MMJ Group Holdings (ASX:MMJ) Shareholder Update Presentation, July 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: I'll talk generally about what we've been seeing in the industry, both in Canada and the United States, and then have Mohan and Jim walk through some of the portfolio companies that made the NTA.

So, what we really saw this year was an exceptionally strong start to the year. We saw cannabis stocks take off dramatically, especially post the President Biden win. Within Canada, we'd finally seen a lot of the companies that had been built around the structure of medicinal first, and then down to more of an outdoor growth situation, they had to really fix and recap their companies, and that had taken place by the end of the year. And then, as I said, in the United States, we were looking forward to getting some legislation related to the Biden administration.

What really happened, though, was that rally tended to fade a little bit. I don't think investors got enough colour around what was going to happen in the United States, but today we finally got a little bit of resolution. The US government has put forward the Cannabis Administration and Opportunity Act, which will essentially give them some structure related to how they're going to manage cannabis on a federal level. I think investors are going to be happy with this. It's going to take some time to pass through. It looks like it's an April vote next year. But, really, this is the direction it's going. And I think, in the US market, that's going to help stocks a lot. In the Canadian market, you're going to see a similar thing. These are companies that have built pretty good franchises with lots of products, and they're just ready to enter the US markets. So, we're relatively bullish on the US market and think it's going to go pretty well here through the next year.

In terms of the portfolio from a broader perspective, we are always focused on brands within the cannabis space, as well as the extraction space. A lot of those investments have done exceptionally well. Some of them, such as Harvest One, have worked through some capital issues and are now fully financed and doing well. And you have others that are just quality brands that we think are going to do exceptionally well in the US market. These companies have really been built around high quality and, as I said, good brands. So, our expectation is through probably the next 12 to 18 months, some of these larger LPs and US companies are going to start to pick away at these companies, and we're hoping to see a relatively good return through the year.

In terms of the actual overall investment approach, due to the nature of cannabis we've actually expanded the portfolio and what we can do. So 25 per cent of our portfolio now is outside of cannabis. One of the first investments we saw outside of that space was Vintage Wines, which is now public and doing exceptionally well, a great business. This was really one of the first investments, and Mohan will talk about that a little bit as we go further. The ability, though, allows our investors to get not just cannabis exposure, but exposure to a variety of other high-growth industries, such as healthcare and what's happening in terms of renewable energy. We're pretty comfortable in terms of where the portfolio is. We've tidied up any loose ends that needed to be fixed. And we're looking forward to having a really strong end to the year here, especially as we expect the legislation in the United States will help things out.

At this point, I'd like to pass it over to Mohan, who can really start to just generally talk about some of the individual investments and talk about the progress that we've made here over the past 12 months.

Mohan Nair: Last time we spoke on this webinar was back in March. And, as Mike said, that was not too long after Joe Biden had taken office and sworn in. And, as he mentioned, the equities were starting to soar again after a year in the penalty box. At that time, the market was expecting the newly elected Democrats would make cannabis federally legal in the US in the first two years they were in power. And that would kind of make way for a listing of already state-legal cannabis producers on the major exchanges there.

So, on the back of this enthusiasm, as Mike mentioned, a whole lot of money was raised. Actually about 2 billion was raised just in the first two months of 2021. And what this would have all done is it would have been very good, and crucially would have allowed MMJ to invest in that market if it went federally legal.

But now here we are four months later, halfway through the year, and we're looking at a much different landscape. Mike talked about the cannabis bill that's was introduced by Democratic senators in the Congress today, but the White House also came out at the same time and said that they probably won't back it. So, I think we're enthusiastic that eventually a resolution will come, but at this point it's hard to see it happening in the very near term. It's probably more of a next year, the year after situation for cannabis to be federally illegal. I think a couple of more things have to happen now, it's quite clear, with the White House, in order for that to go through.

And the markets have punished cannabis equities for it. So, our benchmark, just to kind of give you some more colour on that, our benchmark alternative harvest index, which is what we look at, is down 45 per cent from its February high. I think in mid-February it was up at 33 bucks. And last night, when I looked at it, it was 18 bucks. So, down about 45 per cent. And similarly MMJ stock has suffered a similar type of drawdown as well. It's down to 8 cents now from 15 cents earlier in February. So, the US political news is most salient for US companies, but there are definitely spillover effects into Canada and the rest of the world, including Australia.

