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CannaRoyalty (CRZ.C): Destined to produce the first national weed brands

01/23/2017

Way back in 2014, when a shift in Canadian laws made marijuana companies a thing you could invest in, I pointed out to anyone who’d listen that, sure, growing will be fun and all, but it won’t be where the crazy money is made.

I still think that. Sure, the licensed producers are now worth hundreds of millions of dollars, but a look at their balance sheets shows those valuations are almost entirely built on promise, not revenue.

Aurora (ACB.V) has done a great job bringing in new patients, but they’ve still only got 12,000 of them. To put that into contrast, an average suburban McDonalds restaurant serves the same number of people in six days as Aurora served all last year.

The average cost to build a McDonalds restaurant is $1.5 million. Aurora is worth $627 million, on sales of $3 million in Q3, with a $6 million net loss.

That’s not to crap on Aurora, who have done a good job emerging from shaky beginnings, but it is to point out that the majority of buying in marijuana stocks right now comes down to gamblers chasing the market more than they chase fundamentals.

The reason this is important is because fundamentals are going to continue to be a tough business in weed growing for some time. Right now there’s a shortage of product almost across the board, with many large companies relying on others to supply them, while their competitors, deprived of a sales license by Health Canada, are entirely reliant on wholesale deals to stay alive. Supreme Pharmaceuticals (SL.C), as an example, has a big ass grow facility pumping out product, but it doesn’t yet have a license to sell to consumers and, frankly, doesn’t appear too worried about that as there’s a big demand for their product through competitor patient bases.

That inventory shortage explains why there’s not much panic in the boardrooms of Canadian LPs to grow patient bases beyond what can be served. But that won’t always be the case. There will come a time where supply passes demand, which will mean that supply will become hard to make money on.

We’ve seen this already in Washington State, where some growers have taken to selling garbage bags of their product at government auctions and at low prices, because the regulators gave out a lot of licenses with precious few of Canada’s high buy-in standards, and a local retail industry that is yet to fully develop.

My mantra has been, since 2014, the growers will eventually become bog standard agricultural operations with low margin, and that it will be the value-adders that rise to dominate.

This is starting to happen, but a few things need to emerge before it really takes off. First, you need to see more American states (and the Canadian feds) moving toward broader legalization, which will keep happening as it has the last few years. The second thing that’s needed for value-adds to become the really big deal of the cannabis industry is the first big acquisition of a brand proper.

To be clear, there are no brands proper in American cannabis just now, with the exception perhaps of Dixie. But Dixie has problems, in that Dixie is not one company, but two.

A year ago, Dixie Elixirs and Medical Marijuana Inc. reached an “amicable resolution” on a year-long legal dispute over a partnership that went sour.

Part of the settlement created a novel business situation in which Dixie Elixirs agreed to sell its non-psychoactive hemp-based CBD product line called Dixie Botanicals to Medical Marijuana Inc. (MJNA:OTC). That means there are two separate product lines, owned by different businesses, that have the same first name – Dixie – and the exact same logo.

“What you have is one corporate entity owns Coke and one corporate entity owns Diet Coke,” said Andrew Hard, a spokesman for Medical Marijuana Inc.

The reason you want to build a national brand is so a bigger entity looking to get into the business will see you as the best way in, and give you many millions to hand over that brand. And Dixie, in settling with MJNA in the way they did, made it impossible for a larger company to do that.

So the brand war has still yet to be kicked off, in that nobody else really has one.

There are dispensary groups that have a lot of locations, such as Colorado’s Livwell, which has 14 stores and a big grow, and there are apps such as Leafly and Weedmaps that have big user-bases but sit on the periphery of the business proper. Privately held Privateer has a piece of Tillray, Leafly, and the Marley Naturals brand.

But one company, and only one as far as I can tell, has spent the last year diving in hard on the cannabis licensing, financing, investing and branding front, putting together the first true cannabis aggregator that, for mine, has the best chance of building out truly national brands in growing, edibles, vapes, accessories, research, creams, and so much more.

