CannaRoyalty Corp (CNSX:CRZ) (OTCMKTS:CNNRF) (FRA:CY4) CEO Mark Lustig discusses the company’s growing portfolio of investments and their valuation relative to competitors in the industry. The CEO details their recent $30m private placement, Aurora Cannabis Inc’s (TSE:ACB) (OTCQB:ACBFF) (FRA:21P) acquisition of their pre-roll technology and Anadia Labs, as well as the prevalence of their products in Californian dispensaries.
James West: Hey, welcome back to Midas Letter Live. My guest in this segment is Marc Lustig; he’s with CannaRoyalty Corp, CSE-listed CRZ. Marc, welcome back.
Marc Lustig: Thanks for having me.
James West: Marc, CannaRoyalty has been knocking it out of the park by all accounts. The value of your portfolio of investments keeps going up, your share price is, I’m sure, putting smiles on a lot of faces relative to what’s going on in the sector. You’ve really started to make this solid move as an operator in California, and you recently closed a $30 million private placement. Is that to support that sort of ongoing evolution of the company?
Marc Lustig: It is. Increasingly, we’ve been acquiring either manufacturing or distribution assets in the state of California; it’s the world’s biggest cannabis market, it’s fully recreationally legal, and we, at the moment, are dominating that market. And so it’s a choice of where we would allocate resources. It’s just much better for us to allocate resources in California, but that particular financing was largely for various initiatives that we’re undertaking in California.
James West: Interesting. And the acquisition by Aurora of your roll technology, is that kind of emblematic of your intention to divest yourself of things that are non-core to the California operations?
Marc Lustig: Exactly. In that case, Terry and his team did a lot of work on pre-roll technologies. We had made that investment more than a couple years ago; it was an excellent return on investment to our shareholders. We’d taken out of it various things that we wanted; for example, we now own or distribute the largest four pre-rolled brands in the state of California. So we learned, we developed brands on the pre-rolled side of the market, which we think is a huge part of the product segment that customers are looking for. And at the same time, we have a very good relationship with Aurora, and they wanted the license for Canada and international use of that technology. So it was a really good trade, if you will. Bought it at one price, sold it at a much higher price to a group that we trust, and in the meantime, took out a number of assets, like branded products, that we’re doing very well with in key markets.
James West: Very interesting. I just returned from a cannabis trip to California, as it were, and I spoke to some individuals who run dispensaries, and some customers, and a couple things emerged that are existent as a problem in California, and I’m curious to hear how you’re dealing with these problems. It sounds like they’re not a problem for you, but one is that since the onset of the new rules January 1, 2018, that the testing requirements for suppliers into the retail channels has become much tougher, to the point where 70 to 80 percent of tested cannabis is being rejected due to pesticides. And the result is that, in the dispensaries, they’re down to 20 to 25 percent of the normal variety of products they’re able to offer, and so there’s a huge squeeze on the supply side. Is that something that you’re having to deal with, or is it a case where no, your suppliers are all one of that small sliver that’s getting through the pesticide testing program?
Marc Lustig: This was a huge win for CannaRoyalty, and I’ll explain why, which is that we made the investments into testing and compliance and ERP systems and point of sale systems and tax payment systems, all of the different things that a number of the smaller, more entrepreneurial outfits in California didn’t have the capital for. So this ends up coming back to that same trend that we’ve spoken about before, which is that if an entrepreneur who’s producing a great edible product doesn’t have access to capital, they’re naturally going to cut those corners like on testing or other types of systems, and you’re right: January 1st was the day that California went rec. The state gave a six-month window for people to get their act in order, and as of July 1st, you had to comply with the state regulations.
So what we saw is that in the last couple of weeks of June, the dispensaries were flooded with product that people needed to get out of the system that was going to not pass the State regulations. So in that period, obviously, you know, the dispensaries were filled with discounted products. But as of July 1st and right as the State had messaged, the enforcements went in, and at that point it was sort of like we were the guys, the fishermen with the nets out during the storm, when everybody else had to sort of come back to shore. We have done extremely well as of that point because of the investments that we made into those areas like you’re talking about. So it’s probably our products, or certainly products that we distribute, that are largely the ones on the shelves right now.
James West: And you’re in a lot of dispensaries in California?
Marc Lustig: Yeah. We would cover somewhere between 70 and 80 percent; our objective by the end of this year is to be covering 80 percent of all dispensaries in California.
James West: Wow. And so what kind of – what’s the range of products that you actually supply into that chain?
Marc Lustig: So at the moment, CannaRoyalty owns 10 of its own branded products that are for sale in California, ranging from edibles to different types of vape cartridge products to pre-rolls, as I said. And those products, specifically vape cartridges, pens, disposables and pre-rolled, to us continue to be the market leading products.
There’s things that we’re doing in the beverage area; you probably noticed a couple of months ago that we brought on Dan O’Neill onto our board, who is the former CEO of Molson’s. And so that should be taken by investors as an indication that that’s an important area to us, as it should be, because we do think that beverages are going to be an important product segment.
