CFN Media Interviews CannaRoyalty
November 7th, 2017
News, Top News
In the legal cannabis space, there is an extreme need for capital provided by companies with expertise and dedication to the industry as a whole. CannaRoyalty (CNSX:CRZ), one of the largest publicly traded cannabis companies in the world, acquires interests based on both current trends and future growth opportunities. Michael Garbuz, Corporate Strategy Executive and Legal Counsel for CannaRoyalty, spoke with CFN Media about how the company uses its in-depth expertise in all realms of the industry to help ensure robust returns for their many investors.
Rachelle Gordon: What does CannaRoyalty do and what is its place in the cannabis industry?
Michael Garbuz: We deploy capital both for our portfolio investments and also for our own operations, which are mainly out in California. We play in various verticals of the cannabis space, but mainly in consumer product goods. Products like edibles, oils, vape pens, animal health, drinkables, patches, sublinguals, pre-rolls, creams, inhalers, and other delivery methods – either through our investing partners or as our own fully owned brands that we operate in California. We’ve raised over $35 million dollars to date to deploy into the cannabis industry.
RG: What is the company’s model of deploying capital and expertise to the cannabis industry?
MG: A lot of traditional capital providers aren’t funding the industry for stigma, policy, or other reasons, or are just not a great match for the industry. We feel like we have a great strategic advantage of considering deals where the ROI or IRR would be a lot more compelling than deals in other industries that traditional private equity or venture capital firms play in. We’re looking at companies when we’re making investments that have leading intellectual property, great brand equity, talented management teams, and proven ability to execute. As it relates to cannabis specifically, we’re looking for people who are more innovative than the rest; who are a step ahead of the “me too” crowd. People focused on developing advanced delivery systems and building significant market share around that, is the core focus of what we are looking at right now. Of course, all of that coupled with teams that are proven in terms of their ability to execute on the entrepreneurial level.
And then for us in terms of our expertise in the cannabis industry, we’ve been able to develop quite a meaningful level of expertise on cultivation, extraction, processing, post processing, product formulation, marketing, branding, and really just engaging with consumers and building brand equity. So for us, we either have that expertise in-house or we work with consultants who do. For example, we own 100% of a marketing and branding firm that leads all of our brand marketing, packaging, and digital and social media efforts. In other industry segments such as cannabis cultivation, we have an in-house consultant who had tremendous experience and understanding of HVAC and systems and processes, strains, genetics, seeds, growing techniques, cycles, facilities that you build out, the soil that you use, and everything else in between. Really anything that takes you from the seed of cannabis to the end consumer product, we have expertise on, so we can work through and assess opportunities to determine what would be more real, and what would be, a little less real.
A perfect example to illustrate this expertise would be our joint venture with Sprott Inc.. Sprott is a company up here in Canada that manages around $10 billion worth of assets. They were looking to get involved in the cannabis space and invest in cannabis. They chose us as their joint venture partner to help find them deals, diligence those deals, and ultimately work with those groups to realize value. So that’s the type of the value-add and expertise we are providing to the cannabis industry.
RG: What exposure do investors have to the cannabis industry, both geographically and segmented?
MG: In terms of the cannabis industry, other than a very small part of our portfolio, an investor is being exposed to everything post-cultivation. So taking the raw material of cannabis and basically applying it into an end product that we see higher value in is where we focus. In Canada, a lot of the major players are mainly involved in growing cannabis. For us, we see that the long term value there is going to be pretty minimal. They’re basically farmers at the end of the day. And just like any farmed product, it’s eventually going to be a race to the bottom as the product becomes commoditized; other than maybe a select number of premier flower products. We’re not really looking to get involved in the cultivation because we see in mature markets like Colorado and California, that ultimately it’s not a super profitable part of the business. So we focus on all of the profitable segments of the cannabis industry – intellectual property, really good manufacturing, consumer engagement, brand marketing, post processing, extraction, product development, scientific formulation, and really a lot of the segments on the value chain of the business where we see the most margin available.
