Indiva Inc (CVE:NDVA) COO Discusses Ontario Cannabis Retail Lottery Fallout
Indiva Inc (CVE:NDVA) (OTCMKTS:NDVAF) (FRA:T8RP) COO Koby Smutylo provides his opinion on the Ontario retail lottery process and outcome. Smutylo reveals that when the government initially released its written framework for cannabis retail operations, cannabis LPs could only have a 9.9 percent ownership stake in a retail outlet. To prepare for application deadlines, Smutylo launched Retail Go, in which Indiva is a 9.9% percent owner, to prepare for retail operations in Ontario. However, the Ontario government opted for a lottery system instead. While Smutylo notes it is unclear to what extent companies like Retail Go can work with lottery winners, Retail Go is open to that possibility. Smutylo warns of the difficulties ahead for the lottery winners, given the short time to become operational and lack of institutional support. Smutylo also reveals that the government has yet to provide guidance on whether LPs are still allowed to open one store at their production facilities. Indiva is particularly interested in this option as it believes its London, Ontario location is a viable retail option.
Fraser Toms: Hey! In this segment we’re joined by Koby Smutylo, who is one of the founders of Indiva. He’s also the founder of Retail Go which has its sights on retail cannabis in Ontario specifically. Koby, thanks for joining us.
Koby Smutylo: It’s a pleasure. Thanks for having me.
Fraser Toms: Yeah, no problem. So, if you don’t mind we’ll just start off if you could talk about the association if there is any with between Retail Go and Indiva.
Koby Smutylo: Sure. Indiva is a licensed producer in London, Ontario and Indiva started looking at retail about 6 to 12 months ago. Then the government issued its rules regarding retail and indicated that licensed producers could only have a 9.9% interest in in any retail business.
So, we set up a separate or I set up a separate company called Retail Go and Indiva is a 9.9% owner of that business, but that business is operated separately and has a separate strategy.
Fraser Toms: Okay. So, let’s dive into the whole, what’s transpired the lottery situation and kind of what you were expecting and how that may have changed in recent, with the 25 lottery winners in Ontario.
Koby Smutylo: Sure, it’s quite a, quite a story and I’ve lived it and I’m sure you’ll enjoy hearing it. Initially the government put out statements including written and oral statements to describe a process and had released rules around what that process would look like. Retail Go when those rules came out started along the path of leasing locations and working with designers, security consultants and other advisors to prepare for the submission of applications for its locations. We expected that to happen in I think it was the 14th of December when the applications were supposed to be open for acceptance.
Two days before that, that acceptance date, the government decided that instead of that merit-based logical process it would run a lottery and anybody, you know from college students to federal government employees could apply for this lottery and the government would select 25 lucky folks to receive the opportunity to open cannabis dispensaries in in Ontario.
Now, what we’ve done is actually when the lottery came out and we started getting calls from winners looking for help because filling out the application process is incredibly simple, the initial step in order to qualify for the lottery, but the next step is daunting and the process just gets more and more difficult as they get closer to actually receiving a retail operation life.
So, we’ve been contacted by lottery winners and sort of trying to make the resources that we’ve assembled available to them to work with them to make sure that they are successful in the licensing and operation of their retail businesses.
Fraser Toms: So, let me ask then because the rules are sort of, you know, they’re written to prevent people selling their golden tickets, right? So, to what extent can you work with the winners and is it clear to you and to everybody how you can work together and what the limitations are?
Koby Smutylo: It isn’t clear and we’ve contacted the AGCO for clarity and we haven’t received much information at all. But we’re working to get clarity and there are a lot of very talented legal minds focused on this issue right now because we’re not obviously, we’re not the only player that that is contacting or in discussions with lottery winners to potentially partner with them.
So, what we’ve done is sort of thought of an arrangement that we believe is on side the rules but obviously before we finalize anything with any lottery winner, we need to have it vetted by the AGCO. Last thing we want to do is jeopardize a lottery winners chance to open a license and realize on this great opportunity.
Fraser Toms: Yeah, you know, I mean it is a huge opportunity. It is actually a kind of a golden ticket. I mean to be one of the 25. Yet at the same time you touched on it a little bit is it’s not easy financially. It’s not easy logistically because 60% of the winners or more were just individuals, right? So what do they have ahead of them in terms of obstacles to actually get this done? Is it even likely they could get it done?
Koby Smutylo: I think it’s going to be challenging. I would like to think that even if the individual is a college student or a machine shop mechanic or you know, it’s possible and I think there are a lot of good consultants in the industry. I think there are a lot of less good consultants and I think that the navigating the good from the bad is going to be a real challenge.
