MMJ Group Holdings (ASX:MMJ) Shareholder Update Presentation, March 2021

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 Parallax Ventures Inc, the asset manager of MMJ; Mohan Nair, Partner, Parallax Ventures Inc; and Jim Hallam, Chief Financial Officer and Company Secretary of MMJ.

Mike Curtis: Thanks Clive, and happy St Patrick's Day. I think you guys are deep into it now. What I'd like to do today, Clive, is I'll take a little bit of time and just talk to the investors about what's been going on in the last quarter in this space. Because it's been very active. And then I'll hand it over to my partner Mohan to walk through some of the investments and how they've improved.

Really putting things into context, what a difference a year makes. At this time last year we had a market in free fall. Within our portfolio, a lot of companies really just trying to figure out what was happening as we were really just entering the first phase of the pandemic at this time last year. We had companies looking for financing. We had companies trying to deal with the shutdown of services and other stuff. But some really interesting things started to happen for the cannabis sector, and things that have really fundamentally changed it going forward and really accelerated what's happening. What we really started to see at the beginning of the pandemic in the first couple of weeks was cannabis being labelled essential services. We saw this within Canada and we saw this in the United States. So, that really started to solidify and legitimatise across North America the cannabis sector. What we've seen in just a week like this week is major things happening, and those essential services are now starting to expand globally. So, within just this week alone, we saw the largest US MSO, Pure Relief, making an acquisition into Europe and focusing on international expansion. We had British American Tobacco make a large investment into a Canadian LP, showing that there's a lot of interest outside of just the cannabis players that are coming for these companies. And that's one of just many as it's starting to accelerate here. And I think, lastly, what you're going to see too, is countries continuing that legalisation process. We saw just this week in Mexico, talking about them approving recreational cannabis within what's a very large sector. So, our belief is this will continue to accelerate globally, and then we'll continue to take those steps forward.

What we've seen in Canada, and really it's been driven a lot by the pandemic, I think, and these very strong lockdowns, is we've seen general cannabis sales continue, monthly increases of 10 and 15 per cent, to where they've really doubled in the last 12 months to what they were before. And I think we're seeing a lot of participants outside of your normal cannabis users expanding, and that's being driven by stress and anxiety and other things. And they're moving to that. So, within Canada we've really seen the consumer ramp up their consumption, and that consumer base has grown bigger. We've also seen the LPs within Canada start to really make the changes that they needed to. And this was an industry that was driven originally from regulation. So, a lot of these big LPs built very high-cost production facilities, which, as the regulations decrease, they were no longer necessary. So, through the last 12 months, those companies have shut down operations that weren't profitable. They raised money. And they've really just turned themselves around to be companies now that are fully capitalised and ready to both take advantage of the opportunity in Canada as well as expand into the United States, within Canada at the same time too.

So, you've had the consumers expanding use. You've had the LPs and the companies that are participating fix their cap structure, and you're starting to see them chase those revenues as it grows. And, lastly, you're just seeing the entire sort of retail space, especially within Ontario, grow rapidly. So, that transition within Canada from an illicit black market to a fully regulated legal market is happening, has happened very quickly. We've also been talking through the last 12 months about US legalisation. We had a real belief that US legalisation was going to come along faster than people expected. With the change in the administration in the United States we're starting to see that accelerating quickly, and we're starting to see a trade being put on as the Canadian LPs are definitely taking advantage. And I think people see that those companies are used to dealing with a highly regulated environment in Canada. And as we get full federal legalisation in the United States, they're also going to be prepared to deal with that.

And at the same time, the MSOs, so the multi-state operators, the ones that were the early entrants within the cannabis space in the United States, such as Cura, are now taking that base and they're expanding globally. So, really, from our perspective, Clive, and I'm happy to say, everything from a global industry perspective is really working for us and for our investors and our companies. We're really excited about where the space has gone in the last 12 months. And, frankly, we're really excited about the portfolio companies. And I think that's probably a good time to hand it over to my partner, Mohan, as he can start to update the investors about the progress that these companies have made over the last 12 months.

Mohan Nair: Thanks, Mike. And thank you, Clive, and thank you to everyone who could join us today. We really appreciate your time.

Mike started off his segment with a statement, “what a difference a year makes”. And I think that statement is sort of emblematic of where our portfolio is at and where we're at as a company and where the industry's at. It's a really correct statement that captures the mood. Things are indeed looking much better for the cannabis industry these days from where we were a year ago. Last time this year, as Mike alluded to, companies in the sector were truly having liquidity crises, incredibly challenging to get new money to enter the space. Today we're in a completely different place. Companies no longer challenged by liquidity issues. Actual end market sales are rising. The end market is getting bigger. And public equity evaluations are reflecting that.

