VIDEO: Canopy Rivers Inc (CVE:RIV) Co-Founder on Cannabis Industry Potential: “We’re an Inch into a Marathon”

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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.

Canopy Rivers Inc (CVE:RIV) Co-Founder and XIB Financial Principal Sean McNulty has nothing but excitement for the cannabis sector: “My personal perspective is that commercialization of cannabis on a worldwide scale…is one of the most compelling opportunities in the history of capitalism.” McNulty acknowledges cannabis companies are truly global entities and believes Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) is best suited for worldwide success. As McNulty sees it, the Rivers team leverages the insight and institutional knowledge of Canopy, but provides a new and separate platform for minority investment. The Canopy Rivers joint venture between TerrAscend Corp (CNSX:TER) (OTCMKTS:TRSSF) (FRA:TED) and PharmHouse Inc illustrates the Rivers practice of identifying companies with a record of success and specialization outside the cannabis industry, which it subsequently brings into the space. McNulty brushes aside concerns of an industry-wide dot.com-style crash and believes there is still tremendous economic upside in the cannabis space.

Transcript

James West:   My guest in this segment is Sean McNulty. He is an advisor to Canopy Rivers, and if I’m not mistaken, a co-founder as well. Wouldn’t it be safe to categorize you as a co-founder, Sean?

Sean McNulty: Yeah, I think our firm, XIB Financial, is one of the co-founders, along with Bruce and the team at Canopy.

James West:   So tell me about XIB Financial, how you got that thing all started and how you came to be so integral to the whole Canopy machine.

Sean McNulty: Well, I guess XIB kind of started many years ago, but my background and kind of similar background as Peter Hatziioanno, my business partner. We were both M&A investment bankers at CIBC, learned kind of I think fundamental valuation of a Tier 1 firm, moved on, did some institutional equity sales covering mostly the hedge fund community in the event-driven kind of sector, and then I spent five years on the buy side at MM Cap, which has been one of the largest allocators of capital in the cannabis sector, and I was fortunate enough to be able to convince the PMs there and start a cannabis practice in 2013.

I fell in love with this opportunity. My personal perspective is that commercialization of cannabis on a worldwide scale is one of, if not the most compelling investment opportunities maybe in the history of capitalism. So we wanted to start a firm that we thought we could leverage those three unique vantage points of insight, being the investment banking pedigree, the sales experience, and the portfolio management experience, coupled with the first-mover advantage in cannabis.

So we started XIB to do corporate advisory work, capital markets consulting, M&A advisory work specializing in the cannabis industry, and Canopy Growth was our very first client. So it kind of just started there.

James West:   Mm-hmm, yeah, I remember talking to you back in, I guess it was 2014, about – at that time it was Peace Naturals, which became Cronos Group, which you were also instrumental in helping them raise some capital, I believe. And so I was always sort of intrigued by, like, who’s this guy who’s like seems to be as interested in cannabis space – and back then, there weren’t a lot of people who would tell you to your face that ‘I’m all in cannabis’, and they’d be like, ‘What are you, crazy? You know that shit’s illegal’. But so, you’ve been fortunate enough to be early and to be sort of visionary in terms of positioning yourself personally in the space, and then also professionally; you’ve aligned yourself with some of the top names in the space. So from your perspective, where is Canopy and Canopy Rivers going from here?

Sean McNulty: So I think what we’re starting to see now is the proliferation of worldwide cannabis companies, and there’s definitely a tremendous amount of retail euphoria in the whole sector. Canopy Growth was the first. They’ve spent the most money, they’ve been the first in all these new places, they’ve learned a lot of these lessons through trial and error, which has given them a tremendous amount of insight. They would do things a lot differently doing it over again, but being first in so many places has afforded them a tremendous opportunity and a worldwide competitive advantage.

So about a year or so ago, we’ve decided at XIB we’re going to focus on Canopy Growth as our horse. We think that this is the worldwide leader in the cannabis community, and as Canadians, we have a regulatory environment that we’re able to leverage, and a capital markets environment that’s incubated the worldwide cannabis industry. So aligning ourselves as a company with Canopy Growth, which in our opinion is the biggest and most progressive and advanced company in the sector, on this worldwide basis, we thought we’d position ourselves very well.

So I think that as Canopy goes into these new markets, which are almost on a daily basis undertaking their own regulatory reform, you have them arms wide open, receiving guys like Bruce Linton to come in and share some of the insights they’ve learned from navigating, you know, the world’s first G7 or G20 cannabis regulatory reform. And that insight, and those lessons learned, you know, the easy way through triumph and the difficult way through some tribulations, sharing that, sharing the capital that we have, sharing the cannabis acumen that we’ve developed and bringing in worldwide talent is something that they’re in a position to do that most companies aren’t.

