# Marching on Towards the 7th of June

We continue to march on towards the June 7th vote in Canada. As most of you know, on June 7th the Canadian parliament will have the third reading of Bill C-45 which aims to legalise marijuana for adult recreational use at the federal level. This would make Canada the first G-7 country to do so, and only the second country in the world, after Uruguay. A massive moment, and one the entire world is watching, and for many reasons.

First and foremost, other countries would like to see how it is managed at the federal level and from there, down to the state level. Until now, the only real examples that have stood as guidelines have been the 9 US states that have legalised cannabis for both medicinal and recreational use. California the latest to do so on the 1st January this year. But having the state manage this and having the federal government manage it, are two very different scenarios – this includes both taxes and distribution.

And secondly, how Canada is going to handle supply and demand, and the impact this is going to have on the "legal" markets. There are lessons to be learned from both California and Oregan on this.

From California, we have learned that although sales go "legal" on a certain date (in this case January 1), in reality, it is a very different story. Licenses still needed to be issued for retails sales outlets, and suppliers who could not get licensed in time found their products not being able to be stocked on shelves. It became a domino effect. If the dispensary could not get their license on time, then they could not sell.

This left suppliers who were licensed unable to distribute their product. On the other side of the fence, licensed dispensaries sometime had nothing to sell as their regular suppliers did not have all the necessary licenses and permits to produce and distribute the stock. And finally, customers who queued (sometimes for miles) to get legal cannabis found themselves in the same situation as poor old mother Hubbard.

So what about supply and demand? There is no doubt that initially there is NO way that there will be enough supply to meet the legal demand. Deloitte has estimated that total "legal" demand for Cannabis (from the adult market) would be around 800,000 kg per annum. Currently, the total production capacity of the LP's combined would be in the region of 100,000kg per annum. You don't need to be a genius to realise that the black market is going to thrive for some time. But this will change, and drastically. How do we know this? Well, from Oregan.

Since Oregan went recreationally legal in 2014, wholesale marijuana prices have dropped dramatically and continue to do so. Not only have they dropped, but the amount of supply now sitting in inventory has gotten to the point that many of the Oregan growers are turning to Hemp production rather, as a way to maximise the value of their "arable" land. There is simply too much weed and with an oversupply come lower prices and downward pressure on production. There is no doubt we will see this in Canada in the coming years.

Think about it, every week I write to you and let you know that this company just increased their growing capacity and that company has opened another cultivation facility. Then there are countries like Columbia and Australia that are producing simply for export. With Aurora and Canopy Growth ramping up production capacity to be able to produce over 1m kg per annum just between the two of them, there is going to be a massive oversupply, and with it, casualties of war for the smaller Tier 2 and 3 Licensed Producers. This is what I have been warning about for a while now, and if these companies cannot find a way to differentiate (and quickly) then there is going to be a lot of blood on the dancefloor.

The vote is this week. I will, of course, keep you all posted.

And finally, this week saw the long-awaited IPO of MedMen and what a shocker it was. Let me start off by saying that I like MedMen and like what they are doing as a company. Their IPO, however, was a stinker and for so many reasons. First off the valuation – $2.14bn. That's simply ludicrous. They only generated revenue of$8.4m in 2017 and operated in the year with a loss of over $43m. Then there are the executive packages. First off both the CEO and COO are to receive salaries of$1.5m for the next 4 years. In addition, they have $10m each in redeemable units based on both performance and valuation (yup, if the company stays valued at over$2bn for a period of time, they receive $4m each). Then there's the preference share issue. The founders got preferential stock that has voting rights of 1,000x an ordinary share, essentially meaning they cannot be voted out of office, and have full and effective rights on all material decisions. Simply crazy. The stock listed at$5.25 and closed the week out on $4.26, nearly 20% down. I feel there is still a long way to go before this stock hits it's bottom and caution our members from purchasing this stock at these levels. When you consider Terra Tech has over$40m in annualised sales, operates in the biggest state (California) and has a market cap of only \$185m – you can see where we are coming from on this one.

## And they told you money doesn't grow on trees.

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###### Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.