Saturday, May 17, 2014 5:52:39 PM
Canadian Marijuana Stocks: Medican And IHMML Give Investors A Reason To Be Bullish Apr. 8, 2014 1:51 PM ET | About: MDCN, Includes: ATTBF, CHTR, ENRT, FITX, MDRM, MINE, NXTTF, SPLI
QASP is u.s.a. breed! SKYF u.s.a breed. ILIV u.s.a breed. IDGC u.s.a. breed!
http://seekingalpha.com/article/2131563-canadian-marijuana-stocks-medican-and-ihmml-give-investors-a-reason-to-be-bullish?source=yahoo
Summary
•Medican Inc. is seeking to acquire a 50% stake in IHMML, which is acquiring two facilities at 393,000sqft. and 293,000sqft that will be able to extend to 900,000 sqft.
•Medican Inc. represents one of the strongest "speculative" Canadian plays for investors in the US.
•The Canadian marijuana market may have been grossly underestimated with a potential market capitalization of $2-4 billion.
•A new organization called the Canadian National Medical Marijuana Association (CNMMA) has stamped Medican with approval along with IHL and Zenabis.
•In the Canadian marijuana market: size matters. Even the darling of the marijuana market (Tweed) will seem pint size next to Medican
Over the past month, several publicly traded companies jumping in on the "Canadian Cannabis Craze" have caught our attention: Enertopia (OTCQB:ENRT), Creative Edge Nutrition (OTCPK:FITX), Next Gen Metals (OTCPK:NXTTF), Abattis Bioceuticals (OTCPK:ATTBF), and Modern Mobility Aids (OTCPK:MDRM).
There is one restless giant, however, that has not had its fair share of the spotlight. And boy, does it need it.
Medican Inc. (OTCQB:MDCN): A Giant in our Midst
If you have been paying attention to headlines coming out of Canada, you would have heard about a company called "Zenabis" and their plan to acquire a 393,000 square foot facility for medical marijuana production.
News like this makes investors drool. I briefly discussed this company in a previous article. What I didn't mention was that the company behind this acquisition has been Medican Enterprises. Medican might be the most ambitious player in the Canadian scene. If it succeeds, a few years from now investors will say, "Tweed who?"
The story begins last year on June 25, 2013. Kenneth Williams, a veteran of Michigan's Medical Marijuana Program, bought out a Nevada based shell, TC X Calibur Inc., for the very purpose of running a publicly traded Canadian MMPR firm. From this moment on, Mr. Williams has worked tirelessly to assemble an experienced team, accrue essential assets, and form strategic partnerships in order to create a medical marijuana empire.
The story is impressive. But investors should be forewarned: the only tangible asset that Medican can boast is ownership of Cannabis Magazine. The company publishes Cannabis Magazine online and in hard copy form, which is distributed for free in over 4000 medical cannabis locations throughout the United States. Nevertheless, I still think there is strong evidence to be bullish.
Team: The Marijuana Aficionados
Medican boasts one of the most impressive teams of any of the publicly traded Canadian marijuana companies.
Board of Directors
•The honorable Gary Johnson, two-term governor of New Mexico, serves as a director of Medican Inc. In addition to starting a successful multimillion-dollar enterprise, the honorable libertarian has been a longtime advocate for marijuana legalization.
You may remember Gary Johnson as the 2012 libertarian presidential candidate who won .99% of the vote.
•Michael Thompson has been involved in the medical marijuana industry as a licensed provider since early 2012.
Management
•Kris Klassen President. According to his bio, Mr. Klassen has "over 15 years experience in the medical marijuana industry." Disclaimer: this information is unverifiable.
•Wayne Hansen CFO
•Bal Sandu, P. Eng., COO.
•Danny Camele, VP Marketing
Research and Development
•Laila Benkrima, Ph.D, is Medican's chief horticulturalist. Dr. Benkrima is an expert in chemical hybridizing agents in wheat. Dr. Benkrima is not an expert in medical marijuana. She is currently a research associate at BCIT in the Natural Health & Food Products Research Center for Applied Research and Innovation.
•Renee Priya Prasad, Ph.D, Sr. Production Manager. Dr. Prasad is a specialist in pest control. Again, it is important to note that Dr. Prasad is not an expert in marijuana pest control. Dr. Prasad is a highly experienced entomologist with over 18 years of experience in cranberry crop control.
•Manessha Jaitly, Ph.D., Quality Assurance Manager
Although a very knowledgeable team, it is questionable that these scientists are agreeing to apply their expertise to marijuana cultivation. Dr. Benkrima is a "wheat" specialist; Dr. Prasad is a "cranberry" specialist. As I am not an expert in any of the related fields, I do not know whether the fields are that different and that the R&D team will be unable to apply their horticultural expertise to medical marijuana.
Advisory Board
•David Tobias, founder of Hemp Inc. and Cannabis Sativa Inc.
