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A Very Nice Chess Board Of Cannabis Assets: Part One Of An Exclusive Interview With CannaRoyalty CEO Marc Lustig

Feb 15, 2018

In an overcrowded field of cultivators vying for maximum yield, CannaRoyalty Corp. (CSE:CRZ) (OTCQX:CNNRF) is noteworthy for their rich tapestry of diversified holdings in the cannabis sector. It is a unique long-term strategy in an industry riddled with companies born with the intention of being acquired and anxious investors overcome with panic about the fear of missing out.

Sans greenhouses and grow operations CannaRoyalty focuses their intentions on a portfolio of royalty agreements, equity interests, and a host of other investments on both sides of the U.S. - Canadian border. In part one of our exclusive interview with company CEO Marc Lustig, a man with over 15 years experience in healthcare and capital markets on both sides of the Atlantic, we find out out about CannaRoyalty’s remarkable growth, their diverse assets, and the reason why California is the most significant marijuana market in the world.

Marc, thank you so much for taking the time to speak with us today. So, for the benefit of our readers, would you tell us a little bit of your history about how you came to be involved in the cannabis industry and ultimately with CannaRoyalty?

Absolutely. I have a graduate background in both science and business. I started my professional career in pharmaceuticals at Merck, and then I moved on to capital markets. I ended up moving into a role where I was the head of capital markets at one of the non-bank investment banking firms in Canada in 2014. By the end of 2014, given my track record and my education plus business experience I founded CannaRoyalty myself with my own money really because I thought that cultivation was not an area that I was going to be very good at, but also because I thought that the cultivation side of the cannabis sector would become saturated.


Like any other commodity, in this case, an agricultural commodity, it really depends on the cost of production. I felt as if at that period of time the only thing that was protecting the industry was sort of a drawn out and extensive licensing process, but that would relieve itself and then there would be lots of different growers, which is a basic ingredient. The idea behind founding CannaRoyalty was to invest into more strategic assets that give investors access to the cannabis sector beyond cultivation. When you talk about formulations or hardware for different types of devices or you talk about brands or manufacturing or distribution, that was the focus of the investments that CannaRoyalty was making in order to give investors a diversity across the cannabis sector outside of the traditional Canadian licensed producer.

So, let's talk a little bit about CannaRoyalty because you do have a unique approach to the cannabis industry. As you said, many people when they hear cannabis they do have an image in their mind of something like a greenhouse and a grow operation. Talk to us a little bit about the company's approach to the cannabis industry and your portfolio of investments.

First of all, geographically we have a broad base of assets. A number of them are in Canada, but a number of them are in the U.S. In the last year, or so, our focus has been on building up our asset base in California. We believe very strongly that California is and will continue to be the most important cannabis market in the world. So, we ended up investing in a number of strategic assets.

We now have nine different assets once we close on an acquisition of Bhang Vape and Alta Supplies. Bhang is the leading vape cartridge manufacturer, and Alta Supply is one of the licensed distribution companies in the state of California. That will give us nine different assets in California. I think makes a very nice chess board of manufacturing and distribution across the state of California which, again, we believe is the most valuable and most important cannabis market. Outside of California, we have assets in Washington, Oregon, Arizona, Florida, and Nevada as well as Puerto Rico and I mentioned Canada. Geographically, obviously, we have a great deal of diversification, but in addition, there's a diversification in terms of the structure of deals that we execute. Some of the deals give investors access to royalty streams, such as our investment into River which is the largest distribution company in the state of California, but we've also made a variety of strategic equity investments.

Examples of that would be Anandia which just closed financing which makes it about three and a half times more valuable than where we invested in it just under a year ago. Resolve Digital which is a medical vaporization device company, same idea. We invested in it about a year and a half ago, and it has returned to shareholders at a value of eight times prior to where we invested. Another example of a strategic equity position would be our ownership of Wagner Dimas which is a California asset that we own 22 percent of and would today be, to our knowledge, the largest company with manufacturing IP for the large-scale production of pre-rolled format flower or cannabis.

So, there's sort of a handful of strategic equity investments that we've made, but in addition, there’s also full out acquisitions of 100 percent of assets where we end up consolidating the companies fully. Bang Vape and Alta, which I referred to earlier, would be examples of that. In summary, it's a variety of geographical diversification of assets, but also different types of structure in terms of the types of investments that we make with the focus being on what we consider more value-added areas of the cannabis sector such as brands and IP and manufacturing and distribution.

I'm actually glad you brought up California because that leads to my next question. California has had their adult-use market open for about a month now, and you say you consider it to be the most important cannabis market in the world. So, after about a month in California, what's going right in the state? What’s going wrong in the state and what's surprised you the most so far?

