MMJ Group Holdings (ASX:MMJ) Shareholder Update Presentation, April 2020

Company Presentations

MMJ Group Holdings Limited (ASX:MMJ) presents an update on the company. Speakers are Mike Curtis, MMJ Non-Executive Director and Director of Embark Ventures Inc, the asset manager of MMJ; Mohan Nair, Partner, Embark Ventures Inc; and Jim Hallam, Chief Financial Officer and Company Secretary of MMJ.

Mike Curtis:
Thanks everyone for taking the time today. I am the Non-Executive Director for MMJ Group Holdings (ASX:MMJ), as well as the managing partner for Embark Ventures, which is the investment manager for MMJ Group. It's an Australian pure-play cannabis LIC. Market cap’s about $30-35 million through these difficult periods. The investment portfolio is generally combined of unlisted private companies and listed Canadian and more generally European investments as well. We tend to take a real global view of the cannabis sector and have current investments in most of the legal jurisdictions, but we've really remained well in the Western geographies.

We entered 2020 relatively bullish. We figured there would be some additional consolidation and cleanup from the very difficult bear market we saw coming through September. I don't think any of the industry or market participants are under the illusion that you're going to see a massive demand of 2.0 products everywhere.

Coming to February we saw the coronavirus hit, and we think on top of the ending of what's been a bear market, we saw a massive increase both in stockpiling of supply as people were locked into their homes. In addition, we're starting to feel like you're probably going to see increased just consumer use in general, as people are looking for ways to deal with the stress that aren't alcohol or hard-core pharmaceuticals. In addition, as most of these businesses around the globe have been labelled essential, it's really continuing them to have a strong cash flow through this. And more importantly we think you're going to see this legalisation happen in the United States even faster now as those businesses which remain illegal have now been focused on as essential businesses.

In general, what we are looking at over the next 12 months, stepping away from focusing just on the pandemic and corona, we expect we're going to continue to focus on investments which are cash flow fully financed, such as the significant investment we did in WeedMD. We're going to focus on bottlenecks within the value chain, specifically investments within the extraction space and brands, and we'll continue to support that. And I think more than anything right now, we're going to look within this capital constrained environment for new opportunities. So we expect we'll see some of that as we go along.

In general, we're expecting as this bubble is burst and the pandemic moves on, that it's really going to take probably another 6 to 12 months, but as we come into the end of 2020, we're starting to see relatively strong demand here, and we think 2021 is going to be an exceptionally good year for cannabis stocks, and they really have solid demand and supply characteristics versus many of the other investments out there that you can see, such as the trading that we saw in oils today, up and down all around. What we're going to see in cannabis is consistent demand and increased demand.

Mohan Nair: So, my name is Mohan Nair. I'm a 20-year veteran in financial services and investment banking. Most of that career has been with Canaccord T-D Bank and Macquarie as well. Mostly it's been on the sell side. About five years ago, I switched to the buy side. And last year I joined Embark Ventures and MMJ because I saw a once-in-a-lifetime opportunity in the cannabis space.

So, I'm going to give you an update on the major investments. I'm going to focus more on the private ones. I'm going to focus on Embark Health, Weed Me and Sequoia, but I'll also touch on Harvest One, which is a major public one that we hold.

But before I get into that, I kind of wanted to maybe add a little bit of colour to what Mike was saying earlier, which is the cannabis industry downturn began a lot earlier than the current general market downturn. The cannabis industry downturn began late summer of 2019, and that's when the capital markets for cannabis companies closed on our specific industry. So, in an odd way, the cannabis companies are almost better prepared for what's happening now. Well, the ones that we’re invested in and the better ones anyway, than the rest of the general market, because they've had to adjust their cost structure a lot earlier than a lot of the companies that you see in the general market. And you'll see as I go through the examples that we were able to put in a lot of cost controls into our portfolio companies -- starting about six months ago actually, and really kind of peaking two, three months ago. So, they're ahead of the curve on that. And I'll address a couple specific ones now, and you can see our whole portfolio if you go to our website.

So, I'll start with the Weed Me. Weed Me is a large indoor producer of high-quality dried flower for the medical and recreational market here in Canada. So, this was a company that wasn't really EBITDA positive for much of its initial stages of its existence -- for the first 18 months or so let's say. But this month they just had their best month ever, and they're finally EBITDA positive. And this was a company that was really struggling in August of 2019, and they came to us and they said, “Listen can you give us a million bucks to see us through for the next couple of months?” And we said, “Sure, but you've got to address your cost issues first.” And this was a great opportunity for them to address their cost control, make some management changes that were quite frankly overdue. And they made those changes, and now they're actually through the other side of the bridge. They're enjoying some of the demand that's been created by what Mike said earlier in terms of quarantine, and people are using this as an opportunity to use more of the cannabis product, but they're also positioned quite well in terms of cost structure and their own setup and their own cap table. So, that's one example, that's an update on that. Things are going really well there.

Now we'll talk a little bit about Harvest One. So, this is a legacy position that MMJ has had for at least three years now. They have great brands, a great distribution network, but has struggled to produce enough cannabis. Right. And now what ended up happening last year is they tried to solve that by building a huge facility, and that attempt to build this huge facility ended up making them capital constrained. So, what we did is we did a sum of the parts evaluation on the company. We realised this thing's worth actually quite a bit more than what the current market cap implies, and it has no debt. So, we came to an agreement with the management of the company to lend them about two million bucks in a convertible debt. That's actually straight debt, but with warrants attached now. That's secured against all of their assets. And then what we did is we encouraged the company to go out and start a strategic alternatives process to try and raise capital from the non-core assets that they have. And we're actually seeing progress on that front.

