Since its inception earlier this year, Cannabis Wheaton (TSXV:CBW; OTC:KWFLF) has been a polarizing stock for cannabis investors. The company implemented a “streaming” business model made popular in the mining sector, and while they have faced heavy criticism online and from analysts the company has successfully closed 15 long-term streaming deals and has big plans for the future.
The Investing News Network (INN) had the opportunity to talk with the president of the company Hugo Alves, a lawyer with nearly 18 years of practice, who spent a lot of time involved in the cannabis industry before joining Cannabis Wheaton this year. Alves goes into detail about his decision to leave his law practice for a chance at a public company, the uncertainty facing detractors online and how he deals with those comments. Alves also tells us about the company’s business model in relation to one of their latest deals with ABcann Global.
In early June of this year, a private placement deal was set to take place between the company and a pairing of Eight Capital Canaccord Genuity. The transaction was dropped and later resulted in a change in management for Eight Capital. Cannabis Wheaton came back with a $50.2 million offering, with Mackie Research Capital acting as the lead agent and sole book-runner.
As of the time of this interview, Cannabis Wheaton had successfully closed 15 streaming deals and according to Alves, the company is looking to get even more, while nothing could be announced at the time.
Ever since the announcement of the new business model and the integration of CEO Chuck Rifici and his team of cannabis experts on May 5, the company’s stock has seen a substantial 48.97 percent decline in its stock on the TSXV. Over the past five trading days, shares of Cannabis Wheaton have dropped 1.33 percent on the exchange.
The interview has been edited for clarity and brevity. Read on below to find out what Alves had to say.
INN: Looking at the team at Cannabis Wheaton, I noticed that you actually joined the company fairly recently.
HA: Yes that’s right. [August 7] was really my first full-time day.
INN: Oh wow.
HA: Yeah that’s right. I’ve been doing work for the company, I was a counsel before so I have been doing lots of stuff, but in terms of 100 percent focus on Cannabis Wheaton business that started [August 7] and [it’s] exciting, I couldn’t wait … to get going here.
INN: What attracted you to fully join the company?
HA: I’ve been a private practice lawyer for close to 18 years and a partner at Bennett Jones for about a decade now. In early 2014, I started the cannabis practice there, really myself and Mike Lickver. We were very successful in building a business around legal and advisory services in the cannabis industry. I [previously consulted] for 12 of the leading Licensed Producers (LP), about 60 LP applicants and a couple of dozen of the auxiliary business globally. It’s a very broad network.
We had clients in every industry protocol; we got to see the industry through a lot of different lenses; we got to understand the sort of changes people want; how people make money in this industry. Not only did we get to see it, we helped structure it and we helped create it in a lot of instances.
The idea for Cannabis Wheaton, I [was] working on client file. Clients ask[ed] what I saw as a gap in the market and then slowly we built a model around it. The opportunity was presented to me to come and take a more direct role. I thought, ‘well if I’m not willing to take a risk’–as lawyers are notoriously risk-overt– ‘jumping into [an] industry with the business model I helped create, in an industry I’m passionate about and have a deep understanding of, with a team I had a big hand in putting together,’ then it’s hard to see the circumstances under which you’re ever going to step out from behind the desk… I didn’t want to live with the regret.
The question I’ve been asking myself over and over again is, ‘do I believe in the underlying business model and do I believe that the management team assembled can execute it?’ In both instances the result was a resounding yes. So I decided to look past the noise and the unpleasant things that I haven’t had to deal before in my career – negative blog posts, people not wanting to see the model succeed–and just commit myself to making it work and that’s what I intend to do.
INN: As your role of director, what are your duties with Cannabis Wheaton?
HA: My duties are to help the strategic direction of the company, to oversee all aspects of the implementation of our business model and to source and evaluate new opportunities in business partnerships. Chuck Rifici, our CEO, will be doing a lot of the public face and the promotion of the company along with Mike Lickver… my main priority here is the overall strategy of this company and how we implement it.
Partners join the Cannabis Wheaton platform
INN: What do you see is the role of Cannabis Wheaton in the Canadian cannabis market?
HA: Our main goal is to provide financing to cultivators. The first respect is that we put our capital in at a valuation that the cultivators are not going to be able to get in the open market for a variety of reasons, we put our capital at an aspirational valuation in order to align ourselves with the company and to ensure we have a strong incentive to help the company achieve a valuation where we give them overpay for our equity.
