CannaRoyalty Is a Standout Performer
Contrary to the popular ’60s song “One is the Loneliest Number,” CannaRoyalty Corp (OTCMKTS:CNNRF, CNSX:CRZ) has enjoyed being a loner in the marijuana industry. Its share price soared even while everyone else’s fell apart.
This standout performance has caught my eye over the last few months. As a result, I have cobbled together a CannaRoyalty stock forecast and an analysis of CannaRoyalty financials.
So, let’s dive in.
The first thing you should know: CannaRoyalty is not your typical marijuana producer/retailer; it is a “streaming company.” In other words, CannaRoyalty gives money to weed growers in exchange for a percentage, or royalty, of their future earnings.
We’ve seen this before. Silver miners like Wheaton Precious Metals Corp (NYSE:WPM) would finance entrepreneurial miners that lacked the capital needed to set up shop. In return, these miners paid a steady stream of cash to Wheaton, which Wheaton then passed onto its shareholders. It’s a win-win-win scenario.
CannaRoyalty is using the same template for marijuana.
To be honest, I’m surprised that no one has done it before. Heck, I’m surprised that I didn’t think of it, given how much I admire the streaming model.
The bottom line is this: “Marijuana streaming” makes CannaRoyalty a different beast than its contemporaries.
Not even the biggest players in the market—Canopy Growth Corp (OTCMKTS:TWMJF, TSE:WEED) and Aurora Cannabis Inc (OTCMKTS:ACBFF, TSE:ACB)—are in the same category.
But the devil’s in the details, as they say, so let’s go a little deeper.
CannaRoyalty Investments: Behind the Curtain
CannaRoyalty’s investments are made with special consideration. The company looks at several factors, including:
- Management: Who’s running the company? What’s their track record as entrepreneurs, managers, and investors?
CannaRoyalty says it stands behind “passion, determination, human values and leadership,” which means that the company recognizes that planning for the future is no guarantee of success. Sometimes strong leadership is needed in order to survive.
- Innovation: A dozen people can see an opportunity, but the most imaginative and industrious usually end up on top. That’s a general rule of life, not just in business.
- Strategy: At this stage, CannaRoyalty leverages its marijuana expertise to evaluate potential businesses.
Since all of the analysis is proprietary, it’s hard for us to know if the company’s metrics are effective. The only window we have is the CannaRoyalty financials. But more on that later.
- Portfolio Risk: CannaRoyalty cannot afford to invest in every great marijuana startup.
It has a finite amount of money, so it balances royalty agreements, equity interests, secured convertible debt, and licensing agreements into a portfolio of CannaRoyalty investments.
When you mix in CannaRoyalty’s focus on science and marketing, it’s not hard to understand why CNNRF stock is making headlines. It does all the heavy lifting for investors.
We don’t have to sort through competing financial statements. They do it for us! We don’t have to stare at charts until our eyes bleed. They do it!
And we definitely don’t have to throw technical indicators at charts, praying for one of them to stick. They…well, I hope they don’t do that.
But I think you get my point.
CannaRoyalty painted over an age-old business model that has worked in metals, biotech, and finance. The company is not calling it a “streaming” business, of course, but that’s what it is.
A Closer Look at CannaRoyalty Financials
Now let’s get to the CannaRoyalty financials. You have to be very, very careful with the company’s recent earnings report.
You see, CannaRoyalty went through a “reverse takeover” in December 2016, meaning it only recorded nine of the 12 months for that year.
So, when you look at, say, revenues between 2016 and 2017, you’re really comparing a long year against a short year.
The Ontario Securities Commission has set these rules, and CannaRoyalty isn’t doing anything wrong by following them. Nevertheless, it’s our job to remember that 2016 was a short year in terms of the CannaRoyalty financials.
Here are a few of the highlights from the year:
- Revenues jumped 379% to almost $3.1 million
- Gross margin increased 176% to $905,629
- Net loss per share decreased 46% to $0.22
- Cash and equivalents increased 54% to $4.5 million
- Adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) loss per share increased 27% to $0.18
(Source: “Consolidated Financial Statements for the year ended December 31, 2017 and the nine-months ended December 31, 2016,” CannaRoyalty Corp, April 3, 2018.)
The first four numbers are great, albeit slightly warped from the short year/long year imbalance. But the last number, the increase in adjusted EBITDA loss per share, is genuinely a reason for concern.
For those who may not know, EBITDA is basically a way for companies to say, “Hey, here’s how lean and efficient our company is without the fat of these specific expenses.”
A well-run company should have positive EBITDA, or have shrinking EBITDA losses at the very least. But to have the losses already big, and continually growing, is a troubling sign for a young firm.
Game-Changing CannaRoyalty News?
On the upside, CannaRoyalty recently made a few smart investments that could repair its financial dilemma.
Two of them—Alta Supply Inc. and River Distribution—helped the company build a “leading cannabis distribution and logistics network in the world’s largest regulated cannabis market”: California. (Source: “Management’s Discussion and Analysis of the Financial Condition and Results of Operations for the Twelve Months Ended December 31, 2017,” CannaRoyalty Corp, April 3, 2018.)
California is a mega-hotspot for cannabis. It suffered a brief cooling at the tail end of last year, but then, in April 2018, CannaRoyalty reported record-high monthly revenue from the California investments.
CannaRoyalty also bought FloraCal Farms, an ultra-premium distributor with selling prices more than double that of the biggest players. (Source: “CannaRoyalty to Acquire 100% of California Licensed Producer FloraCal Farms, an Ultra-Premium Craft Cannabis Company,” CannaRoyalty Corp, April 18, 2018.)
Further to the north, in Canada, CannaRoyalty established a subsidiary whose sole purpose is to invest in promising marijuana-related companies. It issued its first “tranche” in May 2018 to a vape and e-cigarette retailer known as 180 Smoke.
I am intrigued by CNNRF stock (or CRZ stock to our Canadian readers), but I worry about bloated marketing, sales, and administrative costs. Those are not easy problems to solve.
Nonetheless, I would argue that CannaRoyalty stock has tremendous upside potential. I wouldn’t be surprised to see this stock hit $10.00 before 2018 is over. It’s that much of a gem.