•Rick Brar, President and CEO of IHL
•Kevin Coft, General Manager at IHL
•Sam Perera, MBA, CAIA Founding partner at Lion Financial Group (LFG)
Some investors might be uncomfortable with the name David Tobias attached to the firm. However, I am fairly confident that he will benefit Medican immensely since he does have extensive experience in the field of publicly traded marijuana stocks.
It is clear that Mr. Williams has put together a distinguished team. Most of the Medican team boasts years of experience in the business of marijuana cultivation, production, and sales. This is the kind of team I feel comfortable investing in.
The Management Agreement
Although an experienced staff is comforting, there is only one reason to invest in Medican Inc.: their partnership with International Herbs Ltd's subsidiary ("IHL"), IHMML. Kevin Coft, General Manager of IHL, has gone on to create IHMML (International Herb Medical Marijuana Ltd) branded as Zenabis. Zenabis is in the process of acquiring a 393,000 square foot facility in Atholville, New Brunswick.
A Couple of Hiccups
It is clear from the filings that Mr. Williams has always had his sights set on Canada. Towards the end of 2013, Medican founded two subsidiaries:
•Median Systems, Inc., a Yukon corporation
•Medican (Delta) Systems, Inc., a British Columbia corporation.
Medican Delta was essentially established to obtain a Medical Marihuana Purposes Regulations (MMPR) producer license. Medican Delta signed a management services agreement with International Herbs Ltd. (IHL) and Lions Financial Group (LFG) for the purposes of promoting and assisting Medican Delta to obtain an MMPR license.
Hiccup #1: IHMML Going Rogue
Since the agreement, it is suggestive that IHMML went rogue and decided to acquire a facility for itself. Most likely because of strict rules preventing US based shell companies from acquiring the MMPR licenses. Medican Inc. still wanted in.
Resolution: "Amended Agreement"
On March 13, 2014, Medican, LFG, and IHL entered into an "Amended Management Services Agreement." Under the terms of the "Amended Management Services Agreement" IHL and LFG agreed to cooperate and work together to promote and develop the business of Medican CanaLeaf and to assist Medican partnering with IHMML, a company that is applying to obtain licensed producer status from Health Canada through its subsidiary Zenabis.
Hiccup #2: A Nonbinding "LOI"
It has already been all over the news that Zenabis is in the process of acquiring a 393,000 square foot facility. Not wanting to lose out on its meal ticket, Medican on March 24, 2014 entered into a nonbinding Letter of Agreement (LOI) with IHMML to become a 50% holder of IHMML by way of subscription for 41,600,000 common shares of IHMML for an aggregate subscription price of $52,000,000.
*393,000 square foot facility in Atholville
The proceeds of the deal will be used by IHMML to complete not only the purchase of the 393,000 square foot facility in Atholville, New Brunswick which has 300,000 square feet of grow space, but also an additional second building in Poekmouche, New Brunswick, which is a 273,000 square foot facility with the potential to expand to a total 600,000 square feet. This means an initial total of 593,000 square feet for cultivation with the potential to have 900,000 square feet.
900,000 Square Feet Marijuana Facility
Medican essentially will be the 50% owner of 900,000 square feet of marijuana cultivation space, or 450,000 square feet. To give you an idea of the profitability of owning a 900,000 sq ft. facility:
Medican Inc. & IHMML
Tweed Inc. (TWMJF)
Est. square footage
900,000 sq. ft.
150,000 sq. ft.
Conservative: 1 plant per 9 sq. ft.
100,000 plants
16,500 plants
Maximum: 1 plant per sq. ft
900,000 plants
150,000 plants
Average annual yield of 200 grams of dry bud per plant
20,000 to 180,000 kilograms
3,300 to 30,000 kilograms
Average sales at $7 (CAD) a gram
$140 million to $1.26 billion
$23.1 to $210 million
Est. pounds per yield
44,150 to 396,832 lbs
7,285 to 66,138 lbs
Est. revenues
50% adj. $70-630 million
$23.1 to $210 million
Est. costs of electricity at $238 per lb
~$10,507,700 to ~$94,446,016
~$1,733,775 to ~$15,740,844
Est. gross profits
$59,492,300 to $535,553,984
$21,366,225 to $194,259,156
Realistic est. revenues at 68 grams per sqft. 50% adj. $214.2 million $71.4 million
Realistic costs 50% adj ~$32.1 million ~$5,4.million
Gross Profits 50% adj. $182.1 million $66 million
**The above figures are estimates and do not reflect actual yields or earnings. They may be much higher or lower depending on the given circumstances, yields, and facility utilization. I assume 5 harvests, annually yielding 40 grams per plant per harvest for a total of 200 grams per year.
As you can see, the numbers yield a wildly large range. This should help investors understand what goes into investing into an agricultural company that has limited space and resources. The slightest misstep in space utilization or production inefficiency can yield grossly divergent results.
