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Fincanna Capital (CALI.C) revamps royalty agreement with subsidiary QVI as delays fall away

royalty
06/23/2020

Fincanna Capital (CALI.C) has restructured the previously agreed upon royalty agreement with its portfolio company QVI, located in Sonoma county, California, to account for some of the roadblocks and delays its faced prior to its opening.

The commitment for additional funding was contingent on QVI meeting major milestones, which included the completion of its 8,300 square foot manufacturing facility, receipt of its municipal Occupancy Permit and Manufacturing License from the California Department of Public Health and the Office of Manufactured Cannabis Safety as well as a successful commencement of operations and revenues.

QVI has taken longer than anticipated to get into operation, having experienced delays courtesy of licensing, city permitting, timing issues regarding the facility construction and of course, COVID-19 and its assorted hassles. Now they’ve jumped over all of these hurdles and started pushing out product.

“We are very pleased to announce that QVI is fully operational, and we continue to see sizeable escalating demand for QVI’s manufacturing services. QVI has an exceptional management team, a brand-new customized facility located in one of the best jurisdictions in California and is operating in the edibles sector, which many experts report to be the fastest growing cannabis sector in the U.S. The additional funds we’re providing will enable QVI to meet its goal of becoming the premier contract manufacturer in California, the largest single market in North America, and the revised royalty agreement creates a strong win-win for QVI and Fincanna,” said Andriyko Herchak, CEO of Fincanna Capital said.

The acronym QVI stands for Quality, Value and Integrity, and it operates an 8,300 square foot manufacturing facility known as “The Gallery” out of Sonoma County, California. The facility is custom built to meet standards set by the FDA and CDPH, and is focused on producing in-demand cannabis 2.0 products like edibles, topicals, tinctures, hard candies, gummies, chocolates, beverages, vapes as well as the standard pre-rolls and flower.

Terms of the restructured royalty agreement:

  • Fincanna to provide an additional US$1.5 million to QVI to ensure it is sufficiently capitalized during its launch and ramp-up phases of operations and has additional working capital to maximize the significant volume of sales opportunities as it scales and reaches profitability expected in the coming months.
  • Royalty rate increases to a flat rate of 20% of QVI’s revenues, paid in cash monthly. Previously, the royalty was a tiered rate ranging from 15% to 6% of QVI’s total revenues, with the top royalty rate of 15% on the first US$20 million of annual sales decreasing to 10% once cumulative royalties of US$10 million were achieved.
  • Annual Supplemental Payment increases to 70% of QVI’s after tax-income and paid in cash every year. This Supplemental Payment, when coupled with the royalty, will ensure that Fincanna receives a minimum of 70% of the annual after-tax net income from QVI, paid in cash every year. Previously, the Supplemental Payment was 35% of QVI’s after tax-income, accrued annually and would only be paid to Fincanna upon certain triggering events such as a sale of QVI.
  • Sale Proceeds from a sale of QVI paid 70% to Fincanna and 30% to QVI shareholders. Previously, Fincanna’s share of proceeds ranged from 25% to 35%, depending on certain predetermined conditions, with the remaining 65% to 75% to QVI shareholders.
  • The previously agreed to bridge loan commitment to QVI of US$300,000 (not funded) has been cancelled.

A combination of the regulatory hassles at both the state and municipal level and the capital costs required to do business give potential competitors a significant incentive to outsource large parts of their organization to QVI, instead of setting up or expanding on their own manufacturing facilities. Also, QVI can produce virtually all high value cannabis products under one roof, delivering a complete co-manufacturing solution for both in-state and out-of-state brands.

“We are thrilled to be up and running. Although it has taken longer than anticipated, those hurdles are now behind us. The word is clearly out in the industry about our state-of-the-art facility and our outstanding production team. Our sales funnel is building rapidly from a growing influx of inquiries from interested brands as we continue to move quickly to onboard new customers. We also couldn’t be happier with the ongoing support and commitment from the Fincanna team who continue to be excellent partners,” said Annie Holman CEO and founder of QVI.

QVI’s immediate goal is to become the premier contract manufacturer in California, the largest single market in North America and, upon success, to license products nationally and globally.

—Joseph Morton

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