MMJ Group Holdings (ASX:MMJ) Shareholder Update Presentation, November 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. Good morning to everyone who's listening today. What we'd like to do today is just walk you through a bit of a general update about how the industry's been doing over the past months, when we last spoke with you, and then have my partner, Mohan, walk through the portfolio, just generally talk about the positive changes that we've seen over the last year and where we think the portfolio's going to go over the next 12 months.

So if we look at the cannabis industry and stepping back into the jurisdictions, as we look at Canada, we had a pretty strong start to the year that was obviously driven off the expectation that the Biden administration would pursue full legalization in the United States. That hasn't happened, and the following months from that event have been very challenging for cannabis companies across the way. Its valuations have come down pretty significantly.

Within Canada, what we've seen is, really, the largest cap companies out there, whether it's Aurora Cannabis, whether it's HEXO, really shutting down non-producing operations, leaning it out, and working towards getting to what's a really net income-positive businesses.

In the United States, the MSOs have continued to do exceptionally well from the perspective of generating money. States continue to open up. And more recently, what we've seen within the United States in the past few weeks is talk about legalization again, and surprisingly this time, it's being driven by the Republicans. So there's a real sentiment change. We believe that in the United States, they're going to continue to push exceptionally hard for legalization, and I think there's a real reason for euphoria and bullishness within the space, and you're really seeing that reflected within the stocks on a day-to-day trading basis.

And then Europe continues to move ahead. We're seeing within Germany that sentiment has really changed in a positive way, and the expectation is that the current coalition is going to get a deal on cannabis done, at least on the medical side, which, I mean, Germany remains what is the largest European market, and that would be a huge boom for both the large LPs within Canada, as well as the smaller ones across the way, and I think you've seen a few of the MSOs, like Cura, attacking that European opportunity as well. So started strong, bit of a lull through the middle of the year, and we've entered a very bullish phase for the sector, and we think the stocks are going to really start to perform here into the end of the year and into 2022, as we really follow that legalization strategy.

What we've been doing from an investment perspective is really continue to focus on established brands that are going to benefit from that federal US legalization and realistically, some of the brands, as Europe starts to open up. We're focused on those bottlenecks, which for us was really early on the cycle extraction, and now we're focusing on other jurisdictions, just really working that same playbook, focusing on the bottlenecks and the supply gaps, and making sure that we're involved where we need to be, and we can generate the most money from that.

Then at the same time, we've changed the portfolio slightly in the sense that we've opened up 25% to participate outside of cannabis. And we're really focused on other specific high-growth areas. So whether that be protein-enhanced food, healthcare focused on the new initiatives, especially within the COVID world and how it's changing the healthcare system, and then, obviously, green initiatives. We continue to focus on anywhere within the gap where we believe we can really make long-term money and make a difference. And we've been lucky enough to receive funding from the Australian government, which was non-dilutive, of approximately $4 million. So we're well positioned to take advantage of those new opportunities, as well as start to harvest some of the cannabis investments.

In terms of performance, we've really just mirrored what's the broader index within the cannabis space. What we believe, from a Parallax perspective, is that the stock doesn't reflect what's happened in the portfolio. We believe that as the market takes off, people are really going to start to realize that some of the companies we have within the portfolio are really unrecognized, just say Weed Me, for example, which is now Canada's largest private LP, and generating a fair amount of revenue in EBITDA as we go along.

I think what makes the most sense is I'll have my partner, Mohan, really walk you through some of the specific companies. He can give a bit of an example of where they were a year ago and where they're headed now, as we've gone through a fair amount of work with most of these companies, and they're really positioned exceptionally well. Mohan?

Mohan Nair: Mike, and thank you, everyone, for joining us on the webinar today. Before I do a deeper dive into some company stuff, let me piggyback and echo some of Mike's thoughts and give you some additional macro color briefly first.

So, as Mike's saying, as everyone knows, it's not been a pretty picture in the cannabis industry over the last 18 months. Most ETFs and all other names of the space reach their peak valuations in mid-2019 and have declined from that point on. So far in 2021, the benchmark Alternative Harvest Index, which we track, is down roughly 50% from its high in February, as you saw in that chart that Mike just put up a few moments ago. The Australian cannabis names haven't performed significantly better, either, with even well-known names, like Little Green Pharma, underperforming the broader market since the peak back in February.

So we're clearly in something of a cannabis winter, similar to where oil and commodity stocks were about five years ago. But it's not all bad news, right? As Mike pointed out, we're finally seeing some green shoots with the US-based MSOs bouncing off their lows. These are the multi-state operators. These names have been sharply ticking up over the last several weeks due to speculation, as Mike mentioned, about legislative changes around decriminalization and regulation from the US Congress. The latest draft bill that's being circulated, it came from the Republican side, which is a big surprise, and their proposal to decriminalize and regulate differs a little bit from the Democrat-led proposal that we saw earlier in the summer.

