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

Company Presentations

Mike Curtis: I think what I'd love to do today is just give a general overview for people in terms of what we see happening in the general market, and then dig down a little bit deeper as we look at what's happening in Canada, the United States and some of the other jurisdictions and what we think are really significantly positive events. Once we've gone through that, I think I'll have Mohan talk about the investments, some of the advancements we've made in those, and then we can answer any questions at the end.

So I think we spoke a few months ago, and our expectation was that the path to normalcy was going to continue as countries came off lockdowns. And what we're seeing is that's being delayed a little bit here, but from our perspective, it really hasn't impacted any of the portfolio companies. And that’s really just a factor of what we're seeing in terms of the essential business and the essential services that that designation has happened. So we're really positive of where it's going, and the cannabis market is going to continue positively.

What we saw in late 2019 and 2020 was really that overcapacity that had been built out. And I think we've talked about it before, as the industry was really built out backwards, that the medicinal facilities were built first, and those are really the highest-cost facilities. Now what we see here in Canada is outdoor growers are really the new thing and they're the lowest-cost providers. So our expectation is that the cost is going to continue to come down.

We've seen a fair amount of restructuring happening. Some of the big companies out there like Aurora and others taking massive breakdowns, laying off staff, shutting down facilities. We really feel like the bulk of that is behind us at this point in time. And now we're starting to see, and you can see it in the news, most recently is companies such as Aurora and Aphria are having conversations about big M&A deals, about really that consolidation that we're expecting. And we expect that that's going to accelerate and continue as we go through 2020 and into '21.

I touched on it a little bit, but I think this is going to have far-reaching implications across the broader cannabis sector. What we saw in Canada, which was already a legal industry, we're seeing it designated as an essential business. We saw that happen in the United States. And we think what we're going to see is a continued ramp up here, both in Canada and in the United States, as people accept that the cannabis business is here to stay, and it's just going to grow and get bigger.

Within Canada, we've seen a bit of an inventory build, and I think generally people are a little bit nervous about that. Myself and Mohan are seeing a real dichotomy in the industry. We're not seeing necessarily inventories building in a big way. We're seeing bad inventories building in a big way. So, dried cannabis and distillate that no one really has a use for, or anything's going to happen. More importantly, what we're seeing is real competition on the low end of the black markets. So the companies such as HEXO and others are really attacking that black market and trying to bring customers into the legal sphere. And we're also seeing actual brands that are holding in their pricing, and in fact, doubling and are tripling sales through the pandemic, as people are looking to get involved.

We really think that it is going to make a difference, and that good quality is really what's going to differentiate companies over the next while. And you're seeing that pretty clearly.

The other thing that we're really noticing too, is the extraction space, which we've been a huge investor in for many years. It's really now transitioning. So the extraction companies just can't be extractors. They have to be able to provide end products, do companies, LPs, etc. You can't just deliver. Can't have someone draw potatoes and expect Grey Goose to come out the other end. What you really need to do as an extractor in these times is produce finished products, so products that are going to be high margins and can be sold directly into the boards and into big companies, such as Shoppers Drug Mart.

And then lastly, what we're seeing within Canada is we're seeing the retail network really starting to take traction. A lot of rules and regulations with the initial rollout, especially in Ontario. Those have generally been lifted now, and we're seeing stores open, definitely on a weekly basis and almost a daily basis. Those stores are going to need inventory. So I think we're going to continue to see the high-quality brands continuing to stock those stores.

So the view or general view in Canada is exceptionally positive right now. And the way that we've structured the bulk of our investments, as Mohan goes through them, is really to focus on those areas where we think we're seeing the maximum value and the maximum return.

As we look at the United States, we've been guiding investors over probably the last six months that we feel like over the next 18 to 24 months, we're going to see full legalisation in the United States. We've already seen it in the Farm Act on the CBD side. You saw today now the Democrats are beginning to talk about full legalisation on the THC side. Our expectation is the Republicans are going to probably continue with that.

So we think there's going to be a big opportunity on the legal side within the United States. And the variety of our companies are pretty well positioned to deal with that.

Overlaying that legal world that's happening is the FDA on the CBD side in the Farm Act. And obviously, they're going to apply it on the THC side, but we think the FDA is going to come out over the next six month with pretty stringent rules in terms of how CBD can be produced and sold and the health claims, etc, really what we're seeing in Canada right now, as it stands.

