CannaRoyalty Corp (CNSX:CRZ) (OTCMKTS:CNNRF) (FRA:CY4) CEO Marc Lustig joins us to shed light on the factors weighing on the Cannabis sector in Canada, and tells us why his royalty model will ultimately deliver value to investors.
James West: Hey, Marc, I see that you’ve been making great strides in your business model as a royalty company in the cannabis space. Your balance sheet from your last financials shows a dramatic increase in assets over the same period in the previous year, and a dramatic increase in cash, yet the stock has not reflected that. Why the juxtaposition?
Marc Lustig: Well, I think that the stock has been under pressure, like a number of other cannabis stocks in the public markets, for the last maybe six weeks, or two months. In our case, there’s certainly nothing that I can point to other than, like I said, the general weakness of the cannabis sector, and our view is that the stock price will take care of itself as we execute more transactions and as people start to see the numbers that those transactions start to lead to.
So nothing in particular; in fact, our shareholders or prospective investors, if they look at CannaRoyalty, would just see a very nice sequence of deals that just continue to add value, and I think that’ll be recognized in the stock in time.
James West: Yeah, sure. Actually, that’s what seems to be happening. Now, can you give us an example of one of the better deals that has worked out, and then we’ll follow that up with one of the ones that hasn’t panned out quite as expected, and how you deal with that.
Marc Lustig: Sure. In the case of a deal that we’re extremely happy with and think that it will only continue to get better and better, both the asset itself and how it leads to synergies for the company, would be our River transaction. So River is the largest distribution company in the state of California, and we closed that deal in the middle of Q2, so about a month ago. It’s a combination of an investment directly into streams of royalty-like returns, and at the same time, an agreement that our products can be distributed preferentially by River for the California market, which is obviously the largest cannabis market in the world at the moment as a state goes.
So that’s worked out phenomenally well. They’ve been great partners, and as I said, it’s a two-part transaction. So the first part is a payment in return for our investment that equates to about 2.25 percent of their top line revenues until we’re paid back our principal, and then after we’re paid back our principal, the rate goes to about 1.75 percent, but it goes all the way out until the end of 2024. So that’s one part of the transaction.
But the other part is that River is the largest distribution company, and so, to be able to launch our products including Green Rock Botanicals, Soul Sugar Kitchen, and other product that we have that we wholly own through River, is going to have a dramatic impact on our numbers going forward. And so that’s a transaction when you wrap it all up, I think is extremely unique and gives us exposure to as large a state as California, and with partners who we really like and trust.
Luckily to your other point, we have at the moment 27 assets as of today, and I’d like to answer your question directly, which is that one that hasn’t worked out, I would say that there are some that are longer tail. As an example, we have an investment with a company called Bodie Research which is researching therapies for the treatment of concussion using cannabis. And it’s not as if the company hasn’t made progress; it definitely has. We haven’t yet noted an increase in that position in our balance sheet or in our income statement in any way, but as one would understand, that’s a longer-term investment that takes clinical trials and just a longer time frame.
So I wouldn’t say that there’s – certainly I’m not aware of anything that’s decreased in value. There are some that, due to the length of the actual project itself or, in some cases, governmental compliance, legal sort of changes in structure and things like that, that we have delays, but none that I regret, certainly.
James West: Right. So is the reluctance of, or I guess just the non-existence of, a Federal framework in the United States, and the subsequent fear and loathing that big capital positions have about deploying capital into the space – is that really the opportunity that you’re exploiting in CannaRoyalty?
Marc Lustig: It really is. People ask me quite a bit about which administration we would like to see, and how Federal policy is going to affect our company directly, and the answer is that when the Federal policy does change, as I think it will – I don’t think personally that anyone today doubts that it’ll get to unifying with the policies of now 33, I believe, states in the US who are either medically or recreationally legal – I do think that everything will unify with time. But when that happens, we actually get more competition in our model, because I believe that at the time that Federal legislation changes in the United States, that’s also the exact moment at which pharmaceutical companies, tobacco companies, wine and spirits companies, consumer products companies of all sorts of different sizes and shapes but national or multinational companies come aggressively into the sector and bid up assets and invest aggressively into the sector with capital that nobody has. You know, the much larger companies.
That would change our model, and ultimately restrict our opportunities.
James West: Yeah, I guess that would be a sort of a mixed blessing in that you would probably realize a dramatic rise in the valuation of your holdings, but at the same time, your ability to acquire them at huge discounts due to an absence or scarcity of capital would be significantly diminished?
Marc Lustig: That’s exactly right. You’ve got it.
James West: Mm-hmm. Now with the increase in the rate at which ACMPR licenses are being granted, if we were to take June as a sort of representative of the new pace, that would imply that, you know, we’re going to see 60 licenses issued in the next year in that June saw five licenses issued where there were only six licenses issued in 2015. Do you think that’s sort of a dampening factor on the sentiment or the willingness of investors to venture into this space, when they see such a dramatic uptick in the new entrants of potential public companies down the road that are going to be competing for capital and investor dollars?
