MMJ Group Holdings (ASX:MMJ) Shareholder Update Presentation, December 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; Shemek Fedyczkowski - Chief Executive Officer Sequoya an investee company of MMJ Group Holdings and Jim Hallam, Chief Financial Officer and Company Secretary of MMJ.

Mike Curtis – Embark Ventures


Thanks, Clive. Happy holidays. Good to see you again. And we're kind of looking at this I think more than anything as a year-end wrap up. And I think a glimpse into 2021. We've had a pretty interesting year in terms of we had to deal with a variety of over-capacity issues within Canada, that was really dealt with as we started as a medicinal country, moving to full recreation, those are really high cost things to build. Now we've moved on to that, and what we're seeing within Canada is the lockdown is really starting to drive sales. So as the pandemic continues within Canada, we're seeing cannabis sales going up dramatically. And I think that's just a general indication of the ease of use as the retail network gets out there, but it's also starting to be, and continuing to be viewed as medicine for people as they're stuck in their homes, or they don't have things to do, or they're not feeling well. So, we're really starting to see those sales taking off.

Our expectation is finally that we're probably going see an M&A cycle begin. We'd expected it to start right around this time. As we come to the end of the year, it's really going to be a January, February time, as these companies that have managed to make profitable companies begin to consolidate. So we're actually pretty bullish. We're very excited. They have strong either extraction operations or brands. So really well positioned to take advantage of this next secular trend. As we look to the US, we've really kind of talked to people over the last 12 months, talking about legal cannabis in the United States. Nobody really seemed to believe that was going to happen as soon as it is.

What we're seeing now is the United States is literally one senator seat away from full legalisation across the country. So the good news is for MMJ investors, we're highly positioned to take advantage of that. We've essentially separated our portfolio into the highest value targets. So on the extraction side, we have companies like Embark and Sequoya that have built these highly regulated extraction operations, those operators are going to be great, I should say, as they enter into the United States, as the FDA begins to regulate THC and CBD. If you're not able to run a highly regulated operation, you're going to be shut down. So from that perspective, our portfolio is exceptionally well positioned. And at the same time, we have a lot of brands, such as Harvest One, which put out some news today in terms of they're expanding their distribution network, looks like they're going to go beyond 35,000 retail, let's call it touches. Which if you look at it in the context of an Aphria and the SweetWater deal they did on the brewery side, you can really start to understand how these brand companies are going to become highly coveted and assets that are going to be very sought after as the cycle continues here. We think 2021 is really where these stocks start to take off. And I think we've already seen glimpses of that in this last quarter. Fundamentally this is the time when cannabis is beginning to enter the next secular bull market. We've really cleaned up a lot of the overcap capacity and now they're starting to chase that profitability as well. 

Mohan Nair, Partner, Embark Ventures

Thanks, Clive, and thanks, Mike. Hope you can hear me, and thank you everyone on the line for joining our webinar. We very much appreciate your time. I'll go over some recent highlights from two of our larger private holdings before passing it on to Shemek, who's going to do a deeper dive into his company, but first kind of let me talk a little bit about recent performance for the industry as a whole, and expand on a couple of things that Mike touched upon there as well. So we're basically in the midst of a small renaissance for cannabis stocks, after what seemed like a year long decline since the fall of 2019, the big catalyst for this as Mike correctly pointed out, or alluded to, has been the US elections in early November. So since the elections, cannabis stocks have been up nicely, including our own, which is up almost 50%, I believe. The alternative, Harvest ETF, which we use to track industry wide performance is also up almost 40% since the end of October.

So obviously, the US election results were a big driver for cannabis stocks over the last several weeks. But what exactly is going to change on the ground? What exactly is going on in more detail? The answer to that question is the MORE Act. So the MORE ACT stands for Marijuana Opportunity Reinvestment and Expungement Act, which aims to deschedule cannabis in the US, and basically legalise it at a federal level. So the MORE Act has passed the US house of representatives, and it's awaiting a hearing in the Senate. So just as a reminder to everyone out there who may not be familiar with US politics in so much detail, a bill needs to pass the House, the Senate and be signed by the president to become law, right? So once Joe Biden is sworn in, we're, as Mike correctly pointed out, one senate seat away from federal legalisation of cannabis in the US. That's pretty significant, right?

