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Canopy Rivers Inc (CVE:RIV) Horizontally Integrated Investment Ecosystem

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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) (OTCMKTS:CNPOF) CEO Narbe Alexandrian joins Midas Letter to discuss the company’s value proposition for investors to avail themselves of venture capital firm level due diligence while investing in a portfolio of cannabis companies. The CEO likens the investment to an Exchange-Traded Fund (ETF), however Canopy Rivers also are able to invest into private companies at multiples lower than companies already trading in public markets. Mr Alexandrian states he “can proudly say that I don’t think any other venture fund out there within the cannabis space looks at as many deals as us.” In the last year Canopy Rivers, with its merchant bank type of structure in the cannabis space, have seen 1,523 pitches to date. The company looks to invest in all segments of the cannabis value chain and currently have eighteen companies in its portfolio. The recent purchase and supply agreements between portfolio companies James E. Wagner Cultivation Corp (JWC) and TerrAscend Corp demonstrates the collaboration and synergy that can happen within their investment ecosystem. The CEO also discusses his views on the future of the cannabis sector and what that means for Canopy Rivers future deal flow.

Transcript

James West: Narbe Alexandrian joins me now, CEO of Canopy Rivers. Narbe, welcome back.

Narbe Alexandrian: Thank you for having me. I’m glad to be here.

James West: You guys are, you know, prolific in terms of the amount of information and news you guys put out. Most recently – well, not most recently, but on August 15th, purchase and supply agreement among your portfolio of companies, TerrAscend and JWC, for me that was very exemplary of the value proposition inherent in Canopy Rivers. Can you tell me about that transaction, and why it is so representative?

Narbe Alexandrian: Yeah. So to take a step back, Canopy Rivers, we have two main teams: the deal team, who goes after new investments, and then we have the impact team, which helps our companies grow.

So the impact team’s whole basis to create an ecosystem effect with our companies. We believe, and our thesis has always been – and is going to be for quite some time – that vertical integration just doesn’t work. You have companies that are trying to do too much. They’re trying to be a pharma company and a consumer-facing brand; they’re trying to farm, and they’re trying to create a brand; they’re trying to be an oral spray and a sexual lubricant at the same time.

You’ve seen all these crazy things happening in the cannabis industry, and it reminds me a lot about what the tech industry looked like back in the early 2000s, where, if you were coming up with an internet company, you had to do everything. You had to be the payment rails, you had to be the e-commerce website, you had to create the network infrastructure and the servers, you had to basically create everything from scratch, because nothing really existed out there.

Over time, that’s shifted away. Now you have Shopify for e-commerce, you have PayPal for payment processing, you have Amazon web services, AWI, for network infrastructure; that’s all outsourced. We think the cannabis industry is going to move into horizontal integration, and I’m not looking at the large, Canopy Growth-type companies that have the capital and the talent to do everything, but this is for the majority of the companies out there: they need to really laser-focus on what they’re doing very well.

You have JWC here, which is a Kitchener-based cultivator; they do aeroponics, which the roots are suspended in air, shot with water that has minerals in it, and through that process, they basically have no genetic drift of the plant itself. It’s a very engineer-heavy, patented process that they’re licensing out as well.

And then you have TerrAscend, which is a vertically integrated company, is doing very well on that end, but has a huge patient network of medical cannabis patients that JWC can sell into.

Now, if they’re focused on what they do very well – JWC cultivates, and then they sell to TerrAscend, and then TerrAscend sells it to their customers – you’re creating a horizontal integrated system where companies are focusing on what they do best, but likewise coming together to create a vertically integrated supply chain.

James West: Mm-hmm. Well, that’s so refreshing to hear you say that, because, you know, if you look at, for example, the consumer packaged goods industry and consumable foods for human beings, Kelloggs doesn’t grow corn, nor do they manufacture boxes, nor bags, nor inks to print the thing. So the horizontalization of the industry is something that is, I guess, emblematic of its maturity. So to see you guys ahead of that is heartwarming.

Now, you told me that you look at a lot of different opportunities, because people hear and know that Canopy Rivers is sort of like this merchant bank type of structure in the cannabis space. So tell me about, like, the number of opportunities you look at, just to give the audience a sense of the sheer volume of data that you’re measuring every week.

Narbe Alexandrian: Yeah, so I can proudly say that I don’t think any other venture fund out there within the cannabis space looks at as many deals as us. Over the past 365 days, we’ve seen 1,523 pitches to date. I’m not talking about just the deck comes to us and we just review it, but we actually talk to the entrepreneur. And there’s all this information you can gain from secondary research: reading a pitch deck, reading a report online – but there’s so much more you gain off of actually talking to the entrepreneur and understanding what that segment of the value chain looks like.

So when we’re investing in, call it, Greenhouse Juice here, we’re looking at different beverages out there, we talked to all the beverage manufacturers we could talk to within the cannabis space, and found out what’s working for them, what isn’t. what do sales look like, what does the valuation look like? What markets are they after? Where are they selling their product into? To truly create an investment thesis of why we’re investing in a certain company versus other ones.

This is the whole Silicon Valley mentality that we bring to Canopy Rivers that I just don’t see present in many other investment vehicles within the cannabis space today. And we’re really proud of all the data that we’ve gathered up to this point in time.

James West: So tell me how – what’s the, sort of, net asset value of your entire book at this point?

Narbe Alexandrian: We don’t publish our NAV, but we do have five analysts that do publish NAV, and the consensus is around the $4.25 range. 

James West: Okay, so, and how many companies would that encompass?

