CannaRoyalty Looks to Acquire Leading Canadian Vape Operator

CannaRoyalty Corp. (CSE: CRZ)(OTCQX: CNNRF) (“CannaRoyalty” or the “Company”), a North American cannabis products and brands company, and its subsidiary, Trichome Financial Corp. (“Trichome”) announced today that the Company has signed a binding term sheet to acquire 100% of investee 180 Smoke and its affiliates (“180 Smoke”) for total consideration of $25 million, as well as an additional $15 million upon the completion of certain milestones (the “Acquisition”).

Afzal Hasan, President and General Counsel, at CannaRoyalty, commented, “180 Smoke is the Canadian cornerstone of the home we have been building to originate the global cannabis brands of the future. Our platform emanates from California, where we have fostered the growth of almost 50 cannabis brands as a manufacturer and distributor into over 450 dispensaries. Customer satisfaction and attachment are the primary determinants of success in a consumer brands business and cannabis is no exception. Looking at the Canadian market and the lack of compelling consumer offerings on the horizon even a year out, we view 180 Smoke as one of the few companies who is doing it ‘right’. As a management team, we are drawn to business models that can be rapidly and profitably scaled with the addition of each new customer, brand and dollar of capital, and 180 Smoke fits this formula. The 180 Smoke management team has built a growing, profitable retail and online Vape business along with several strong in-house brands in a fragmented, competitive and highly regulated marketplace. We expect to be in a position to rapidly leverage 180 Smoke’s existing platform and additional cannabis locations to drive sustainable, accretive growth in the Canadian market.”

Ashutosh Jha, President of 180 Smoke added, “The investments made by CannaRoyalty and Trichome and the strategic counsel both management teams have provided over the past seven months, have enabled us to begin aggressively expanding our retail footprint and setting the foundation for the consolidation of the fragmented retail and online Vape industry as well as to rapidly grow our retail cannabis exposure. With the positive announcement regarding private cannabis retail out of Ontario on September 26^th, we are even more confident that we can drive significant growth and profitability over the next two years, while continuing to focus on harm reduction for consumers. This deal will give 180 Smoke access through CannaRoyalty to the additional capital and expertise both to execute on those plans as well as to become a force in cannabis retail and brands, together.”

Strategic Rationale:

• Already approved for one cannabis location, marquee GTA retail locations and actively negotiating additional locations, nationally. In addition to 420 Wellness’ recently approved Calgary location, the company is actively looking to expand its cannabis footprint by applying for and acquiring cannabis retail licenses across Canada. 180 Smoke believes that the vast majority of its Ontario retail locations would fit within a conservative Ontario framework regarding private cannabis retail in the province.
• Leverages CannaRoyalty’s distribution and brand support platform in California across Canada and globally. True consumer brands transcend physical borders and cost little incremental capital to apply to a new market, like Canada. 180 Smoke currently has 26 tier-1 locations that it expects will be suitable for cannabis across three provinces and the largest share of the online Vape market in Canada. 420 Wellness expects to apply for a Canadian cannabis processing license by year-end 2018. The approval of a processing license would give CannaRoyalty export access to global markets.
• Access to an established, repeat customer base both online and in bricks & mortar locations, with a high propensity to use cannabis. Over 80% of 180 Smoke’s nicotine vape consumers are also potential cannabis users.
• Restrictive advertising and branding rules in the cannabis industry will push the responsibility of building brands to the retail level. 180 Smoke is well positioned to be a major influencer of consumer trends and preferences in this new industry. The management team is currently operating in a highly regulated environment, has been a driving force in Canadian Vape legislation and has developed several successful lines of consumable goods in a fragmented and competitive space.
• Vape industry is ripe for consolidation. The Vape industry is currently fragmented. By number of operating locations, 180 Smoke is one of the key players in the Canadian market. 180 Smoke estimates there are approximately 1,000 Vape stores in the Canadian market, currently, with the majority of those stores owned by small owner/operators. 180 Smoke is ideally situated to make accretive acquisitions while driving cannabis optionality with each transaction. A dominant Canadian Vape business is expected to be an attractive acquisition target to large, global nicotine companies.
• Strong financial performance. The senior management team at 180 Smoke has grown revenues 51% year-over-year to $6.78 million for the eight-month period ended August 2018, for an annualized revenue pace of $11 million [4]. In 2017, 180 Smoke generated $7.8 million in revenue with net income of $0.4 million, while investing heavily in growth.

Retail Portfolio Summary:

The Company expects that based on regulations adopted in other Canadian jurisdictions, the vast majority of 180 Smoke and subsidiaries’ retail portfolio, including its GTA stores, will be eligible for retail cannabis distribution.

