The ‘big boy pants’ weed play that owns one of everything

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November is going to be bat shit crazy if you’re buying and selling weed stocks, and October is already halfway there. You can take early 2014’s Mining-to-Pot diaspora and toss it aside. You can take the ‘Trudeau loves weed’ run shortly after the Canadian election and never speak of it again.

This November, the dotbong world changes forever.

During Green November, three big things are going to happen. First, California votes on whether or not to accept recreational weed, which will (assuming the referendum goes as expected) make the world’s largest weed economy grow exponentially – with some estimates seeing a triple from current levels.

Second, the US votes on who will be the President for the next four years, and whoever wins, it’s a lock that they’ll be liberalizing weed laws. Even Republicans, who generally fear monsters under every bed (and what goes on inside the bed), across the US have been voting at the state level to let weed users do their thing unhindered – albeit heavily taxed.

The third thing is, Canada’s weed regulators and interested parties are expected to table their findings at the great weed Algonquin roundtable of 2016, where such issues as ‘where will recreational weed be sold’ and where can the entire nation sign up for it’ will be answered.

In the run-up to these things, weed stocks are going to run. To be sure, for a lot of the companies flying at the moment, there’s no business plan to speak of behind their individual run. It’s just a rising tide of weedcos floating all boats, dinghys, bits of driftwood and discarded plastic bags right now.

But one more very important thing is happening in Green November that, I think, will have as big an impact. And that’s the arrival of, what I consider to be the dopest dope plan to have come out of the potosphere.

If you go right the way back to talks I was giving at conferences in mid-2014, the theme of those talks was very clear – growing is fun, but brands will dominate the world.

If you go back to the end of prohibition, sure, everyone wanted to run a bar and guys who grew hops and barley made decent coin as the covers came off the business, but the guys who made all the fat money, the billions rather than millions, were the ones who owned the brands.

Budweiser snapped up breweries during prohibition, when they were going for a song, and started the beer distribution business, where rather than competing with them when prohibition ended, you’d just set up a sales territory and sell their product through your own warehouse, with the company’s protection against competition.

What did people want to drink when prohibition ended? Not RotGut 45 or Artisinal Beverage Beers Incorporated, but Seagrams, Johnny Walker, Canadian Club, Budweiser. The brands lent legitimacy, and were desirable.

Tell me today, what ‘brands’ are out there for the weed world? What’s the go-to for oils or leaf or vape pens? It’s a mess of different companies in different states, some licensed, some not, some run out of Billy bob’s garage next to the Skidoo and the box of fireworks, and others out of polished industrial facilities. What brand do you buy because you know it’s what you paid for? What brand delivers consistency, in any product?

But branding is the only play right now, if what you’re looking for is a company that will no doubt get taken out by a major non-weed player with billions rather than millions.

Building brands that poke out further than just a US state, however, has been difficult, because it’s tough to take a product across state lines, so if you want to sell edibles in Washington State and California, you need a production facility in both. Then you need to figure out how an out of state company can own them both. The legal issues are constantly moving and prohibitive. Add to that, weed is still not technically legal on the federal level, and building a genuine brand becomes next to impossible.

But not impossible.

One company has, by my understanding, acquired and/or built a portfolio of brands in the most important segments of the cannabis market. One company, which 2 years ago didn’t exist, has gone on a spree of snapping up and developing best in breed brands in the major legal states of the US where weed is regulated – and Canada.

Why?

Because they can take those brands, and license them in other states, to other operators who are licensed to do business in that state. They can take up-front fees and ongoing royalties for bringing an established brand of oils, the tech that extracts them, the machines needed to do that extracting, and the team that knows how to do it. They can bring established lines of edibles or pet foods or pre-rolled joints or skin care products. They can bring a licensee that has just hit the ground running in Nevada and wants to offer a full line of SKUs, like CBD pills and researched strains and vape pens and shatter and gummy bears. Then they can take the best products Nevada folks have developed and license them to everywhere else.

This is how you build legal, respectable national brands in a market as fractured as weed.

But to do it, you need a few things.

You’ve got to be able to acquire and develop brands in the key areas of the weed sector, and not just whatever you find lying about on a dispensary floor, but companies that have revenue and technology and IP and a customer base.

You’ve got to have a real presence everywhere weed is regulated, as a way to bring all your brands into that market before it establishes alternate brands.

You’ve got to be able to find big players who want access to those brands and will pay for the privilege, not LOIs that say maybe you’ll get paid if maybe someone sells something and the planets align and we can raise some cash selling paper.

You need grown-ups at the wheel. The sort of guys that a roster of Big Pharma or Big Tobacco lawyers and accountants and directors won’t be scared of, when they come knocking looking for the fastest way into a newly legal market that threatens their own deals.

One company, and only one company that I know of has done this. They expect to be public in November in Canada at a pre-listing valuation of $70 million. I was introduced to it months ago by marijuana man about town, the deal maker heartbreaker, the Warren Buffett of the Fraser Valley himself, Brayden Sutton, who you may recognize from the dozens of weed companies he’s helped steer, cheer and propel over the last few years.

