Royalty Streaming: A Different Way to Get Exposure to the Cannabis Market
Ash Stringer
February 9th, 2021
App, Exclusive, News, Top Story
When cannabis legalization started to gain momentum in 2012 with Washington and Colorado legalizing recreational marijuana, everyone knew it was going to be a big industry. For nearly a decade now, the investment community has ridden the volatility of the emerging market that generated $13.8 billion in sales in North America in 2019. Analysts don’t expect a slowdown, calling for the U.S. market alone to reach $43.9 billion by 2024, underpinning bullishness in so-called “pot stocks,” including leading growers Canopy Growth Corp. (NYSE: CGC) (TSX: WEED) and Tilray (NASDAQ: TLRY) recently printing new 52-week highs.
Investors have different options to get market exposure, some that are congested like licensed producers, and others that carry a high risk/reward profile like cannabis-focused biotechs. There are also drink makers, agriculture products, ancillary services and more, many of which are lumped together in exchange-traded funds with built-in diversification.
Of course, no matter what the business segment, it takes money to operate and that’s where capital company FinCanna Capital Corp. (CSE: CALI) (OTCQ: FNNZF) has set its sights on capturing market. Led by seasoned vets of the financial industry, the company is employing a royalty model, a business strategy that sets it apart from nearly everyone else in the cannabis space.
Royalty (sometimes called “streaming”) models have long been used successfully in other industries, and FinCanna is the only publicly listed company that is focused on royalty financing in the cannabis space with some key improvements. In mining, for instance, a royalty financing company will provide cash to help develop a gold mine in exchange for a future royalty payment calculated as a percentage of the gold produced or sold, which is typically for the life of mine. FinCanna’s royalties, however, are in perpetuity with no end date, and FinCanna’s royalties are corporate-wide, so royalties are earned on 100% of all revenues of its investee companies.
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In addition to the opportunity for a lucrative return, another benefit of a royalty model is found in the corporate structure, as royalty companies typically run lean and deliver a high revenue per employee. Consider metal streaming company Wheaton Precious Metals (NYSE: WPM) (TSX: WPM), a $17.3 billion company that generated $307 million and net earnings of $149.9 million from its portfolio of royalty deals during the third quarter of 2020. Wheaton has 39 employees.
FinCanna offers a royalty opportunity to those operating in the legal cannabis markets, earning its revenue from royalties paid by its investee companies that are calculated based on a percentage of their total revenues. The model is beneficial across the board, offering companies attractive, non-dilutive alternatives to debt or equity financing and giving investors in FinCanna exposure to a diverse and vetted group of companies. Without high-cost operations, the company can scale very quickly as it identifies best-in-breed companies seeking fresh growth capital.
FinCanna is taking a measured approach, initially targeting the massive California market. With nearly 40 million people, California is the largest economy in the U.S. and fifth-largest economy in the world. Both recreational and medical marijuana are legal in the state, which translates to California being a juggernaut cannabis economy too, accounting for 21% of the $14.9 billion in legal cannabis sales globally in 2019.
The company is led by CEO Andriyko Herchak, CPA, CA, who brings more than two decades of executive leadership experience with public companies to FinCanna. Herchak knows success, serving as CFO of Hathor Exploration, which was the subject of a bidding war between Cameco (NYSE: CCJ)(TSX: CCO) and Rio Tinto (NYSE: RIO), ultimately being sold to Rio for $654 million in 2011. Herchak was also previously CFO at an international sales and marketing company generating $1.4 billion in annual sales in addition to a number of other C-suite and director positions during his career.
Robert Scott, CPA, CA, CFA, serves as CFO at FinCanna and from there the rest of the team is directors and advisors, embodying the spirit of a royalty model running lean in overhead. The group of directors and advisors reads like a Who’s Who in finance, business, law and legal cannabis. They include people like Morris Reid, a globally recognized corporate and political strategist and partner at high-stakes public strategy firm Mercury, as Chairman; Holger Heims, Managing Partner of Switzerland’s Falcon Equity Advisors GmbH, as Director; and a solid team of advisors.