And right now there's actually a runoff election happening in Georgia, which has the potential flip two Senate seats towards the Democrats. So if that happens, and the Democrats win those two seats, there's a possibility that cannabis could become federally legalised in the US in 2021. I mean, that's a major shift, but if those two Senate seats go Republican, then we may have to wait until the 2022 midterms. Either way, the point remains that we are awfully close to what is a major turning point for cannabis in the US, and the public support is clearly there, right?

According to a November Gallup poll that we kind of followed recently, 68% of Americans support legalising cannabis. This is up from 60% in 2016, and we noted this in our shareholder letter, which you can take a look at in our monthly NTA, and these numbers are very different from what we saw in New Zealand, which may be closer to the geography of most of the people listening in on this webinar.

The support for legalisation there was only 48%, 49%, 50% in the polls, as they were going into their referendum. So what you're seeing in the US is very different. You're seeing a far more advanced level of support at the public level and at the state level. And the truth is, it's really hard to put the genie back in the bottle. So for example, if you take a look at a place like say, Illinois, right? Taxes collected on a monthly basis there from the sale of cannabis, now are almost equal to the taxes collected there from alcohol and spirits, right? And you're probably asking yourself, "Well, how does that work? Why is it? They probably sell a lot less cannabis, they probably sell a lot more..." It's because tax rates on cannabis is a lot higher.

So you don't have to sell as much cannabis to have the same amount of excise tax and sales tax income from those products. So it's very hard once a state is used to receiving those tax dollars, for it to go back, right? Because then now how are you going to make up for the deficit that you're going to add on to? So the question really in the US is not if cannabis will become federally legal, it truly at this point is on when it will become federally legal. Another thing that we sort of saw that was very positive when we looked at the US, and then kind of drawing those trends into Canada as well, is that as cannabis becomes more mainstream, the consumer market data is showing an increasing demand for higher priced products, right?

So it's a clear indicator of brand loyalty, consumers becoming more discriminating, and I've put a chart for this, in actually our monthly shareholder letter, which viewers should take a look at, where you'll see the trend more and more of the sales are actually being captured by higher margin, higher quality products. So it's good to see the brands are becoming powerful, and they're exerting some pricing power here. And this is a trend we've seen in the spirits industry, obviously in the past. And it bodes well for our investment strategy of focusing on companies producing higher quality, higher margin, branded products.

While all this is good news, it's good macro news, we don't want to get complacent, right? There's been a lot of short covering on the back of this positive macro stuff that's driven the stocks higher over the last couple of weeks, but there are still some challenges ahead. And companies continue to show revenue growth, but we still see too many instances of management teams, not in our portfolio, but in the broader industry, planning for market growth or access to US opportunities to bail them out. And so I would kind of agree with them that, yes, the total domestic market is going to double, triple, potentially more, over the next five years, and obviously the US opening up is a huge opportunity, but these things take time to materialise and they take longer sometimes than management teams can plan for. So for our part, we highly encourage our portfolio companies and their management teams to take a conservative approach on costs. And that's what they've been doing. And it's yielded huge benefits from a portfolio perspective. 

So with that, I'm just going to give you guys an update on two companies, two private companies that we have, the first I'm going to talk about is Embark Health, which is our largest position. It's a Vancouver based extraction company. And then I'll talk about what Weed Me, but on Embark Health it's, as I said, largest position, we're in constant contact with the management team, always trying to be abreast of what's going on here. They just received last week a sales amendment for their license, which allows the company to sell their products direct to provincial retail bodies. The company is essentially fully licensed at this point, and they would no longer have to negotiate with B2B intermediaries and take a margin hit to sell their products. They've also announced a contract with the ALTC, which is the provincial buyer and retailer for cannabis in Alberta. They're also in the final stages of signing contracts with other provinces, and are currently working on purchase orders and docking space for actual deliveries to begin. So we're expecting a significant revenue ramp up from this company to begin in the very near term. And simultaneous to all of this, where the company has also entered into an agreement with a publicly listed company called Mesa Exploration, to conduct an RTO and publicly list to the shares in the early part of 2021. So we're very excited about what's to come here. We expect to see a significant revenue ramp up and a go public event. 

