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CannaRoyalty Corp's Royalty and Distribution Agreement - What it Means for Shareholders?

March 1, 2017

 

Earlier today, CannaRoyalty Corp. (CSE:CRZ)(OTC:CNNRF)(FRA:CY4) announced that it has entered into a binding term sheet with California-based cannabis logistics, distribution and transport company, River Wellness, Inc. for both a revenue royalty and product distribution agreement. 

 

Deal Terms: 

 

  • The total value of the deal is $5,000,000 USD in exchange for a variable revenue royalty percentage from River Wellness until 2024 and a guaranteed product purchase agreement. 

  • CannaRoyalty will receive 2.25% of River's net sales until the $5,000,000 USD advance has been fully paid back, followed by 1.75% of revenues through 2024.

  • River Wellness also agreed to purchase and distribute $15,000,000 USD of CannaRoyalty's products over the term of the agreement through 2024.

 

 

Deal Milestones:

 

  • Closing of the deal is subject to the satisfactory completion of due diligence, execution of final definitive documents, and the satisfaction or waver of all conditions specified in the deal documents, among other things. 

  • Upon the deal's closing date, CannaRoyalty Corp. will advance $3,500,000 USD to River Wellness.

  • CannaRoyalty will advance the remaining US$1,500,000 to River Wellness following the close of the deal with River Wellness no later than December 31, 2017.

  • The deal will be secured by the assets of River Wellness in the unlikely event that they are unable to pay back CannaRoyalty's advances and / or the agreed upon revenue royalty percentage. 

 

Deal Analysis: 

 

Although CannaRoyalty Corp. already has exposure to the marijuana market in California through it's ownership of GreenRock Botanicals and Soul Sugar Kitchen, among others, this deal bolsters their position to take advantage of recreational legalization in the most populous U.S. state. 

 

In fiscal year 2016, River's revenues were $26 million and continued growth is expected.

Currently, River Wellness represents 20 brands, over 100 farmers and manufacturers and has distribution relationships with 400 retail collectives.

 

Of course, as with everything in business, there are risks involved. Regulations regarding adult-use marijuana in California are still being developed. Competition could arise and River Wellness could run into financial problems. Not that we see any of this as being likely, but risk is a part of life and its important for stakeholders to be aware of it. 

 

That being said, CannaRoyalty strategically mitigates risks by doing royalty agreements like this one. Their downside is effectively capped at $5,000,000 (plus the deal is secured by River's assets, so even in the absolute worst case scenario they could lose less).

 

On the other hand, their upside is theoretically limitless, 1.75% of revenue is 1.75% of revenue, no matter how high that revenue goes. This makes the deal look pretty good for CannaRoyalty, plus River gets to benefit from being able to distribute their products and by getting more capital to grow their business. 

 

As this is a cash transaction, the deal results in no dilution to shareholders. 

 

Market Reaction:

 

 

As of midday trading, shares of CannaRoyalty Corp. were in positive territory all all three exchanges that they trade on. In Frankfurt shares of CY4 are up 0.59% on the day at €2.22. This is the smallest gain today in CannaRoyalty Corp. with their shares in the U.S. and Canada gaining 3.39% and 2.22% on the day, respectively.

 

Stay tuned, as we'll be increasing our coverage of CannaRoyalty Corp. In the mean time, be sure to subscribe to our newsletter so you never miss an important update. 

 

Disclaimer


Investing in nanocap, microcap, and small cap stocks is highly speculative. The publishers of DailyMarijuanaObserver.com are not registered as Investment Advisors or Broker-Dealers in any jurisdiction whatsoever. The information contained on DailyMarijuanaObserver.com (“this site”) has been prepared solely for informational purposes. Nothing on the site is an offer or solicitation to buy or sell securities. Investors should seek financial advice regarding the appropriateness of investing in any securities mentioned from their financial advisor.

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