The second thing we do is give you access to our platform of industry leading experts to help de-risk your execution, as a cultivator we like to think that we’ve covered the bases in terms of the core verticals… the infrastructure build out to the cultivation, the legal and regulatory, the operational and the branding and marketing.
Once we decide to deploy capital into a partner that platform becomes completely available to [them]–whether it’s working with Ian Rapsey, our chief creative officer to figure out how your brand can speak to your target audience more effectively–or whether it’s working with me and my team to solve regulatory problems or exploit opportunities that are created by regulatory change. It’s free to the cultivation partner because we are working to increase the value of our equity. [The cultivator] becomes a part of a platform with Cannabis Wheaton; sitting at the top and is strongly incentivized to make sure the whole platform is healthy. That gives us some advantages when it comes to helping our cultivation partners on distribution or on accessing distribution.
If you’re operating at an enterprise level, usually you have a grow that produces a certain number of grams per [yield] and then you will have demands on that grow. Right now that means patients; fast-forward it’s going to mean customers and it’s going to be patients that are recreational buyers. Depending on the distribution model, in that case, you have your distributors: are they institutional or are they individually-owned? Will the market standard be long-term forward sales contracts with guaranteed minimum delivery obligations like we’ve seen them in other industries?
They are demands on your grow, and if you … have a crop failure, or lower than anticipated yield or there’s a change in regulations that will force you to change your sort of cultivation methodologies a little bit. [Those things] impacted you on a term, and if you are going through those on your own you got limited options. You[‘ve] got to go into the market and find wholesale product. Usually if it’s available and it’s not always available. What price are you going to pay?
With us, it’s part of our platform. If we have one partner that is going through some difficulties and if we can help them out by getting another partner to transfer product to them our allocation of product to them, deal. We like to say we help our partners, because it’s all about our partners with us, become the best cultivators and the best operators that they can be.
INN: Looking back at the deal with ABcann, what was the deciding factor for Cannabis Wheaton to select this company?
HA: I know ABcann very well, I’ve been to the facility I’ve met the executive team, [and] the grow team. I’ve seen the product, I’ve seen what they are doing there, and I think anyone that has gone to that facility and has had the benefit of going to many other facilities, quickly realizes that they are doing something a bit different there. It’s an intensive build out but it is very science [and] pharma based.
The amount–in terms of the system that they use, in terms of the data that they have collected, and [in terms of] the grow team that they have assembled for us–it ticked a very important box, which we think that they’re risk on scaling is lower than many others. They have a tremendous amount of data that they have overlayed.
We looked at it and said ‘from an expandability point of view when someone is going from 30,000 square feet to 60,000 doubling, that presents its challenges right? When someone is going from 30,000 to 200,000 alright how are people going to manage the rapid growth.’ We looked at ABcann and said they got a better chance than most of doing this right without any major hiccups, they grow excellent quality products and have a strong team in place.
We made the right deal, we’re getting the same result after we deployed all our capital, we’re getting effectively somewhere between $55-$60 million range, depending on where we come out on the construction budget in the timeline. We’re getting anticipated yield of –even being conservative– somewhere in the 7.5 and 8 million grams of cannabis annually.
Even if the sale puts pressure on the product I think, whether you’re … bearish outlook on where the margins are going to be, with $2 a gram in terms of the margin should be relatively achievable. We get our stream, it’s a 99-year stream, [and] there’s a rule against perpetuities in the law so you can’t say it’s forever. It’s not hard to do the math on 8 million grams a year, multiply by a $2 margin, multiplied by 99 years. From an investment and return perspective, it’s a very attractive deal for us.
“I’m still always surprised by how controlled [ABcann’s] grow environment is”
INN: If we talk about specific goals for the company, like targeting a specific partner, what are those for Cannabis Wheaton?
HA: For the rest of the year, we’re hyperfocused on capitalization, it’s ongoing and that’s not my primary responsibility but I would say is capital raising and it’s doing the due diligence on our existing deals and deploying the capital to our partners and then evaluating new opportunities.
INN: Can you tell me what you see the impact of cannabis legalization in Canada will have on the business of Cannabis Wheaton?
