patient and ready for a long haul. Also, diversify: three licensed producers are three companies doing more or less exactly the same thing. Invest in different areas of the industry, in companies doing different things. Erich: do your own due diligence and understand the rules of the operating jurisdictions. There are a lot of cool stories out there, but only a very few hold up under pressure, and those are the ones you want to be involved in.
Winter is Here: Major Licensing Changes for Applicants from Health Canada
- Health Canada recently announced a major licensing policy change: new applicants for a licence to cultivate, process, or sell cannabis for medical purposes must have a fully built site that meets all the requirements of the Cannabis Regulations at the time of application.
- With respect to existing applications, Health Canada will complete a high-level review of the application and provide a status update letter to the applicant if it passes. But a detailed review will only commence once a site has been built that meets all regulatory requirements, including Good Production Practices (GPP) under the Cannabis Regulations. Applicants will then be put in line based on their original application date.
- There are hundreds of applicants in line for a licence, and it doesn’t take much to see that the regulator is feeling over-invested in applications that may never proceed: “more than 70% of applicants who successfully passed Health Canada’s initial paper-based review of their application over the past three years have not yet submitted their evidence package to demonstrate to the Department that they have a built facility,” the press release says. “As a result, a significant amount of resources are being used to review applications from entities that are not ready to begin operations, contributing to wait times for more mature applications and an inefficient allocation of resources.
- Health Canada also notes that there are now more than 600,000 square metres (nearly 6.5 million square feet) of space under active cultivation in Canada – enough to produce 1 million kilograms of cannabis, or about the country’s entire consumption. Sounds to me like a distinct lack of regulatory interest in pouring more resources into application review.
- While prioritizing fully-built facilities makes sense to help ease supply shortages, and in many ways the design and function of an acceptable production site is better understood now than in the early years (so applicants should be able to get it more or less right without prior regulatory review), this policy change will force would-be applicants to raise their capital, build out their site and then get in line behind potentially hundreds of others for their application and security clearance reviews – not an appealing scenario for any investors looking for a quick return.
- There have been warning signs before that “winter is coming” for applicants, including a regulatory policy last fall that applications which were not migrated onto the new CTLS computerized application system by January 31, 2019 would be rejected. This change, however, is likely to draw a clear line between advanced applications just shy of licensing, and everyone else.
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