Bruce Campbell, B.COMM, CFA, CAIA, the founder of StoneCastle Investment Management Inc. and the portfolio manager of the StoneCastle Cannabis Growth Fund (CNSX:CGOC) joins James West to discuss his expertise in the cannabis space and current attractive investment opportunities. Mr. Campbell recently highlighted Halo Labs Inc (NEO:HALO) (OTCMKTS:AGEEF) (FRA:A9KN) in The Globe and Mail as a cannabis oils producer with a “potential high-growth story that is very much under the radar”. The Toronto-based company, which launched in Oregon in 2016, has expanded into Nevada and California and has recently struck a deal to buy Bophelo Bioscience – a medical cannabis producer in the African nation of Lesotho. Lesotho provides Halo Labs with the ability to grow great cannabis and service the 60 million market of South Africa while planning to provide Europe with extracts produced at a low cost with EU GMP standards. The StoneCastle Cannabis Growth Fund Portfolio Manager also highlights Halo Labs’ expertise in extraction and different extraction solutions. Plus, the company’s innovative product design, with their Dab Tabs and Shatterizer product catalogue, which could “revolutionize the business to a certain degree”.

Transcript

Transcript

James West: All right. Bruce Campbell joins me now, portfolio manager of StoneCastle Cannabis Growth Fund. Bruce, welcome.

Bruce Campbell: Yeah, thanks for having me on the show.

James West: You bet. So Bruce, let’s start with an overview: you’ve obviously moved heavily into the cannabis sector. You’ve got some favourite names out there, but what is it in the cannabis space that you’re most attracted to now in terms of company configuration?

Bruce Campbell: I mean, there’s a few areas that we like. Obviously, the extraction area, we think, continues to be fairly big with the fact that now we’re going to see these concentrate markets open up. You know, they’re talking sort of December, but more likely January of next year when those open up. And there’s going to be so many different products that need extraction, so we think that space is going to be fairly big.

And then in the US, we continue to think that there’s opportunities there both from a branding perspective, from a multi-state-operator perspective, and then on the ancillary services. And then looking at Europe and South and Central America I really take a look at those and think that they’re probably three years behind where we are in Canada, and so we think there’s opportunity there as we start to really get into medical and then probably down the road, recreational markets there in those markets.

James West: Sure. I’m looking at your, your top ten investments. So it seems to me, if I was to just look at this Top Ten list from a 50,000-foot view, I see like two patterns in here. I see that you’re very attracted to people who are focused on extraction rather than cultivation in some cases, and then you’re also focused on the US multi-state-operator model. Would that be an accurate sort of takeaway?

Bruce Campbell: Yeah, I mean, those are the two areas that we think have the most immediate opportunity, and then obviously Europe goes beyond that. There’s not a lot of investible opportunities for Europe yet, but so you know, most of it is what we’re looking at in Canada because we’re looking, again, for cash flow. And you look at the Canadian extractors and Neptune, Valens and MediPharm, and they’re the ones that are generating cash flow.

And then down in the US, obviously the multi-state operators, especially if they’re in limited license states, then they have an opportunity here to really build and gain real estate before we see some type of legislation change that happens are anyone’s guess. But you know, I would imagine in the next five years you see some type of legislation change, and then it’s legal.

James West: Right. I read about in the Globe and Mail, you talked about a company called Halo; Halo Labs, down in California, who’s in Oregon, California and Nevada, and as a result of that, I went in to some research and discovered that they have this, quite a diverse product line of extracts, and then they’ve got this new thing called Dab Tabs with a shatterizer, which I’ve never seen anything like it before. But Halo is not on your Top Ten list. Is that just because it’s kind of new for you?

Bruce Campbell: It’s new, and it hasn’t been as liquid until late, so we have it actually split up into a couple of different holdings. So we own some of the common stock, but we also own the convertible debenture, as well. So it shows up as two different positions. So if you combine those, it would probably show up in the Top Ten, but as individuals, they don’t.

James West: I see. And what was it particularly about Halo that attracted you?