The company is Cannabis Royalties and Holdings (soon to be re-named CannaRoyalty).

CannaRoyalty is the brainchild of Marc Lustig, a straight shooter with a Masters in Science and an MBA and 16 years of experience in the pharmaceutical sector and the public markets. I talked to him over a year ago when he was in the early stages of assembling what is now a unique, diversified portfolio of 18 investments spanning 5 U.S. states across 3 key verticals – brands, research and devices.
Back then, he hadn’t acquired anything, but he was looking to bridge the gap between what could be and what will be. I told him then, his concept was spot on, it was EXACTLY what someone needed to do to bring some real corporate thinking to a fractured space.

And then I didn’t talk to him again for a year because who on earth would actually manage to put such a plan together? I mean, a markets guy says he wants to get companies in every single sub-sector of the space, in the key states of the US where cannabis is legal.. good luck, son.

Well.

COVERING THE COUNTRY:

I got my hands on some information from August recently that made my heart throb. CannaRoyalty had, at that time, acquired, either fully or partially, 18 brands, IP, assets, and holdings across:

• California
• Washington State
• Oregon
• Arizona

They’ve got everything from weed-based sex oils to industrial packaging and filling systems to dosage reporting software to vapor pods.

CREDIBILITY:

Aphria, one of Canada’s major weed licensed growers, has to-date invested into CannaRoyalty, for an approximate 7% stake. This should no doubt give Aphria a good vantage point from which to look at whatever CannaRoyalty has in the portfolio for the Canadian market whenever the market allows. In addition, CannaRoyalty just closed a $5 million financing led by a syndicate of dealers led by Clarus Securites (the same firm that led the $35 million bought deal by Aphria).

BRANDS:

CannaRoyalty has developed its own brands or partnered through licensing or funding with other brand owners across the full menu of product segments from vape cartridges to award-winning edibles and pre-rolls. And while brands are great if you really want to be at the forefront, you need to have a little R&D going on too. You need to be able to bring potential acquisitions a vertical integration set-up that allows them to sell more product with less capital, at better margins, and in more places.

To that end, CannaRoyalty has an investment in a fully licensed research facility in California with leading scientists doing research on given ailments and how effective certain strains are in alleviating those conditions. It also has a stake in a dispensary that has 30,000 registered patients, which is ideal for brand testing. That facility is licensed to cultivate, extract and dispense.

In Washington State, they have a 30% royalty on the gross revenues of a cannabis campus, which includes an oil extraction building licensed for full scale production. They have a royalty on the net revenues of a company that has transdermal patch technology, topicals, and metered dose inhalers. This company was founded by former executives of MedImmune, which was sold to AstraZeneca in 2007 for over $15 billion – these guys are very senior pharma guys that know how to develop products and bring them to market. CannaRoyalty has a 8.2% equity stake in the parent of this company, which also has active operations in Arizona and Colorado, and is well positioned in Florida to launch a leading medical cannabis business if the vote is approved on November 8th in that state.

SO HOW DO I BUY SOME?

Look, I know it’s going to be frustrating to many of you that this isn’t some tiny penny stock shell on the market right now that you can buy at $0.03 and ride hard before Joe Public catches on. Sorry, but this is not one of those plays.

This play is going to market in the >$2 range, not the >1c range. The information regarding it has been kept close to several chests. As I mentioned earlier, the latest financing was done at $2 per share, and it has not yet been open to the general public. When it does list, I would expect it to list at above $2.50 or higher. I’m totally connecting dots here, but based on a portfolio of 18 incredible holdings some of which are now producing revenue, this is a unique company that offers investors a diversified way to play the legal cannabis market versus many of the Canadian LPs that are cultivation only, Canada only focused.

CALIFORNIA EXPOSURE:

If you’re buying weed stocks right now based on the potential of California recreational approval, there are only so many stocks that will realistically benefit from that shift. Tinley (TNY.C) is one, selling hemp beverages in that state, and that company has been on a multi-bagger rip over the last week as a result. Maple Leaf Grow World (MGW.V) is another, with their leaseback deal renting a grow house to a licensee in return for most of their sales. And that’s basically it. Canada has been a little scared of doing business in California.

But nothing plays California like CannaRoyalty, with a side bet on many other key states thrown in, and upside potential in Canada from Licensed Producers who may want to in-license various CannaRoyalty’s products.

Nobody – but nobody – that I’ve seen has gathered this level of licensing, this many SKUs, this many brands, and brought it grown-up style while doing so.

CannaRoyalty. Look for it in November.

I will be buying on opening day.

Chris Parry

FULL DISCLOSURE: I do not have any commercial arrangement with Cannabis Royalties, nor do I own any stock, because I don’t run with the level of big dogs who get in this early on deals like this. But I will, once it’s available.