But the major takeaway from all of this is that at a first principle's perspective, both parties are on board with the idea of decriminalization and regulation of the industry at a federal level. The argument now is about how to do it, right? And this is a major shift and focuses the question on not if we'll see US legalization, it's when we'll see it.

So for those reasons, we continue to believe in the long-term potential and believe the fundamentals of the industry will, in time, drive a total industry market cap that's going to be significantly higher five years from now than what it is today. But it'll be a bumpy journey, lots of hills and valleys along the way, and to ensure that we can cross those hills and valleys, we continue to focus on two things. So the first is high grading our cannabis assets through management changes and corporate actions within our portfolio companies, and the second action is to diversify the portfolio itself with some non-cannabis assets and help de-risk exposure to the sector.

So to that end, we're pretty happy to report that we've recently deployed capital into three new deals, two of which are non-cannabis. Brainworks and Valo, you may have seen the press releases, are both in the biotech space, and Weed Me, the third deal we put money into, is a core cannabis holding that we already have. We put roughly about a million bucks into each of them.

So with that overview, we wanted to provide you with some portfolio highlights. First, let me talk about our cannabis names and how we've high graded them through management changes and corporate actions. And secondly, we'll give you some more info on the non-cannabis names, and maybe Mike can chip in on those as well, since biotech is a specialty of his. So let's start off with the cannabis names and see how we've high graded them.

So the first one is Harvest One, which we've got up on the screen now. Publicly-listed name, trades under the symbol, HVT. MMJ is highly leveraged to Harvest One. We own more than 20% of the outstanding equity. So where was this company 18 months ago, in early-2020? High burn rate, tons of cash being used, huge collection of assets, completely unfocused across the world, large holding company overheads, and it required a strategic review and a further investment from MMJ to streamline and focus on its core business.

So where are we today? After about 18 months of aggressively restructuring the company, they're in a much stronger financial position. They did almost a $6 million deal earlier in the year. The burn rate is much lower, less than half of where it was the year prior. Now, they're focused on two products, two great products, Dream Water and LivRelief, and they continue to have, probably, some of the best distribution capacity of any cannabis company in Canada. They reported Q4 and year-end financials recently. Revenues were about 8 million bucks for the year. Trade payables and liabilities are also less than 50% of where they were. The current state of affairs at Harvest One is significantly better, and its future is secured, and management is now laser-focused on two products, humbled in geography, and growing revenues.

Next, we'll talk about Weed Me, which you see up on the screen. Where were we in early-2020, late-2019? Very low monthly revenue. I remember there were months where this company was doing 90,000 a month at revenue, negative EBITDA, high cash burn rate. Most of the sales that they were making were actually to other businesses. They didn't have much of a brand or retail presence at that time. And we stepped in, and we gave them a million dollar funding facility, and that loan was fully repaid a year later, and that helped drive their transformation that we saw. Today, they're reporting record-breaking monthly revenues, an excess of 2 million bucks a month, and it's now one of the largest, if not the largest, privately-held producer in Ontario. And it's not a B2B player anymore. It sells a lot of products, cannabis 1.0 and cannabis 2.0 products directly to consumer.

And we've seen significant interest from wide variety of parties who want to expand their retail and their consumer product, taking an interest. To help them along since they're having some pretty spectacular growth, and what they really need is money to grow, we recently announced a million dollar convertible debenture into the company, with an option for another million bucks. The use of the funds is to finance the tremendous growth that they're seeing. The company basically needs money to buy inventory and packaging, and so this deal is structured to allow conversion of our debentures into equity at a discount in the event that there's a takeover, and it also gives us significant warrant coverage.

And next, I see that Mike's already moved to Embark Health. We'll talk about that. Embark Health is also privately listed and will be public before the end of November, once the amalgamation with BevCanna is complete, and it'll trade under the symbol BEV. So where were we in late-2019, early-2020? No license to produce, high cash burn rate. They tried several ways to go public, to merge into different entities. And we stepped in. We helped replace the prior management team that have better operational and public markets experience. The company got its license, and now, they have a hit product on their hands, which is Hazel Sticks, which has a very high reorder rate from the various provincial buyers.

We merged the company with BevCanna. So that's going to close before the end of November, and going forward, we'll own shares in BevCanna. The combined company will be a major producer of beverages, utilizing BevCanna's brands and Embark's capabilities at its Delta facility. And before this deal closed, over the last 18 months, they've spun out J. Supply Co. and Protein Quest, subsidiaries before that.

So we'll talk about J. Supply Co., which we received free shares in, actually, from that spinout. This has actually been a great little story. When this thing was spun out, it had one franchisee store. So they owned the brand, but they didn't actually own the store itself. It was in a pretty bad financial position, and the prior manager and team was not very effective. So we appointed the current CEO, Xristos, who streamlined the operations and brought the company to profitability. He's grown the company, not just in franchise stores, but in actual corporate stores that are fully-owned. So by the end of this year, they'll have a footprint of nearly 20 stores. So this has been spectacular growth over the last two years, actually, from a company that we received free in a spinout. And it's attracting corporate interest from various parties, as consolidation continues to occur in the retail space.