Bruce Campbell: So they have, again going back into extractions, kind of the expertise there. They have some expertise in extraction, and they have a number of different extraction solutions, so they’re not just CO2 or ethane or butane, but they provide a number of different solutions. Plus, they’ve been innovative in their product design, so the Dab Tabs, and now they’re actually trying to introduce a product which will be a Dab Tab vape type of product which could, again, sort of revolutionize the business to a certain degree.

James West: Sure. The Shatterizer/Dab Tab combo you’re referring to, I actually interviewed Kiran Sidhu, the CEO, in London last week, and that, combined with this move into Lesotho, which is something that when I see these – like, a lot of the companies move into Lesotho and I’m like, what’s with Lesotho? Why is everybody going into Lesotho? And then I also interviewed the Deputy Prime Minister of Lesotho last week and now I understand that oh, okay, Lesotho is basically this sort of elevated mountaintop kingdom that’s got the ability to grow great cannabis and service the 60 million market strong market of South Africa, which is significant. But they’re planning to service Europe from extracts produced in Lesotho at super low cost, because it’s a a low cost nation.

Bruce Campbell: Yeah, exactly. So I mean, that’s, you’ve seen a number of the different Canadian LPs all head over there, and you know, eventually, I think the African market is going to be big. You know, there’s going to be a competition there with the black market to begin with, much as there is in Canada, but eventually that gets regulated. But the European market if they can get GMP facilities set up so that then they can export into Germany, that would be the first place, and then sort of beyond that as we see country by country roll out medical or recreational programs, then there’s going to be a huge opportunity there.

And as you mentioned the cost of production is going to be very favourable, especially compared to indoor Canadian facilities.

James West: Right. Halo Labs has 120 million warrants overhanging the stock at $0.80. How much of that – how do you perceive that in terms of a barrier to the investment thesis for new investors coming in? Do you think that’s a manageable sort of overhang that is ultimately going to get chewed through because of the milestones the company will achieve?

Bruce Campbell: Yeah, that’s what we think. I mean, obviously investors have to be cognizant of that, and you know, as the stock probably approaches that level you will see some pressure on it, especially as it sort of pops over into the low 80s; there’ll probably be some pressure as people who have been sitting on the stock exercise their warrants and then sell the stock to probably exercise those warrants. But at some point in time, it will chew through that, and it will chew through it based on their business. If they can do all the guidance that they’ve suggested that they can, then at some point in time the market’s going to say okay, well, we’re willing to put a higher valuation in this fully diluted than what it’s worth now. And it will chew through those warrants and go to a higher level, which will of course also help the company, because they’ll have all this cash that comes in to accelerate their business without having to do a new equity financing. But it’s kind of built in from the previous financings.

James West: Sure. Let’s talk a bit about StoneCastle Cannabis Growth Fund, now. What kind of investor is it appropriate for, and how do they get involved?

Bruce Campbell: Yeah, so I mean, we took a long time to get it set up. When we set it up, we wanted to have to flexibility, kind of go anywhere with it, and so we worked quite extensively with the Securities Commission to get it set up. So that’s really what we’ve designed, and what our feel is, is that cannabis is going to be the fastest-growing sector, or one of the fastest-growing sectors, over the next decade in the world. And so we want to be able to take advantage of those anywhere.

So if you’re a growth investor and you want a piece of the cannabis market, it’s very difficult to try to pick individual names. For one, the sector’s extremely volatile; we talk about this now being the eighth wave that we’ve seen since we’ve been in the sector, and we started back in 2013, and those waves can be 50 percent down and over 100 percent up. So you know, you need professional management, in our opinion, and you need diversification, and so we add both of those.

And what we do is, we’re able to act a little bit quicker, so we think that we add a lot of value to a holding. If you had something like the HMMJ that can be a good base, and then we can add sort of some diversification there, being able to act a little quicker and get into opportunities that they can’t necessarily immediately act. And so we think that we’re a nice complement to them, and a portfolio should have a combination of sort of that passive approach and our active approach, as well.

James West: Okay, great. Bruce, that’s a fantastic first conversation with you; I’d like to do this again and again and again and again, so we’re going to leave it there for now and I’ll come back to you soon. We’ll do this again. Thanks for joining me.