HA: What we’ve already seen is with the recent announcement of Health Canada on the streamlining of the licensing process under the ACMPR, in my view is indicative of a broader goal at the regulator which is they are committed to that July 1 date for nonmedical use to come online.
I think is just safe to say the total medical market in Canada is sub 200 patients. The number of Canadians who have, do or are willing to try cannabis and are over the age of 18, is nearly 10 to 11 million. You don’t have to be a market expert to know, even if that is grossly inflated and you’re talking about a million or 2 million, that’s still five to 10 times your existing market. There’s a supply shortage now, we are in a supply constrained market. How do you get enough capacity online that’s compliant and operate in accordance with the regulation and that has the funding necessary in order to be able to service that demand otherwise like if you got a market and you can’t service it, people go back to the black market.
We’ve already reaped some benefits from the streamlining of the LP process. Sundial Growers was awarded its license, Beleave (CSE:BE) has been awarded its license too. We see other of our partners progress through the licensing queue with great speed. I think in the run-up what you’re going to see is real derived benefits from having more of our partners obtain their license and also what I think we’ll be able to do is other deals where people are getting closer on licensing where we can help them with the final steps as a precursor to funding.
“There will be people that try to compete… the competitive advantage we have is we already have 15 deals”
INN: Have you seen anyone else using the streaming model in the Cannabis space? If not, do you expect any competitors to appear anytime soon?
HA: Sure I think that there are other people looking at this model. I think there will be other people that want to look at the model. The difference, I think, is our model is a very relationship-based in the sense that we have a management team that’s known in the industry as people who are valued, who are generous with their time and build relationships.
This isn’t an easy model for a producer to understand. What I always found with my clients is, up until the point of licensing, they had a lot of time to focus on a lot of different stuff–whether its commercial arrangement or some new thing– as soon as the cultivation starts, all of their bandwidth is completely focused on actually operating that business, actually operating the growth, so they don’t have a ton of bandwidth to digest this and think about it modeled out.
What gets deals signed is they got to be comfortable with the people, because you’re in a long-term relationship you’re entering into, our minimum stream is 10 years. It’s a 10-year relationship, if you don’t feel comfortable with the people and being in a partnership, as opposed to a creditor/debt relationship then it’s hard to sell this deal. There will be people that try to compete. I think the competitive advantage we have is we already have 15 deals, and we’ve got lots of opportunities in the pipeline.
INN: Since you mentioned the bad reputation Cannabis Wheaton received and the deal gone wrong with Eight Capital and Canaccord Genuity, can you provide an explanation as to what went down?
HA: All of the disclosure is out there. There were members of the underwriting firms that were equity holders and the press interpreted that negatively because of the price at which the banks obtained their equity–relative to what we were raising at. Ultimately they just turned it into bad and negative publicity. I don’t know what happened internally at banks in terms of their risk committee, but they determined that–given what was happening in the media–they would prefer not to be part of the financing.
We were given every assurance that the deficient had nothing to do with their due diligence on the company or their view of management or the underlying business model. They just determined that they would prefer not to participate.
INN: I imagine for a young company, even with the experienced management team you have, it must have been a rough experience to have gone through?
HA: Very rough. I think it definitely made our story more complicated, it raised questions in the market, it didn’t help us in the capital raising efforts. It was about as difficult to go through, luckily we have other supporters who believed in the company, believed that they could get the deal done. We had a strong group of investors who also felt strongly about the opportunity and were able to pull it off, but certainly, the deck was stacked against us.
INN: Have you seen a change in the public perception of the company since then?
HA: To tell you the truth, I would say you … don’t pay attention to the noise anymore. What goes on the press, or the public perception, it is what it is. None of that press has to do with what–in my view–are the important things. What is the underlying business model and can this management team execute it? Everything else to me I go, ‘I can see why people want to know about it, why it’s important to them, why they like it or don’t like it.’ But my focus, and the reason I left my successful practice to join the company, is I believe this business model works and I believe that we can execute on it.
That’s my principle responsibility … and I don’t plan to get too distracted on what happens in the market. I think if we can execute this business model, our investors will be exceptionally well and that sort of negative noise will go away.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in contributed article. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
Editorial Disclosure: ABcann Global, and Beleave are clients of the Investing News Network. This article is not paid-for content.