However, it's not all bad news, right? I think there's some real positive sort of green shoots here. The run-up earlier in the year has really well-positioned companies, especially some of our portfolio companies, to address balance sheet and liquidity issues. And so, Harvest One, WeedMD, two of our holdings, took advantage of that, so that was very positive. They're much better prepared this year for any sort of downturn than any company was maybe a year and a half ago. Private companies in the portfolio, they didn't have same access to capital as the public companies did. Ongoing cost reduction initiatives over the past year have really started to pay off. And so, what we're seeing is increasingly a portfolio that can handle the ups and downs of the market, and that's far better insulated than it was maybe a year ago, even.

So, in summary, US legislation is positive. It's going to come. It may be a bit delayed. But it won't save the industry today, right? Management teams have to do the blocking and tackling required to achieve their own success. And we're pleased to report that the majority of our portfolio companies have learned this lesson and they're well-positioned.

And so, with that sort of background, let me update you on some of the larger portfolio holdings. I'll talk about Harvest One. I'll talk about WeedMD, which is now called Entourage. Embark Health. And I'll talk about Weed Me as well.

So, I'm going to start with Harvest One. So, this is a public company. It trades under the ticker HVT and has been a long-time core holding for MMJ. We own about a quarter of the company's equity via common shares and warrants. MMJ stock is highly leveraged to Harvest One. Every 2 cent move in Harvest One is a million dollars approximately in that asset value for MMJ. And the good news here is this company has been fully restructured with the core CPG business and has capital now to execute its business plan going forward.

I don't know if you guys have seen some of the press releases from Harvest One, but they recently announced that they've expanded their retail distribution footprint in the US into nearly 11,000 retail locations in Arizona, Virginia, Massachusetts, North Carolina and Montana. The primary focus of this expansion is to push non-infused Dream Water, which is their big product within the North American market. So, as you know, we can't directly invest into the US recreational markets, because it's not federally illegal, but what we do is we continue to push our management teams and look for other opportunities that are in related spaces that are federally legal. And so Harvest One is sort of unique in that it gives us this unique upside in this situation. They've created this huge large distribution network in the US now, and they can sell through the same brand, but non-infused, while selling the same brand infused in Canada. And so if you do get US federal legalisation next year, as we're predicting, or the year afterm within the next, say, call it one to two years, Harvest One can easily make the switch to make them infused in the US as well, and already have a brand that's associated with cannabis there without actually putting THC in it so far. So, a very good strategy on their part, and we support them on that front.

Next, I'll talk about WeedMD, a publicly listed licensed cannabis producer, well-known consumer brands. The main brand that they have is called Color Cannabis. And they do a lot of medical sales as well. Our investment is held via convertible debs and warrants. They're changing their name, as I mentioned earlier, to Entourage Health, and they also just reported a few days ago Q1 numbers. They reported 12.9 million, which beat the guidance that they had provided. So, that was very positive to see that they're now beating guidance. Well, it's positive to see that they're providing guidance and then they're beating it. So, this is a very good sign. They also reported significant improvement in SG&A expenses, which are down about 66 per cent quarter over quarter. And now they're sort of nearly at break even on an adjusted EBITDA basis, the last quarter anyway.

So, very positive news, good direction there. The value of the convertible notes we now hold, we hold out standard about $72 for every a hundred dollars worth of face value. These things were trading at 20 bucks of face value in November. So, the market has recognised the company's efforts in reducing costs, raising capital, and now people understand that this is going to be a long-term success. So, we expect to hold on to these debentures until maturity and redeem them for face value while we continue to collect interest along the way.

So, that's Entourage and their tickers are also going to change. It's going to go from WMD to a new ticker. Yeah, I'm pretty sure, so be on the lookout for that.

Next I'll talk about Embark Health. It's a privately held company, a large cannabis extraction facility in British Columbia. Our investment is held by an equity convertible debts and warrants. The company has a hit product on its hands with the Hazel Hash Sticks, and they've had multiple reorders from various provincial buyers for it. So, it's very positive news on that front. On the flip side, the premium Bubble Hash segment they were trying to establish at an $80 program pricing has been a bit more challenging. So, they have now lowered the price on that, and that's created more customer traction and the product is still economical at the new level. So, broadly speaking, a little bit more on Embark Health. Speaking a little bit more broadly about extracted products in that industry in general, they have not taken off in the market as fast as the industry previously believed, right? If you look at cannabis sales in Canada, two-thirds of that sales continue to be for dried flower and vapes. Edibles, oils, beverages concentrates, they're about a quarter of the market in terms of sales, but the segment is showing steady growth. And the good news is there's a lot more pricing power for producers in this segment than they do in, say, dried flower. It's also much easier to differentiate products, differentiate with packaging because the format of the packaging is different. And there appears to be at this early stage from what we can tell more brand stickiness. But, ultimately, customer demand has been a bit slower to rise. And there's a learning process there. And we think that'll take six to 12 months to fully play out. We continue to expect this company will find liquidity for its shares in 2021, and as they transition to become a cannabis 2.0 brand company.

