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The accidental pioneer: Vodis’ first mover advantage in Washington State
Date: December 4, 2015
When the Vodis (CSE: VP, Forum) team walked into the Stockhouse boardroom this week, there was a little tension in the air. President, COO and Director Ivan Milloivski, who is built like a Men’s Health magazine cover model and was a college football All-Star offensive lineman, looked me in the eye and said ‘hello,‘ but what his look was really saying was “I remember you. And I remember what you said.”
 
Here’s what I’d said, in a nutshell, about Vodis about six months earlier:
 
They had nothing but big name advisors, and those big name advisors hadn’t been complimentary about them in the press. Yes, they had an MMPR application, but so does your grandma. And they had a plan to build a growhouse in Washington State and lease it out to a license-holder but, again, so does your grandma. The guys promoting it were also promoting six other deals and, frankly, I saw it as a meh deal in a sea of meh deals. I wasn’t completely dismissive, but I also wasn’t kind.
 
Millovski wasn’t happy with me the last time I’d crossed paths with him, at some industry event or other, but he held it well. Now, here he was again, in my house, and that look was there once more, a mix of annoyed and sad - ‘hey…why are you being so mean to us?’..
 
But the frost melted quickly this time around, because Vodis has nailed it.
 
Remember way back in the day, when I was yelling that growing weed in Canada was for suckers and that the only way forward was to figure out a way to work in the US? Remember Dev Randhawa taking a time out from his uranium deals to finance a dispensary leaseback roll-up in the US that quickly turned turtle? Remember one company after another rolling out their ‘plan’ to do business in the US, only to never actually deliver any part of said plan when reality rolled along?
 
Well, Vodis did it. They made it happen. I’m not even sure they believed they’d get there through a lot of the last year, but they’ve actually built a facility in Washington State and leased that facility to a Washington State Tier 2 license holder, with consulting deals in place that have given that license holder training and technology and a place to call his own and distribution and aaaargh! They did it.
 
But when the news landed that the Washington State Liquor and Cannabis Board had visited the Vodis facility and dubbed it ready for prime time, the market barely hiccupped. In fact, back in July, when Vodis genuinely had nothing generating revenue and no idea when that might change, you had to pay $0.49 to get a share. Today, just a few months later, with the wheels actually turning? $0.125. Madness.
 
Here’s the Vodis business model, in short: They go into WA, they build a high tech, Canadian standards-level facility, they then rent that facility to a licensee who can’t raise capital by himself (which is basically every licensee in Washington State right now), and they offer advice, services, anything that grower needs to do business. In return, they get paid for services as the grower gets paid.
 
The grower does his thing, harvests, distributes and maintains high standards, then he gets his Vodis monthly bill that covers literally all non-production related expenses he’ll need to get his product out the door, and when all is said and done and his taxes are paid, he might have anything from 10-25% of his revenues left.
 
Let’s be clear - he’s not going to become a Bellingham-based version of Scarface, but he’ll have a million or so left at year’s end, if he does what he’s supposed to do. And Vodis? They estimate their revenues on that arrangement may come anywhere from $3.6m to $8m, depending on the wholesale price of the product.
 
I’ve seen SO MANY fly-by-nighters claim they’re going to make millions consulting with US growers over the last year, and none of them have made it happen. Until Vodis.
 
Millovski tells me the first WA State building they’ve completed has 10k sq ft of canopy space and could generate as much as 30,800 plants that will yield as much as 3,850lbs of product at max output, over the first year. Second year, that could rise to 37,000 plants and 4,600lbs.
 
A second, smaller building, for a tier 1 client, is being worked on right now. It’ll only be 2k sq ft of canopy space, but it’ll be for a client with an established brand and existing distribution, so Vodis has done a small $750k raise to complete that plan, ignoring their currently oversold stock price to get the deal done and add more revenue to the VP family. That placement, says CEO Otto Folprecht, is currently almost 80% oversubscribed because, “People who know, know what a deal they’re getting.”
 
At $0.10 per share? They sure are.
 
A third building, another 10k sq ft tier 2 facility, is in the planning stage and the company is talking to candidate licensees.
 
“We could have done a deal on that building many times already, but we don’t want any licensee, we want the right licensee, who will adhere to our standards and be a good tenant for ten or twenty years,” says Millovski. Good plan. I like guys who want to play the long game.
 
Vodis, formerly, was geared toward the success of another facility completely; their Delta BC-based facility that is in the Health Canada MMPR approval queue. Their current share price, however, doesn’t factor in the potential of that operation at all because who knows if it will ever move forward?
 
“We got our Ready To Build approval on January 16, 2014,” says Millovski. “We’ve been waiting since then.”
 
Folprecht says that facility isn’t currently a drain on resources, figuring it costs around $400k a year to maintain, with staff, but that the staff is currently training their first licensee.
 
