In the old days, former sports stars would inevitably buy a bar to run out the clock on their remaining not-yet-punchdrunk days. They don’t do that anymore. Now they buy Budweiser distribution territories, because making a buck on every beer you serve at midnight isn’t near as fun as making a buck on every beer sold in the region, while you play golf.
Cannabis aggregator CannaRoyalty’s (CRZ.C) latest deal understands that economic truth, and it may be the tastiest of its deals yet, and the most important going forward.
CRZ has closed a deal with River, “the first medical cannabis distributor to receive local permits for medical cannabis wholesale logistics, distribution, and transportation in California.”
The Agreement includes a: i) promissory note financing, ii) consulting services arrangement and iii) preferred product distribution arrangement. CannaRoyalty has now advanced US$2 million to River pursuant to a secured promissory note, and will advance a further US$3 million in two equal tranches during 2017, subject to the satisfaction of certain financial milestones. Repayment of principal and 15% annual interest commences in January 2018.
Okay, so on the surface of it, the market looks at this and says, “So you’ve got a little loan going on and you’ll make a nice return. That’s fine.” Then the market goes back to the corner and plays with its Lego blocks.
But this deal is a stone cold killer. Here’s why:
- Logistics is dope, and dope logistics is megadope. Why grow the weed, commit all the capital to set up, do the work of fertilizing and processing and employing staff and paying rent, when you can make margin just backing up the truck once a month, loading it up with finished product, and delivering it to 200 dispensaries? River delivers product from 100 California weed farmers and 20+ brands to 400 collectives. This is the modern day equivalent of a Budweiser distributorship for the territory of California.
- The agreement includes wording that says River will move 4x the value of CRZ’s promissory note, in CannaRoyalty product value. “The arrangement entitles CannaRoyalty to preferential rates on River’s distribution services, and is reinforced with a commitment from River to acquire US$20 million of CannaRoyalty branded products over the term of the Agreement, subject to certain conditions.”
- Even after the loan is paid off, royalties continue to flow to CRZ for the next seven years. “The compensation payable to CannaRoyalty preserves the originally announced economic arrangement, being equal to 2.25% of River’s gross revenues until repayment of the $5M invested, and 1.75% thereafter until December 31, 2024 (in each case, net of any other payments made to CannaRoyalty pursuant to Agreement).
In addition, upcoming legal changes in California will make it imperative for all operators to work with companies like River, so their access to CRZ’s capital will help that group explode in growth at exactly the right time.
California’s recently published revised draft legislation requires suppliers of cannabis in California to distribute all medical cannabis products through independent distributors. As an independent distributor, River protects consumers through rigorous quality assurance requirements. Although not required to do so under California law, River has a long standing zero-tolerance policy on the presence of pesticides in the products it carries, and requires that such products be independently tested by accredited laboratories to meet the requirements of this policy.
Now consider CannaRoyalty has 24+ assets in its network, some small investments, some large, but all legal in California and most assuredly likely to benefit from 400 new retail outlet partners.
This is vertical integration at its finest, and brings a big plus to every piece of the CRZ roster.
Well played, CannaRoyalty.
— Chris Parry
FULL DISCLOSURE: The author has served as an occasional consultant for CRZ.