The next one I wanted to talk to about was Weed Me, it's a $4 million position. It's a privately held Toronto based indoor cultivator. We originally invested in this position in 2018, they continue to have record-breaking sales every month. So in December, they're going to clock in slightly above $1.3 million, which is actually the maximum sales that they can have with the current plant capacity. So given the huge demand that they're finding for their product, and again, this company focuses on what I talked about earlier, which is higher quality, higher margin branded products. So they're going to do a significant plant expansion, which will nearly triple the processing and packaging capacity that they have, and that should have a significant impact on top line growth. And so these guys have shown that focusing on premium quality and brand new can have a significant impact on the top line. The turnaround when you focus on cost, and focus on branding, and focus on marketing can be huge.

This company was doing less than $100,000 in revenues per month just 12 months ago. Now they're doing $1.3 million a month, and the only thing constraining them is plant capacity which they're working really hard to overcome. And so we think this company will be able to go public as well in 2021, if they choose to do so. They certainly have a profile that the market would very much like. And with that, with those two updates, I'd like to pass the mic onto Shemek, who's from Sequoya Cannabis, which is another large holding of ours. And, Shemek, please take it away and tell us about your company.


Shemek Fedyczkowski, CEO, Sequoya Cannabis

Thanks a lot, Mohan. My name is Shemek Fedyczkowski, I'm a CEO of Sequoya Cannabis. 

Can we please go to the next slide? 

Okay. So today I've got four topics and four slides, a snapshot of introduction of Sequoya, the European opportunity. What has Sequoya been up to across 2020, and what Sequoya has planned for 2021. Let's dive right in there. 

Can we go to the next slide, please? 

Great. All right. As an introduction to Sequoya. So Sequoya is a Canadian company, we're registered in Ontario under the name of Sequoya Cannabis, LTD. However, our main operations are in the heart of Europe, in Poland. We operate as Sequoya, Europe, LTD, and this is where we have our production facility and our sales. Across 2020, as we launched operations and sales, we've focused on producing highly refined cannabinoid extracts, primarily intended for use in formulas and various consumer goods, products in specifically cosmetics and the supplements industry. So we've then sold directly those extracts to brands, brand manufacturers across Europe, and most recently across certain opportunities in Asia Pacific. 

Our strengths beyond the quality of our products are in the accreditation and the standards, specifically in line with the businesses that we do business with. So, again, this is talking about the cosmetics and the supplements industries. Diversified product portfolio is another strength of ours. We've worked very hard to have the necessary diversification across our products to meet the demand. And we've worked very hard to have the necessary, the best possible quality across Europe amongst those products. And we do custom formulations as we interact with our clients and orders across most of the products that we have listed to the right of the screen.

So accreditation in standards is absolutely one of the keys in doing business, it's important to appreciate that we're entering established and mature industries that have established immature standards that you just cannot get around. So a company that doesn't appreciate that, it doesn't acknowledge that, just really has no chance of doing business. So I've seen some garage operations pop up across Europe, thinking that they could just do extraction. Well, those times are over. The mainstream legitimate businesses and brands are coming in, they're asking for CBD extracts and accreditation standards is just a necessity. 

Mike Curtis – Embark Ventures

Shemek, it's Mike. So I think I just wanted to... Sorry to interrupt you, Shemek, but from what you're talking about, and I want to make it clear to MMJ investors and people who are watching this, what Shemek has just described is the highly regulated, highly regimented process that they've gone through within the European Union to get approved. What you see generally across extraction operations globally is a lot of these mom and pop trap labs, that are essentially unregulated, unlicensed, and that's what's generally feeding a fair amount of the THC and CBD products across North America and Europe currently.
Our expectation in 2021 is all these labs are going to be effectively shut down as the FDA and the DEA take over the handling of this globally, and facilities like Shemek's, who managed to make it work in the European Union, will be the ones that expand out into North America, Canada, et cetera, as the regulations and the regulated market continues to increase.

