Ottawa pot investor CannaRoyalty acquires California cannabis companies

Vaporizer

An Ottawa company that finances and invests in marijuana enterprises is ramping up its presence in the world’s largest cannabis market, announcing this week it is acquiring a pair of California-based firms that sell pot products.

CannaRoyalty (CSE:CRZ), which made its debut on the Canadian Securities Exchange late last year, said it has agreed to acquire Kaya Management and Alta Supply, which manufacture and distribute marijuana vaporizer pens, chocolate and other products to more than 200 dispensaries in California.

Kaya and Alta Supply combined for total sales of more than $12 million over the past 12 months. CannaRoyalty CEO Marc Lustig said the deal will give his company a strong foothold in California, which is poised to legalize pot for recreational use and is the world’s largest medicinal marijuana market with sales of nearly $3 billion in 2016.

"With the advent of a full recreational market in California in January 2018, we believe Kaya and Alta are well-positioned to drive further revenue growth,” he said in a statement.

“The acquisitions will also give us the right to produce and market one of the most awarded brands in the global cannabis space as well as access to an extensive network of California dispensaries.”

CannaRoyalty did not identify a specific dollar figure for the cash-and-share transactions. It said the value is equivalent to half of the consolidated revenues brought in by the two privately held companies in the 12-month period that ended Oct. 31, 2017, plus half the future revenues of Alta and Kaya for the 12 month-period that ends Dec. 31, 2018. CannaRoyalty will also pay US$1 million.

CannaRoyalty, which has a market cap of C$127 million, already has a portfolio of 20 companies in the cannabis industry, half of which are based in California. It said sales of marijuana products in the state are forecast to grow to more than US$6.8 billion by 2021, with vaporizer products expected to account for 15 per cent or more than $1 billion of that total.

Mr. Lustig said this week’s acquisitions are the next step in CannaRoyalty’s plan to aggressively expand into the most populous U.S. state.

“Our primary focus over the next 12 months will be to continue to build, support and grow our product and brand portfolio in California, while actively pursuing opportunities to license our broader portfolio into other key jurisdictions such as Canada,” he said.

As part of this week’s agreement, Richard Sellers, the majority owner of Kaya and Alta, will join CannaRoyalty’s executive team. Mr. Sellers noted that as of July 1, 2018, all cannabis products in California will need to be sold through a licensed distributor, creating a huge opportunity for companies such as Alta.

“CannaRoyalty truly understands that having great products and a comprehensive distribution strategy will be the key drivers of success in the California marketplace,” he said in a statement. “With the adult-use market opening up just around the corner, California is the market to be a part of in 2018. Thanks to a growing portfolio of premium products and brands, CannaRoyalty is poised to capitalize on this opportunity.”

Revenues rising

Also this week, CannaRoyalty said its total revenues for the third quarter ending Sept. 30 were more than $744,000, up from about $127,000 a year earlier. For the first nine months of fiscal 2017, the firm posted total revenues of just over $2 million.

CannaRoyalty recorded a net loss of $3.3 million for the quarter, up from $1.86 million a year earlier. It had cash and equivalents of $2.6 million, as compared with $2.9 million at the end of 2016.

The company also said it recently launched a new line of edibles under the Soul Sugar Kitchen brand and started production of vape pens under the GreenRock Botanicals banner, adding it will “continue ramping up production of these products as well as other products within its existing and growing CR Brands portfolio.”

Earlier this year, the firm secured a $12-million financing deal with asset management company Sprott Inc. Mr. Lustig said the joint venture will identify new investment opportunities in the growing Canadian cannabis market.

CannaRoyalty’s stock was down about four per cent in late afternoon trading Wednesday to $3.04 after gaining sharply over the past couple of weeks.