What CannaRoyalty has gathered under its umbrella is unique, wide-ranging, and smart. It’s uniquely diversified, it has multiple bets across multiple sub-sectors of the cannabis space, and it is set to generate revenue, be it from sales, licensing deals, spin-outs or asset flips.

Two years ago, Marc Lustig, Vancouver-based cannabis markets consultant Brayden Sutton, and myself had a long chat on the phone. It wasn’t the first time I’d received a call from someone asking me what was good in the weed space. But it was the first time anyone had heard the message.

“If you’re going to build a national brand, it won’t be in growing. It will be in products, perfected in one state and licensed to others. That’s the only way to go national – to perfect it in one place and quickly bust it out into every other place through local licensees.”

Lustig went one better. He wasn’t content to buy a brand, in an industry. He bought 21 – no, scratch that, 22 – wait, it just shifted to 23 assets. And he did so, largely, without spending a lot of cash.

The plan is simple: You buy an edibles company, the best you can snag, an award-winner with real sales, then you buy into a pre-rolled joint company, one that’s also winning awards and high praise. Then you buy into a research lab, and a vape company, and a CBD cream developer, and…

Then you take all of those assets, and you sit down with a Canadian LP who, right now, can’t touch any of that stuff, but will be able to soon. You do this knowing that, when the law changes, and allows said LP to do all of the above, that the last thing they’ll want to do is develop all those products and manufacturing processes and brands in-house. What they’ll really want to do is announce, on day one, that they’re in business with established brands that they’ve licensed for use up north.

CannaRoyalty has already done that. A deal with Aphria, before they even came to market, valued the company at some $75 million. After CannaRoyalty’s public listing, Aphria’s investment jumped significantly in value, with the company now worth some $120m+.

On Friday, the company opened the trading day with an announcement that it would take in a $15 million financing. By 9am, the book was closed and shares allocated.

Insiders in the weed mover shaker end of the market have been telling me for a while the big weed investment capital is drying up, that a recent Canopy raise topped out pretty close to their target, but only just.

But then came CanniMed (formerly Prairie Plant Systems, the one-time government supplier of weed), going public two days before the end of the year, on the big board with a large investment by Telus and AltaCorp (that has already doubled in worth), showing that new money was entering the fray, and from the sort of institutional areas that haven’t been touching weed previously.

CannaRoyalty’s financing on Friday took the wind out of a few other company’s sails, just as they were enjoying a nice stock run, but it also announced (without actually announcing it), that the company is going to pick up something new.

Sure, CannaRoyalty boss Marc Lustig said in his news release the raise was for ‘acquisitions, general working capital, and financing existing investments as they grow.’ But we all know what’s up: CannaRoyalty is going to buy something sizable, and is now cashed up enough to do it.

It’s not like that’ll be a surprise. In late December they announced Royalty Financing Arrangement with a 100k sq. ft. grower in Puerto Rico, that’ll bring them a 2.5% royalty on net profits going forward, “and a further 10% referral royalty on revenue generated from products licensed by Natural Ventures from CannaRoyalty for the Puerto Rican Market over a 10-year term, each starting from the date Natural Ventures commences commercial sales.”

The population of Puerto Rico is 3 million, which is similar to the size of the population or Uruguay, where International Cannabis Corporation has a grow license, and a $90 million market cap. CannaRoyalty, however, owns a piece of 22 other assets as well.

Two weeks after the Puerto Rico deal, CannaRoyalty announced it had taken 20% of Anandia Labs, which provides analytical testing services and strain development under a Health Canada Dealers License. In Lustig’s words, “This licensing gives Anandia Labs the ability to undertake research and development, and develop products beyond those currently permitted for Licensed Producers.”

In other words, you want to develop a strain that helps cancer patients? Anandia is allowed to do that. You want to develop a SKU of THC-infused fruit juices? Anandia is allowed to do that. You want to get a breath strip product developed in expectation that Health Canada might decide to permit that soon? Anandia can do that.

Also, they’re providing (profitable) analysis for seven LPs which, right now, is a REALLY important business, with Organigram (OGI.V) having to recall product all the way back to February of last year after it was determined they had banned pesticides in the mix. That recall has also affected Mettrum (MT.V), right after Canopy announced a big money deal to acquire them, and has also touched Aurora, which had a recall of its own when it determined it had sourced some Organigram product that was affected by the mess at OGI.

I talked to Aurora’s Cam Battley last week and he said his company did its own testing and found problems with the Organigram batch, which brought about their voluntary recall, and that his company has long been a believer in testing its product, hard and often. I suspect others will be coming around to the Aurora standard on that topic now, which will only be good for Anandia, and CannaRoyalty’s stake in it. All that, and we haven’t even got into Anandia’s genetic IP assets.

That deal cost CannaRoyalty $1.5 million in cash, $500k in equipment, and $2 million in stock. The earlier deal cost $250k.

With the Puerto Rico deal and the Anandia deal, frankly, I see about $30 million in worth, based on current market pricing – and we’re only 10% of the way down the list of what this company has accrued.

Consider the edibles scene, where CRZ owns 100% of Soul Sugar Kitchen, which makes gourmet cannabis edibles, including peanut butter cups, hand-rolled truffles, and premium snack mixes. Soul Sugar is a multiple award winner, with the truffle product coming in dark chocolate raspberry nougat, milk chocolate peanut butter, toasted coconut, and white chocolate rainbow crunch flavours. Since being acquired by Lustig, the brand has grown to both California and Washington State markets… so far. When Canada’s market opens to edibles, and the government likely rejects any product that may be attractive to children (cookies, brownies, gummies), having a complex adult-facing product like this, which can be produced locally quickly based on recipes that have been tested in other markets, will be a really big deal.

Maybe you see the potential for a pet-focused brand of CBD-enhanced treats. Lord knows, Naturally Splendid (NSP.V) and True Leaf (MJ.C) do, as both have put a lot of elbow into developing products in those niches. CannaRoyalty has not: They just went out and bought one, in Best Buds, a product line focused on ‘anxious dogs’ and ‘joint pain.’

True Leaf only does pet treats, and has an $11 million market cap, so we can probably use it as a good comparable on what Best Buds is worth to CRZ.

4 assets down. 18 to go.

Stokes Confections is another edibles brand under the CannaRoyalty umbrella, and it’s a good example of what CRZ plans to do across the board, eventually. The company acquired licensing rights to California-based Stokes, rather than buying it outright, and has currently licensed it in three US states (WA, OR, and AK) and Canada.

The Stokes pitch is not that they’ll make chocolates that get you shit-faced. In fact, the opposite. Stokes is positioned as a low- and precisely-dosed grown-up brand of truffles and pills, sold in childproof containers, for people who don’t want to trigger a positive on a workplace drug test, don’t want to spend all night eating Doritos, quoting Big Lebowski, and blowing smoke in Snowball’s face, and would just like a nice night’s sleep with a little THC and CBD in their system.

That is appealing to a much broader market than you know, and is exactly what regulators want to see. The San Francisco Chronicle has said as much:

Despite the police headlines about increased potency, the legal marijuana landscape is actually becoming more mellow and mild thanks to the influence of moderate, mainstream consumers as well as state regulations. **

As a comparable, Nutritional High (EAT.C) has been developing a line of edibles for 18 months now for the Colorado market, and has a market cap of $40 million despite not yet having actually launched a product yet. Let’s assume Stokes is worth half of that, and Soul Sugar Kitchen is probably worth another $5 million on top…

5 assets down and we’ve got an assumed worth of over $50 million. That’s halfway to CRZ’s market cap of $120 million and we’re not even a quarter done.

This is going to take a while. So let’s flip through some more.