And, last but not least, I'll talk about Weed Me. Again, privately held Canada-based licensed producer of branded cannabis. Our position is held via common equity. Continues to break records in terms of monthly sales in 2021. And is now likely, after the takeover of Redecan, probably the largest cannabis producer in terms of sales in Ontario. So, very positive, just firing on all cylinders. And we expect them to either list publicly or find some sort of liquidity over the next 12 months as well.

So, in summary, the stock market continues to explore what a post-COVID world looks like. Roughly half the US population is now fully vaccinated. The economy there looks like it's fully reopening. A lot of large public sporting and entertainment events taking place at full capacity across the country. Here in Canada, several provinces have lifted lockdown orders. Certain cities in Alberta, like Calgary, have even removed the mask mandate entirely. So lockdowns meant that the retail cannabis outlets couldn't serve their maximum number of customers. So now, as we move out of that lockdown, we expect physical retail sales to tick much higher in addition to continuing online sales. And that should help some of the portfolio companies as well that have retail locations, like J. Supply.

So, roughly, the Canadian market size is about three and a half billion now. And we think this thing's going to be a multiple of where that is now 10 years from now. So, a decade from today, this is probably a 10 billion-plus market, possibly closer to 20 billion. If you look at the spirits market, that's about 40 billion. So, if cannabis achieves even a quarter or half of that, especially given the changing demographics and preferences of millennials and Gen Z, we could see it reach 10 to 20 billion quite easily in the next 10 years, and producers and processers in our portfolio set to take advantage of this.

For the US, the outlook is positive, but in the short term a little less certain than it did a few months ago. But the market has adjusted for that by taking all the equities a lot lower. From our perspective, the smart play is to continue focusing on legal and regulated jurisdictions, but through companies that have upside potential in case there's some unexpected, positive surprises on the regulatory front, like the Harvest One example I was giving you earlier. You know, have products in both markets, but it's infused with THC in Canada, and it doesn't have THC in the US. And if and when they go federally legal, you can easily sort of flip the switch there.

Overall, most of our portfolio companies are in a much better position than they were a year ago. Management teams have been smart enough to raise capital at the right time, lower costs and create marketing strategies to build real businesses. So, we continue to be encouraged by their prospects. And on top of that, we're constantly seeking new investments, as Mike mentioned, to diversify our portfolio as well. And so that's it for me. And, with that, I'd like to turn it over to Jim Hallam, who's our CFO, who is going to give you a financial update. Thank you.

Jim Hallam: I'd like to touch on some of the information which we included in our 30 June portfolio update that was released this week to the stock exchange. I'll just caveat that to say that the information in that report is unaudited, as you'd expect at this early stage after year end. We expect to produce audited accounts by the end of August this year, in line with the ASX reporting requirements.

So, for the month of June, we had an approximately 2 per cent increase in NAV. Overall for the year, unfortunately, we had a disappointing 9 per cent fall in NAV. That was principally due to the devaluations of our investment in Embark Health, primarily because of their delays in rolling out their business plan. However, that devaluation was partially offset by material gains in Weed Me, Southern Cannabis and WeedMD.

MMJ, at the moment, is highly liquid. We have about 20 per cent of NAV in cash in the company tax refund. And, in addition to that, we've got about 27 per cent of the portfolio in listed securities. So, we're highly liquid. Having said that, we've got some unlisted positions, which if we were looking at this time last year, we were expecting the majority of those to achieve some sort of liquidity event, either a sale or a public listing. For the reasons that Mohan's outlined, that hasn't occurred. But we're optimistic that, over the next 12 months, one or more of our material unlisted investments will have a liquidity event.

A lot of work's gone on in the last financial year, and particularly with our unlisted investments, in terms of assisting them work through their business plan and to generate significant sales growth -- again, as Mohan has provided an update.

The opportunities that we see and I appreciate that investors... We're all not happy with the discount of the share price to the NAV. We are, as I said, hopeful, that because of the potential re-rating of Harvest One, where we have a highly leveraged position to any market improvement, as well as any liquidity events in our other material unlisted investments, that we'll be able to breach the majority of that gap.

We'll have another investor update in October after we've released the September 30 NAV, and, as Clive mentioned at the start of this presentation, we welcome any questions. And, if you wouldn't mind, there's still time for you to put them in the Q&A, and we'll reflect those in the next update.


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