Canopy Growth Corp CEO Bruce Linton Talks Canopy Rivers: A Visual Podcast
Canopy Growth Corp (TSE:WEED) (OTCMKTS:TWMJF) (FRA:11L1) CEO Bruce Linton returns to shed light on Canopy’s latest platform – Canopy Rivers. More than just a cannabis company incubator, the wholly owned subsidiary provides logistical, financial and moral support for late stage medical marijuana applicants across Canada.
James West: Bruce, thanks for joining us again.
Bruce Linton: Hey, thank you for having me back, James.
James West: Bruce, so you made an announcement today about the streaming cannabis business. Why don’t you give me an overview what that’s all about?
Bruce Linton: Well, we called it Canopy Rivers, because it is a streaming deal, but streams are kind of small – they’re like creeks or dripping faucets, and we wanted to do something a bit bigger, so we called it ‘the river’. And the way it works is, in this sector there is a reasonably high cost of capital, but even if I gave you a bag of money, James, and you didn’t know how to spend it, the probability you’re going to get a license is moderate to low.
And so what we’re doing is, we’re going to take our, I’ll call it capital, likely adjoin it with additional capital, but I think more importantly we’re going to take our capacity to understand what it takes to get a license, and assist those people who are funded with us. So what it turns out, I think, is, suppose you have a site and you’ve been in the queue for a year or two or three, and you hope maybe, soon, you get a license. What we do is, we come in and we do an assessment of the probability of getting a license based on our experience.
We then come up with a budget of what you have to do to get to the right spot, and suppose we then pre-pay for future streams of cannabis that will come out of that facility. So now you and me are aligned. I don’t do well if you don’t get a license and you don’t have those streams. And so what happens off of that is, you get an accelerated end point where you actually have a license and you’re producing, and we like that because we get what we paid for. And I bet your cost of capital, if you need a little more money than we’re providing through that prepayment goes way down, where you can talk about having access to the Tweed main street store, the guidance of us, and so the probability that you hit the target is quite a bit higher.
James West: Sure. So in some respects, Canopy Rivers then becomes a cannabis incubator?
Bruce Linton: Yeah, in a sense. And what we want out of it is, we wish to have additional streams of product. We wish to do it from a diversified supply group who actually have an interest in operating their business in compliance with the rules, and you know, how much of a discount we get on these future flows really depends how far you are away from having. So if you have a terrific building and haven’t begun an application process, that’s really different than if you’ve finished almost to the point where you could pass an inspection and just need a little help, or if you’re a smallish licensed producer who is looking at the cost and choices of capital to expand.
James West: Right. So do you think that ACMPR growers who are in the process will achieve a preferable sort of place in line in the eyes of Health Canada in the licensing process as a result of your involvement?
Bruce Linton: There’s no, if you want to call it, queue jumping, but I think we’re up to about 160 or 170 inspections across all our locations. Once you’ve been through that many inspections, you kind of understand what it is you’re supposed to do, and if you don’t, you’re pretty dumb. We’re not that dumb, and we get what it is that makes the regulator feel that you have a controlled environment.
James West: Okay.
Bruce Linton: And so the effect of that is, if you and I set to work, I bet I’d have a pretty good idea on how to make a securitized envelope, how to have a seed to sale transaction, tracing software, how to attach all the attributes of, I’ll call it, chain of custody; how to make sure that the registration patients occurs in compliance, you know, clunk, clunk, clunk. And that turns into thousands of pages of standard operating procedures, not just a couple of guys putting some code together.
And so you can imagine when you take all of that, if it looks exactly as it should be to be compliant, it’s a lot easier for an inspector to say you’ve done it.
James West: Sure. Okay, so is Canopy Rivers a separate entity that investors can avail themselves of somehow? Or is it just a subsidiary of Canopy Growth?
Bruce Linton: So it starts off, we put 20 million across, we’re putting that expertise I described across, and we will probably seek some additional funds in terms of a private placement for that. Over time, these types of vehicles tend to be a pretty stable business, and typically trade at a reasonable multiple, but really they trade on, I’ll call it, the return on invested capital. So it would make sense down this road that it become more separate, but that its purpose will always be to have the streaming of the product come to Canopy.
So the shareholders of Canopy will like that, that we get leverage on our capital, and we also get a bigger base of product and more diverse brands in the store.
James West: Sure. Somebody might be observing this and suggest that this is sort of a strategic pre-emptive move to mitigate future competition.
Bruce Linton: I would say you could look at it that way. You also could look at it from the perspective of, the regulators want to have more and small companies out there. Being a small company in this sector is hard if you don’t have some upstream offtake or some, I’ll call it, additional support. So I think it gets more micro-brands the potential to become licensed and selling, and it does give us a stability of supply that, you know, is pretty desirable, I think, as a company.
James West: Sure. Looking forward across the recreational universe, assuming that all comes to pass as scheduled, do you see a risk that you might be actually sort of creating an excess of supply somewhere along the line?