So again, this is another case of a company that may have had issues when cannabis companies were starting to have issues in late summer, fall of 2019. But because of that, they're actually kind of starting to show daylight on the other end of it, because a lot of the processes that we encouraged them to do and that they did themselves, are now starting to bear fruit.

And I think the other one I wanted to talk about also was Sequoia. And I think there was a question from the audience as well. So, we wanted to give you an update on that. This was a 2.5 million dollar investment we made last year into a Polish extraction company. Extraction is a subsector in cannabis that we really believe in. And they've actually built out a wonderful facility. It's the only GMP-certified hemp CBD producer in Europe.

So, other people produce hemp CBD, but these guys have the only GMP-certified product. So what that means is that their isolates and their extracted products can actually go into pharmaceutical grade end-markets. And so we invested that money, they built this wonderful facility, and just last week we completed a follow-on investment of another 350,000 which will get them to cash flow by June of this year. So, we again worked with the company to establish when they'll become cash flow positive. And by June of this year, we expect them to start producing cash flow. And we have the option of investing another 2.2 million again in the company to complete another 2.5 in total as they ramp up and as they need to buy more equipment. So we have that option.

So, with a lot of the companies, how we're structuring these deals now, and how we're advising our portfolio companies is to say, “Listen, there's more capital coming. But you can't just rely on the capital anymore. You have to also readjust your business and readjust your cost base to operate in the new reality.” And a lot of the cannabis companies had already started to do that last year, even late last summer. And now we're starting to see the fruits of that labour.

And I think the last one we wanted to talk about what was Embark Health, but I'll kind of kick that back to Mike as he's very familiar with that company and will be able to provide you an update better.

Mike Curtis: So, for investors that don't know Embark Health, it's a very large extraction company focused on large deal extraction. It has a facility in Delta, BC and it has a facility in Woodstock. We recently at the facility in Delta received the Health Canada licence. Today they've achieved their building permit, and we expect the occupancy permit to happen within the next couple days. So, our expectation is, in Delta, that will become the commissioning process of the equipment that we have in Delta currently. So, we expect that to be revenue-generating within the next couple weeks here. The Woodstock facilities continues to be built out and has been put on hold for the last two weeks just for construction slowdowns within the COVID. But our expectation is in the next couple of weeks it's going to get up and get back running. So, both projects are going along exceptionally nicely, and the revenue will ensure that that continues to be one of the extraction leaders going forward.

Mohan Nair: I think the conclusion in this segment that we wanted to drive home to all the people listening is that our companies understand the need to generate not just more revenue but the need to become cash flow positive. And that's the message that we've been driving, and we're kind of glad to say that all our major investments have not only gotten that message, but are actually executing to achieve cash flow in 2020.

Mike Curtis: And I think just following on from those comments, it turns out that this, the bear market in cannabis that started in the summer of last year, really allowed the companies that were going to survive and thrive to get their cost structures in place, where you're seeing many other companies in many other sectors out there having exceptional difficulties. The cannabis sector, they've pulled down all the high costs and adjusted for profitability. And with the strong demand that's coming, we feel exceptionally bullish as we head into the end of 2020, and we think 2020 is just going to be a gangbuster year for the sector.

Jim Hallam: My name's Jim Hallam. I’m the Chief Financial Officer of MMJ. I've been with the company a couple of years, and I'm based in Sydney. In February, all the shareholders were provided the opportunity to buy MMJ shares at eight cents. The SPP raised approximately $390,000. Those shareholders who've participated have been rewarded for supporting the company through a share price rise from eight cents to… It’s currently, as of yesterday, at 14 cents. Funds were used to fund the Sequoia investment, which Mohan went through just before.

In terms of MMJ funding, MMJ's well funded. We've got $10 million worth of cash in listed securities, and the majority of MMJ's operating expenses are funded by interest income on loan investments that have been put in place during the last 10 months.

I'll move on to the next slide, which is on the NTA at 31 March. This information is drawn from our monthly announcement, which is available on our website and, as I said, is produced each month. The NTA is approximately 20 cents a share. The discount of the share price to the NTA's been halved over the last two weeks. It now remains at an attractive 30% discount to the NAV. Our net asset returns continue to be above our benchmark. Our benchmark is based on a group of North American companies, an ETF that we track our performance against. The monthly NTA reflects our valuation policy, which is detailed in our annual report. Unlisted investments valuations are recommended by Embark Ventures and approved by the MMJ board. That process was completed as at 31 March. Our listed investments reflect market prices, and our asset valuations are reviewed each six months by our independent auditors, BDO.

Just moving on to the next slide, which is in relation to our investor updates. As was mentioned at the start, this is our first webinar. We're going to conduct another webinar in July after completion of the 30 June unaudited NTA. Any investors should sign up to our weekly emails. If they go to our website, they'll receive weekly emails that contain all of the releases that we've made during the week.

We also, as mentioned before, provide a monthly update on our NTA and our portfolio, which includes a contribution from Embark Ventures and their view on the cannabis investment markets. Any questions that we received in this webinar, we're going to answer through our next monthly NTA release.

So, I very much appreciate your participation, and I trust that you got a lot out of it.


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