VIVO Cannabis Inc. and two other unnamed licensed producers are investing up to $40-million in National Access Cannabis Corp. (NAC), becoming the latest LPs to seek retail exposure by buying minority stakes in bricks-and-mortar retail chains.
VIVO, formerly called ABcann Global Corp., is buying $5-million worth of NAC common stock in a private placement financing round. It’s committed to investing a further $5-million when NAC hits certain milestones in the expansion of its retail footprint, the companies said in a pair of news releases on Tuesday.
The other two LPs – which won’t be named until Friday or next Monday, according to NAC CEO Mark Goliger – have each committed to investing between $10- and $15-million, in several milestone-based tranches. A fourth LP may also join the private placement round in the coming days, Mr. Goliger added.
Vertical integration, from LP to storefront, isn’t permitted in most provinces, due to government middlemen and limits on LP control over retail stores. That isn’t stopping LPs from looking to retail as an important place to eke out margins.
The investments in Ottawa-based NAC follow a similar path taken by Aphria Inc. and Hexo Corp. in August, when each invested $10-million in the retail chain Fire & Flower Inc.
Like Fire & Flower, NAC is planning to open dozens of stores across the country, under the brands META Cannabis Supply Co. and NewLeaf. Only one NAC store was open on Oct. 17 – a META store in Winnipeg – but the company expects to open several NewLeaf stores in Alberta in the coming days and weeks.
The company also has a partnership with Second Cup Coffee Co. to turn underutilized Second Cup real estate into META dispensaries – something that Mr. Goliger says is underway in several locations. NAC has said it wants to have 50 to 70 locations open by the end of the year.
"We're trying to maintain the pace to hit our targeted and disclosed footprint for 2018,” said Mr. Goliger. “Of course there's what we can do in construction, and there's what's done externally with licensing. And then the question is: Is there product?"
Since Oct. 17, it’s become clear that demand for legal cannabis is far outstripping supply, at least in the short term. That makes timing the opening of retail stores a challenge.
"Nobody knows for sure exactly when which control board is going to have what product. Control boards have not disclosed to retailers, 'here's what we've ordered, or here's what our supply agreements look like.' So we're in the dark, we don't know. All we can do is pace our own construction and internal dynamics to hit what we assume to be right for the market," Mr. Goliger said.
He expects supply will begin to catch up with demand in the first half of 2019, when a number of large growing facilities, currently under construction or awaiting licensing, come online.
The other big unknown is Ontario, where the provincial government has hinted at a cap in the number of stores a retail chain can own, but has yet to say anything concrete. There are also questions about LP ownership of retail companies, after the provincial government said that LPs and their “affiliates” could only own one retail location, which has to be attached to a cultivation site.
Mr. Goliger said that NAC is currently securing real estate in Ontario, and isn’t concerned that the new investments from VIVO and other LPs will make the NAC run afoul of Ontario's “affiliate” rules.
"We're not an LP, and even with this investment, they're micro shareholders," said Mr. Goliger, noting that NAC’s LP investors will all hold less than 5 per cent of the company’s shares.
NAC plans to raise a further $35-million by issuing convertible debentures – a type of bond that can be converted into shares. The private placement is being led by Cormark Securities Inc. on a “best efforts” (read: not guaranteed) basis, with the debentures carrying an 8 per cent interest rate and convertible at $1.08 per common share.