What a Difference a Year Makes: MMJ Exclusive Interview

We chatted with Michael Curtis from MMJ Group Holdings (ASX:MMJ) to discuss the future of the cannabis industry, MMJ's portfolio strategy, and why investing outside of cannabis is a wise move.

MMJ Group Holdings (ASX:MMJ) is a publicly-traded investment fund holding a series of minority investments with a focus on the cannabis value chain including cultivation, extraction, manufacturing, and more.

With a $39 million portfolio of both listed and unlisted cannabis companies, MMJ can offer investors an 18% return per annum, through accessing cannabis companies beyond the ASX as well as additional industries including natural resources, software services technology, and pharmaceuticals.

In order to find out more about MMJ, we sat with Michael Curtis, an experienced former investment banker and private equity executive, and the Managing Director of MMJ Group Holdings (ASX:MMJ).

We recorded a podcast with Michael here, and below you can read the transcribed interview.

Michael, thank you for joining me. Why don't you begin by giving our audiences a brief primer on what MMJ Group Holdings does?

MC: Sure. We're effectively a publicly traded investment fund. We began originally with a sole focus on cannabis, primarily on investments in the westernized cannabis world. So Canada, now Europe, and Australia as well.

Throughout the last year, we've opened up that mandate beyond just cannabis so that we can look at sectors like healthcare and renewable energy and others.

Alright, and before we get into your portfolio strategy, I think it would be useful to look at where the industry has been. Can you tell me a bit about 2020 as it pertains to cannabis?

What you really saw coming into 2020 were some structural issues within specifically the Canadian Space. The way the regulatory environment worked within Canada was highly regulated at the beginning, and then eventually worked toward full recreational legalization.

What this meant was in the front end of that business cycle, the facilities that the companies were having to build were exceptionally expensive, while also not being particularly cost-effective. Producing a dried gram of cannabis was more expensive than it should have been, compared to what they've come to now where you have big greenhouses and outdoor grows and large scale extraction.

We also saw that 2020 was the end of the cannabis financing cycle. It took about 12 months for the bulk of the companies to work through profitability issues. And it involves lots of big write-downs, highly diluted financings, and a variety of other issues.

But as we head into 2021, it looks like the bulk of those issues for the Canadians have been sorted out, and the rest of the cannabis sector has progressed with it. You had a Joe Biden win in the United States, which created a fair amount of euphoria early [in the year].

Legalization on the state level seems to be almost accelerating here as we enter the middle of the year. But on the federal level, it appears a little bit nebulous and has kind of taken a little bit of the shine off from the beginning of the year.

Yes, it seems that is the case. On the one hand, there was the story about Joe Biden firing members of his staff for having smoked marijuana previously. And so that's been kind of a little hurdle. Although, on the state level, we just saw that New York legalized cannabis. I think that'll be a huge market. So there is a lot of reason to be optimistic, particularly in the US.

Yeah, and I don't think you're gonna see it stop.

One of my colleagues always says the legalization of cannabis around the world continues in steps. Sometimes they're smaller steps, sometimes they're bigger steps. I think what you're going to see in the United States at the federal level is that legalization will accelerate. They've certainly printed a lot of money during COVID-19 and are going to require a lot of tax revenue.

Cannabis is one of the industries in which sales continue to grow almost astronomically.

One of the first states that we saw legalize [recreational cannabis] was Colorado. And it appeared that pre-pandemic that it had almost plateaued out where people were starting to think that it got saturated. However, as we've gone through the pandemic, you've actually seen those states sales start to take off again, as well as a variety of other decriminalizing that you're starting to see in the psychedelic sector as well.

So, you know, these sectors are not going away. And they've been labeled essential industries through the COVID-19 pandemic, which is exceptional. This has allowed them to continue to work and operate, and you've seen no issues from them. So I don't believe that federal legalization is gonna be stopped anytime soon.