Bruce Linton: Yeah, that’s probably a problem in about 20 years.
James West: Twenty years!
Bruce Linton: I don’t have a real fear that that’s a problem in the next three to five. It’s because if getting a license and becoming a supplier became terrifically easy, the primary goal, which is to extinguish the black market participants, wouldn’t happen. And so this is not a business opportunity similar to Colorado where like in the course of our call I probably could have put an application in and you and I might have become growers in Colorado already. This is a much more regulated and restricted environment because it has different policy goals.
So I don’t think you’re going to find those policy goals permit or likely create an accelerated wild big market of producers.
James West: Right, okay. So the structure of Canopy Rivers as described in the press release makes it seem like it’s very much a separate business from the business of growing cannabis, even though it seems like it’s more like a Canopy-related financial vehicle to help emerging growers succeed.
Bruce Linton: Yeah, you know, I’ve done this a few times. I think that if you have, if things connect in the core point, which is the production of cannabis, but they have different focus points so that they achieve stuff – so, for example, we’ve set up Canopy Health Innovations, and into that we have a number of PhDs and a great number of research, and the relationship with Canopy is the supply of cannabis into that in all formats. And the commercial right to present the resulting intellectual property from Canopy Health into the market for royalty.
That gave focus and attracted top-tier talent that might not have wanted to be inside of a singular focused LP. In the case of Rivers, it is an aligned business on the cannabis, but it has a different priority that just draws some of the skills. So that’s why in the announcement we put forward the XIB led by Sean McNulty will be kind of acting as the, I’ll call it ‘functional president’ because they’ve been around the space quite a long time, but their principal skill set is money and banking. And so this is really a transactional cost of equity thing for everybody we’re dealing with.
James West: Okay. So at the end of the day, this is designed as a way to increase shareholder value for Canopy Growth investors?
Bruce Linton: Yeah, listen, and if it was simple and we could just throw all the money in one pool and just dip it out and do everything in a linear way, we would, but you don’t usually get what you want by keeping it ultra-simple, you don’t get the focus and the push. So this gives another place where experts can push and make things happen rather than just constantly keeping it in one big area.
James West: Sure. Okay, I was looking through your financial statements at the end of last year, which were recently released, and I saw that you had made an acquisition of a company called Canmed GMBH (phon), which implies Germany?
Bruce Linton: Germany, yes.
James West: Okay. So you’re actually establishing growing capacity in Germany at this point?
Bruce Linton: No, so what we – that company we’d worked with for about 18 months, so they became one of the first licensed importers in Germany, and they’re licensed holders and distributors of cannabis, and they have a GMP certified environment for that. We worked with them so we could become the first exporter from Canada, and second the world to Germany. Once we worked together for awhile, it became quite evident for all that it’d be better for them to be now part of Canopy rather than appear to, because our intent was not to have a JV or partner in Germany; our intent is to have a business. And so they became part of it, and that enabled us to have capacity in the country to focus on our Canopy goals. And it seems like timing is pretty good.
James West: Yeah. I also talked to another ACMPR applicant, not yet certified, and they mentioned that they were sourcing all of their genetics from Canopy, and I’m curious as to what extent Canopy’s genetics program will become a profit centre for the company going forward.
Bruce Linton: Yes, it’s one of those interesting things that Germany is a legal point of acquiring genetics from that market into Canada. So by owning somebody there, we have that capacity, so we have been bringing seeds for sale to the end patient who wanted to grow their own, and/or genetics that could go into ACMPR participants.
Yeah, it becomes a profit centre, but it’s much better when it’s driven by having some ongoing relationship with those genetics that may turn into a small royalty from the production that comes off of them. And so it’s just another piece.
James West: Sure. Okay, so now you’ve got a total of about 500,000 square feet under cultivation, and I recently visited Smiths Falls and noticed that you were building out another, what is that, another 300,000 square feet?
Bruce Linton: Yeah, we’re surely, we finally had to hire someone to be in charge of construction management, because the point of the exercise was to be able to have multiple places where construction is occurring, so we could accelerate a little bit more than if you’re just doing it at one spot. So we have about that occurring in Smiths Falls, we have some work going on, whether it’s Saskatchewan, Quebec, a few of the Ontario sites. And realistically I think that no one’s expecting the demand to be met easily with the current supply or the supply that can be created, and because we have the largest current production by some multiple over others in the sector, it would seem sensible to multiply our current base each year. and at a certain point in time, you’re actually adding a few hundred thousand square feet, but you’re not doubling after a while, you’re just kind of adding 8 or 10 or 20 percent, which then all of a sudden starts to be, or the yield off of that starts to begin the reason you are cash flow positive.
So this has been a plan for some time via a pretty substantial player, and you can’t do that without spending money and making the license capacity improve.
James West: You bet, Bruce. All right, let’s leave it there for now. Thank you so much for the update.
Bruce Linton: Okay, thanks, James. Bye.
Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.
Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.
Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.