• 15 profitable Greater Toronto Area (“GTA”) locations
• 6 Tier-1 leases in Hamilton Region, ON
• 1 Tier-1 lease in Niagara Falls, ON
• 1 approved cannabis Development Permit for Tier-1 lease in Calgary, AB
• 2 Tier-1 leases in in Edmonton, AB
• 1 Tier-1 lease in in Chilliwack, BC
• 1 profitable location in Buffalo, NY

Transaction Summary:

The total consideration for the Acquisition shall be $25 million dollars (the “Purchase Price”), plus up to an additional $15 million dollars upon the successful completion of certain milestones (the “Milestone Payments”) by December 31, 2020.

Purchase Price

The breakdown of the Purchase Price is as follows:

a) $22.5 million in CannaRoyalty common shares that will be priced based on the 15-day VWAP to market close on September 26, 2018 (the “Acquisition Share Price”).

b) $2.5 million in cash to be paid on the Closing Date.

Purchase Price Adjustment

If CannaRoyalty’s average VWAP during the 3-month period of October 1, 2020 and December 31, 2020 does not trade 15% above the Acquisition Share Price, 180 will receive an additional issuance of $10 million of CannaRoyalty common shares, calculated as $10 million divided by the Acquisition Share Price. (the “Purchase Price Adjustment”).

The Purchase Price Adjustment is contingent on 180 Smoke meeting or exceeding $25 million in exit rate revenues in 2019 (the “2019 Revenue Target”). If the 2019 Revenue Target is not achieved, the Purchase Price Adjustment will not be issued.

Milestone Payments

a) New Cannabis Licenses
A payment of $300,000, payable to the shareholders of 180 Smoke in CannaRoyalty common shares, per Cannabis Store opened prior to December 31, 2020, up to a maximum of $9 million.

b) Vape Stores
A payment of $120,000, payable to the shareholders of 180 Smoke in CannaRoyalty common shares, per Vape Store opened prior to December 31, 2020, up to a maximum of $6 million.

c) Acquired Vape Stores
A payment of $60,000, payable to the shareholders of 180 Smoke in CannaRoyalty common shares, per Vape Store acquired prior to December 31, 2020, up to a maximum of $3 million.

d) Processing License in Canada

A payment of $2.5 million, payable to the shareholders of 180 Smoke in CannaRoyalty common shares for the obtainment of an Indoor Standard Processing License.

The Milestone Payments referred to above in section a, b, and c are further subject to a total cumulative cap of $12.5 million.

The Acquisition is subject to customary closing conditions including but not limited to: due diligence; the execution of definitive documentation related to the Acquisition; and the approval of the definitive documentation by the boards of directors of CannaRoyalty and 180 Smoke.

[1] 180 Smoke customer survey
[2] Based on analytics provided by SEMRush
[3] Based on unaudited, internal numbers from 180 Smoke
[4] Based on unaudited, internal numbers from 180 Smoke

About 180 Smoke

180 Smoke is a leading Canadian Vape product retailer that is considered the Gold Standard for Vape store operations and customer service. 180 Smoke sells Vape and nicotine-related products, herbal vaporizer products and parts. With the corporate mission of “significantly reducing harm done to human health from addictive substances,” 180 Smoke’s vision is to become a multi-region, omni-channel, vertically integrated market leader servicing the end-to-end needs of Canadian nicotine and cannabis consumers.

About Trichome

Trichome, was formed to offer credit-based capital solutions to companies operating in the legal cannabis market. Trichome provides flexible and creative capital solutions to companies across the value chain for a broad array of requirements. Focused initially on the Canadian market, Trichome will offer its capital solutions to companies operating in jurisdictions where it is legal to produce, sell and consume cannabis related products.

About CannaRoyalty

CannaRoyalty is a North American cannabis consumer product company currently focused on building a leading distribution business in California, the world’s largest regulated cannabis market. By building a world-class logistics platform and supporting contract manufacturing assets, the Company intends to support the growth of new and established cannabis brands. The Company believes California, home to some of the world’s most discerning consumers and a nexus of information and trends, will be the point of inception for the global cannabis brands of the future. CannaRoyalty has developed a diversified portfolio of assets within the cannabis sector, including research, infrastructure and intellectual property to support our existing brands, partner products and distribution networks. The Company’s leadership and staff combines passion and a hands-on understanding of the cannabis industry, with proven financial and legal expertise. CannaRoyalty’s Common Shares trade on the Canadian Stock Exchange (CSE) under the symbol CRZ and in the US on the OTCQX under the symbol CNNRF.