Gali Weinreb, Globes, 15 September 2019
A first American company involved with cannabis for recreational consumption is about to enter the Tel Aviv Stock Exchange (TASE). From the Earth (FTE), which runs cannabis stores (called dispensaries) in California, signed a merger agreement last week with shell corporation KMN Capital. FTE’s CEO, Dan Zaharoni, told globes that “FTE is opening a door for more American companies to enter TASE.”
Controlled by Yoel Yogev (71.4%), KMN Capital is traded on TASE according to a market cap of NIS 32 million, after hiking today by 28%. The merger agreement will provide the shareholders of the American companies 80% of KMN Capital shares. As a result, the value of the merged company will be NIS 160 million based on the stock’s current price. If the American company achieves sales of $12.5 million over three months (representing an annual turnover of $50 million), its shareholders will receive an option to increase their share of KMN Capital to 90% under conditions which have not been disclosed. A suspending condition for the agreement is that KMN Capital will have at least NIS 10 million in cash at the time of the merger. As at the end of the second quarter, KMN Capital had no cash and Yogev is funding its operations with loans that have accumulated to several hundreds of thousands of shekels.
What was your true motivation for having the company traded on TASE?
“At first, we considered issuing in Canada, similarly to all recreational cannabis companies in the USA (which are not allowed to issue in the USA due to the federal law that prohibits the use of cannabis). However, when we realized Canada has become saturated with companies that are quite similar to ours, I decided to look for other markets. In November 2018, I visited Israel with my father and my two children. I was also looking for a loan for our hotels. I cautiously asked the investment banks if they are also involved with cannabis, and they roared with laughter.”
At that time, cannabis companies were flowing into TASE en masse. At that time, KMN Capital was under a memorandum of understanding with Asif 420, which has not proved successful. In January, the venture with Asif collapsed, and the connection with FTE was established with the halo of Yuval Barak from Radhan Investment bank and advocate Arik Kaufman from Kaufman-Rabinovich Law Firm, who represented KMN in the deal. Ilanit Landesman and Niv Sivan from Herzog Fox & Neeman represented From the Earth.
Based on KMN Capital’s presentation, FTE is a fast-growing company operating since 2015 via two candid dispensaries in California. The Company’s revenues in 2018 were $12 million. Zaharoni says the turnover will double this year. The lion share of the operations takes place in the Santa Ana dispensary, which opened in December 2015 on an area of 465 square meters. Two more dispensaries are under development. Zaharoni says a cannabis processing facility is expected to start working shortly.
FTE founder, Dan Zaharoni, told Globes: “Growing in the USA only via the opening of stores is very difficult since the competition is fierce and the number of licenses is limited. We have to make acquisitions to grow, and acquisitions required external funding.” Advocate Yuval bark concurs, “Israel has money that looks for investing in cannabis. However, the market is offering dreams that depend on export. There are no many companies with revenues, let alone earnings.”
To conclude the deal, an arrangement had to be reached with the Israel Securities Authority since selling recreational cannabis is still considered an offense in Israel. However, after “numerous attorneys provided their opinions,” the Securities Authority has decided to allow the move.
Who is From the Earth?
“My parents were Israeli. I was born in the USA. I practiced law for 27 years and then became a real estate developer, specializing in assisted living compounds and hotels. I became acquainted with the company via a friend, who suggested I invested in it. At that time, I was a little skeptical about cannabis, but when I saw the dispensary, I said to myself that this is the store I would have loved to build. It is very high-end and elegant, targeting lawyers and physicians, not teenagers or freaks. They also advocated the values of community engagement. So I suggest becoming responsible for the real estate while they will be dedicated to management so that we will grow together.
“Right now, we are growing at a pace of $2 million per month, but once the factory opens, we will have a free supply that would take us to the next level with another $2 million per month. We project revenues of $45 million in the next 12 months. Our revenues originate logically from the current situations and from what we did so far with our money alone, with no external investment.”
FTE is not interested in playing in the Israeli cannabis market in the short term, but this does not mean it has no interest in Israeli technology. Zaharoni says, “To win in the cannabis market, a company needs three things: technology, strong brands, and markets with a certain degree of exclusivity, for example, some of the US states, which award a limited number of licenses.”
What kind of branding did you create for the dispensary?
“We are From the Earth, which means that our produce is organic. Someone has described our dispensary as ‘a fusion of a pharmacy and a Starbucks Store.’
“Customers who walk into our dispensary are met with a consultant, who helps them customize the product. We plan to open adjacent ‘lounges’ that will sell cannabis products licensed for consumption in social, away from home settings.”