MGC Pharmaceuticals | 22 October 2018

repayment of the existing C$2.5m working capital loan owed to MGC by MGC Derma. As

Cannaglobal is an unlisted entity, we are unable to independently confirm the value of their shares.

MGC Derma (previously known as Ananda Cosmetics) is a joint venture company that was owned

51% by MGC and 49% by the Slovenian cosmetics manufacturer Dr M Burstein (Burstein). To

complete the Cannaglobal transaction, MGC has acquired the 49% of MGC Derma held by Burstein

for C$1.25m (Burstein’s share of the MGC Derma working capital loan). In turn, Burstein will benefit

from the five-year cosmetic materials supply agreement that is part of the transaction.

Contract default notice issued to Korean cosmetics

manufacturer Varm Cosmo

On 20 October 2017, the company announced that its MGC Derma division had signed a binding

terms and conditions supply agreement for the supply of A$40m per year of white-label (unbranded)

cosmetic products to the Korean cosmetics manufacturer Varm Cosmo. Ten days later, it signed the

first binding sales agreement with Varm Cosmo, for a minimum contracted volume of A$8m of

product.

However, Varm Cosmo failed to meet its commercial obligations under the agreement, including the

payment of a A$1m deposit. On 25 September 2018, MGC issued a formal contract default notice

to Varm Cosmo and will seek a minimum of A$0.5m from the company as restitution, plus additional

damages.

MGC Derma’s range of CBD-based cosmetic products

MGC Derma has developed a range of CBD-based cosmetic products, including the Derma Plus

range of dermatologically tested products that have shown efficacy in improving a range of highly

irritated or inflamed skin conditions. The Derma Plus range includes products for the relief and

prevention of psoriasis, acne and seborrheic conditions, including its CBD Herbal Repair Cream,

Herbal Balm and Herbal Replenish Cream. Successful safety studies have allowed the company to

them to be sold in Europe as ‘dermatologically tested’ products.

MGC Derma is marketing its mgc derma range of CBD-based cosmetic products through its online

shop and through wholesale reseller agreements in Spain, Italy, Romania and the Czech Republic.

It has signed supply agreements with leading online retailer Cult Beauty and the prestigious

department store Harvey Nichols to sell the range of cosmetic products internationally.

Sensitivities

MGC faces the typical risks of a development-stage biopharma company, including the

unpredictable outcome of trials, regulatory decisions, success of competitors, financing and

commercial risks, coupled with unique risks associated with its medicinal cannabis focus.

The investment case hinges on establishing expanded, GMP-certified, medicinal cannabis growing

and processing facilities in Malta. The ability to obtain regulatory approval for CannEpil for the

treatment of refractory epilepsy will be crucial to its ability to drive additional sales growth in the

competitive medicinal cannabis space.

Due to the highly regulated nature of the medicinal cannabis market, the company is vulnerable to

regulatory changes that either restrict its ability to operate or alternatively leave it open to increased

competition from new entrants.

We note that the inclusion of low levels of psychoactive THC in CannEpil could potentially increase

the incidence of side effects such as drowsiness or nausea in patients.