Additionally, nearly all MMPR firms have agreed to offer compassionate pricing to patients living in households with under $30,000 a year in income. This will affect the return on investment.
Although the above figures are merely estimates, no matter what Medican Inc. potentially stands to yield 3x more in revenues than Tweed Inc. This is not to say that Medican will also be more efficient at keeping costs of production and overhead low. Furthermore, Medican has only signed a nonbinding agreement with IHMML. If IHMML can come up with the capital itself, it may not have use for Medican.
Seal of Approval
Medican and IHMML are not only setting themselves apart by acquiring the largest facilities for growing medical marijuana. They have also joined an organization called the Canadian National Medical Marijuana Association (CNMMA). The CNMMA stamps companies with a "seal of approval" for upholding stringent MMPR guidelines. As a result, it has made itself the coveted ersatz endorsement needed to assuage investors and patients alike.
(click to enlarge)
[-chart]static.cdn-seekingalpha.com/uploads/2014/4/20467391_13966473370278_rId35_thumb.jpg[/chart]
It is interesting that IHL is CNMMA approved, since it plans on entering the marijuana sector only through a subsidiary. It is unclear why IHL would also receive this stamp of approval.
Disclaimer: There is no publicly available information regarding the legitimacy of the CNMMA. Several attempts have been made to contact the CNMMA without success.
[-chart]static.cdn-seekingalpha.com/uploads/2014/4/20467391_13966473370278_rId37.png[/chart]
Zenabis Approved
With so many companies desperately finding ways of distinguishing themselves from the competition, the CNMMA brand gives the impression that these companies are certified and trustworthy. To the untrained eye, this seal of approval seems like an unbiased legitimation of the company's authenticity. However, without full disclosure of the CNMMA's independent board, investors should pause before demanding that their MMPR firms also receive their CNMMA membership.
And finally Medican, along with Zenabis and IHL, also has the CNMMA stamp of approval. I must admit that it is tantalizing that a publicly traded company in the US had a Canadian CNMMA stamp of approval, even if I doubt the legitimacy of the CNMMA, it does give Medican the allure of having more legitimacy than the other Canadian players. Tweed does not even have the CNMMA stamp.
Market Outlook
MDCN
FITX
ENRT
(TSXV: TWD)
ATTBF
Share price*
2.75
.082
.51
2.59
1.48
Outstanding Shares
33,616,040
3,417,417,54
87,233,072
32,042,612
57,831,082
Proposed Facility Size
900,000 sq. ft.
58,000 sq. ft.
60,000 sq. ft.
150,000 sq. ft.
N/A
Authorized Share Count
100 million
3.5 billion
200 million
35 million***
62 million***
Market Cap
90.75 million
280.19 million
45.24 million
82.99 million
84.36 million
Adjusted Share Price**
0.908
2.802
0.452
.83
.76 (US)
0.854
**April 4th, 2014
**Adjusted share price at 100 million shares
***Canadian law allows for unlimited authorized shares but it has been suggested that this is the 'cap'
On an adjusted per share basis FITX is the most expensive. The combined market cap of ENRT, MDCN, ATTBF, and TWD equals 296 million, roughly 16 million more than FITX. This may be surprising because it is by far the "cheapest" of the five companies.
Remember a share price can "look cheap" that does not mean the company is cheap. Even though the share price of MDCN "appears" 2,647.7% greater than FITX, the actual per share cost of FITX is 384.6% greater than MDCN.
One can interpret FITX as "market perform," which would suggest the other companies are currently undervalued. I would not endorse this interpretation. Value is interpretative and I'll leave it to the more savvy fundamental analysts to determine intrinsic values.
Overall, I believe Medican has the most potential out of all the publicly trading MMPR plays. Although Tweed actually boasts a license and a facility, Medican has the potential to be 3X bigger.
Canada versus the US
Canada versus the US
Use
Canada: 3,015,000 10.2% of population 15+
US: 25,768,000 9.6% of adult population 15+
Canadian consumption
US consumption
Estimated casual 45%
.6 grams p/year
1,356,750
11,595,600
814,050 g
6,957,360
Estimated regular users 41%
15 grams p/year
1,236,150
10,564,880
18,542,250 g
158,473,200 g
Estimated daily users 9%
320 grams p/year
271,350*
2,319,120
86,832,000 g
8,245,760,000g
Estimated chronic users 4%
1,825 grams p/year
120,600*
1,030,720
220,095,000 g
47,026,600,000 g
Estimated totals
3,015,000
25,768,000
326,283,300 g
55,438,035,105 g
At $7 a gram
108 grams p/year
$2.283 billion
$38.806 billion
n/a
n/a
Estimated 391,950* core MMPR patients
783 grams p/year
$2.148 billion
n/a
n/a
n/a
*The Canadian Centre on Substance Abuse (CCSA) estimates that 25% of marijuana users over the age of 15 consume daily. If 25% of Canadian marijuana users consume daily, I believe that the core market equals 753,000 daily and chronic users. 753,000 users is nearly double the above estimates. Maintaining a similar distribution, I estimate there are perhaps 225,900 chronic users and 527,100 daily users. That is 7.7% chronic users and 17.28% daily users out of 3 million Canadians who reported using marijuana.