You’ve got the MUV brand of delivery systems: Transdermal patches, rechargeable vape pen cartridges, topicals, concentrates, packaging.. CRZ earns a royalty on all revenue from this Florida-based pharma developer, and Florida just voted to approve weed use. If MUV decides to expand its wares into that new market, CRZ has a catalogue they can choose from.

Then there’s the wholly owned Freya intimacy spray. The idea here is you spray it on your bits to increase relaxation and promote blood flow before you go like the clappers. Hell, I’d give it a shot. While you’re at it, maybe slap on some Dermaleaf Skincare products, which focus on pain relief and which CRZ has a majority stake in.

Maybe you’re a shatter man, or you like rosin concentrates and distillates. CRZ has a deal with Rich Extracts, an Oregon-based extracts outfit, which is one of the largest extraction labs in the state. These guys are good enough at the shatter business that they drew a 3rd place at the High Times Cannabis Cup, and a 2nd place the Portland Dope Cup.

You want pre-rolls? We all love loosies, so CannaRoyalty snared Lucy’s Pre-Rolls, and Rockets Mini Pre-Rolls (otherwise known as dog-walkers). Organic sun-grown weed with no shake in heat-stitched rice paper, with no chemicals. Then there’s California’s Greenrock Botanicals, which engineers vape pens and cartridges under the umbrella of Dreamcatcher Labs, which is 100% owned by CRZ.

You’re starting to get it, right? I mean, the plan is simple, but only works if you have properties in every vertical, and brands that speak to quality, and in states where you have local licensees so that you can pepper each of those states with your IP, brands, formulas and know-how.

Think about this: Marapharm is opening a big ass grow in Nevada, to go with their others in a few other states. Marapharm is planning to develop new products once it has weed to put in them. But that’s going to be expensive and slow and hard work, so they’ll probably find licensees to just plonk down an oil extractor, a machine roller, an oven or two, a pill press.. and bring the existing brands that work well in Alaska and Washington State and Oregon and Arizona and Florida and Colorado and California…

And who is best suited to bring all of that product to them?

Nobody but CannaRoyalty. You can do 12 deals and hope for the best with each one, of you can do one deal, rely on a single entity that can have your operation running multiple SKUs in weeks, and simply pay them a royalty on anything you sell.

Back three years ago, Dixie Elixirs boss Tripp Keber, then four years in to his plan to make a national brand, told Entrepreneur Magazine, “Right now, the marijuana must be cultivated and consumed in the state it’s licensed […] No interstate transport is allowed. I believe that will change. But in the meantime, there is no law against exporting the brand.”

It’s taken Dixie seven years now to get edibles, topicals, and vapes into five states.

In two years, CannaRoyalty has 23 assets in four states, Puerto Rico, and Canada.

You know why that $15 million CRZ financing was taken up in an hour? Because it’s insanely undervalued, and it’s just getting started.

I love it when a plan comes together.

— Chris Parry
FULL DISCLOSURE: You’re damn right I own CannaRoyalty stock.

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Comments 5

  1. Erin says:

    Hi Chris,
    Great article. I’ve been waiting to get into CRZ, and I think now is the time. Currently I own MT, APH, OGI, ACB, CGC,GWPH, and MJN in this space. I’d like to take some profits and liquidate all/part positions in one or more of these – any recommendations as to which has the least upside as compared to CRZ? Many thanks for any insight you might be able to provide!

    • Joe says:

      How many shares are you planning to buy?

      • Erin says:

        Probably a few thousand – haven’t decided exactly yet.

  2. Alexa says:

    Hey Chris,
    Thank you for the in-depth article. I was wondering if you could comment on the below post that somebody put up on Stockhouse yesterday. I would really like to know your opinion before I invest. Thanks.

    Investing is a risk vs. reward tug-of-war, and I’m not sure if everyone that knows about the Finore/Kushtown deal has properly assessed each side of the rope. I think that most people have a good handle on the risk side because its pretty blatant: If the deal falls through then Finore’s shares will tumble. How much strength and pull this risk has though is up for debate, but my opinion is that its very minimal. Both companies are 110% on board with it and its not breaking any laws or regulations. Deals take time to finalize, so I think that many people’s paranoia and worry that the deal will fall through has been blown completely out of proportion.