I’ll give you a few examples. We own a percentage and licensing rights of the leading pre-roll joint technology. When you take wholesale cannabis, at let’s call it $1,000 a pound and you actually package it in a format where it’s pre-rolled, you’re able to get two to three times the amount in the wholesale market. That’s a major value add from someone who’s selling flower. But also it’s at a pretty minimal cost to get the product into that pre-roll. So then when you start talking about more advanced products like edibles and drinkables, it’s a similar story –you’re able to extract a lot of value and a margin where you’re able to isolate the more active cannabinoid, use less active ingredients that have the same sort of effect and bioavailability in the patient or consumer and have that great experience that they’re looking for with high margins because of the technology that’s being implemented. So in terms of the exposure that investors get, that’s what I would say for every product segment we play in. And we’re really touching all the major product categories that have significant market share in the US.
In terms of geography right now, we’re operating in a number of US states as well as Canada, so throughout North America with a lot of exposure to California, which is the biggest market in the world and where we think will be a really important part of the story of cannabis going forward. California has been involved in the cannabis industry in a legal way for a very long time. California exports a lot of technology and culture, what we eat and how we dress, so we think it’s a crucial jurisdiction for us to grow brand equity and trends. Globally we’re exploring many opportunities. When you’re building a leading product portfolio and the global conversation around cannabis is changing, we will continue to explore those opportunities internationally as they come to us.
RG: What is the company’s plan for growth matched with the global expansion of the cannabis industry?
MG: For us right now, it’s about building a really good product portfolio that’s defensible in its own right in California; building great brand equity with products that span all the different verticals that consumers are really interested in. Vape pens are a big focus right now. We’re going to sell a ton of vape pens that are great margin, low rate of return, really easy and intuitive for consumers to use, with branding that’s super approachable yet sophisticated – products that we’re proud of and are generating a lot of revenue. And as we develop that product portfolio as new legal markets open up, where the expertise and products are going to be starting from day one, we’re going to be there with a proven solution. We can then figure out the best way economically to succeed in those markets. So, whether it’s setting up a camp in an international location, whether it’s licensing our products, or joint venturing with groups who we feel would be good partners, or a whole host of other structures that we’re considering for these international opportunities we are looking at; in order to leverage a lot of what we’re doing successfully in California.
RG: What sets CannaRoyalty apart?
MG: I’d say we have different groups that you could compare us to. One obvious group for us has to be Canadian public companies because we are ourselves a publicly listed company in Canada. And when you’re looking at that peer class, they’re mainly what I would refer to as producers. They’re basically cultivators of cannabis and might do some basic oil products. With us, we view them as more farmers than anything. It’s interesting what they are doing and interesting how they’re building out a lot of capacity. But for us when we look at a mature wine or beer company, you’re not going to value them based on the number of grapes or wheat they can grow respectively, it’s just not generally a KPI of those businesses. It might be part of a business structure of a winery, in terms of how many grapes they can grow. It might not actually be part of their business at all, they might be buying it from someone else. But it’s really the value and the same thing we’re focusing on, which would be how you manufacture it, how you keep cost down and keep healthy margins, introducing products that consumers want, strong management teams, engaging with consumers, marketing the product well, building that brand equity, building up distribution platforms and really committing to that part of the business which ultimately I think will drive a lot of value.
When asking what sets us apart, for us, in California for example – and this gives a really good flavor of the kind of investment we like to make – we put five million dollars into a company called River Distribution, which is the largest legal distributor in California. So for us, that gives us access to almost a thousand dispensaries for all of our products that are being pushed out through River. But above and beyond that, based on the great relationship we have and royalty we earn on their business, they also have committed to purchase 20 million dollars of product from our brands and products portfolio. It just shows that a lot of the stuff that we’ve been discussing, because you have on one hand a great investment into a company that we think we’re going to be able to have a great ROI on the investment because they’re a leading distributor, they have a ton of sales, we’re earning money off their whole top line. It’s great from a pure investment perspective. But in addition to that, we have that strategic 20-million-dollar purchase commitment for all our products, so getting that channel to push out our edibles and push out our vape pens will be invaluable in driving our own sales and distribution.
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