So, Mike, you may want to flip to the next slide. So this slide gives some more detail on what Mike was mentioning earlier regarding our investment strategy going forward and the diversification that we find to undertake. I would specifically call out the second part of this slide, though, where it says, "Industries of the future," and point that DeFi and cryptocurrency is spaces were doing a ton of work in right now. We would like our next investment to be in that sector.

So having said that, let's talk about some of our non-cannabis investments thus far. So we'll go to the next slide, which is Vintage Wine Estates. So this is a publicly-listed consolidator of wineries across North America. Trades under the ticket, VWE. This was initially an investment that we made into an at-risk capital round of the Bespoke SPAC. Originally, this SPAC was looking to acquire cannabis companies, but because of what happened with this cannabis space and the name underperforming on a sector, then there are bases across the sector, the company decided to use the experience and knowledge of its chairman, Paul Walsh, who's the former CEO of Diageo, to pivot their strategy and move into the spirits business, actually, which was a change that we endorsed and think has been spectacular.

Paul actually quadrupled the market cap of Diageo while he was there. He had a great relationship with Vintage Wine Estates, they combined, and the company was de-SPACed. I'd have to look at my math again, but roughly, we're up 75% on the position since we made our original investment. They recently just came out with some projections for next year, and they've forecasted that they're going to close fiscal 2021 with 221 million in revenues, which is up 16% over the prior year. And they're also expecting that in 2022, they'll achieve 35% EBITDA growth over 2021. So we're really happy to see what's happened with Vintage Wine, and it's one of the pieces of non-cannabis assets that we own.

And with that said, I'll go to the next one, which you'll see up now, which is Brainworks. This was a recent investment that we made under their Medio Labs brand. They basically provide COVID testing using a unique DNA barcoding process. As vaccination efforts reach higher levels, we think this is going to be a new normal test. Every time there's going to be an outbreak of any new type of disease, testing is here to stay. It's sort of like what happened after 9/11, like maybe the intensity dies down, but the new security measures are here to stay. The Department of Homeland Security is still with us. So we think while the intensity may die down as vaccination rates go up, testing is here to stay as a secular theme. That was the logic there, and we've been very happy with how they've executed. And they've actually already generated revenue, which is pretty incredible for an early stage company, and they're growing their revenues with their sales force.

And we also just announced another $1 million investment into Valo, which is another biotech name. It has a very promising stage one on-clinic viral drug candidates. And we have a very good handle, we think, on a path of liquidity for this name, so we're pretty excited about that. So with Valo, Brainworks, and Vintage Wines, MMJ now owns more than 10% outside of cannabis, and we're going to continue driving towards the 25% allocation that we can in those names, and we think the rest of that allocation will likely come from the DeFi, or crypto space, or some of the other spaces that we highlighted earlier as well. With that, I'll turn it over to Jim, who's going to go through our financials. Jim?

Jim Hallam: Thanks very much, Mohan. For those on the call, I just wanted to point out, in our 31 October portfolio update, we provided a table where we made comment on each of our investments and, in particular, trying to highlight the value benefits that we see in each of those investments. Clearly, some of them locked up because of escrow, some of them are moving to liquidity, such as been discussed with Embark Health, but also highlighting that we've increased the amount of non-cannabis investments. And really, the board is looking now at each investment on its merits rather than looking at a particular sector. That thinking is behind the approval that's being sought at the annual general meeting in December, where the board is seeking approval to remove limits on non-cannabis investments, and we're quite excited about the opportunities that are coming through in that space.

And again, it's been mentioned, we've made a couple of investments in the healthcare space, Valo and Brainworks, but on the other hand, we still see value in specific individual opportunities in the cannabis space, where we've made a follow-on investment in Weed Me. So I just wanted to point that out. That table will be retained in the monthly update so that investors can clearly see what our strategy is for each investment.

The board, obviously, continues not to be happy with the discount of the NAV above our share price. It's probably not a lot of comfort to our investors to say that our NAV has declined by 11% compared to the cannabis market, which is well over 30% year to date. We clearly want a positive return. We think that we will reduce that discount as we get greater liquidity in our investments.

Clearly, investors are waiting for that to happen. We've been making those statements regarding our intention to move from private to listed over the last 18 months. We've had some success, but clearly not as much as what we thought the portfolio would deliver. Also, wanted to confirm that we received the $6 million tax refund that's a cash amount that was because of the Australian government's new regulations last year. The company is well-funded. We've deployed two million of that in the Weed Me follow-on investment and the Valo investment. So the company's core positioned both to operate, both to have flexibility with its investments and also to make new investments.

Our next webinar will be in February 22. As I said, we believe we're holding our annual general meeting, which will be a virtual AGM. We welcome the participation of any of our shareholders at that meeting, where, again, we'll give a brief update on where we're at as a business. Thanks very much for your time.

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