So aside from the ten branded products that we manufacture and own, we’re currently distributing, either through Alta or River, which are our two owned cannabis distribution platforms in the State of California, we’d be distributing about 55 different products. Our target is to be distributing more than 100 products by the end of this year, and that would range from tinctures, concentrates, distillates, even animal health related foods, share of CBD-type products, edibles, and then obviously the products that I mentioned: vape cartridges and pre-rolls as being the most important for us.
James West: Sure. One of your investments was the investment into Anandia Labs, which was then acquired by Aurora Cannabis. And it’s interesting to me that you, you know, obviously did very well by the investment as an investment, but is that sort of where you became cognizant of the importance of testing, was through that relationship?
Marc Lustig: Absolutely. We had made the investment in Anandia at the beginning of 2017; we put $4 million total into that investment, and we owned 20 percent of the company. And naturally, as you pointed out, the transaction with Aurora, which is about to close, is a significantly higher valuation that again shareholders have done extremely well on. But once again, we’ve never been a passive investor where we hoped that, you know, the return from one price to the next was the only thing that our shareholders had access to. It was always, let’s pull whatever else we can out of this relationship, whether it’s a branded product or it’s a royalty or an ongoing option on something with respect to their business. In this case, it was excellent relationship with entrepreneurs who are probably the leading group in terms of testing and quality assurance for products. So that was one of our ancillary takeaways from the relationship.
James West: Sure. In the Power Point that you recently updated, it was a great graphic representation of Canada is big, but California is huge! And I’m curious as to, I mean, you’ve obviously made a commitment to California; is that at least in some part because you think that maybe it’s now the US turn to make that exponential jump in valuations for its cannabis companies because Canada has already done that, and we’re now, in the grand scheme of things, even though it’s been a short timeline, we’re more or less a mature market from an investment perspective? You think that investors are going to flock more to US plays now that Canada has sort of become more or less fully valued or, at least what some investors will call fully valued?
Marc Lustig: Absolutely. I mean, that was really our strategy from the beginning when I founded the company. It was to give an investor exposure to the US. Three years ago, that wasn’t as popular as it is today, but with progress being made at the Federal level on policy with respect to cannabis, but more so with state progress – I think there are now 39 states that are either medically or recreationally legal – you read the same stats as I do about public support for cannabis in the US. From an investment perspective, the amount of either private family office, ultra high net worth, or fund money that’s coming into the sector would give people a lot more confidence investing in the US today.
So I guess we got that one right so far, and in terms of a choice between California and Canada, there was never a choice. California is, by every single metric, a market that’s 10 to 20 times bigger than Canada. We would look at Canada, and though we are Canadian and we respect our roots and we have a lot going on here, as just another market, a state, maybe, in some senses. And yet you have a state that has probably on its way to 200 different producers, now you’ve got micro-growing and the ability for the smaller guy to grow…it’s a complicated and crowded market.
Having said that, we look at our asset base as we pivot and look at the Canadian market, either as it relates to branded products, the knowledge about manufacturing and distribution of branded products, and some ideas that we have around distribution/retail; those two areas, if you were to ask the CEOs of the leading Canadian licensed producers, they would tell you that their priorities right now are branded products, so that consumers who are soon going to be buying their products, not just receiving whatever was sent in the mail, need to see some good products with variety and good quality.
And so I would say that the CEOs of Canadian public licensed producers, I should say, are now fixated on ‘How do I produce a great vape cartridge in the future, or an edible, or whatever it is that my consumer base is really going to look for from me on the one hand, and on the other, how do I get that on the shelf of a store?’ And so, you know, we’ve been doing all this in California successfully in arguably the most sophisticated market, with a consumer base who doesn’t have any time for a vape cartridge that doesn’t work, or an edible that’s lousy and melted inside the packaging. Like, you actually have to have figured this stuff out. So we look at our value proposition even in the Canadian context as very significant, but very unrealized yet by the Canadian or cannabis investor. And that’s sort of how we were able to help on certainly the Anandia side with the sale to Aurora, and then, as you pointed out, the sale of the pre-rolled licensing technology to Aurora as well.
James West: And so what’s your view on when Federal de-prohibition will happen in the US?
Marc Lustig: So I’ve always been an under guy. I’ve always taken the under on the timing that most people think. Look, there’s an interim election coming up here in November that’s going to be very interesting, right, because you have an administration right now that has its issues, and its competition, let’s call it the Democratic party, would be very progressive on cannabis. Yet in your own party, the rate of support for cannabis, Federal legalization, is the highest it’s ever been. So it kind of feels to me, and I’m not a political analyst, that it would be a pretty easy move to legalize cannabis Federally and have pretty widespread support for that, not just politics, but actual economic jobs, taxes, etcetera, is that that’s the trend that we’ve been on, is that people are actually realizing that this isn’t, you know, Devil’s weed. This is actually a product that competes alongside a number of other different consumer products, and is creating jobs and creating a lot of tax revenues, and also on the science side, there’s some really good progress happening. So I think it’s – I’m an under guy. I think it’s less time than most people think.
James West: Sure. All right, well, that’s great as usual, Mark. Thank you so much for the update. We’ll come back to you soon enough. Thanks for coming in today.
Marc Lustig: Thanks for having me.
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