FinCanna has three portfolio companies that demonstrate its mission for diversity. QVI, Inc., operating as “The Galley,” is a cannabis-infused product manufacturer in Sonoma. With an emphasis on quality and compliance, The Galley is a fully-license 8,300 sq. ft. facility built to FDA and California Department of Public Health standards, producing and co-packing a wide array of products, including edibles, topicals, tinctures, chocolates, gummies, beverages, vapes, pre-rolls, flowers and more.
Per the royalty agreement, FinCanna receives 20% of QVI’s revenues, paid in cash every month. With the edibles market booming, QVI is in an enviable position, already onboarding 25+ brands since The Galley launched operations in July 2020. QVI is FinCanna’s largest investment, being owed an Annual Supplemental Payment in addition to the royalty that equates to FinCanna entitled to at least 70% of QVI’s after-tax profits annually, payable in cash. If QVI is acquired or goes public, FinCanna gets 70% of the sale’s proceeds.
The Galley’s clients currently are mostly small to medium-sized brands, with management also beginning to win contracts with larger brands both in the state and those looking to enter the California market. Any new manufacturing deals are like a gold miner striking a new vein for Wheaton; it goes right into the revenue stream for FinCanna.
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Cultivation Technologies Inc. (CTI) operates as an award-winning extraction and manufacturing enterprise in Palm Desert branded “Coachella Manufacturing.” From its state-licensed 5,200 sq. ft. facility, CTI produces high-end Butane Hash Oil (BHO) concentrates for premium brands and cultivators throughout California. It’s first investment, CTI started operating in 2017 and generating royalties for FinCanna in the second half of 2020. CTI has recently committed to expanding its core business, which FinCanna believes will result in “…a large increase in high margin royalty revenues…”
In this case, FinCanna earns a perpetual royalty of 10% of CTI’s consolidated revenue, with 5% paid in cash monthly and the other 5% deferred until pre-set milestones are met. The contract further stipulates that if CTI is sold, FinCanna is entitled to 25-50% (dependent upon certain conditions) of the sale’s proceeds.
On February 4th, the company announced that it sold a portion of its underutilized extraction equipment to CTI in exchange for an increased royalty stream. The new equipment will increase the investee’s current capacity by as much as 500%.
With investments in manufacturing, FinCanna is now also participating in the technology space, acquiring eZGreen Compliance in August. eZGreen operates a state-of-art, HIPAA (Health Insurance Portability and Accountability Act) compliant point-of-sale software for dispensaries. Subsequent to completing the transaction in August, the company partnered with a “highly regarded” marketing company with a deep reach into the California dispensary market. No royalty stream here, all profits from eZGreen sales and services go directly to FinCanna’s coffers.
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2020 was a tumultuous year, to say the least, and particularly hard on California. In addition to the COVID-19 pandemic effecting businesses, the state dealt with out-of-control wildfires that put additional pressure on all levels of the economy. Things are looking brighter for 2021 on the coronavirus front and the cannabis community is buzzing about the Biden administration, which is expected to be proactive towards cannabis legislation, including hopes that it will be de-scheduled or at least re-scheduled in the Controlled Substance Act to allow even greater consumer access and commerce and much-improved income tax economics, which should give an additional lift to cannabis stocks.
For FinCanna’s cautionary note regarding forward-looking information visit:
https://www.fincannacapital.com/corporate/forward-looking-statement/
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This article was published by CFN Enterprises Inc. (OTCQB: CNFN), owner and operator of CFN Media, the industry’s leading agency and digital financial media network dedicated to the burgeoning CBD and legal cannabis industries. Call +1 (833) 420-CNFN for more information.
This article was published by CFN Enterprises Inc. (OTCQB: CNFN), owner and operator of CFN Media, the industry’s leading agency and digital financial media network dedicated to the burgeoning CBD and legal cannabis industries. Call +1 (833) 420-CNFN for more information.
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