California’s legal cannabis industry continues to impress investors and many are looking for investment opportunities levered to this burgeoning market. According to legislation passed January 1, 2018, under the Medical and Adult Use Cannabis Regulation and Safety Act, cannabis in California will be regulated by various state agencies. This new state licensing and regulation legitimizes the billion-dollar cannabis industry in California which is expected to be the largest in the world, according to New Frontier Data.
Over the last few months, we have highlighted FinCanna Capital Corp. (CSE: CALI) as an attractive company levered to the California licensed medical cannabis market. The company recently went public on the Canadian Securities Exchange (CSE) and has raised C$14 million to date.
The company is focused on executing its “royalty model” business plan for licensed medical cannabis with a focus on California. Led by a team of finance and industry experts FinCanna is building its portfolio of investments in scalable best-in-class projects.
FinCanna’s flagship investment is in Cultivation Technologies Inc.’s (CTI) which plans to construct an indoor medical cannabis facility to be developed on a six-acre site in Coachella, California. The Coachella Campus is designed to be a 111,500 sq. ft. state-of-the-art facility that will include cultivation, extraction, manufacturing, testing and distribution.
Increases Rights to the Production Capacity
Earlier this week, FinCanna announced a significant development in the extraction business of its flagship investment in California. CTI is currently operating its interim medical cannabis extraction facility and plans to directly operate its permanent facility to be constructed at its Coachella facility. In conjunction with this restructuring, FinCanna and CTI have amended their funding agreement, which will support FinCanna in capitalizing on economic opportunities made possible due to the new regulations which took effect on January 1st of this year.
The interim extraction facility, which commenced operations in October, had been operated by a third-party tenant of CTI on its site in Coachella. Under the prior arrangement, CTI was entitled to a maximum of 20% of the production capacity of the interim extraction facility. Under the new arrangement, CTI has the rights to 100% of the production capacity, which it will allocate towards extraction services, including white labeling for other brands, and CTI-branded sales.
The new operating structure is expected to allow CTI to generate significantly more revenue which is of direct benefit to FinCanna. Under the agreement, FinCanna continues to be entitled to receive 50% of the profits of CTI which are derived from this interim extraction facility.
Facility Upgrades to Increase Production Capacity
The new operating arrangement provides many benefits to FinCanna. One of the benefits relates to the amount of processing at the interim extraction facility, which currently can process up to 6,000 pounds of biomass per month and can produce approx. 3.7 million grams of raw oil per year.
Under the new operating arrangement, CTI can add an additional extraction machine and fractional distillation and winterization equipment. These improvements would result in additional capacity to process an additional 3,000 pounds of biomass per month and can service third-party customers with approx. 100,000 grams of finished product weekly.
The new arrangement also provides CTI with the ability to drive new products lines, add distribution services and improve control over sales channels.
The economics of this new operating arrangement result in potential revenues to CTI that are significantly higher than those expected prior to the restructuring, both from profit sharing at the interim facility as well as expected royalties on the permanent extraction facility once in operation.
New Funding Agreement to Benefit FinCanna
Additionally, CTI and FinCanna agreed to amend their funding agreement to provide for certain changes to the terms of FinCanna’s investment. Under the new funding arrangement, FinCanna will provide CTI with a loan of US $3.15 million in tranches, and the funds will be used for the restructured extraction operations, to secure an additional 5MW power commitment at the Coachella site and for working capital purposes.
FinCanna will benefit by having an ability to earn an increased royalty interest in CTI’s entire Coachella Project. The initial royalty consideration was to be 10% of overall revenue which is now increased to 14% of revenues of the Coachella Project. The new arrangement also allows FinCanna to convert its loan into a royalty of up to 5% of CTI revenues in perpetuity on projects which FinCanna elects not to fund.
This is an important agreement, as the restructured arrangement allows CTI to capitalize upon the immediate opportunity in California through extraction, manufacturing, and distribution before construction of the Coachella Project. Revenues from these areas are expected to be the largest segment of CTI’s Coachella Campus, and the increase in expected royalties to FinCanna could be significant.
A California Cannabis Opportunity
We will keep an eye on how FinCanna continues to execute from here and investors interested in licensed medical cannabis opportunities levered to California may wish to follow the company as well.
For additional information about the company, and associated disclaimers and risks please visit: