FinCanna: Bringing the Royalty Model to Cannabis, Signs Royalty Agreement with Green Compliance for U.S. Medical Cannabis Compliance Software
February 8th, 2018
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The global medical cannabis industry is projected to reach $55.8 billion by 2025, according to Grand View Research, driven by favorable regulatory trends and increasing interest among academic researchers and health care providers. While many companies are ramping up production, investors may want to consider royalty companies, which are financing companies that may have significantly less overhead costs than the operating companies that they finance. Producers and other operating companies may also want to consider royalty companies as an alternative or complementary source of financing that’s less dilutive than equity financing and easier on the balance sheet than debt financing.
FinCanna Capital Corp. (CSE: CALI) is one of the first royalty companies for the licensed medical cannabis industry. The Company currently has two significant projects, options on additional projects and is building a diversified portfolio of royalty investments in scalable, best-in-class projects and companies in U.S. legal states, with a focus on California.
Why Investors Like Royalties
Royalty companies seek to invest in projects in exchange for a percentage of revenue on an ongoing basis. For example, Wheaton Precious Metals. (NYSE: WPM) and Franco Nevada Corp. (NYSE: FNV) are both royalty companies focused on precious metals that invest in mining projects in exchange for a percentage of revenue.
Royalty companies are popular among investors for several reasons:
- Cash Flows – Royalty companies receive a percentage of revenue, which means they’re insulated from production costs and related factors. This makes cash flows potentially a lot easier for investors to predict and model than the underlying operating company that is being financed.
- Minimal ongoing Cash Costs – Royalty companies typically make an initial investment to acquire the royalty, but ongoing cash costs tend to be minimal.
- Low Overhead – Royalty companies don’t require nearly as many personnel or resources as production companies, which keeps overhead costs relatively low and predictable.
- Diversification – Royalty companies can invest in multiple projects across multiple regions or sub-sectors, which makes them typically more diversified than production companies and could lower the risk for investors.
There are also many benefits for operating companies receiving the royalty financing. For example, these companies can receive the funds they require without taking on debt or issuing equity. The deals are often structured as long-term partnerships with economic interests that are aligned and there may be as much or as little involvement as needed. Since royalty payments are made before tax, the deals can also be very tax-efficient for the operating companies.
Bringing Royalties to Cannabis
FinCanna Capital recognized that the licensed medical cannabis industry, particularly in the U.S., faces numerous headwinds when it comes to raising capital and getting projects off the ground. Management’s goal is to become a “whole capital” solution for top-tier businesses in the licensed medical cannabis sector by providing capital investment for a royalty which is essentially a percentage of future revenue. These investments may replace or complement traditional debt and equity financing.
The company’s first royalty investment is with Cultivation Technologies Inc., or CTI, which plans to build a large-scale indoor medical cannabis facility in Coachella in Southern California. The 111,500 sq. ft. campus will include vertical grow cultivation, extraction, testing, distribution, and centralized processing. In exchange for funding, FinCanna will receive a royalty worth 14% of CTI’s revenue from the Coachella project.
While the project is being developed, CTI has established an interim medical cannabis extraction facility on the property in accordance with its Conditional Use Permit. The facility can process up to 6,000 pounds of biomass per month into about 3.7 million grams of raw oil per year with ample room for expansion. FinCanna will receive 50% of the profits from the interim facility that is expected to come into full production in the near-term.
FinCanna’s second royalty investment is with Green Compliance, Inc., which offers a state-of-the-art enterprise compliance and point-of-sale software solution (“ezGreen”) for licensed medical cannabis dispensaries and cultivators. Green Compliance helps its customers comply with both the Health Insurance Portability and Accountability Act (“HIPAA”) and State Laws by ensuring patients’ confidential data is being handled properly, helping to protect from possible security breaches and financial and criminal liability resulting from potential violations. Most dispensaries use a seed-to-sale solution, and ezGreen has the flexibility to integrate as a plug-in with any existing seed-to-sale software or it can operate as a stand-alone point-of-sale system. Green Compliance has commenced sales in the U.S., and its target market is every licensed operating dispensary and cultivator in the states which have passed laws legalizing medical cannabis – currently 29 states and Washington, D.C. FinCanna will receive a royalty worth 10% of Green Compliance’s revenues.
FinCanna is run by a seasoned executive team. President and CEO Andriyko Herchak has over 20 years of executive leadership experience. Prior to leading FinCanna, he was the CFO of an international sales and marketing company generating US$1.4 billion in annual sales and the CFO of a mineral exploration firm that raised C$100 million and was sold for C$650 million in cash.
FinCanna Capital Corp. (CSE: CALI) represents a compelling investment opportunity for investors interested in the cannabis industry, as well as a great partner for top tier companies looking to grow their businesses. With a royalty-based business model, the company seeks to provide its shareholders with several cash flow streams generated from its project royalties and provide companies with a source of funding that doesn’t dilute its shareholders or hurt the balance sheet.
For more information and to read the company’s statement regarding potential risks associated with FinCanna, its business and its shares, visit www.fincannacapital.com or download the company’s Investor Presentation.
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