I believe the core Canadian market comprises of the approximately 753,000 people who use marijuana daily and will therefore utilize the legal and accessible MMPR program. And since 7% of Canadian physicians support prescribing medical marijuana, this will make it easier for a larger portion of marijuana users to be able to obtain physician prescriptions.
With 225,900 chronic users and 527,100 daily users, that would mean 580,940 kilograms consumed. If this was purchased through the market at $7 a gram, that would yield total annual revenues of $4.067 billion in the Canadian market. This figure sounds more reasonable since the CCSA has stated that in 2002 the illegal marijuana market was estimated to be approximately $8.2 billion.
But let us not get ahead of ourselves. Returning to the original estimates, in the event that 25,600 patients under the MMAR system are able to keep growing for personal that still leaves the low estimate of 356,350 chronic and daily users. If the additional 12,000 licensed users continue to buy from the 4,200 that are licensed to grow for a maximum of 2 patients that will mean 37,000 will not participate in the MMPR program.
Let's say that the 37,000 MMAR patients are all chronic users. That would still leave 83,600 purchasing an average 1,825 grams p/year and 271,350 purchasing 320 grams p/year to yield a $1.675 billion market for users who were unable to access legal marijuana under the old system. This is a conservative estimate.
On the other hand, if my estimates are correct-that there is a greater percentage of chronic and daily users in Canada-then the market is potentially $3.594 billion. In both scenarios, I reduce revenues by $473 million, which should account for the 37,000 patients allowed to keep their MMAR licenses and consuming 1,825 grams p/year.
This research is limited because it does not consider whether current total MMPR licensed producers have the facility capacity to fulfill the annual of 529,107 to 1.28 million pounds of marijuana needed to satisfy this "core" market.
Medican Inc.: The Nevada Shell Game
A huge issue for potential shareholders of Medican is the seemingly 25,000% increase in stock price. Well, there actually hasn't been a "25k" increase. Stock prices tend to act funny after the shell is taken over by an ambitious company (compare this with Charter Communications (CHTR), for instance, which went from .10 a share to $35 a share).
•On June 25, 2013 Kenneth Williams entered into a series of Stock Purchase Agreements with Jenson Services and several other minority shareholders through which Mr. Williams collectively purchased 858,946 shares of TC X Calibur, Inc., representing approximately 65% of the outstanding common stock of the Company, for total consideration of $96,500.77, making the entire company worth about $130,276.04.
This information was released to the public in an 8-K. As the chart indicates above, the stock price remained unchanged from June 25 to September 17th, 2013.
•On September 18th, 2013, the company announced in an 8-K that it has changed its name to Medican Enterprises Inc.
•On September 24, 2013, shareholders of record were entitled to a 20:1 dividend split increasing the outstanding shares to 26,501,240, which went ex on September 26, 2013.
•On January 1st, 2014, Medican amends its October 1st, 2013 8-K to inform its shareholders of its plans to become a licensed MMPR in Canada for the purposes of medical marijuana production.
MDCN data by YCharts
•From the date of the stock dividend to the announcement of plans to enter the Canadian marijuana market the stock price dropped 18.1% in value.
(MMPR announcement. Still very light volume. Click to enlarge)
MDCN data by YCharts
•Within 3 days of the announcement, the share price shoots up to $2.55 on January 24th, 2014 on a volume of 126,000 shares. It closes at $1.99.
•The price jump from $0.35 a share on the 21st to $1.99 on the 24th represents a 569% increase. The price drops down to $1.32 on February 24th before bouncing and hitting a high of $3.83.
I think we can dismiss the 25,000% increase as the effect of a shell-takeover since no trading actually occurred from the company's reorganization until the 20:1 stock dividend. Arguably the stock is up 700% from 0.35 since the reorganization.
Ken Williams procured this company precisely because it was a cheap shell, based in Nevada. Nevada has become the hub for shells because of its loose regulations giving it the "Offshore Advantage" for tax evasion, since corporate taxes are unheard of in Nevada. This will be highly beneficial for shareholders because it will mean higher profit retention. This was clearly a strategic move to do business in Canada while avoiding costly taxes. Another company, MDRM Canada Ltd., also chose to procure a Nevada based shell for similar reasons.
(The price jump from 0.35 to $2 occurred on relatively low volume.
Conclusions
There is nothing conclusive now. Medican is still a long way away from the MMPR license. But this one is a great speculative play. If they are able to accomplish what they are setting out to accomplish, they will be the biggest player in the MMPR scene.