And the US really, really has been the story that's driven that. It feels like every month a new state decides to go legal. So, last month it was Virginia's turn. And this month it looks like New York is about to take the plunge and go full legal. There's only one more hurdle. And most likely by this time next week New York state will have gone legal. And I can't emphasise how significant it is for New York state to go legal. New York city before the pandemic got about 55 million visitors annually, tourists. Once this pandemic is over and travel returns, millions of people from around the world could experience legal cannabis in a major alpha world city. And that could have like ripple effects globally that we haven't even fully thought through yet. And, obviously, as Mike alluded to, the stock market has reflected this enthusiasm, driven the cannabis names much higher.

We keep track of something called the alternative harvest ETF and that thing has more than doubled over the last 12 months. And this enthusiasm has really kind of made it easier for our portfolio companies to raise capital and ensure their future. So, to kind of give you a little bit of specific colour on that, so far in North America about $2.3 billion in equity has been raised in the first two months of 2021. That's about two-and-a-half times the amount of capital that was raised in the first two months of 2020. And what we're seeing is that the deals are being done as straight equity or equity units with warrants attached, as opposed to convertible debentures. So, that's sort of showing you the investor outlook for the sector as a whole has also changed from last year. So, it's not just that we're doing more deals. The type of deal is also different.

So, the headline I want you guys to take away from all this is that cannabis is here to stay. By this time next week, New York is going to be legal, and that will basically make it a fait accompli that the US will go federally legal over the next two years. So, with that as sort of a backdrop, let me update you on some of the portfolio holdings that are benefiting from this buoyant market and taking advantage of the financing window that's opened up. So I'm going to give four examples. I'll talk about Harvest One, WeedMD, Embark Health and Weed Me. So, the first two, Harvest One and WeedMD, are actually our public company holdings, and the other two are private company holdings.

So, Harvest One trades under the ticker HVT. It’s been a long-time core holding for MMJ. We own about a quarter of the company's equity and are control block in it. About 18 months ago, Harvest One was essentially a holding corp for a variety of cannabis-related businesses that span from large-scale cannabis production all the way to pharmaceutical-related businesses. So, while many of these businesses were interesting, many of them also underperformed in terms of revenue growth and were capital intensive. Overall, the company had an incredibly high burn rate at the time, and the businesses together didn't really form a cohesive strategic vision of any sort. So, to deal with this, Harvest One decided to do a strategic review of itself and sell all of its non-core assets and focus on consumer-branded products, which has always been its strength. The board also put in place a new management team with a skillset to execute on that new strategic vision. And we, Mike and I at Parallax, and MMJ, we supported the new management team in this endeavor. And the company has now achieved its goal of becoming a consumer brands business. All that effort over the last 18 months finally has paid off, and the fruits of the labour are starting to show. So, in our own sort of internal modelling, we estimate the cash burn rate for the company could be as low as 200 to 300,000 a month after it's completed selling all these businesses, which it just did. Recall that that number, the monthly burn rate, was nearly 4 million a month at one point 18 to 20 months ago. And the market’s rewarded them. The stock’s more than doubled in the last 12 months. And the company got an opportunity to raise capital to secure its financial funding. So, as of tomorrow, they'll close on their deal. They've raised 5.75 million bucks in new equity. It’s a unit deal priced at 15.5 cents. And it comes with a warrant at 19 cents. So, it's sort of showing the market belief in this company, and the markets are rewarding them for all the effort that they’ve put in, but the money is coming in in equity rather than as a convertible, and so that's also interesting and very positive for the company. So now they're fully restructured with a core CPG businesss, and they have the capital to execute their business plan going forward.

MMJ is highly leveraged to the success of Harvest One. This stock has the biggest impact on MMJ’s NAV. And now they're in a prime decision to execute on their business plan. So, we're really excited about Harvest One's future.

The next public company I want to talk to about is WeedMD, another publicly listed name, licensed cannabis producer, well-known consumer brands. Color Cannabis is the moniker their brands go under, and they have great medical sales through their LiUNA union sales channel. And our investment in them is held by convertible debentures and warrants. They raised 17.5 million in new equity. They did a unit deal at 48 cents and a half warrant at 60 cents. So when you combine that with the 25 million bucks they got in LiUNA from the LiUNA union in a debt deal, fundamentally, the sort of short-term and medium-term funding issues for the company are solved at this point, right? The management team has proven to be extremely savvy in being able to raise new capital and time the markets really well, and this is really good for us because all this capital raising has basically added security to our convertible debenture position. And we feel the upcoming Q4 financials will be indicative of whether the company can achieve the sales it needs to become cashflow positive, but in either case this investment is now much more secure than what it was 12 months ago.