A lot of those labs and extraction facilities that are currently making products are probably not going to be able to go and continue to produce under FDA standards. So we think that there's going to actually be a bit of a pullback in the United States, as those labs either have to up the standards, or they really need to be replaced by higher-quality facilities.

So that's generally where we see the market right now. And I think more than anything, as we head into the end of sort of the election process in the United States, we expect the markets are going to continue to stabilise here relatively quickly, and we continue to think 2021 is just going to be a very, very bullish year for cannabis stocks.

We really saw a bottom in the listed sector probably back in January, February. And remember, a lot of other companies out there and a lot of other sectors entered this pandemic not having completed a pretty long bear market. Most of the companies, as they entered pandemic, had already made the changes they need to either become profitable, focus on brands, etc.

I think, and the charts pretty much indicate it, they've started a pretty steady trend upwards here since January, February. They're continuing to perform well. And we think it's going to be exactly like you saw at the end of a tech bubble, right, or the real estate bubble, all of these things. As you have a big washout, the overcapacity gets taken care of. Now is really the time when people should be putting money to work in the sector, because you can tell if the companies that are going to become profitable, they're going to make it through, and clearly you're going to see continued focus on the cannabis sector, continued interest.

There's a long bull market to run here. And we're really only in the second or third inning. Remember, when the United States ended prohibition many years ago, it took over 18 years for the legal market to eventually take over from the black market. So in Canada, we're realistically probably three or four years into that cycle and really just getting to where the... you can see the supply there and starting to see the end market and other things.

In the States, it's been a bit of an odd ad hoc process state by state, but you can quickly see that that's going to be gaining momentum here as well. There's a massive market. And through the pandemic, you've actually seen sales many times double, triple as people are at home, people are stressed out and people are looking for medicine that's not coming from a pharmaceutical company.

I think I might leave before we move over to Mohan, and talk a little bit about what we're thinking over the next 12 months in terms of our investment strategy. We have been lucky enough to deploy some money into companies over the last six months or so as we supported them. And a lot of that money is coming back and is clearly not reflected in the NAV or the share price right now. But we are going to have a fair amount of money to deploy here over the six to 12 months in a variety of areas.

I think the areas that we're going to really focus on, we're going to focus primarily on that extraction space in the United States. We can make federally legal investments on the CBD side right now. So we'll continue to pursue that, especially as our assumption is if you're going full legal, those extraction facilities can quickly transition over into processing THC and other stuff.

We're going to look for Cannabis 3.0 products. So what that really means from a Cannabis 3.0 product is you're really looking to continue up the value chain in terms of unique ways of differentiating delivery, in terms of quality of product, in terms of a variety of other areas. So we'll continue to look for those products that either can be delivered in a novel and unique way, or have efficacy in other areas where it's going to be a much bigger, broader, and a market that's going to keep its price point over a relatively long time.

And then I think the last thing we're going to do is look at some of the value opportunities out there. There's a fair number of assets that have put a lot of money into them over the while. We've got great operators within all of our portfolio companies. So we're going to start to look at those and see where there's opportunities, where we can get real physical assets that are blowing out pretty strong cashflow, and we'll direct some money there as well.

So I think that's probably a pretty good time for Mohan to talk about all the positive news that's coming out of the portfolio companies.

Mohan Nair: So year to date, the Alternative Harvest ETF, which is what we use as a benchmark to compare ourself against has declined approximately 25 per cent since the beginning of January. Our broader market, as I'm sure you've seen in Australia, like the ASX 200, is down almost 12 per cent year to date.

However, I think as Mike's pointed out, we're seeing less volatility now. I think we really saw a bottom earlier in 2020, and we're kind of going through that long slow march to a post-COVID world. And that path to normalcy here in North America has been particularly longer than expected. You're seeing several Southwestern States and even some Midwest States in the US seeing large sudden spikes in COVID-19 infections.

We think all this sort of gets resolved in and around the US elections in November, in terms of that second wave having gone through. And typically a new presidential cycle is usually just a reset for the markets as a whole. And by that time, they're also going to see significant benefits of the massive government stimulus packages worldwide sort of really plowing through the economies worldwide. So we can have a positive outlook on the broader markets.

And kind of with that as a backdrop, we can say that the cannabis industry is moving towards becoming more of a normal sector, let's say. Gone are the wild days of wild speculations and tons of capital being pumped in, and the days of cash conservation and creating long-lasting revenue and cashflow are in. And I think Mike touched on that as well. And I'd echo that thought.