I do not doubt for a second that Medican and IHMML will do whatever they can to enter the MMPR market. Even if you decide not to invest in Medican, there's still a way for you to make money from Medican Inc. Zenabis is looking to hire 1,000 people for their facility in Atholville.
QASP is u.s.a. breed! SKYF u.s.a breed. ILIV u.s.a breed. IDGC u.s.a. breed!
http://seekingalpha.com/article/2131563-canadian-marijuana-stocks-medican-and-ihmml-give-investors-a-reason-to-be-bullish?source=yahoo
Summary
•Medican Inc. is seeking to acquire a 50% stake in IHMML, which is acquiring two facilities at 393,000sqft. and 293,000sqft that will be able to extend to 900,000 sqft.
•Medican Inc. represents one of the strongest "speculative" Canadian plays for investors in the US.
•The Canadian marijuana market may have been grossly underestimated with a potential market capitalization of $2-4 billion.
•A new organization called the Canadian National Medical Marijuana Association (CNMMA) has stamped Medican with approval along with IHL and Zenabis.
•In the Canadian marijuana market: size matters. Even the darling of the marijuana market (Tweed) will seem pint size next to Medican
Over the past month, several publicly traded companies jumping in on the "Canadian Cannabis Craze" have caught our attention: Enertopia (OTCQB:ENRT), Creative Edge Nutrition (OTCPK:FITX), Next Gen Metals (OTCPK:NXTTF), Abattis Bioceuticals (OTCPK:ATTBF), and Modern Mobility Aids (OTCPK:MDRM).
There is one restless giant, however, that has not had its fair share of the spotlight. And boy, does it need it.
Medican Inc. (OTCQB:MDCN): A Giant in our Midst
If you have been paying attention to headlines coming out of Canada, you would have heard about a company called "Zenabis" and their plan to acquire a 393,000 square foot facility for medical marijuana production.
News like this makes investors drool. I briefly discussed this company in a previous article. What I didn't mention was that the company behind this acquisition has been Medican Enterprises. Medican might be the most ambitious player in the Canadian scene. If it succeeds, a few years from now investors will say, "Tweed who?"
The story begins last year on June 25, 2013. Kenneth Williams, a veteran of Michigan's Medical Marijuana Program, bought out a Nevada based shell, TC X Calibur Inc., for the very purpose of running a publicly traded Canadian MMPR firm. From this moment on, Mr. Williams has worked tirelessly to assemble an experienced team, accrue essential assets, and form strategic partnerships in order to create a medical marijuana empire.
The story is impressive. But investors should be forewarned: the only tangible asset that Medican can boast is ownership of Cannabis Magazine. The company publishes Cannabis Magazine online and in hard copy form, which is distributed for free in over 4000 medical cannabis locations throughout the United States. Nevertheless, I still think there is strong evidence to be bullish.
Team: The Marijuana Aficionados
Medican boasts one of the most impressive teams of any of the publicly traded Canadian marijuana companies.
Board of Directors
•The honorable Gary Johnson, two-term governor of New Mexico, serves as a director of Medican Inc. In addition to starting a successful multimillion-dollar enterprise, the honorable libertarian has been a longtime advocate for marijuana legalization.
You may remember Gary Johnson as the 2012 libertarian presidential candidate who won .99% of the vote.
•Michael Thompson has been involved in the medical marijuana industry as a licensed provider since early 2012.
Management
•Kris Klassen President. According to his bio, Mr. Klassen has "over 15 years experience in the medical marijuana industry." Disclaimer: this information is unverifiable.
•Wayne Hansen CFO
•Bal Sandu, P. Eng., COO.
•Danny Camele, VP Marketing
Research and Development
•Laila Benkrima, Ph.D, is Medican's chief horticulturalist. Dr. Benkrima is an expert in chemical hybridizing agents in wheat. Dr. Benkrima is not an expert in medical marijuana. She is currently a research associate at BCIT in the Natural Health & Food Products Research Center for Applied Research and Innovation.
•Renee Priya Prasad, Ph.D, Sr. Production Manager. Dr. Prasad is a specialist in pest control. Again, it is important to note that Dr. Prasad is not an expert in marijuana pest control. Dr. Prasad is a highly experienced entomologist with over 18 years of experience in cranberry crop control.
•Manessha Jaitly, Ph.D., Quality Assurance Manager
Although a very knowledgeable team, it is questionable that these scientists are agreeing to apply their expertise to marijuana cultivation. Dr. Benkrima is a "wheat" specialist; Dr. Prasad is a "cranberry" specialist. As I am not an expert in any of the related fields, I do not know whether the fields are that different and that the R&D team will be unable to apply their horticultural expertise to medical marijuana.
Advisory Board
•David Tobias, founder of Hemp Inc. and Cannabis Sativa Inc.
