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Vodis Pharmaceuticals, Inc., a cannabis turn-key operations, product licensing, and distribution company looks to accelerate growth

March 2, 2017 

This article is an extension to the Stockhouse Editorial: VODIS USA: cannabis pioneer accelerates growth by Jeff Nielson.

Introduction and Overview

The dizzying growth of the cannabis sector has captured the interest of many small-cap investors. This has been accompanied by an explosion in the number of publicly-listed cannabis companies from which investors can choose.

While having a broad selection of potential cannabis investments available is desirable for investors, the flip-side is that choosing from among these emerging companies can be confusing. Vodis Pharmaceuticals Inc. (“Vodis” or the “Company”) is endeavouring to separate itself from the pack through developing and perfecting a turn-key cannabis operation, product licensing, and distribution model – which can then be replicated and exported to other medicinal and recreational cannabis markets.

As a cannabis turn-key operations, product licensing, and distribution company, the Vodis business model seeks to capitalize on the natural business relationship between licensed U.S. cannabis companies and an experienced, publicly listed company like Vodis. What Vodis brings to the table is the capacity to raise capital, along with superior growing and infrastructure expertise acquired by the Company through its extensive history in the cannabis industry.

Vodis’ master grow teams have consistently won or placed in each cannabis competition they have entered with their “VIP” product. As a Canadian publicly listed company, Vodis has access to Canadian capital markets, currently the fastest/easiest avenue for cannabis companies to fund their operations.

As a general rule, U.S. cannabis operators must own the cultivation and processing licenses. In states which have already approved recreational consumption (Colorado, Alaska, Oregon, Washington, California, Maine, Massachusetts and Nevada), there is access to huge recreational markets, ripe for penetration.

In comparison to Canada, however, the U.S. cannabis industry is still relatively immature. Due to the U.S. legal framework – which is more restrictive than that of Canada – most of the recently legalized U.S. jurisdictions are still at an early stage of development. Equally, with U.S. financial markets slow to embrace legal cannabis, raising badly-needed capital and completing and operating a turn-key facility is still problematic.

In the eyes of the Company’s management team, a “problem” for potential U.S. cannabis producers represents an opportunity for Vodis. With a much smaller population base, Canadian cannabis producers do not have access to a market with the same sort of revenue potential represented by the U.S. market. The population of the State of California alone exceeds the total Canadian population.

Meanwhile, with Canada now lagging behind the U.S. with respect to legalizing recreational consumption, Canadian producers are still limited to a smaller medicinal-use market. Vodis is bringing Canadian capital and cannabis expertise to U.S. cannabis licensees in need of turn- key facilities, assistance with grow operations and techniques, product branding and marketing, and product distribution. In doing so, Vodis seeks to gain access to that huge, U.S. recreational market through revenue producing client relationships.

Vodis Restructuring

For investors who have already been following Vodis, revisiting the beginning of 2016 is in order. The Company and Our Church International, LLC (OCI), a Washington-based entity licensed for cannabis cultivation, processing, and distribution, were ready to move ahead on cannabis production at the new Vodis Washington facility. The stumbling block at the time, ironically, was that Vodis hadn’t raised sufficient capital to fully fund the OCI cannabis operation.

Internal frustration at this delay led to changes at the senior management level. Vodis co- founder Ivan Miliovski re-assumed his role as the Company’s CEO and co-founder Derek Good joined the Board of Directors returning the company to its founding mission. Along with going to capital markets for needed financing, the first thing that Miliovski did was to add considerable depth to Vodis’ management. When the new Vodis team arrived at the Stockhouse boardroom to discuss the Company’s latest developments, they were elbow-to- elbow around the conference table.

With the necessary funding now in place, and with a revamped management team, Vodis was once again ready to hit the accelerator pedal in its growth strategy. OCI, likewise, is also ready and able to ramp up its cultivation and distribution of cannabis products.

U.S. Market – Vodis Business Model

In sum, the Vodis business model identifies land suitable for cannabis cultivation. It builds out the full infrastructure required for cultivation and acquires the necessary production equipment. In conjunction with its U.S. partner, it obtains necessary permitting and regulatory approval for cultivation. Then it supplies its U.S. partner with Vodis’ in-house cultivation, harvesting, packaging and marketing expertise. Literally a turn-key operation.

It sounds fairly simple, but the actual execution of this business plan is not quite so straightforward. In a nutshell, foreign companies are not allowed to own any Washington-based cannabis assets. They are not allowed to produce or deliver cannabis in Washington. They aren’t even allowed to receive a percentage interest in revenue from Washington cannabis operations.

Undeterred, management customized its turn-key business model to harmonize it with Washington laws while still allowing Vodis to benefit from the revenue potential of the Washington recreational cannabis market. How did they do it?

The Vodis strategy for maximizing the economic potential of value-added client relationships with Washington licensees involved a three-pronged approach. The principal basis for a Vodis client relationship with a Washington license-holder is a basic tenancy agreement.

Vodis leases or sub-leases its turn-key cannabis operation to the U.S licensee, with the rent representing a fixed charge per square foot of the total operation. That’s revenue stream #1 for the Company. This provides Vodis with a return on its capital investments in infrastructure.

As already noted, Vodis also supplies its in-house expertise in the cultivation of cannabis for its U.S. partner. In return for adding value to cannabis operations, the Company receives consulting fees for those services. That’s revenue stream #2.

The third-prong in the Vodis strategy is arguably the most-important element in terms of the long-term growth of the Company: branding, licensing, and marketing. Again, Vodis looks to create a win/win arrangement with its U.S. clients.

As an established Canadian company with cultivation expertise and market reputation, Vodis intends to license the Vodis brand to U.S. cannabis producers. Vodis also works with those partners to help market and distribute the Vodis-branded cannabis products. The revenues from such Vodis brand licensing and marketing represent revenue stream #3 for the Company.