So I think Canopy Growth has made a very clear kind of path forward of trying to take over the world of cannabis. They want to be everywhere, do everything, be the biggest, be the best, be the first, and they’re diligently focused on accomplishing that. But because this industry is so nascent, there are so many worldwide opportunities, so many entrepreneurs that are taking their skill set from something else and coming into cannabis, and whether it’s a little extra capital or a little boost of insight and confidence on the operational side of things, I think Canopy Growth in collaboration now with Canopy Rivers, they have two vehicles through which to provide that support – whether it’s full acquisition and join the team and join the dream of Canopy Growth, or you’re trying to realize your own dream and build out your own business, but you can take some financial support and some operational insight from the team at Canopy Rivers.

So the Canopy portfolio of companies as a whole now has two platforms to go after what is the worldwide opportunity.

James West:   So Canopy Rivers is distinct from Canopy Growth in that it is strictly an investment arm, not an operational arm?

Sean McNulty: So I’d say it’s more of a mix. So the way they’re doing it, the two platforms, in the most simplistic way, is to say that Canopy Growth wants to have complete ownership, complete control, autonomy over the operations and the economics. And kind of, it’s probably easier to tell the story of how we started Canopy Rivers, because when we were doing M&A advisory work, which we still do at this time from an XIB perspective for Canopy Growth, we often found ourselves in that same situation, where there’s an entrepreneur with a great business, a great idea, logistics platform, process, what have you; we think they’re going to be tremendously successful, whether it’s with us or with someone else. And they either didn’t want to sell the entire business to Canopy Growth yet, or we couldn’t see eye to eye on the valuation at this point in time.

And because the industry is so nascent, a lot of them do fall into that former camp; they want to build and realize their own dream. So at the time, we were passing on them from Canopy Growth, because we want to own and control. So we created this separate vehicle, and it is a separate company – separate management team, A1 team, independent directors, and we built the team the same way we built the portfolio: let’s go and find specialists with a track record of success from outside or ancillary industries, where we think their skill set is applicable in cannabis. And by having them come in and build the team that it focuses on investing for Canopy Growth, we can now leverage the insight of Canopy, but also have a new platform to take minority interests.

So Canopy Growth is the largest individual shareholder, and we have a special strategic support relationship with them, which gives Canopy Rives, as an investor and provider of capital, a tremendous advantage. But it’s much more than just an investing company; there is an impact team that goes, boots on the ground, to provide operational support. You know, Canopy Growth has 1,200 employees now, and a good chunk of that employee group has some sort of economic association with Canopy Rivers. And that is a great retention tool for Bruce at Canopy Growth to keep his team, because as you can imagine, they get poached all the time. But for Rivers, it’s also a huge advantage for us, because it’s bench strength that we can draw on; people that have an economic incentive to provide us great insight, early leads for opportunities, great ongoing operational support on the due diligence or ongoing perspective.

And then you also have that 35 people that aren’t on the payroll on a daily basis, we don’t need them full-time, so we can draw on everyone from the communications team all the way to the C-suite when we need operational support. And then from a financial support level, we have a team of investment bankers, venture capitalists, accountants and lawyers that really go through a comprehensive due diligence process so that outside investors, when they pick Canopy Rivers, they know there’s professionals managing the money, and there’s professionals governing the operations.

James West:   Right, interesting. So this is the logic that governs your acquisition process or your investment decisions. Can we talk about the deal that you announced between PharmHouse and TerrAscend, and how that sort of that association with Canopy Rivers brought that deal together, and how it sort of benefits the shareholders of these companies neutrally?

Sean McNulty: Sure. So I think that’s a great example, and it’s really what we’re trying to see more of inside of the Rivers portfolio. Because if we get this right, we’ve created a portfolio of complimentary cannabis companies that’s representative of pretty much the entire value chain of cannabis, and that includes much more than just growing the plant. It’s technology and media companies, it’s logistics platforms, it’s retail platforms, formulation compounding, etcetera. So the relationship between PharmHouse and TerrAscend is a great one, and those are even two, I think key pillars in our portfolio, and a great demonstration of what we’re trying to say we’re doing: going and finding someone with a track record of success, an area of specialization outside of the cannabis industry, and bring them in.

So TerrAscend, you have the team of pharmacists, compounders, formulators. Chairman of the Board, the largest individual investor, is a specialty pharma investor out of the US that manages over $1 billion, has built multiple billion-dollar companies. So that great track record of success and the relationship Rolodex is something that we think is very important for eventually going into the largest cannabis market in the world, which they’ve now stated their intention to do so.

On the PharmHouse side, same thing. We’ve gone and found operators from one of the largest global agriculture companies. Yes, it’s low-cost production, but these are entrepreneurs; they’re marketing specialists. They own the IP that their competitors sell their products in. they exclusively provide all the tomatoes for Walmart. This is a very large commercial agriculture operator that can use their skill set, their area of specialization and expertise, to help out another company in the ecosystem, while at the same time for PharmHouse, it financially and operationally de-risks their path to scaling up, because scaling up in these large greenhouses, as you know, and as many of your guests would share, is not an easy feat.