Marc Lustig: I do. I mean, it’s a classic example of supply and demand in this case. It doesn’t lessen the size of the market, and it doesn’t lessen the opportunity for standout licensed producers; I think that things like the quality of the product, ultimately the cost of producing it, the ability to distribute it effectively, the variety of different strains and types of products, obviously all subject to Federal legality and the variety of products which are approved as part of the adult use market in Canada, those are all factors on which these LPs will compete.
But at a very basic level, increasing by 60, you know, is the number that you used; I personally think it’ll be more – that increase is the net number of licensed producers. It obviously increases the total supply to the market and inevitably that will, at the very least, cause investors to question the valuation of one licensed producer over another.
I think for a long time, and probably getting into the territory of really changing now, due to a number of different factors, the investor is being a lot more picky about valuation, as they should be. I think until now, it was just sort of ‘here’s the going rate; if you have a license, then you’re worth this’ and I think the onset of more licenses, especially that have so many different criteria – you know, there are ones that are going to be really well-built, there are going to be ones that are run by people with excellent business acumen versus not – you know, there’s different jurisdictional, I think, issues. If you’re in one part of the country, that would make a lot more sense for your market than maybe in other places…and so I think people are just being a lot more methodical about valuing these.
And I think ultimately that will lead to a number of the licensed producers who may have had visions of tens of millions of dollars as soon as they get a piece of paper, not getting that.
James West: Right. Certainly, that has been the case in a few groups coming to Toronto to market to the institutional side; I’ve been party to some of those meetings where the expectation and the reality are very far apart. Now so, from your perspective, would you say that this make the US more attractive from a royalty company’s point of view?
Marc Lustig: We’ve always believed that. You know, you referred at the start of the interview to our share price; I think that still there are a lot of licensed producer companies that are effectively cultivating cannabis and waiting for the market to open up next year sometime for Canada, who have significantly higher valuations than ours, yet we’re looking into markets in the US and Canada by the way, and I’ll come back to that in a second, because I think frankly our portfolio of Canadian assets is misunderstood.
But you know, I think just on an asset versus asset level, I think there are phenomenal opportunities for value in the United States. There’s the obvious federal policy, which is a risk, and there’s no other way to put it, than that it’s a risk. But if you’re willing to take that risk, then I think people will find, investors will find, some very good opportunities at great value, especially in certain states where there’s obviously first and foremost, an open and compliant market, whether that’s medical or recreational, but also just the state and how they view a public company coming in and doing deals in that state is an important element of whether an asset is really investable or not by certain companies.
So once that type of work has been done, and I think we’ve really as a company learned which states present the best opportunities for us being a public company, then you’re also, going through that process, you’re managing the risk at the same time. So when we come out of it, we just see so many different, really good opportunities for large revenue-generating businesses that are growing very quickly for large markets. And I think it’s just, again, it’s just risk over time. The risk, in my opinion, is not diminished at the Federal level, but every day we see new investors or new assets that are finding capital in states by people who are very sophisticated investors.
I think when you put that all together, that the environment is moving on even knowing that there’s that Federal risk, I think that the environment in the US is moving on because there is sophisticated capital which is seeking and finding assets in key states. And I think if that happens, people will just become more comfortable with investing in the United States.
James West: Okay. And so you said that you felt your Canadian portfolio was misunderstood; what do you mean by that, exactly?
Marc Lustig: Well, I think that we, you know, commonly CannaRoyalty would be thought of as a company who’s doing deals exclusively in the United States and that our assets are only US, and that’s actually not just not true, it’s changing all the time. In fact, I think that by the time this year ends, we’ll probably have as much exposure from a couple of different perspectives in Canada as the United States. And I’ll tell you why in a second, but you know, as an example of our assets in Canada today, we have the Bodie investment into concussion which I referred to earlier; we have a control position in a private company called Anandia, which is one of the leading genetics and testing companies in the cannabis sector in Canada; we have, we own 27 percent of a company called Resolve Digital Health, which is making cutting edge devices for the cannabis sector; we have our royalty deal with Aphria, which is one of the largest licensed producers; and we also announced on Monday a joint venture with a partner that, you know, the focus of that joint venture is exclusively on Canadian assets. And because of what we talked about earlier, in that we see there being probably a deflation of some of the key strategic assets in Canada, that’s actually why we created, and why the timing around the joint venture for Canada.
So I think that will increase our Canadian asset base and again, it’s just rally my opinion that we get grouped together with really companies that are only doing US deals, and that’s really not the case for us.
James West: Okay. Interesting. You know, Marc, I feel like I could always spend hours talking to you about this, and now especially as it’s become more robust, but we’re kind of at the limit of the attention span of the average listener now, so we’re going to leave it here. but let’s come back in a couple of months and I’ll be eager to learn more about the joint venture and see how you’re progressing, because I think the space is getting that much more interesting, personally.
Marc Lustig: I agree with you, James, and I’m always – it’s always a pleasure to speak with you.
James West: You bet. Okay, Marc, thanks for your time. We’ll talk to you next time.
Marc Lustig: Take care, James.
James West: Thanks. Bye-bye.
Marc Lustig: Bye.
Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.
Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.
Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.