•Rick Brar, President and CEO of IHL
•Kevin Coft, General Manager at IHL
•Sam Perera, MBA, CAIA Founding partner at Lion Financial Group (LFG)
Some investors might be uncomfortable with the name David Tobias attached to the firm. However, I am fairly confident that he will benefit Medican immensely since he does have extensive experience in the field of publicly traded marijuana stocks.
It is clear that Mr. Williams has put together a distinguished team. Most of the Medican team boasts years of experience in the business of marijuana cultivation, production, and sales. This is the kind of team I feel comfortable investing in.
The Management Agreement
Although an experienced staff is comforting, there is only one reason to invest in Medican Inc.: their partnership with International Herbs Ltd's subsidiary ("IHL"), IHMML. Kevin Coft, General Manager of IHL, has gone on to create IHMML (International Herb Medical Marijuana Ltd) branded as Zenabis. Zenabis is in the process of acquiring a 393,000 square foot facility in Atholville, New Brunswick.
A Couple of Hiccups
It is clear from the filings that Mr. Williams has always had his sights set on Canada. Towards the end of 2013, Medican founded two subsidiaries:
•Median Systems, Inc., a Yukon corporation
•Medican (Delta) Systems, Inc., a British Columbia corporation.
Medican Delta was essentially established to obtain a Medical Marihuana Purposes Regulations (MMPR) producer license. Medican Delta signed a management services agreement with International Herbs Ltd. (IHL) and Lions Financial Group (LFG) for the purposes of promoting and assisting Medican Delta to obtain an MMPR license.
Hiccup #1: IHMML Going Rogue
Since the agreement, it is suggestive that IHMML went rogue and decided to acquire a facility for itself. Most likely because of strict rules preventing US based shell companies from acquiring the MMPR licenses. Medican Inc. still wanted in.
Resolution: "Amended Agreement"
On March 13, 2014, Medican, LFG, and IHL entered into an "Amended Management Services Agreement." Under the terms of the "Amended Management Services Agreement" IHL and LFG agreed to cooperate and work together to promote and develop the business of Medican CanaLeaf and to assist Medican partnering with IHMML, a company that is applying to obtain licensed producer status from Health Canada through its subsidiary Zenabis.
Hiccup #2: A Nonbinding "LOI"
It has already been all over the news that Zenabis is in the process of acquiring a 393,000 square foot facility. Not wanting to lose out on its meal ticket, Medican on March 24, 2014 entered into a nonbinding Letter of Agreement (LOI) with IHMML to become a 50% holder of IHMML by way of subscription for 41,600,000 common shares of IHMML for an aggregate subscription price of $52,000,000.
*393,000 square foot facility in Atholville
The proceeds of the deal will be used by IHMML to complete not only the purchase of the 393,000 square foot facility in Atholville, New Brunswick which has 300,000 square feet of grow space, but also an additional second building in Poekmouche, New Brunswick, which is a 273,000 square foot facility with the potential to expand to a total 600,000 square feet. This means an initial total of 593,000 square feet for cultivation with the potential to have 900,000 square feet.
900,000 Square Feet Marijuana Facility
Medican essentially will be the 50% owner of 900,000 square feet of marijuana cultivation space, or 450,000 square feet. To give you an idea of the profitability of owning a 900,000 sq ft. facility:
Medican Inc. & IHMML
Tweed Inc. (TWMJF)
Est. square footage
900,000 sq. ft.
150,000 sq. ft.
Conservative: 1 plant per 9 sq. ft.
100,000 plants
16,500 plants
Maximum: 1 plant per sq. ft
900,000 plants
150,000 plants
Average annual yield of 200 grams of dry bud per plant
20,000 to 180,000 kilograms
3,300 to 30,000 kilograms
Average sales at $7 (CAD) a gram
$140 million to $1.26 billion
$23.1 to $210 million
Est. pounds per yield
44,150 to 396,832 lbs
7,285 to 66,138 lbs
Est. revenues
50% adj. $70-630 million
$23.1 to $210 million
Est. costs of electricity at $238 per lb
~$10,507,700 to ~$94,446,016
~$1,733,775 to ~$15,740,844
Est. gross profits
$59,492,300 to $535,553,984
$21,366,225 to $194,259,156
Realistic est. revenues at 68 grams per sqft. 50% adj. $214.2 million $71.4 million
Realistic costs 50% adj ~$32.1 million ~$5,4.million
Gross Profits 50% adj. $182.1 million $66 million
**The above figures are estimates and do not reflect actual yields or earnings. They may be much higher or lower depending on the given circumstances, yields, and facility utilization. I assume 5 harvests, annually yielding 40 grams per plant per harvest for a total of 200 grams per year.
As you can see, the numbers yield a wildly large range. This should help investors understand what goes into investing into an agricultural company that has limited space and resources. The slightest misstep in space utilization or production inefficiency can yield grossly divergent results.
Additionally, nearly all MMPR firms have agreed to offer compassionate pricing to patients living in households with under $30,000 a year in income. This will affect the return on investment.
