California has a total population of nearly 40 million and a medical cannabis market that includes roughly 1 million patients (compared to 269,500 in Canada as of December 2017), serviced by an estimated 1,000 legal medical cannabis dispensaries.
In 2016, the California licensed medical market for cannabis was worth an estimated $2.81 billion.
Now that adult-use cannabis sales are legal, the Golden State and the sixth-largest economy in the world has become the Green State and North America’s largest cannabis market. Arcview Market Research forecasts that regulated cannabis sales in California will grow at an annual rate of 23.1 percent between 2016 and 2020. By 2020, the state’s total regulated cannabis industry could be worth $6.5 billion, representing nearly one-third of the total US market, which is pegged to reach $21 billion by 2021.
The right investment strategy can help investors cash in on some of that value. Diversification is a great investment strategy that can protect and increase cashflow and profits. A diverse portfolio allows investors to take advantage of opportunities in all sectors of California’s licensed medical cannabis market, from seed to sale — including cultivation, R&D, security, extraction, retail and even software.
The royalty model is an excellent vehicle for this strategy. Royalty companies have the ability to invest in a variety of high-quality projects across a broad range of subsectors in exchange for a percentage of future revenue on an ongoing basis.
Royalty companies offer cannabis startups non-dilutive, debt-free financing
For startup companies, royalty agreements can serve as an alternative source of financing that’s less dilutive than equity financing and easier on the balance sheet than debt financing. In challenging financial climates, royalty financing can give emerging companies the capital they need to move forward. This is especially critical in California’s cannabis sector, where capital is not always readily available from traditional sources due to the uncertainty surrounding federal cannabis laws. With California’s cannabis market currently in expansion mode, it has created an environment where numerous cannabis companies are looking for startup or growth investment.
“The royalty model is a very attractive alternative or complement to the two typical sources of financing, debit or equity, which are largely not available from traditional sources in the US right now,” Andriyko Herchak, CEO of FinCanna Capital, told INN. “Equity can be significantly dilutive for startup companies. As a as a source of financing, royalty capital is well aligned with the economic and financial interests of great management teams that are looking to expand and grow their businesses in the licensed medical cannabis market.”
Medical cannabis royalty companies, diversified revenue stream and lower risk
Smart investors know not to limit their exposure to just one segment of an industry, preferring to tap into several revenue-producing areas. They understand diversification is key to reducing risk and creating wealth. For investors, royalty companies could provide ample opportunities for cashflow and future upside potential and with potentially less exposure to the ongoing costs faced by operating companies.
The licensed medical sector of the cannabis industry is a strong market from a revenue perspective, and a less risky market compared to the adult-use recreational sector. The federal government is only just finding its stance with respect to the overall cannabis industry, but the medicinal space has benefited from some recent protective legislation. Of note for investors is the passage of the Consolidated Appropriations Act 2018, a $1.3-trillion spending bill that continues protection for the implementation of state medical cannabis programs.
FinCanna Capital is one of the few royalty companies focused on the licensed medical cannabis industry. The company currently is building a diversified portfolio of royalty investments in scalable, high-quality US-based cannabis companies with a focus on California. “We provide companies focused on the licensed medical sector with the capital they need to meet their business objectives and in exchange we are rewarded for their success through a percentage of their revenues going forward,” said Herchak.
Diverse opportunities in the licensed medical cannabis market
The licensed medical cannabis market is more than cultivating flower. There are several avenues for investment in this industry that have the potential to create real value and steady cashflow, including those businesses focused on cannabis-derived edibles, oils, pharmaceuticals, health and beauty products as well as the ancillary businesses that support cannabis-based companies. Ancillary businesses are those that supply goods and services, such as agricultural technology, software and security systems.
According to some cannabis-focused investment funds like Green Acre Capital, these suppliers of specialized software, extraction and testing labs and other services are expected to grow at a faster pace than the cannabis market as a whole, bringing additional opportunities to the space.
The royalty model is well suited to harnessing the full investment potential in this varied landscape. Royalty companies with diversified portfolios allow investors to participate across the width and breadth of the US licensed medical cannabis space, offering exposure to a number of opportunities rather than the limited scope of a single sector focused investment.
“The cannabis market in California will change substantially as regulation is implemented post the full legalization that occurred in early 2018,” said Herchak. “We think there will be numerous opportunities created in the licensed medical sector where we are focused, as a result. We are seeing opportunities in several verticals from transportation and security to software supply chain and payment solutions to value-added product creation, really across the entire spectrum of the industry. These are the types of companies that could potentially operate in all 29 states and Washington, DC where medical cannabis is legal and many of them need financing.”
Currently, FinCanna Capital’s portfolio of investments includes cultivation, extraction and a software company. FinCanna’s flagship royalty investment is in Cultivation Technologies (CTI), a private company that owns 6 acres in Coachella, California. FinCanna is funding the development of CTI’s Coachella Campus, which would run the full wholesale supply chain for licensed medical cannabis. The operation is expected to include a large-scale indoor medical cannabis facility designed to include a 81,600-square-foot cultivation space with a multi-tier grow system, extraction and manufacturing facilities and a testing lab.
In March, CTI announced it is quickly advancing toward commercial production at its Interim Medical Extraction facility, for which FinCanna is entitled to 50 percent of the profits.
FinCanna Capital also has royalty investments in Green Compliance, a Florida-based provider of a state-of-the-art enterprise compliance and point-of-sale software solution for licensed medical cannabis dispensaries and cultivators, and Gram Co. Holdings, a Northern California-based cannabinoid research and refinement company focused on the medical cannabis industry.
The cannabis industry needs technological infrastructure specifically tailored to meet its unique needs. Green Compliance’s compliance and point-of-sale software is designed to aid licensed medical cannabis cultivators and dispensaries in remaining compliant with state laws and regulations that require confidential patient data to be protected. FinCanna’s agreement with Green Compliance includes a 10-percent royalty on revenues.
Gram Co. Holdings plans to produce cannabinoid concentrates as well as provide white-label services once it brings its Oakland-based medical cannabis extraction facility into operation in late Q3 2018. In return for financing under its binding term sheet, FinCanna is expected to receive a tiered corporate royalty ranging from 7.5 to 14 percent of Gram Co. Holdings’ revenues.
The takeaway
California represents one of the world’s largest markets for cannabis, with sales in 2016 totaling twice that of all of Canada. By 2025, the legal cannabis market in the US is expected to grow at a 16-percent CAGR to top $24 billion, according to research by New Frontier Data, as more and more Americans begin to accept the medical benefits the plant has to offer.
At a global level, according to Grand View Research, the medical cannabis industry is projected to reach $55.8 billion by 2025. Royalty companies could offer investors a valuable path to profits at all levels of the cannabis industry through exposure to profitable sectors via a diversified investment portfolio.