The industry so far for the last four to five years has been hyperfocused on just creating cultivation capacity, as Mike said. Now, everyone understands it's no longer just about supply and demand. We're moving towards brands. This is especially relevant as you're seeing retail-level customers here in Canada coming back for specific products. So the theory was that it was all going to be about pricing, and now we're seeing, no, people want specific brands. They come back for Jack Haze, they come back for Broken Coast Quadra.

And so pricing actually at the retail level is holding in a lot better than expected. So this industry is playing out similar to the spirits industry, and that's a very positive sign in terms of the impact of brands. On this brand and cashflow front, many of our portfolio companies have made tons of progress. There have been significant developments of these companies, and we wanted to share those with you. So let's start with our publicly listed names.

I'll start with Harvest One Cannabis. The ticker symbol is HVT, trades on the Toronto Venture. It's a legacy position and large-scale cultivator. It's transitioning to becoming a cannabis consumer products company. They announced a sale of their Duncan facility to Costa Canna, which is in line with their previously announced strategic transition from a cultivation company to a CPG company. This sale is for 8.2 million in proceeds. And it's going to close before August 31st, 2020.

So MMJ had lent them two million in a bridge loan back in January. And we will be paid back from those closing proceeds in addition to interest, of course, and 17 million warrants, which were a compensation for the originally providing the loan and extending that loan as well. So, a very positive outcome.

This sale of this asset streamlines Harvest One's operating model, significantly improves the cost structure and strengthens the balance sheet. And part of this deal also is the Costa Canna, the acquirers have also provided a 1.5 million dollar bridge financing to Harvest One in the interim. So this is a significant milestone in Harvest One's transition to becoming a consumer packaged brand company focused on cannabis. And it's getting out of being a cultivator, which was not its specialty, and it's going in to being a CPG company, which is its specialty and which is its strong suit.

So that's Harvest One. I'll move on to WeedMD next. This is a large-scale outdoor cultivator with a unique sales channel through the LiUNA union relationship that they have. Mike mentioned that outdoor cultivation is super positive because of the low cost of production. WeedMD reported Q1 results ending March 2020 of 12 million bucks. Well, actually, let me correct myself. They didn't report results, but they've provided guidance for that quarter of 12 million bucks. This is the first time they've provided a forward-looking guidance, and it's exceeded most market expectations.

This is actually a record-breaking quarter for the company, and it's a 300 per cent quarter over quarter increase from the prior quarter. So what these guys are doing with their brand, which is Color Cannabis, and their unique sales channel, which is going through the LiUNA union has been super, super positive. And this is all of course during a period of time where you had COVID-19 and oversupply issues, as we've already talked about. So the fact that these guys are breaking records and really able to move product through a unique sales channel is very commendable.

So, those are our two large public companies that we can talk about. Now, kind of, let's move on to the more exciting part of the portfolio, which are our private company names, where we can really kind of surface value in that private to public transition, that we embark to take on in all our investments.

So the biggest one for us is Embark Health, a large-scale cannabis extraction services provider has a facility in Delta, BC, and is building one in Woodstock, Ontario, will be one of the largest extraction services providers in Canada within the next 12 months. They've entered into a binding letter of intent with a shell company named Mesa Exploration under which Mesa and Embark are going to do a reverse takeover of Mesa and list on the TSX Venture. You're going to see more press releases about this. And this go public transaction's expected to be completed by October of this year.

So this is a very positive step. It shows a significant evolution that Embark Health is undergoing. It also demonstrates MMJ's ability to make private company investments that achieve public market liquidity. So we identify these things early. We fund them, we guide them along, and then we realise liquidity from them. So, very positive on that front.

Mike Curtis: The one thing I might want to just mention is that as Embark gets up and begins running, we now have the ability within our entire portfolio to offer our clients, whether they be growing cannabis, we can provide them extraction services. We can provide them white-labelling services. And Embark now has in-house products that we produce.

This really goes back to it's great to have extraction capacity. It's great to have large scale. But when companies come to you and portfolio companies, especially, we can deliver them finished products on the Cannabis 2.0 side. And that's a unique advantage to all of our portfolio companies and frankly, any other companies that want to be involved with MMJ, we can provide that service globally.

Mohan Nair: Thanks, Mike. I'll move on to Volero Brands next, which is another exciting private company that I wanted to highlight. They make vape pens, and the brand that they're associated with is called Flyte. It has significant brand traction and popularity in Canada. And so Volero and Embark Health as an update have also entered into an agreement to produce and distribute Volero's Flyte Pens in the Canadian market. So Volero is going to bring the brand recognition and Embark is going to provide the raw extract production at the Delta, BC facility.