Canopy Growth has a tremendous amount of experience and operational insight on the application side and even in the growing out of the greenhouse side, so in our joint venture, which is 50/50 with PharmHouse, we help on the application, we help with the initial genetics, we help ramp the asset up, and now through our ecosystem in Canopy Rivers, we provided a great offtake partner for a significant portion of their production: 20 percent of the flowering space will be going out to TerrAscend, so that saves TerrAscend mega CapEx dollars, they have raw active ingredient is the way they think about it – input for their production.

And for PharmHouse, who will eventually develop their own proprietary brands as well, they’ve now de-risked 20 percent of their square footage, and you know, they’ve actually de-risked 30 percent of it when they include all of the offtake that they’ve entered into so far.

So it’s good collaboration among the ecosystem; we’d like to see lots more of it.

James West:   Yeah. That’s amazing. And so I guess in your position as sort of at the apex of the relationship between Canopy Growth and Canopy Rivers, you’ve really got a bird’s-eye view of the industry in its entirety. You have insight into the operations of the largest cannabis company in the world, you also have a steady pipeline of people coming looking for money and hoping to get Canopy’s involvement.

So I want to ask you, because this is the big million-dollar question I’m leading up to is, you’ve got one camp in the market that’s saying this is dot-com 2.0 all over again, including the dot-com meltdown. And then you’ve got the other camp that says no, no, no, you don’t understand; this is the beginning of a revolution and the evolution of a product which will have applications for every man, woman, child and pet going forward.

So I know I’m in that camp; which camp are you in?

Sean McNulty: So, I think I said at the beginning, I think this is one of the most compelling opportunities in the history of capitalism. I really do mean that. Everyone that works at Rivers, everyone that works at XIB has quit their job, taken a pay cut, written a cheque, and we work for equity. We think of ourselves as principals instead of agents, because the best way to have leverage return, if we’re right on this economic opportunity, is to be owners rather than advisors and commission-collectors.

So I think that there is a huge opportunity. I think for the retail investor and even the institutional investor, there’s also a very tremendous amount of risk. Just like the dot-com bubble, there are lots of stories that are going to end in tragedy. I think in cannabis, anyone who says that that’s not going to be the case is naïve to what’s going to happen in these capital markets, because we’re in an environment that is still predominantly driven by retail investment flow, which is psychological-based, not fundamental-value based.

On the other end of the spectrum you have hedge funds, so with retail and hedge funds and not a lot of institutions in the middle just yet, you have a lot of volatility, a lot of discrepancy in valuation, and that’s going to eventually lead to some pain for some and some triumph for others. But if you were to compare it to the tech bubble, companies like Amazon or Google or Apple emerged from that tech bubble. And if you have exposure to any companies like that in a cannabis industry, which is already significantly different than the internet – this is a worldwide, $200 billion a year economic economy that already exists, all we’re doing is changing the source of supply, doing it in a way that has tremendously high barriers to entry, and as Canadians and Canadian companies, we’re the financial epicentre and the regulatory gold standard which the world is following.

So I think it’s a little bit different than the tech bubble or the real estate bubble or one of the other kinds of paradigms you can compare it with, but the opportunity is real. We have a huge competitive advantage; I think if you were to add up the total value of the three largest liquor companies or the three largest tobacco companies or the three largest global CPG companies, you get $400 billion valuations for that group. If you add up the three largest global cannabis companies, you have less than $50 billion.

So for the ultimate winner, there is a lot of upside. For some of the others along the way, there’s going to be consolidation, there will be some that fail, and there will be some that do okay. But if you pick the horse that is going to win this race, and we’re an inch into a marathon, I think that that winner has a tremendous amount of financial and economic upside from here.

James West:   So that’s interesting; you say we’re an inch into a marathon. Clearly you would say that it’s not too late, but you’re going to have to be more discreet with your choices and that deployment of capital to avoid becoming a victim rather than a successor.

Sean McNulty: I think that investors, and even people looking to get into this cannabis industry, need to do their diligence, do their homework, right? If you’re going to put money to work in the cannabis sector, find a management team that has credibility and track record of success. Find a business that’s very well-capitalized and has access to incremental capital over time. Find one that’s made mistakes but then got it right the second time around. And so when I say we have what I think is an almost unfair global competitive advantage at Canopy Rivers, we tick all those boxes for now, and most of our peers and most of the other companies in the cannabis industry don’t.

There’s a handful of really, really solid operators out there, and you’re seeing the talent from these other industries flow into those companies; I think you’ll see that continue over time. But for the small group that have been in this sector from Day One and have made mistakes but have learned from those mistakes, and now are bringing that insight to a worldwide platform instead of just a domestic one, there’s a tremendous amount of opportunity.

James West:   You bet. All right, Sean, we’ll leave it there for now. Thanks very much for your participation.

Sean McNulty: All right, awesome. Thanks, my pleasure.

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.

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