Narbe Alexandrian: Eighteen companies. 

James West: Eighteen. So, you’re very particular; you look at 1,400, and you’ve got 18 in the portfolio.

Narbe Alexandrian: 1,518, so, just a little over 1 percent. So it just, it’s the benchmark of what a venture capitalist should look like.

James West: Oh, is that right? Interesting. Okay, so then, tell me what’s – from where you guys sit – where is this industry going next?

Narbe Alexandrian: Great question. There’s a lot that we keep proprietary to us just because it is our secret sauce. Kind of the three areas which I’d love to talk to you about, or three things that we’re really seeing moving in the industry. And some of it is right now present, and then the near future, and then the long-term future.

In the present, we think that brands are going to become the biggest thing within the global scale. You’re already seeing it happen in the US, where you have some brands coming out creating vape pens and edibles and beverages, and they’re making anywhere from $20 million to $150 million of revenue per year. This is a lot of revenue for what is a gray market; legal in that state, but illegal Federally.

In Canada, we’re going to see a ton of innovation come through with all the large LPs and the smaller LPs looking at creating legalized beverages and drinks, and the reason I say innovation is because, unlike the US, where innovation is very secluded to what that company can do, because we’re le gal in Canada, you have large corporations that were really pushing their IP into creating new products.

So on the beverage space we’re going to see Constellation really come through with what they’re going to bring out to the market, Molson-Coors in bev…all three of them are entering the market, so a lot of innovation there. 

On the edibles side, on the patches, and in different use methods, we’re going to see a lot of innovation come play through.

The second, more medium-term focus is on agricultural technology. When you talk to the large agtech companies like the Bayers and the Cortivas, which is Dow Dupont pioneer, they look at cannabis cultivation as very 1.0. All we’re doing is planting the seed and waiting till it grows to cut the bud off.

But when you look at other crops such as vegetables, berries, tomatoes, corn, maize, soy, there’s a whole slew of innovation that’s gone through there to change the way the plant is cultivated without actually messing around with the genetics of the plant.

So it’s still going to be non-GMO, it’s a non-genetically-modified organism, but likewise, you’re going to be able to get more yield off of it, make it more stronger against pesticides and any of the things that are really suffer. Like, the cannabis companies a re suffering from, and there’s a lot you can do there.

And the long term, we think biosynthetics is the way to go. We do see a lot of correlation between something else that’s happened within traditional industries such as how Aspirin was created off of birch trees or willow trees, and you don’t see any cultivation of that taking place.

James West: Right.

Narbe Alexandrian: And you’re seeing how the pharmaceutical market is really looking at the cannabis space. Seven out of ten landholders of pharma patents in the cannabis space are the large multinational pharmaceutical companies, and to get their product out, t hey need a very stable cannabis isolate, which you can only get through an active pharmaceutical ingredient, or API, through biosynthesis.

James West: So where’s your bet in the biosynthetics space? I know there’s yeast bacteria and algae sort of contenders; where does Canopy Rivers see that future?

Narbe Alexandrian: We’ve looked at, say, four dozen companies within the biosynthetic space, both the ones that are currently doing it as well as the large ingredient manufacturers for typical CPG – talking about multi-billion-dollar companies that are slowly looking at the cannabis space. and we think that all three have some pros and cons to it.

My personal belief is I think the algae focus will probably be the best one, just because it is the most controllable, and you stay the closest to the organic side. But it just really depends on what these companies can do. Our view is that, within the next 12 to 24 months, you’re going to see one of these companies come out and say, I got it. I found a way to biosynthesize CBD or THC or THC-V or CBN, CBG, you name it, and it’s going to take another three to five years to actually get it to scale. And when I say get it to scale is, it costs a lot of money to biosynthesize cannabinoids, and you need to get it to a certain point where the costs drop, so you actually compete against  the organically cultivated cannabis that we see today. 

James West: Sure. So let’s focus for a moment on the essence of Canopy Rivers, because this something that I think a lot of the investing public is not aware of, despite the fact that you are a publicly traded issuer. And the value proposition for an investor in Canopy Rivers is to avail themselves of the venture capital firm level of due diligence and analysis to improve their odds of having a positive experience in the cannabis sector overall. Is that the way that the investor should look at this?

Narbe Alexandrian: Absolutely. There’s – think of it as an ETF, but a smarter way of doing it, because we’re not public companies; we’re actually investing in private companies at fantastic multiples that are lower than what you’re seeing in the public markets today. So if our companies that we keep at cost for accounting reasons were to go on the public exchanges, they would get definitely enough of a lift.

So you’re coming in early and you’re seeing what’s next, what the disruptors look like of the space. it’s very early in the game. It’s probably the third inning of a nine-inning baseball game, and there’s so much innovation that still has to happen. There’s so much of a greenfield in the consumer’s mind of brands. If you talk to any consumer, whether in Canada or the US or elsewhere in the word, and you ask them to name five brands of cannabis, they might not even get there, the average consumer.

And so there’s a lot of greenfield in terms of how this thing is going to grow, and the amount of innovation that’s going to come through. And we believe that Canopy Growth is a fantastic platform to be based off of, because they’re doing everything right internally in terms of looking at every piece of the value chain. But when we look at other companies out there, we can actually pick off innovative ideas and disruptors, and bring them into the Canopy umbrella and really push them forward.

James West: You bet. All right, Narbe, I could talk to you all day long, but we’re going to have to leave it there for now. Thanks very much for joining me again.

Narbe Alexandrian: Thank you for having me.

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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