Shemek Fedyczkowski, CEO, Sequoya Cannabis

Exactly. Yeah. So just below in the middle of the slide, I have a few of the key certifications and production standards that we've worked towards. This is just the start. So just the first one is really interesting. We've got food grade GMP certification, and essentially these are standards and accreditation's directly in line with the businesses that we plan to do business with. So specifically we're accredited to produce extracts for the cosmetics industry, and to produce extracts for the food and supplements industry. When we engage these clients, the first question from them is, "Do you have the documentation to prove that you're you're certified, and you have the proper standards? Because we're a billion dollar company, and we can't afford liabilities." And we have so far. So we're taking strides in the right direction, learning as we go, and becoming more and more certified as we go.

The next opportunity that I wanted to highlight here, as we're getting certified through all the growth areas within Europe, is the point just below that is, we're currently pre-approved for the THC handling permit. What that really is, is that allows us in 2021, that's the bottom of the slide, that's going to allow us to do THC extracts, legally obviously, and interact and do deals with medical marijuana brands, and specifically in the German market. So we're already preparing for that. We're pre-approved by the National Pharmaceutical Council in Poland, and we're just waiting for the formalities to come through.

In Q2, we're aiming at being GMP pharma grade certified. We've already started the necessary steps in that direction. Everything seems on track. And once we're done that by the end of Q2, that's going to translate into supplying and doing deals with pharmaceutical companies worldwide. Obviously, we're going to start with those in our backyard across Europe, but Asia Pacific has been knocking as well. So that's, for Sequoya, going to be a huge game changer. The margins are drastically different there, and it's worth mentioning that already weekly, we're getting anywhere from two to four serious inquiries from across the world as to whether we can provide GNP pharma grade certified products. So of course we can't do that yet, but we're already engaging them in anticipation for 2021, Q2. 

Can we go to the next slide please?

Great. Thank you. So I'm extremely excited about the opportunity in Europe. As the title says, it a legal CBD market, and it's an emerging market, and it's a massive market of 750 million population. Currently CBD sales are in the range of 450 million euros, and it's roughly 30% of the global CBD market share. CBD is a legal compound, that's a controlled legal compound, and therefore it can be used in retail products. The requirements there though, is that it has to be extracted from hemp, not cannabis, and that the THC level needs to be at 0.2% or below. There are a few exceptions to that, Switzerland, and in Italy, they're at 0.3%. sorry, it's possibly a little higher in Switzerland, but anyways, moving along. 

So again, the key industries so far have been cosmetics and supplements. These are the ones that we've been focusing on and building sales channels into, and the growth markets, the main ones this year, have been Germany, Poland, Czech Republic, Spain, and the UK. Across these markets you see major retail chains, the shelves lined up with products labelled hemp and CBD, various new brands popping up every month. Namely, I've, I've listed three major companies in the consumer packaged goods business below. Namely, Nestle, L'Oreal, and Johnson & Johnson. So Nestle has acquired four CBD supplement companies recently, and L'Oreal has acquired two CBD cosmetics companies. And Johnson & Johnson is developing their own products. Again, because these are all legal products, they're being distributed through legal and the massive FMCG retail chains across Europe, across borders, across the Schengen European area.

So again, it's a massive opportunity and new brands are popping up all the time. What's important to realise though, that these new products that are being rolled out by various brands, big and small, they don't produce their own ingredients. And in many cases, they don't produce their own formulas. They rely on accredited certified suppliers to do that. So with respect to CBD, we aim to establish our position as the leading accredited supplier of CBD to these companies. So this is why we've been working extremely hard, not just on the quality, but to be recognised as a legitimate player with the accreditation in place with documents, without those, these companies aren't going to talk to us, but we've certainly had some successes, and we're going to keep working towards that. 

