Many early cannabis companies were forced into vertical-integration due to regulatory constraints. While it may make sense for cultivators to create extracts, it doesn’t always make sense for them to own commercial kitchens for confections or bottling machines for beverages, given the high capital costs and low return on investment.

Most cultivators can earn a better return on investment by outsourcing capital-intensive manufacturing and packaging processes and reallocating the capital to branding and marketing efforts. Aside from product quality (that many specialists can offer), branding is the most important difference between a commodity and high-margin product.

Let’s take a look at the rise of specialization in cannabis and how investors can partake in the growing trend.

Next-Generation Products

Cannabis-infused edibles, vapes, beverages, oils and topicals are quickly becoming the preferred consumption methods among consumers. In many markets, cannabis flower represents less than one-third of total demand, often with the slowest growth rates and lowest margins among the different product types on dispensary shelves.

Anticipated spending in cannabis by product type. Source: BDS Analytics

Some cannabis cultivators have expanded into extraction as a way to bolster margins, notwithstanding the potential significant capital cost of the equipment required. For example, some cultivators will sell premium high-end flower and use the remaining subpar flower and trim for extraction. These efforts minimize waste and can create higher-margin products that can be sold either retail in basic forms (e.g., cannabis oils) or wholesale.

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While some cultivators have expanded into more specialized areas, such as confections or beverages, it typically makes more sense to work with specialists in these areas. These specialists sometimes work via tolling agreements where cultivators may provide raw materials that are turned into finished products that can be white-labeled or custom branded.

Investing in Specialists

Many specialists that produce cannabis-infused products are privately held, but there are a few publicly traded companies with exposure to the fast-growing space. For example, FinCanna Capital Corp. (CSE: CALI) (OTCQB: FNNZF) is a royalty company that provides capital to cannabis growth firms in exchange for a royalty on their future sales.

QVI Inc, operating as The Galley is FinCanna’s largest investment and specializes in helping cultivators develop nearly any high-value cannabis product, including edibles, topicals, tinctures, beauty products, chocolate, hard candies, gummies, pre-rolls, vapes and small beverages. The company even offers fulfillment and distribution to dispensary doors on behalf of its clients.

The Galley’s specialty equipment. Source: The Galley

Unlike many other specialists in the space, The Galley provides end-to-end services to help develop high-end products. Its R&D team creates original ideas, formulas, and recipes with the help of credentialed experts while conducting necessary testing, developing the right packaging, and even sourcing cannabis if dispensaries are the ones looking for specific products.

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Under the terms of its agreement, FinCanna is scheduled to begin receiving royalty payments in 2021 amounting to 20% of QVI’s revenue paid in cash monthly. FinCanna will also receive annual supplemental payments that ensure that it receives a minimum of 70% of QVI’s annual after-tax net income paid in cash each year and 70% of the proceeds of any change of control or sale of the business.

Cultivation Technology Inc., also known as Coachella Manufacturing, is another award-winning extraction and manufacturing business under the FinCanna umbrella. Under its agreement, FinCanna receives 10% of CTI’s revenue in cash (5% is deferred) and a 10% additional royalty on monthly sales from newly acquired production equipment until certain milestones are met.

Looking Ahead

The cannabis industry is quickly evolving from flower toward a growing number of high-end cannabis-infused products. While some cultivators have pursued extraction, it’s often impractical to hire experts and invest in the equipment necessary to target a wide range of end markets. Fortunately, specialists can step in and provide these services at a great value.

Investors looking for exposure to cannabis specialists may want to consider FinCanna Capital Corp. (CSE: CALI), a royalty company with an interest in The Galley and Cultivation Technology Inc. The company also has several other projects under its unique umbrella, including ezGreen Compliance, a point of sale software solution for the cannabis industry that’s 100% owned.

For more information, visit the company’s website or download their investor presentation

To review FinCanna’s Cautionary Statement please visit: https://www.fincannacapital.com/corporate/forward-looking-statement/

Disclaimer

The above article is sponsored content. CannabisFN.com and CFN Media, have been hired to create awareness. Please follow the link below to view our full disclosure outlining our compensation: http://www.cannabisfn.com/legal-disclaimer/

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