    The reward side, on the other hand, hasn’t been looked at clearly by all investors, in my opinion. I feel like everyone is very focused on the deal itself, and that the big upside here is just the deal being finalized and going through. Yes, this will obviously be huge and, no doubt, will result in a jump in the share price. BUT you need to look at the bigger picture to accurately assess the huge gorilla that is pulling on this side of the rope: the disconnect between Finore’s share price (and market cap) and Kushtown’s sales. Right now you are probably thinking, but we don’t know Kushtown’s sales! And thats true, but it doesn’t take a rocket scientist to make reasonable estimates. Let’s start with a top down approach; in 2015 the medical marijuana market in California was $2.7 billion (and I’m sure it was much bigger in 2016, but I have the 2015 figure at my quick disposable and it will keep us on the conservative end of things). Now, is it reasonable to assume that the MJ beverage space would be 15% of the market? 10%? 5%? Afterall, the market is only made up of dry herb, oils, edibles, drinks, shatter, sprays, and maybe a couple others that I can’t think of. An assumption has to be made to formulate a projection, so lets say its 5%. Kushtown, specifically, has 5% of the market share in the beverage space (taken from their investor presentation), which means that their annual sales would be $6.75 million ($2.7b x .05 x .05).

    Now lets do a quick bottom up approach. An old Kushtown sodas twitter account (@kushtownsodas) states that over 1 million bottles have been sold. That twitter account hasn’t been used since 2012 so you know that the 1 million figure is from 4 or 5 years ago. The company has 8 years of sales history (starting in 2009) so you know that it took roughly 3 years to sell more than 1 million bottles, which is an average of 333,000 a year. Lets make another assumption that if they were selling that many bottles back then, its safe to say that, 4 years later, in 2016 they were selling more (MJ market has expanded in those 4 years and the Kushtown brand would have grown stronger). So lets say that its 500,000 bottles per year. Each soda sells for around $6 retail, so lets say that their wholesale price is $4 (which puts retail at a 50% mark-up). That gives Kushtown $2 million in sales. Please keep in mind that this does not include any sales for their non-carbonated and sauce products.

    So we have a range from $2 million to $6.75 million in current annual sales, depending on which method is more accurate. At the moment, Finore’s market cap is just under $20 million. So even if we take the lower $2 million sales estimate, that puts them at a P/S ratio of 10. Now lets compare that with some of the other companies in the industry: CGC – 44, APH – 31, ACB – 63. This is a pretty big difference, and if the top down approach ends up being closer to reality then their P/S ratio would be more like 3…which is a massive difference compared to the other three companies. I realize that the three comparison companies are strictly dry herb and oil producers, and that they are located in Canada, but I still believe that a relevant comparison can be made.

    Anyway, to wrap this up, Finore’s current stock price and market cap don’t accurately reflect the sales of Kushtown. Once the deal is complete and Kushtown’s sales numbers become public knowledge, I think that we are going to see a substantial jump in the share price. I don’t think that everyone realizes the full upside potential of Finore’s/Kushtown’s stock price when the deal goes through, so hopefully this gives you a more clear idea of why this is one of the best investment opportunities of the start of 2017.

    • Chris Parry says:

      Frankly, and I say this with Kushtown as a client of the site, I don’t know enough about the sales side of the deal to put much stock in what’s said above. They may be right, they may be wrong. It appears the product has been in stores a long time. But I really need to see something from Kushtown that moves this deal along to the next level, and the wait for that has been longer than I’d hoped.
      That’s not to say there are warning signs, just that I’d need to see something progressing to be a homer about them just now. Hoping that will happen in the next few weeks.
      DISCLOSURE: I have a load of FIN stock, so I’m conflicted enough to want to support them as it’ll be profitable for me if they do well, but I prefer to roll with straight up honesty, and I want to see more from FIN at the moment. #hopeful

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