UPDATE: LP-backed Pot Firms Set to Enter Ontario Retail Market

As the opening of the Ontario cannabis retail market approaches, public companies are locking-up deals with retail lottery winners for the development of shops.

On Wednesday (February 13), three Canadian marijuana firms — Choom (CSE:CHOO,OTCQB:CHOOF) and Inner Spirit Holdings (CSE:ISH) in partnership with licensed producer (LP) Newstrike Brands (TSXV:HIP) — secured agreements with lottery winners to aid in the establishment of a retail store in Ontario.

Through two separate deals this year, High Tide (CSE:HITI) has also potentially obtained an entry to the Ontario retail market in a similar fashion.

The Ontario provincial government made the decision to swap an open doors-wide roll-out policy of its marijuana retail market in favor of a lottery, selecting only 25 winners to be allowed the chance to open a store as part of a larger plan.

These cannabis retailers are now striking relationships with undisclosed lottery winners for the opening of marijuana shops in the province.

The 25 winners of the Ontario retail lottery were announced in January by the Alcohol and Gaming Commission of Ontario (AGCO), which is also tasked with regulating these upcoming stores.

Chris Bogart, president and CEO of Choom, confirmed the cannabis retailer had secured a partnership with an undisclosed winner of the Ontario lottery.

“We are thrilled that the lottery winner chose Choom to help them successfully open and operate a retail cannabis store in Ontario,” Bogart said.

Choom’s announcement did not indicate whether the retailer had paid for this deal and, if so, how much. The deal is a letter of intent agreement at the time of this writing.

Jay Wilgar, CEO of Newstrike, the parent company of Up Cannabis, told the Financial Post he and his associates didn’t have “any financial ties to the lottery winner.”

According to Newstrike and Inner Spirit, the two marijuana firms will be allowed to feature an “Up Cannabis experiential hub” in the store of the lottery winner.

The management team of both companies informed shareholders they are expecting an opening in April 1 for the store located in Kingston, Ontario.

Inner Spirit indicated it will collaborate on the construction of the store, licence its own brand and “provide expert product training.”

Up Cannabis is a brand most commonly know for holding an association with the Canadian rock band The Tragically Hip. Newstrike changed its ticker symbol to HIP to reflect the partnership.

Brenna Boonstra, director of quality and regulatory consulting Cannabis Compliance, told the Investing News Network (INN) talk of these sort of partnerships and “buying into a retail lottery winner” were widely held in the lead-up to the lottery.

“It was no secret that deals were being tabled in the week that our retail operators had to complete their retail operator license application,” she said.

Raj Grover, president and CEO of High Tide, said in a press release announcing the first deal the undisclosed lottery winner was “looking for a strong partner.”

Similarly the undisclosed lottery winner that elected to partner with High Tide for its second deal, was “looking for the support of an experienced player in the Canadian cannabis marketplace,” according to Grover.

In both deals, High Tide claims to assist the respective lottery winners “with the establishment and operation of a retail cannabis store.”

According to High Tide, the second lottery winner reached out to the retailer after the company struck its first arrangement with a licensee.

The retailer confirmed the second lottery winner it had partnered with was eyeing the opening of its store in a “potential location” in Hamilton, Ontario.

Canadian LP Aurora Cannabis (NYSE:ACB,TSX:ACB) holds an investment interest in High Tide. As part of an update to shareholders, the LP highlighted High Tide’s two deals with Ontario lottery winners to “assist with the establishment and operation of one of 25 retail cannabis stores in the province.”

Aurora Cannabis also holds an investment stake in Choom through a non-brokered private placement of a debenture in the principal amount of C$20 million. The LP obtained an option to buy up to 40 percent of the retailer at a price of C$2.75 per share in November, 2018.

As dictated by the Ontario provincial government, Canadian LPs are allowed only one retail location if the company has a facility in the province.

Outside of that, LPs are not permitted to participate in the full retail market. However, with the LP involvement in some of these retail companies and then an association with lottery winners, a grey area may be rising for the AGCO.

Boonstra expressed confidence in the AGCO’s ability to take into account irregularities or oversee the role of LPs in these transactions and is sure these new deals are being reviewed against lottery rules set out by the province.

“I would think we can trust the AGCO to do their due diligence and enforce the rules. We have to,” she said.

Deepak Anand, a global cannabis policy expert and formerly with Cannabis Compliance, tweeted a critical stance against these type of deals.

I don’t care how creative your structure is & it doesn’t matter that it won’t create a ‘change of control’ event (through service agreements & brand licensing). The @Ont_AGCO better come down hard on this!

— ᴅᴇᴇᴘᴀᴋ ᴀɴᴀɴᴅ (@_deepakanand) February 13, 2019

Update

Trevor Fencott, CEO of Alberta-based cannabis retailer Fire & Flower Holdings (TSXV:FAF), told INN last Friday (February 15) that he was surprised companies in the space would go as far as send out press releases on these deals since, ultimately, the ruling on these agreements lands on the AGCO.

“I am not surprised that people are gauged in the process but I am surprised that they are announcing them so publicly before the AGCO seems to have officially signed off on them,” Fencott told INN.

On Tuesday (February 19,) Fire & Flower confirmed its own public deals with Ontario retail lottery winners had taken place as the company secured two independent deals.

“Where we are allowed to compete we will compete,” Fencott told INN prior to the public announcement of these deals.

When asked about the potential challenges from a lottery winner associating themselves with a company backed by an LP, Fencott said the limits Ontario has placed on itself are unrealistic given the nature of deal-making and investment in the marijuana space.

“We are waiting for the Ontario government to perhaps clarify its position on that because I don’t know that 9.9 [percent] aggregate is a workable number,” the executive told INN.

In a statement to INN, the AGCO indicated it will review each application for retail licenses from the winners of the lottery to guarantee its rules are maintained.

Don’t forget to follow us @INN_Cannabis for real-time news updates!

Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: Inner Spirit Holdings and High Tide are clients of the Investing News Network. This article is not paid-for content.

The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.