“If the approval comes, and it should, that facility will be worth twenty times what it costs to maintain currently, so we’re just keeping it functional and we’ll keep waiting,” he says.
 
In the meantime, it’s handy to have that greenhouse as a test facility for new tech.
 
“We’re bringing something to Washington that nobody else has done yet,” says Folprecht. “That’s Canadian standards. For all the problems with the MMPR process, the standard operating procedures are world best, and will bring the best possible product. Those standards are so far ahead of what is expected in Washington right now, it brings a real market advantage to our licensees.”
 
So why does the market not give Vodis any love?
 
Well, if I can answer for the market, I dismissed them because the leaseback concept relies on a few things that bring unknowns to the table. You have to trust their legal advice, that such a business concept doesn’t contravene Washington State rules, is solid. That appears to be the case, based on their regulatory approval.
 
You also have to trust the feds won’t kick in the back door and arrest everyone. That also seems increasingly unlikely as state after state continues to open up to medical (and recreational) marijuana. If the Republicans win the next US election, maybe there’ll be some prickly times, but probably not, lest the states of California, Colorado, Washington, Oregon and Nevada cede from the union to protect what is an explosively growing tax base and happy voter base.
 
So assuming all of the above is copasetic, what’s not to like? The Vodis tenant has got plants in the soil right now with the first harvest scheduled for Q4, thus they expect revenues from services to be rolling in Q1 of 2016, and they’ll be earning enough money to expand the moment those first revs arrive.
 
Let’s talk about expansion; the company says that’s on the cards, and that they’re looking in other states. I’m going to say right now, ignore that talk. There’s no reason to expand into Oregon or California or Michigan with the market in Washington State so large, so fragmented, so underserved for startup capital, and so settled on the regulatory side.
 
If Vodis had the money to set up another 200k sq ft of growhouse, they could find the licensees to move in tomorrow, and the regulators already know they’re the smoothest operation in town from a compliance standpoint. And if they’re expecting up to $8m in annual revenue from 10k sq ft of canopy space, you can do the math on what 200k sq ft would bring.
 
And to put that mark in perspective, Supreme Pharmaceuticals in Ontario has a 320k sq ft facility that is currently sitting empty, waiting on Health Canada approval. Vodis doesn’t have to set records to bust into the nine-figure revenue realm, using the model they’re currently using.
 
But that’s for later. Ignore the later. Look at the now.
 
$8m in revenue next year from the first of three planned buildings. Licensee in hand. MMPR application in place.
 
And a market cap of just $7.6m?
 
If Vodis never grows beyond what they have, never completes another building, and never gets their MMPR, that market cap is STILL absurdly cheap.
 
Emerald Health Therapeutics (V:EMH, Forum) (formerly T-Bird Pharma) which, to my knowledge has sold less marijuana than my first roommate out of high school, has a market cap of $12m. The aforementioned Supreme Pharmaceuticals (CSE:SL, Forum) comes in at $18.7m, while Aurora Cannabis (CSE:ACB, Forum), which is farting about with inhaler deals (addendum: They just got their right to sell so, well played, though they have no customers yet) is valued at an astonishing $82m.
 
So Vodis is oversold, no question. For mine, the challenge for them is to demonstrate to the market that US leaseback deals are legit, working, and earning. To that end, if you see news their tenants are harvesting plants, or that they’ve got another licensee locked in, or that work is completed on building two, you’re looking at legitimacy events that take this thing well into the big leagues.
 
I expect those events to come in the next month.
 
I also expect news about the company moving into the extracts space. Folprecht says they’ve been in talks on that front already, and that their facility has ample room to bring in machinery to value-add the weed they’re growing.
 
And there are plenty of people around who’d love to do a deal with a Washington State licensee on the extracts front. Think of Golden Leaf (CSE:GLH, Forum), which is making over $1m a month in Oregon and bringing in machines to expand as quickly as they can be built. That company has said it’s looking to WA, so a meeting of the minds might not be out of the question. Dixie Elixirs just did a licensing deal for edibles with GLH, and is also looking for ways to expand into new states. Then there’s the Canadian companies that would love an entry into the US market..
 
I’m not going to tell you that Millovski doesn’t still have a deep seeded desire to see me in a UBC jersey lining up on the field against him on a dark, stormy Saturday night… but I will say he was right all along.
 
Vodis is at second down, three yards from the goal line. And, frankly, I’d bet on Millovski to drive hard up the middle and put more points on the board before 2016 is out.
 
--Chris Parry
http://www.twitter.com/chrisparry
 
FULL DISCLOSURE: Vodis is a Stockhouse Publishing marketing client
Read more at http://www.stockhouse.com/news/newswire/2015/12/04/the-accidental-pioneer-vodis-first-mover-advantage-washington-state#p3MOpAQUIsr7GTSp.99



Jordana Casey

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