Critical Hot Button Issues and Lessons Learnt: before filing for your application to become a Canadian Licensed producer.

Lessons Learnt: before filing for your application to become a Canadian Cannabis Licensed Producer.

CASE STUDY #1:   The size of the production facility; SITE LOCATION (required before filing the application).

Jack Grey: CEO (An experienced and successful businessman): Interested in becoming a Licensed Producer.

Growth West:   A successful fully integrated Canadian Medical Cannabis Consulting firm, with clients in provinces throughout Canada having assisted them in writing business plans and filing applications to become a licensed producer under the Cannabis Act, more specifically for the Canadian commercial cannabis industry for:  funding, Health Canada requirements.

Jack Grey: Why do I have to choose the location and size of the physical site for the proposed medical marijuana business when I file my application? Surely, I can choose the location while my application is being processed… anyway I can write a physical address on the application form and then argue with Health Canada later when I want to change this? That’s seems reasonable—after all I can show I am trying to comply in good faith—the change is due to circumstances out of my control.

Growth West:  When the Applicant changes the physical address, the License will be put on hold and may have to go back to start with Health Canada—the physical address is understandably critically important to Health Canada. The location impacts directly on the security criteria to meet.  Also, one of the mainsprings for a producer’s license require consent from the locale fire department and local law enforcement, not to mention the site cannot be near schools and residential.

Jack Grey:  Ok, I get that. Yes, I know a realtor and I asked him to find a land parcel and I also have a lawyer primed to settle my commercial lease. The realtor has found land with access to power and water. I read the regulations and the property complies with the Federal Regulations regarding distance from residential buildings etc.

Growth West:  Have you met the landlord, what are the lease terms you have discussed?

Jack Grey: Yes, I have met the landlord—and my lawyer has correctly advised that he will negotiate a lease so we only pay rental once we take possession—this saves us thousands in potential rental payments. This just the break I need; my business partners don’t want to pay rent while we are waiting for Health Canada’s notification that the application has been successfully processed to the stage of the pre-licencing letter (the PLI letter). We only want to start paying rent once we make the improvements to the property to make ready to invite Health Canada to inspect production premises.

The Landlord did ask if we have a business plan, I said “After all, if you are serious you must have a business plan. But I am a negotiator and you manage to close the lease agreement without a business plan.

I am good to go—I don’t need a business plan—that can come later when I need one for funding.

Next Processing Steps: Jack now moves to select his consultant to file his application for his Cannabis producer’s license—he also has a very rough idea of what his business should look like in terms of the extent of the premises—but he is not sure. However, his team has spoken with some people in the industry and they tell you how big his production facility is under the old Marihuana for Medical Purposes Regulations (“MMAR”) legislation. Jack is ready to instruct his consultant to file the application for his producer’s license. He wants to start off with a small facility as advised by our growing experts. The application is filed—relief! The team is pleased –on the way to fat cat city!!

One year Later- Ready for Funding: After a year or more and spending over $100k for filing the application with a top-notch consultant and expenses for the architect, and security experts and other costs -Jack’s Corporation has just received its pre-licencing letter (the PLI letter) and the work on the retrofit for the existing building is ready to commence. He has a strong commercial lease, and the Corporation’s   team is confident they will be able to get funding, guesstimated at $6M for capital expenditure for the Medical Cannabis processing facility, although they are not sure of the working capital but they intend to pay a consultant to the industry to write one. Jack’s team seems very close to success—its been a long haul and they had good technical advice on their application. The team thanks Jack for his hard work as CEO and congratulates him for a job well done. The team agrees you should also consider an IPO or an acquisition by big pharma or big tobacco as exit strategy maybe three to four years out.

The team is confident they are now ready to instruct a business plan consultant, an industry specialist in the Canadian cannabis industry.

Subsequent Meetings with Investors:

The Investors: The Investor group jack knows ask if Jack had a written a business plan for funding of the processing facility does he have a business plan?

Jack Grey: The team agrees—yes, we usually write a business plan for a start up –but in this case, we spoke to industry experts and addressed the technical side of the Cannabis application but not the business of the business side or proposed Cannabis business operations well—that’s why we did not bother with a business plan—but we are getting one written now for funding.

The Investors: They ask for the floor plan submitted to Health Canada, to calculate the marijuana growing area, and ask for subsequent plans for expansion of the premises.

 Jack Grey: Jack finds out when discussing the key performance indicators with the investors that with the present growing area/ production capacity the Corporation will barely break even. It is much too small!

The Investors: Inform the team that the competition for finance has become fiercely competitive because there are a lot more PLI letters issued by Health Canada due to the new adult use market becoming law in 2018.  Some of Jack’s competitors have worked through a comprehensive business plan before filing their applications-they correctly calculated the extent of the operations large enough to attract funding—also most important for an exit either with an IPO or by an acquisition.

The Investors: Does the commercial lease not contain an option to purchase the property or rights of subdivision? The investor wants control of the property before s/he spends the $6M on the retro fit.

Jack Grey: No, there is no option to purchase. Also, the land leased does not have anywhere sufficient space to increase revenue volumes from the legal Cannabis operations after the first license has been granted.

Note: There is a possibility of changing Jack’s marijuana growing techniques to make the project commercially feasible. The business plan consultant has some ideas but it will mean some significant changes to the floor plan submitted to Health Canada and possible additions of greenhouses with changes to the vault and security. This will significantly delay the Cannabis License application. The alternative is to seek permission to change the site but this will set the application back at least a year or more.

Jack Grey: Jack agrees with the Investors that he needs a Canadian Cannabis industry subject matter expert to work through the floor plan using KPI and work out some recommendations for amending the floor plan, using stacking growing techniques to increase capacity, changes to the security vault with amendments to the original License application to take this into account. It will delay the application significantly but there is a chance Jack and his team may save the business.

The business plan is written and Jack and his team are ready to now go back to the Investors with the plan, financial proformas to prove the feasibility of the project.

The Investors: After Jack and his team have presented the business plan to the investors, they express an interest in going on further, but will only do so if the Corporation amends the commercial lease to include the option to purchase the land.

Jack Grey: He meets with the landlord, present the business plan with pro formas and ask for amendments to the original lease.  He also needs to change the original building significantly to accommodate a new floor plan for additional capacity. By now the landlord while waiting for Jack’s Corporation to become funded has found out that investors require a long-term lease and an option to purchase. He also knows you cannot change the site. The Landlord has jack over a barrel and will only negotiate a new to considering the changes to the building lease…resulting in increased rentals and earlier occupation date and the price for the sale of the property is now significant—above fair market value.

Lessons Learnt:

1. Before looking for the physical site of the proposed Cannabis Licensed premises– work out firstly the production capacity and revenues for the proposed legal Cannabis business with a recognised Industry specialist such as Growth West to create a business plan for the Canadian Cannabis operations, and

2. Then work out the approximate surface areas using this information to create a rough estimate of the total surface area for the production premises using the data form the business plan.

3. Once you have this information you can begin to search for a physical site and close a strong commercial lease with an option to purchase.

4. Engage a Cannabis consultant that understands BOTH the technical side of the Cannabis License application and the business of the business side of the License Application—such as for example Growth West.