CannaRoyalty aims to be California cannabis middleman with acquisitions

CannaRoyalty Corp. is acquiring a large California cannabis distributor, bolstering the Ottawa-based company’s attempt to become a middleman in the Golden State’s recreational market.

CannaRoyalty, which invests in cannabis companies and brands, mostly in the U.S., will acquire 100 per cent of Rivers Distribution (RVR) for roughly $20 million (all in shares), with a further $15 million in CannaRoyalty shares promised if RVR hits certain milestones. 

In California distribution is controlled by private companies. That is unlike the system taking shape in Canada, where provincial liquor boards and their newly minted subsidiaries like the Ontario Cannabis Retail Corp. will oversee the flow of product from licensed cultivators to retailers.

“Distributors are really the gatekeepers of the whole system: state taxes are collected there, testing is done there,” said Afzal Hasan, CannaRoyalty’s executive vice-president of corporate development. “If you’re looking at it from a business perspective, it’s a huge choke point in the system too, because that’s really where supply has to go through.”  

RVR doesn’t produce cannabis itself; it sources and warehouses products, negotiates wholesale contracts, and ships. The private distribution system, which is similar to how California controls alcohol, was heavily lobbied for by RVR founder and chief executive Ted Simpkins, an alcohol industry insider who used to be managing director of Southern Wine & Spirits of California Inc.

“It was readily apparent to us that the work that River had done, in terms of building relationships not just in communities but more importantly in the government, was huge,” said Hasan.

CannaRoyalty has been working with RVR since last summer, when it provided capital to the company in return for a revenue-sharing agreement and priority placement for CannaRoyalty-owned brands.

CannaRoyalty is one of a handful of Canadian companies playing in California’s large recreational market, where liberal rules around product availability and branding make for an ideal test market.

“We’re focused on creating our brand portfolio there, because we see that being an asset that we can then very easily leverage and export to other jurisdictions,” said Hasan, noting California’s leading position in global culture, technology and advertising.

Cannabis operations in the U.S. are not, however, without risk. Marijuana is still illegal at a federal level in the U.S., even as more states move towards allowing medical or recreational cannabis use.

Noting that regulatory risk, the TMX Group Ltd. has prevented Toronto Stock Exchange and Venture Exchange-listed cannabis companies from operating south of the border. That’s stopped larger Canadian companies from investing in U.S. operations, or forced them to withdraw, as with Aphria Inc. divesting from its Florida operations with Liberty Health Sciences Inc.

“I would never undersell the risk, it’s a clear and omnipresent risk and one that we take very seriously. Thankfully over the past six months, we’ve had a relatively positive progression of news and developments and regulatory evolutions both in Canada and the U.S.,” said Hasan. 

Along with the RVR announcement, made on Tuesday, CannaRoyalty announced that it had closed on two other previously announced acquisitions in California: the smaller Oakland-based distributor Alta Supply Inc. and its sister company, cannabis product manufacturer Kaya Management Inc.

Kaya has been manufacturing CannaRoyalty’s vaporizer and edibles brands, GreenRock Botanicals and Soul Sugar Kitchen, since the fall. The decision to purchase RVR came after CannaRoyalty realized that Alta would be competing against RVR (in which CannaRoyalty already had an interest) for a share of the distribution market, said Hasan.

While CannaRoyalty is betting mostly on the U.S., the company is starting to make moves in its home market.

It recently signed a deal with retail company National Access Cannabis Corp. – CannaRoyalty CEO Marc Lustig also sits on the NAC board – to carry CannaRoyalty brands in NAC stores when they open later this year. In March, its subsidiary Trichome Yield Corp. made a $2.5 million investment in Canadian vaporizer retailer 180 Smoke.

On Wednesday, CannaRoyalty shares were up more than four per cent, even as the rest of the cannabis sector slumped, with the Canadian Marijuana Index dropping more than four per cent.