U.S. Market – Anticipated Revenue Growth

Highlighting that the Vodis turn-key operations, product licensing, and distribution model is now fully operational is a pair of notable announcements in recent weeks. On February 2nd, the Company reported that the Phase 2 expansion for OCI’s Bellingham, Washington facility had received regulatory approval. This allows OCI to begin immediate cultivation on the full, expanded facility.

Said CEO Miliovski, “We expect OCI to see additional revenue from this expansion in the second quarter this year. The revenue increase for OCI can be modeled by the number of lights and yield numbers from the facility today. As such the revenue increase is expected to be in excess of 80% in each subsequent quarter this year with minimal further capital. OCI’s production revenue target of USD $1,000,000 by the end of the year is fully achievable.”

That’s just for 2017. Looking ahead, rental revenue for Vodis for a full year of production at the expanded OCI facility is expected to produce roughly $2 million per year – by itself. Full revenues for the Company’s consultant services on behalf of OCI is expected to net another $500 - $750K per year.

That leads into the latest Vodis announcement on February 23, 2017 the completion of a full licensing, branding, and marketing agreement with OCI. The deal is for 15 years. It involves the Vodis name and related images being used to brand, market and commercialize OCI’s cannabis products.

Initial estimates are that the OCI licensing agreement could net Vodis $500 - $750K per year. Over time, however the Company believes that the marketing/branding deal could eventually produce revenues in excess of the $2 million per year, which Vodis is expecting with each of its other current OCI revenue streams.

U.S. Market – Anticipated Future Transactions

With OCI’s operations firing on all cylinders, management is now turning its attention to initiating additional agreements with other Washington State businesses licensed for cannabis cultivation as well as other businesses in states where medicinal and recreational use is legal. In Washington, the Washington State Liquor and Cannabis Board operates a three-tier system for licensed cannabis enterprises.

A Tier 1 license-holder is authorized to use up to 2,000 square feet for cannabis cultivation. A Tier 2 license-holder is authorized for 10,000 square feet of cannabis cultivation. And a Tier 3 licensee is authorized for cannabis cultivation of up to 30,000 square feet.

Vodis acquires land suitable for cannabis cultivation. It builds out the full infrastructure required for cultivation and acquires the necessary production equipment. In conjunction with its U.S. partner, it obtains necessary permitting and regulatory approval for cultivation. Then it supplies its U.S. partner with Vodis’ in-house cultivation, harvesting, packaging and marketing expertise. Literally a turn-key operation.

It sounds fairly simple, but the actual execution of this business plan was not quite so straightforward. With its base in British Columbia, Vodis naturally began its search for U.S.clients in Washington State. The fly-in-the-ointment for both Vodis and potential Washington partners was legal restrictions on foreign-based cannabis companies with respect to Washington cannabis operations.

In a nutshell, foreign companies are not allowed to own any Washington-based cannabis assets. They are not allowed to produce or distribute cannabis in Washington. They aren’t even allowed to participate in any direct revenues from Washington cannabis operations.

Undeterred, management customized its turn-key business model to harmonize it with Washington laws while still allowing Vodis to benefit from the revenue potential of the Washington recreational cannabis market. How did they do it?

This was the Vodis strategy in theory. Now it needed to execute. The first U.S. partner for Vodis, and the template for its cannabis management business model is Our Church International, LLC (OCI), a Washington-based entity licensed for cannabis cultivation, processing, and distribution.

OCI is a Tier 2 license-holder. There are dozens of additional license-holders in Washington alone, and Vodis management has already been in discussions with a number of licensees. With full confidence in the economic potential of its turn-key model, the Company is being selective about its next U.S. partner.

Vodis is looking for its next Washington cannabis partner to be a Tier 3 license-holder. The economic potential of a Tier 3 operation would be proportionate: cannabis production will be approximately three times greater than that of a Tier 2 operation.

Further, the Company has no intention of limiting itself to Washington State. Management has already been exploring the potential of expanding its business model into the State of Oregon.

Oregon has a different regulatory structure. Notably, foreign entities are allowed to own licenses and otherwise engage in cannabis cultivation and distribution. This means that if it chose to do so, Vodis could operate directly in Oregon. Without a tenant as intermediary, an Oregon cannabis operation could be potentially even more profitable for the Company.

The true beauty of the Vodis business model lies in its scalability as a cannabis turn-key operations, product licensing, and distribution company. It funds, supervises, and licenses branding deals with U.S. clients and partners. As the Company’s revenue base grows, the rate at which it can execute turn-key operations with additional U.S. licensed cannabis producers increases commensurately. Think: cookie-cutter.

Canadian Market

Vodis is certainly interested in the Canadian market, especially as Canada moves to legalize recreational use. The Company’s problem here is largely bad timing. As an early applicant for Canadian licensing, Vodis originally applied under the old MMPR regulatory framework. Part way through this process, the Canadian government moved to the new ACMPR framework. The problem for Vodis is that there are significant differences in the two processes. The Company has been bogged down in Health Canada’s red tape. While it has already received its ready-to- build license from Health Canada, it continues to wait for the pre-license inspection.

Conclusion

As Vodis expands its cannabis turn-key operations, product licensing and distribution model south of the Border (with revenues soon rolling in), the Company’s shareholders can afford to be patient as VP waits to make its mark in Canada.

The “turn-key” business model has been deployed successfully in a number of industries. As this cannabis turn-key operations, product licensing, and distribution company brings this model to the legal marijuana industry, the growth potential exceeds even its own award-winning “VIP” cannabis.

For added historical perspective follow this link to a December 2015 editorial.




Earl Oliver

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