I think cost wise the expense of opening a location. We’ve obviously done a lot of work in terms of getting a handle on the costs and I think you know, we’re looking at about a million dollars per location roughly to set it up and getting a security plan, point of sale system. There’s is a lot of work that’s involved. But I think it’s doable. I think one of the challenges the license winners will have is if the government, the AGCO says that they’re not allowed to partner with companies like us, how are they going to raise the capital to open the location?
Because as you know, a lot of banks and won’t finance cannabis businesses or even do business with cannabis businesses. Then even if the bank that will do business, a bank that’s going to lend money or finance say a retail establishment is going to want to take security and security is only good if you can realize on that security and if the AGCO won’t allow for transfer then using the assets of the business for security isn’t going to be effective. So, there’s some real challenges, but generally where there’s big dollars at stake and in a lot of talented minds focused, solutions will be found. So, we’re optimistic.
Fraser Toms: Yeah. Is there some kind of line of communication to the government that is there as a resource, where you can ask questions? Or is it just sort of the information that’s out in the public is all you have to go on?
Koby Smutylo: Yeah, it’s exactly it. That’s all we’ve got to go on and we can call the AGCO and ask questions and you can imagine that the type of answers that we’re getting from their frontline folk.
Fraser Toms: Were you also surprised at the well, first of all, it was a quick announcement that sort of if I think it through, caught everyone off guard when they announced the lottery process, but also just the time frame. Can you kind of talk about how long it took you and your team to kind of figure out how things would go and if it’s something that these winners have enough time to do?
Koby Smutylo: Yeah, great question. I mean it took us about four months to assemble all the pieces and these winners have until April 25th to do that. So, it’s a challenge and I think that’s why it’s attractive for them to potentially partner with Retail Go or another company that actually has all the pieces in place.
You know, we’ve got at least locations. We have point of sale system, security plans, building permits. We’ve got it all ready to go. It’s just a matter of submitting it to the government for approval.
Fraser Toms: And as far as you know with the whole lottery process, are they looking to just continue with this way or at some point open it up more broadly and do you have any sense of what’s going on?
Koby Smutylo: Oh, I wish I had a crystal ball. But even if I did I’m not sure that the result would be what was projected based on this government’s approach so far. What I would say is this, I think the government went a lottery route to try and avoid a situation. I think the result of the lottery is that they’ve created the situation that exactly the situation they were trying to avoid.
I mean what’s happening is large U.S and other producers are contacting the lottery winners and offering them very large dollar amounts. What’s going to happen is that I think cannabis retail will be dominated by a few of these companies unless the government does change the process back to a more merit based process. So, I’m kind of optimistic. They might take a look and see that something needs to be done, but it’s kind of anybody’s guess.
Fraser Toms: In terms of licensed producers the thought was that they were going to be each allotted the ability to have retail stores. Is that still something that’s going on? And is there a number attached to that?
Koby Smutylo: So, license producers are allowed to have up to a 9.9% interest in in a cannabis business. They are also allowed to open a store at their production facility. So Indiva is working with its architects and contractors to build a sort of a showcase of its products. And I imagine the other licensed producers are in the same process.
Unfortunately, the government when it launched the lottery it put that other system on hold pending, I guess further information from the government, so we’re not exactly sure when the licence producers will be allowed to open locations at their facilities. But obviously that’s something that producers are real keen to start. Indiva is particularly interested because its facility is located in London, Ontario. It’s actually a viable retail location. There’s a Sam’s Club right across the street.
So, if we can open a store there that would be wonderful. We believe that the supply issues that the government has cited for the reason for restricting licenses to 25, we believe there’s more product available. It’s more of a supply chain concern that the product is residing with the license producers and hasn’t made it through the channels to the OCS. So I would expect that as the supply chain smooth itself out, the supply and more licenses will be available including licensed producers will be allowed to open on their location.
Fraser Toms: Yeah, that’s ridiculous. I mean like what’s the holdup in not allowing an LP to sell their stuff? Go ahead, sorry.
Koby Smutylo: Well the system that’s been created is clunky. I mean the product has to flow from the producer to the government and then from the government potentially back to the producer which would be ridiculous or to the retail cannabis or so.
What the motivation is, I imagine it’s simply money. And unfortunately the consumer is going to pay a higher price because of the layers. Not only do we have taxation, but we have a provincial government distributor who’s going to take its piece before it gets passed through to the retail.
Fraser Toms: Okay. Well, you know, here’s hoping for the best and we’ll like to keep tabs on what’s going on, especially with Retail Go.
Koby Smutylo: Sure and if you want I’m monitoring the situation with the bidding that’s going on for these licenses, so I could provide you with some information on the big dollars that are being paid at some point in the future.
Fraser Toms: Yeah, we’d love that, Koby. Thanks for coming on and yeah, we hope to hear back soon.
Koby Smutylo: Thank you very much. Pleasure.
Fraser Toms: Take care.
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