And now we'll sort of move on and talk about two of our private companies. First, I'll talk about Embark Health. It’s a privately held company, large cannabis extraction facility in British Columbia and another facility under development in Ontario. Our investment is held via equity, convertible debentures and warrants. Our first investment in this company came many years ago when it was simply an idea with great management track record. And now it's gratifying to see them open for business and securing customers. So, they've signed service agreements with provincial cannabis-buying authorities in British Columbia, in Alberta and Ontario. And they've also received first purchase orders from sme of them, I believe, and incoming from the others. Initial feedback appears to be that the product is well received, but reorders will really confirm that the market has accepted the premium product category that the company is trying to establish. So, we're looking forward to that. And in addition to selling these products to provinces, they've also signed two non-government customers, Sugarbud and Shelter Market. So, really gratifying to see these guys ramp up and start generating revenue and have a big customer base. And we're working with a company to help them get publicly listed in 2021. And this current financing window that I've talked about, and Mike has alluded to as well, this is the opportunity to get that done. So, that's Embark Health.

And another private company I wanted to touch on as well to give you a flavour is Weed Me. Again, Canada based producer of branded cannabis, privately held. Our position is held by a common equity. February for these guys was a record-revenue month with lots of interest from various provincial customers for their smokable and edible products. And they're actually rolling out a lot more edible products these days as well in the form of gummies, etc. This is a major change from 12 to 18 months ago. Their monthly sales 12-18 months ago were quite paltry. Literally this company has 15-exxed its monthly sales in the last 12- 18 months. And they were having liquidity issues 12-18 months ago, which we stepped in and helped them to solve. And now the turnaround has just been spectacular, and really what's driven that is the underlying consumer market and management execution. We think Weed Me is probably now the second largest privately held cannabis producer in Canada. Retta Can's probably number one, probably by a wide margin, but we think these guys are probably number two. And we think these guys are also on track to publicly list in 2021 and take advantage of this window, this capital markets window that we're seeing. So, that's Weed Me as well.

So, I just wanted to give you a flavour of how portfolio companies are taking advantage of the financing window that's opened up -- two public, which is WeedMD and Harvest One, and two privates, which is Weed Me and Embark Health, which we think will probably end up giving us some liquidity this year. And to kind of wrap it up here, the common theme in the above examples that I gave you has been management execution through what's been a challenging time, right? Most of our portfolio companies and the industry as a whole were in a much tougher situation last year. Costs were high, capital markets were closed off, revenues were only slowly starting to grow or sort of stagnating. It was just starting to grow. And one year later, as Mike said, what a difference a year makes. Management teams have successfully reduced costs in their businesses while simultaneously growing revenue significantly. And where possible, as we kind of talked about with Harvest One and WeedMD, these public listed companies have secured equity financing to ensure that their businesses are fully funded through the upcoming growth cycle we expect in the cannabis space. And as I said, the privately held companies are using this environment to go public some time in 2021.

So, I kind of would like to second Mike's thoughts. I cannot think of a better plan to be a cannabis investor. The early stage risks are gone and there appears to be widespread legalisation of cannabis in the US. And that will almost certainly most likely culminate in federal legalisation. And our goals are to continue to seek liquidity via public listing for our private companies, and support the management teams in growing their businesses and taking advantage of what appears to be an upcoming cannabis super cycle. And so, with that, I'd like to hand it over to Jim, who's MMG CFO, to give you a financial update.

Jim Hallam: Thanks very much, Mohan. I wanted to point our shareholders to our February portfolio update, which provides highlights of the financial performance, but also some of the colour in relation to the events, most of which has been covered by Mike and Mohan during this call. A couple of the highlights are that the net asset value is 21 cents per share. We had our audit completed in February of the 31 December ‘20 accounts, which provided a clean bill of health for the company. Our share price is around the 12 cent mark. There's obviously a big discount. We feel that a large portion of that discount is attributable to the market waiting for the liquidity events, which have been highlighted by Mohan in relation to Embark Health and Weed Me. That's obviously outside MMJ's control in terms of timing, but we remained positive on the likelihood of those two outcomes during this year.

The 21 cent performance in relation to NAV, again, reflected during February the rerating of Harvest One. We had a 17 per cent rate of return for that month.

MMJ has about $4 million worth of cash to invest in opportunities, both in the cannabis sector and some other sectors that we're having a look at further to diversifying our investment strategy in late 2020. So, we believe we're well placed to take advantages of opportunities that do arise and where necessary support any of our investee companies.

So, our next is shareholder update will be in May 2021. We'll release the date, and we'll advise shareholders who have provided their email addresses as well as their mobile phone numbers of the date of that event. So, I'd like to thank everyone for participating.


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