Q&A with Paul Rosen: Tidal Royalty CEO on valuation metrics and the future of cannabis

At The Arcview Group Investor Forum in Las Vegas, our CEO Paul Rosen joined Stockhouse EVENTS for a webinar and Q&A session with investors.

Rosen shared his perspective on how Tidal Royalty assesses its financing opportunities, where the cannabis industry and cannabis products are heading in the future, and whether vaping will become passe.

Here’s the transcript of the session:

Question: Does Tidal Royalty only work with U.S. companies?

Paul Rosen: Our focus is on licensed operators in the U.S. We see the U.S. cannabis market as the biggest opportunity in global cannabis, and are focusing our efforts and resources towards identifying opportunities there.

Question: Can you expand a bit on your valuation metrics? What is the criteria Tidal Royalty uses to decide on what companies to fund?

Rosen: In order to assess financing opportunities, we undertake a comprehensive due diligence process and use a scorecard method to evaluate the accretive potential of an opportunity.

In the preliminary stages of the assessment of a financing opportunity, we provide each potential portfolio company with a proprietary list of documentary requests, the responses to which are then reviewed and considered. Follow-up questions and further documentary requests are then provided to the portfolio company.

Concurrently with this due diligence process, the information gleaned from the responses to the documentary requests are added to the Company’s deal assessment scorecard, which weighs the alignment of the potential portfolio company and financing transaction against the Company’s goals, financing strategy and then-current portfolio composition.

The deal assessment scorecard assigns the financing opportunity with an overall score based on the following metrics:

  1. Quality of management
  2. The current regulatory and prospective future regulatory framework of the market in which the company operates/seeks to operate
  3. The health of the current and anticipated operations of the business
  4. The fit of the company and its business with the overall strategy of the Company and its then-existing portfolio
  5. The strength of the security that could be obtained as part of the proposed financing

We may add, revise or replace these metrics in the future. Depending on the overall score and the particular areas in which a score is weighted, we then make an assessment whether to pursue a financing transaction.

While we evaluate many financing opportunities, only selected opportunities that align with our scorecard metrics are pursued. If we decide to pursue a financing transaction, we will request additional information from the potential portfolio company (as required), and work to independently verify information already provided to the extent we deem necessary. In certain instances, we may retain external service providers to assist us with doing so.

In addition to assessing company-specific factors, we also analyze the macro factors that may impact a financing, for example regulatory developments, market changes and consumer behavior. We regularly assess these macro factors and continually refine our conclusions with respect to the expected impact of such factors on current and future financings. As such, we strive to select and structure financings such that Tidal Royalty benefits from the outcomes relating to a particular selected portfolio company as well as from market growth in general.

Question: Can you discuss your motivations behind the Lighthouse financing?

Rosen: We believe that the types of cannabis products that customers consume will continue to evolve in a regulated state market. We’ve already seen these changes in consumption habits in more mature state markets like Washington and Colorado.

The segment that we are most excited about is the infused beverage market, as it has the ability to extend reach to a completely new customer segment that might not ever consider inhaling cannabis.

Lighthouse Strategies is one of the leading players in the infused beverage space. They produce Two Roots, a micro-dosed non-alcoholic cannabis-infused craft beer. It emulates the rapid onset of alcohol, and dissipates quickly — and, it tastes great.

They also produce a line of responsibly-sourced teas and coffees, under the Just Society Coffee & Tea Co. brand. And, they have the Brewbudz brand, the world's first 100% compostable and patented line of cannabis-infused single-serve coffee pods that are compatible with all K-Cup and K-Cup 2.0 style brewers.

As part of our financing, we will take an equity position in Lighthouse Strategies, as well as a royalty on certain Lighthouse Strategies’ beverage lines. We are excited about this transaction not only because it provides exposure to a market segment with explosive growth potential, but also because it provides synergistic benefits within our portfolio. We expect the transaction to close in the near term.

Question: Where is the Cannabis heading in the future in your opinion? What is the longer term investment? And what companies are catching your eye in advancements now?

Rosen: Great question. We are constantly thinking about how we expect the U.S. cannabis industry will develop and where we expect the value to accrue within the industry.

We do so through three primary lenses:

  1. Quantitative analysis of market data (third party sourced and proprietary)
  2. Qualitative assessment of markets through deal opportunities and conversations with industry participants
  3. Comparative analysis to the development of the Canadian market and analogous markets in the U.S. (e.g. alcohol, CPG, etc)

In the near term, we expect the trend towards legalization on a state-by-state level to continue. Whether this culminates in complete legalization or acknowledgment of state rights paramountcy (e.g. STATES Act), we nonetheless expect that state boundaries will remain an impediment to interstate commerce for the foreseeable future as states will want to maintain the job creation and tax base created by cannabis regulation.

As such, in the near term, we see continued value accruing to those participants that control the supply chain (cultivation, manufacturing / production, distribution, retail). This value will be multiplicative for those participants that are able to do so — at scale — across multiple states and, in effect, create a national supply chain for the delivery of cannabis to consumers.

In the mid to long term, we expect that value created in the industry will accrue to those participants that own and control cannabis-related intellectual property rights: brands desired by consumers; technologies that enable novel or better delivery mechanisms; and, patents and trade secrets that underlie pharmaceutical and other medical usages.

Question: Are oils/vaping going by the wayside? It seems folks are looking forward to beverages etc. much mores as a brand play now.

Rosen: We don't believe that oils / vaping are going away.

Consumer consumption trends will change over time, and new products will come to market to reflect that. The reason that we believe beverages is so exciting is that it is a segment that is underserved to date. There really hasn't been a lot of innovation in that space, and regulation opening up new markets should spur that.

In addition, it creates an entry point for a customer segment that might otherwise be hesitant. So, we don't expect oils / vaping to go away, but we do see a huge upside for other product types (especially beverage).

Question: What other product types do you think will be big in brand building? Anything we haven't heard much about yet?

Rosen: We think there is a big opportunity in topicals (cosmetics, health and wellness products, etc), especially from a brand perspective.

Cannabis-based topical products are beginning to show real benefits in relation to traditional products, and we expect this will be a significant growth industry. At the same time, the market is nascent so there is still the opportunity to develop market-leading brands and open up distribution networks.

This content first appeared on Stockhouse EVENTS. Register now for on demand video from the event, where you can learn more about Tidal Royalty.

For more insights on the legal U.S. cannabis industry, financing for cannabis companies and more, sign up for Tidal Royalty’s bi-weekly newsletter.

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