Volero's issue was that they were still waiting for a Health Canada licence. Embark Health is obviously a fully funded and a fully licensed facility. So Embark gets access to Volero's brand, Volero gets access to Embark's production, and they're going to be launching Cannabis 2.0 vapes very soon here. In fact, I believe Mike may have another update on it, but they're actually filling the vape pens this week as we speak.

So this, again, kind of demonstrates MMJ's ability to leverage the investment platform. We don't just have like individual companies that work in a silo. We get them talking to each other. If one management team has knowledge about something that another company could use, we introduce them to each other. And so you see great kind of deals like this, where multiple portfolio companies benefit through MMJ's stewardship over the portfolio.

The next name I wanted to talk about is Weed Me. Again, it's a private company that we have. A reasonable-sized position. It's a high-quality indoor cultivator based in Toronto, here in Ontario. This company, as an indoor facility, the cost of their product is a little bit higher, but the quality is much higher.

So this again was similar to WeedMD in that they needed to find the right market for themselves. And so they struggled a little bit later in 2019. We provided them with a one million dollar convertible loan to get over that issue and to fund them while they were figuring out their business strategy. And lo and behold, they've actually figured out a great end market. They've figured out costs of the company, and now they're generating record revenue. The last quarter will be a record quarter for them. Now, consistently they're generating enough revenue to be cashflow positive. And we're actually told by the company that we'll be fully repaid our million dollar convertible loan by the end of August.

So again, a success story where we help... we saw an issue. The problem was the company, costs were out of control and brands weren't the focused. We worked with them. We funded them to solve those issues. And now, we get paid in terms of lift in the value of the company itself, but also in getting back our convertible loan.

So in summary, we're pleased to see many of our investment companies progressing, our investee companies progressing very well, whether it's right-sizing their operations, like Harvest One is, focusing on brands and unique sales channels like WeedMD, entering into relationships, productive relationships, like Volero is doing with Embark, or planning to go public like Embark Health itself is planning to go public. So we're very pleased with what they're doing.

With the cash coming back from Harvest One and the Weed Me loans and combined with the sales and several other positions, including MediPharm and Hemple, we're expecting to see cash inflows back into MMJ of over four million bucks, or a little bit over four million bucks, over the next 45 days.

And that combined, and this is the important part, that combined with our largest position, Embark Health going public by October, we're going to have more than MMJ's current market cap in cash of liquid positions by the end of October. And that's pretty significant. That means there's tons of upside left for shareholders to benefit from underappreciated private company positions like Volero, Weed Me and Sequoia, which the market doesn't necessarily always give us credit for. So this is very significant and we're very happy.

In conclusion, I'll say, listen, June is not just any other month for us, right? It's also our fiscal year end, and typically a time to reflect on the year that's been. And certainly, it's been an incredibly challenging 12 months for us in the industry and indeed for the world as a whole. During this time, we kind of looked at the mirror and asked ourselves, have we done the right things? Did we help our investee companies with the right strategic advice on how to survive the downturn, prepare for the next 12 months? Are we like correctly positioned? Did we make the right investments for Cannabis 2.0, 3.0 as Mike mentioned?

And our answers to both of those questions are firmly, we have provided the right advice to investee companies on how to stay lean. We helped them through the rough times and prepare for the liquidity crunch and focus on the things that are going to matter in Cannabis 2.0 and 3.0, which is brands and extraction. And so we're very confident in our management teams, so that they'll be able to leverage that into a recovery over the next 12 months.

Jim Hallam: On Monday, we released our June report. I'd encourage you to look at that report. It has a lot of detail, both on the financials of MMJ, as well as commentary on the portfolio. In summary, the company has a strong liquid position, which is only going to increase, as Mohan mentioned, from the realisation of some investments in the next quarter.

We completed our review of unlisted asset valuations. That resulted in a decrease in the value of Embark Health. It should be noted, as it's been mentioned earlier in this presentation, that when Embark Health floats, we'll adopt the listed price. So really it should be noted as a point in time.

We also, in the June quarter, in the month of June, the market valuation of Harvest One fell, and that contributed to the loss for the month of about 12 per cent. But as I said, we're quite confident in the prospects of our investments. We all report our audited financial results in August, and we'll provide further updates to investors both in August and in September.


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