Although the above figures are merely estimates, no matter what Medican Inc. potentially stands to yield 3x more in revenues than Tweed Inc. This is not to say that Medican will also be more efficient at keeping costs of production and overhead low. Furthermore, Medican has only signed a nonbinding agreement with IHMML. If IHMML can come up with the capital itself, it may not have use for Medican.
Seal of Approval
Medican and IHMML are not only setting themselves apart by acquiring the largest facilities for growing medical marijuana. They have also joined an organization called the Canadian National Medical Marijuana Association (CNMMA). The CNMMA stamps companies with a "seal of approval" for upholding stringent MMPR guidelines. As a result, it has made itself the coveted ersatz endorsement needed to assuage investors and patients alike.
(click to enlarge)
[-chart]static.cdn-seekingalpha.com/uploads/2014/4/20467391_13966473370278_rId35_thumb.jpg[/chart]
It is interesting that IHL is CNMMA approved, since it plans on entering the marijuana sector only through a subsidiary. It is unclear why IHL would also receive this stamp of approval.
Disclaimer: There is no publicly available information regarding the legitimacy of the CNMMA. Several attempts have been made to contact the CNMMA without success.
[-chart]static.cdn-seekingalpha.com/uploads/2014/4/20467391_13966473370278_rId37.png[/chart]
Zenabis Approved
With so many companies desperately finding ways of distinguishing themselves from the competition, the CNMMA brand gives the impression that these companies are certified and trustworthy. To the untrained eye, this seal of approval seems like an unbiased legitimation of the company's authenticity. However, without full disclosure of the CNMMA's independent board, investors should pause before demanding that their MMPR firms also receive their CNMMA membership.
And finally Medican, along with Zenabis and IHL, also has the CNMMA stamp of approval. I must admit that it is tantalizing that a publicly traded company in the US had a Canadian CNMMA stamp of approval, even if I doubt the legitimacy of the CNMMA, it does give Medican the allure of having more legitimacy than the other Canadian players. Tweed does not even have the CNMMA stamp.
Market Outlook
MDCN
FITX
ENRT
(TSXV: TWD)
ATTBF
Share price*
2.75
.082
.51
2.59
1.48
Outstanding Shares
33,616,040
3,417,417,54
87,233,072
32,042,612
57,831,082
Proposed Facility Size
900,000 sq. ft.
58,000 sq. ft.
60,000 sq. ft.
150,000 sq. ft.
N/A
Authorized Share Count
100 million
3.5 billion
200 million
35 million***
62 million***
Market Cap
90.75 million
280.19 million
45.24 million
82.99 million
84.36 million
Adjusted Share Price**
0.908
2.802
0.452
.83
.76 (US)
0.854
**April 4th, 2014
**Adjusted share price at 100 million shares
***Canadian law allows for unlimited authorized shares but it has been suggested that this is the 'cap'
On an adjusted per share basis FITX is the most expensive. The combined market cap of ENRT, MDCN, ATTBF, and TWD equals 296 million, roughly 16 million more than FITX. This may be surprising because it is by far the "cheapest" of the five companies.
Remember a share price can "look cheap" that does not mean the company is cheap. Even though the share price of MDCN "appears" 2,647.7% greater than FITX, the actual per share cost of FITX is 384.6% greater than MDCN.
One can interpret FITX as "market perform," which would suggest the other companies are currently undervalued. I would not endorse this interpretation. Value is interpretative and I'll leave it to the more savvy fundamental analysts to determine intrinsic values.
Overall, I believe Medican has the most potential out of all the publicly trading MMPR plays. Although Tweed actually boasts a license and a facility, Medican has the potential to be 3X bigger.
Canada versus the US
Canada versus the US
Use
Canada: 3,015,000 10.2% of population 15+
US: 25,768,000 9.6% of adult population 15+
Canadian consumption
US consumption
Estimated casual 45%
.6 grams p/year
1,356,750
11,595,600
814,050 g
6,957,360
Estimated regular users 41%
15 grams p/year
1,236,150
10,564,880
18,542,250 g
158,473,200 g
Estimated daily users 9%
320 grams p/year
271,350*
2,319,120
86,832,000 g
8,245,760,000g
Estimated chronic users 4%
1,825 grams p/year
120,600*
1,030,720
220,095,000 g
47,026,600,000 g
Estimated totals
3,015,000
25,768,000
326,283,300 g
55,438,035,105 g
At $7 a gram
108 grams p/year
$2.283 billion
$38.806 billion
n/a
n/a
Estimated 391,950* core MMPR patients
783 grams p/year
$2.148 billion
n/a
n/a
n/a
*The Canadian Centre on Substance Abuse (CCSA) estimates that 25% of marijuana users over the age of 15 consume daily. If 25% of Canadian marijuana users consume daily, I believe that the core market equals 753,000 daily and chronic users. 753,000 users is nearly double the above estimates. Maintaining a similar distribution, I estimate there are perhaps 225,900 chronic users and 527,100 daily users. That is 7.7% chronic users and 17.28% daily users out of 3 million Canadians who reported using marijuana.