Moving along to 2021, there's going to be, and this is echoing what Mohan and Mike have been talking about, the emergence of pharmaceutical grade products in CBD, but also medical marijuana, THC based products of all sorts. Across Europe, they're going to be distributed as finished products through pharmacies, hospitals, and medical marijuana distribution outlets of all sorts.

I've named vape products. I feel that's probably not as big as some of the other ones, but it is a significant growth area, I believe. One that I've got my eye on, we all have as a company, and we're working towards products in that direction, and that's a product that'll be distributed through traditional FMCG channels across Europe. Before we go on, I just wanted to mention the opportunity, the advantage of being in Poland. So being in Poland, we're in the heart of Europe. However, the Polish currency is not the Euro, it's the Polish currency, excuse me, which is a quarter that the Euro. So we have a real cost advantage, cost savings advantage of being in Poland. Specifically because we've got a tremendous science talent pool that we can tap into, and we've certainly taken advantage of that, and I can say we've built a tremendous team that I'm just super confident of taking us through to 2021. Everybody's extremely motivated, and we all know the goals here, and just a lot of talents in that team. 

Can we go to the following side, please?

Great, thank you. So 2020, obviously it's been a very interesting year. Across this year though, we've managed to do product development and a lot of sales. I've split this slide up into two, let's say stages, on the left. The first stage is really COVID first wave, and then to the right is COVID the second wave. The first wave was fairly restrictive, and there was a there was a lockdown imposed. So we weren't able to really launch sales as we planned at that time, and sourcing biomass was a bit of a challenge as well, since primarily we source it from Italy, and that's where the pandemic really sparked there, but we didn't take that lying down. We actually used that time to improve the quality of our products, and improve the efficiency of our production. So as we transitioned into the second wave of COVID, which was far less restricted than the first wave, we found that a lot of the clients that put projects on hold, were really eager to get back to the discussion table.

They were eager to fire up their production factories for various consumer products, and so that with the quality of our products that we worked on really translated to some excellent results, and so far now we're actually generating over CAD$110,000 per month in sales, and proud to say that November was a break even month for us in terms of the costs, the expenses of that month, and the revenues. We are on track to generate around... Sorry, CAD$400,000 dollars by the end of the year, that's across the five months, we're going to be doing sales this year. And we currently have 630,000 in orders in our pipeline for the Australian community, that's around a $1 million. 

Can we move to the next slide, please?

Thank you. So this is the last slide, just as a wrap up. And so just to sum everything up, as Sequoya, our goal is to really just establish ourselves as an accredited supplier in the CBD area to the consumer goods manufacturers within Europe, Asia Pacific, and the pharmaceutical companies. We're going to do that by getting the necessary permits, the necessary certifications, and the ISOs. So for example, ISO cosmetics certification, we're going to, obviously, be extremely pragmatic with every step we take, but we know that we're entering established industries, and we really have to learn to play their game. That's really what it's all about. So we're on track to doing that, and the last point is the markets we're going to continue to expand across the EU markets, and Asia Pacific across 2021. That's it for me. Thank you very much.

Jim Hallam, CFO

Last week, MMJ released its portfolio update. The NAV is about 17 cents a share. A couple of things I'd like to point out, we've worked hard during the year to bridge the gap between the share price in NAV. During December, we actually exceeded that, we hit a share price hit 21 cents, account lead about 17 cents. Those investors who took up the shares in the capital raising earlier in the year at around the seven cent mark have obviously enjoyed a significant gain on that. So moving forward to 31 December, we're going through our half year evaluation process of our unlisted assets. We expect that there'll be a flow-through benefit from the pickup in listed Canadian security prices through that process. We're not in a position to make a forecast, obviously, but the outcome of that process will be announced when our 31 December NAV is announced by 14 July.

It's already been mentioned that there are a couple of liquidity events coming through our system, given that the majority of our investment portfolio, about 80%, is unlisted. We had a question on the dividend policy, the dividend policies detailed on page nine of the monthly update, that basically is 20% of profits after you're remove the impact of asset revaluations, a decision by the board will be made in February, after the results have been finalised. And as you said, we intend to make our half year ordered results towards the end of February. So thanks very much, Clive, and thanks very much for all of the other presenters.

Ends

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