I wouldn't say anything has surprised us. People do need to keep in mind some of the basic stats. I'm sure generally they're aware, but to put it in perspective, California as a medical market in 2017 did roughly [U.S.]$3 billion in legal revenues. To put that in perspective, for the Canadian market the which was medical all of 2017 and still is in 2018 the revenues may have been [CAD]$250 - $300 million. The California market is 10 to 15 times bigger than the Canadian market yet the investment value of a number of the public companies in Canada would suggest that Canada is bigger. But it's a fraction of the size of the California market. That obviously explains why we're so focused on the California market.

But to answer your question, I wouldn't say that we're surprised by it that much. The demand has been more significant, and that's explained by the fact that now, as of January 1st, California is a recreational market. Now, you require capital to produce the type of product that a more informed consumer is looking for and so that's creating some very good opportunities for a company like CannaRoyalty.

I would say that what's going right for us is that our focus on manufacturing and distribution of branded product across the state is playing out very nicely and will continue to for some of the reasons I mentioned earlier. I think we're better capitalized and have put together a network of strategic relationships that will allow us to leverage our assets much better than the sort of smaller single asset type companies. Scale for a market like California will be the most important asset. That requires a lot of capital and for a lot of the companies in California that access to capital is not improved even though the market is fully recreational. It wasn't as if on January 1st for a number of single-asset companies that may be private or mom and pop type companies that their access to capital changed commensurate with the changes in the regulations.

Bhang Vape
CannaRoyalty will soon close on the acquisition of Bhang Vape
Recently you announced a joint venture with Aequus Pharmaceuticals to develop and commercialize cannabis-based therapies targeting neurological disorders. I’m interested in the research perspective - do you see a need for more clinically validated cannabis-based therapies in the market?

Absolutely. There's a fairly significant misconception that exists in the cannabis market today that there are medical cannabis products. It's our contention that until you partner with physicians or clinicians who are going to do proper clinical trials and on the proper use of cannabis therapies, then there really aren't truly medically-oriented products. It's more of a branding game. If I give you a nice, clean, white cartridge and I tell you it has a large CBD ratio, and the name on that cartridge is some kind of medical image then maybe you think that that's more of a medical product than the same cartridge which is more colorful, has maybe a higher THC content and has a different brand that's more recreational. The reality, however, is that it's the same product. It's really our belief that until someone actually uses products on a proper group of patients that suffer from a specific condition that there really is no such thing as a medical product.

We see a huge upside in terms of cannabis as a proper medical therapy, but the work really needs to be done. That's really the basis of the joint venture with Aequus, who focuses on neurological conditions. They bring a network of clinicians and physicians to properly advise and council on what it is that they're looking for, how a clinical trial should be conducted, and which types of patients to go looking for. So, that's really the emphasis of that joint venture because we do see a day where cannabis is a front line or second line proper therapeutic, but, again, the work really needs to be done. In the meantime, we absolutely don't deny that cannabis is helping people medically, but that just gives some more detail to what it is that we're really trying to accomplish beyond people just using cannabis products because they have general pain or to feel better generally. A lot more work has to be done if someone's going to qualify any of these products as being medical.


Continuing on about CannaRoyalty, some other big news that came out very recently was you just announced the launch of Trichome Yield Corp. which will supply secure debt financing to the Canadian cannabis sector. What does this mean for your company going forward?

Well, after founding the company more than three years ago now it was a lot of work. A lot of relationships in Canada have been built by CannaRoyalty where there are significant opportunities for a vehicle like CannaRoyalty. More specifically, it’s lead to the launch of Trichome to be able to lend on a senior secured direct debt to capital basis into assets because the growth of the sector is so significant at the moment, and lending and capital markets really haven't caught up to how quickly businesses are growing and how quickly they need capital.

Obviously, there's a group of the top tier of Canadian licensed producers that can access equity capital, that's no problem, but that's really only a fraction of the overall cannabis sector. So, if you're talking about production or real estate, facilities, inventory, equipment, dispensary, logistics and distribution, all of those businesses are also part of the sector yet it's really only the licensed producer in Canada that's had exceptional access to equity capital. Because of that, there were very significant opportunities that we saw available to a vehicle, and that's why we formed Trichome which is majority owned by CannaRoyalty. The shareholder of CannaRoyalty is the benefactor in that we created something from nothing and have been growing it to, what I believe, will be a very significant player in the debt capital and lending markets to the Canadian cannabis sector.


*Coming Tomorrow: Part Two of our interview with CannaRoyalty CEO Marc Lustig where we discuss Jeff Sessions, Canadian legalization, and the future of the cannabis industry.

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