I believe the core Canadian market comprises of the approximately 753,000 people who use marijuana daily and will therefore utilize the legal and accessible MMPR program. And since 7% of Canadian physicians support prescribing medical marijuana, this will make it easier for a larger portion of marijuana users to be able to obtain physician prescriptions.
With 225,900 chronic users and 527,100 daily users, that would mean 580,940 kilograms consumed. If this was purchased through the market at $7 a gram, that would yield total annual revenues of $4.067 billion in the Canadian market. This figure sounds more reasonable since the CCSA has stated that in 2002 the illegal marijuana market was estimated to be approximately $8.2 billion.
But let us not get ahead of ourselves. Returning to the original estimates, in the event that 25,600 patients under the MMAR system are able to keep growing for personal that still leaves the low estimate of 356,350 chronic and daily users. If the additional 12,000 licensed users continue to buy from the 4,200 that are licensed to grow for a maximum of 2 patients that will mean 37,000 will not participate in the MMPR program.
Let's say that the 37,000 MMAR patients are all chronic users. That would still leave 83,600 purchasing an average 1,825 grams p/year and 271,350 purchasing 320 grams p/year to yield a $1.675 billion market for users who were unable to access legal marijuana under the old system. This is a conservative estimate.
On the other hand, if my estimates are correct-that there is a greater percentage of chronic and daily users in Canada-then the market is potentially $3.594 billion. In both scenarios, I reduce revenues by $473 million, which should account for the 37,000 patients allowed to keep their MMAR licenses and consuming 1,825 grams p/year.
This research is limited because it does not consider whether current total MMPR licensed producers have the facility capacity to fulfill the annual of 529,107 to 1.28 million pounds of marijuana needed to satisfy this "core" market.
Medican Inc.: The Nevada Shell Game
A huge issue for potential shareholders of Medican is the seemingly 25,000% increase in stock price. Well, there actually hasn't been a "25k" increase. Stock prices tend to act funny after the shell is taken over by an ambitious company (compare this with Charter Communications (CHTR), for instance, which went from .10 a share to $35 a share).
•On June 25, 2013 Kenneth Williams entered into a series of Stock Purchase Agreements with Jenson Services and several other minority shareholders through which Mr. Williams collectively purchased 858,946 shares of TC X Calibur, Inc., representing approximately 65% of the outstanding common stock of the Company, for total consideration of $96,500.77, making the entire company worth about $130,276.04.
This information was released to the public in an 8-K. As the chart indicates above, the stock price remained unchanged from June 25 to September 17th, 2013.
•On September 18th, 2013, the company announced in an 8-K that it has changed its name to Medican Enterprises Inc.
•On September 24, 2013, shareholders of record were entitled to a 20:1 dividend split increasing the outstanding shares to 26,501,240, which went ex on September 26, 2013.
•On January 1st, 2014, Medican amends its October 1st, 2013 8-K to inform its shareholders of its plans to become a licensed MMPR in Canada for the purposes of medical marijuana production.
MDCN data by YCharts
•From the date of the stock dividend to the announcement of plans to enter the Canadian marijuana market the stock price dropped 18.1% in value.
(MMPR announcement. Still very light volume. Click to enlarge)
MDCN data by YCharts
•Within 3 days of the announcement, the share price shoots up to $2.55 on January 24th, 2014 on a volume of 126,000 shares. It closes at $1.99.
•The price jump from $0.35 a share on the 21st to $1.99 on the 24th represents a 569% increase. The price drops down to $1.32 on February 24th before bouncing and hitting a high of $3.83.
I think we can dismiss the 25,000% increase as the effect of a shell-takeover since no trading actually occurred from the company's reorganization until the 20:1 stock dividend. Arguably the stock is up 700% from 0.35 since the reorganization.
Ken Williams procured this company precisely because it was a cheap shell, based in Nevada. Nevada has become the hub for shells because of its loose regulations giving it the "Offshore Advantage" for tax evasion, since corporate taxes are unheard of in Nevada. This will be highly beneficial for shareholders because it will mean higher profit retention. This was clearly a strategic move to do business in Canada while avoiding costly taxes. Another company, MDRM Canada Ltd., also chose to procure a Nevada based shell for similar reasons.
(The price jump from 0.35 to $2 occurred on relatively low volume.
Conclusions
There is nothing conclusive now. Medican is still a long way away from the MMPR license. But this one is a great speculative play. If they are able to accomplish what they are setting out to accomplish, they will be the biggest player in the MMPR scene.
I do not doubt for a second that Medican and IHMML will do whatever they can to enter the MMPR market. Even if you decide not to invest in Medican, there's still a way for you to make money from Medican Inc. Zenabis is looking to hire 1,000 people for their facility in Atholville.
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