In Canada, sales have continued to skyrocket, the infrastructure is getting built out, and now I think both these big jurisdictions are really hitting their strides. And these companies, especially on the Canadian side, have fixed their balance sheets and their operating structures to the point that they're actually starting to make money now, so it's definitely an interesting sector for a lot of people to relook at over the next little bit.

Yeah, we've actually covered how COVID-19 was in some ways beneficial to the cannabis industry. Dispensaries were deemed essential and they implemented curbside pickup, and companies went through a lot of fat-cutting to survive the pandemic. Many are in better shape now than pre-COVID.

Exactly. There's actually a fifth point that the stress of COVID-19 has opened up a completely new segment of users, users who were stuck at home and had nothing to do and didn't want to drink, who have now started to try cannabis. You've also got a massive group of people that are just fundamentally stressed and a lot of them have turned to cannabis, which is where you're starting to see that second wave of growth in the United States and Canada.

That's a great point. Now, I want to get to MMJ Group Holdings' portfolio. So firstly, what is your portfolio strategy? What are you looking at when deciding which cannabis companies to invest in and which to avoid?

Sowe really focused early on on the extraction space. That's the space in between growing cannabis and producing products, such as vapes, gummies, and others. We've tended to stay away from the strictly dried cannabis segment. Whereas the extraction space doesn't require a lot of that really big upfront capital, but it's highly profitable as it comes through.

The second thing we focused on was brands. So if you look at a company like Harvest One, that's a large position in our portfolio. It has exceptionally strong brands like Dream Water and Loose Leaf. They've stayed steady through the pandemic. And now, as the US is beginning to legalize, you're really starting to see these brands that are well-recognized, partnering with cannabis companies that are looking to get the legal distribution of CBD products within the United States.

You saw it with Aphria buying Sweetwater, which was was effectively a beverage company, but they're assuming with the large distribution, eventually, they can start to produce cannabis products. So focusing on the extraction and the brands have tended to keep us very safe through this and those names seem to be really gathering momentum as we come out of COVID-19.

You mentioned Harvest One, they went through an equity raise a few months ago alongside WeedMD, can you tell us a little bit about that?

Harvest One went through a lot of things over the last 12 to 14 months. They were one of those companies that had built a lot of infrastructure, but it wasn't profitable. As we really got involved with them, there's been a transition of management, they've gone through a strategic review and carved off those assets that didn't work. That financing was really a validation of this new CBG company that's really got a clean balance sheet. It doesn't have big physical infrastructure, but it has these highly marketable and expandable products like treading water, for example.

And you also have a few other companies like WeedMe and Embark Health within your portfolio that hit some milestones over the past few months.

We've been lucky. Weed Me has done exceptionally well, they're the second-largest private cannabis company in Canada. They're top-level when compared with the Aphria's and Canopy's of the world in terms of selling, and they're looking to go public this year.

We think Weed Me is going to garner a very good valuation.

Embark Health is again, another one of those extraction companies. But it's an interesting one in the sense that it's both extraction and brands. So it has four very unique products that are coming out into the market, covering sort of the wide variety of cannabis 2.0 products; Products that aren't that dried cannabis, but really the next evolution, such as their all-hash stick. Instead of people having to buy hash and form it, it comes in a really easy delivery method.

They have products that use nano-emulsification. So you would go out for dinner one day, you'd have this little vial sitting in your pocket, and you just have a glass of water, drop in the product, and now you have a cannabis drink.

These are the unique things that aren't really what the early adopter consumers were looking for. Instead, it's your 40-year-old professionals who want a very clean, very professional, almost pharmaceutical-like way to enjoy their cannabis. I think it just intuitively feels better to them.

I think we all have a little bit of conditioning in our head about, you know, smoking and joining outside a restaurant, but we're finding that nobody has a problem taking this and just putting it into their drink. The feedback we're getting is they're even finding their friends become very interested in these products because they are so unique. So that's Embark Health, which we think is going to do exceptionally well here.

I believe it was Deloitte that identified that there were new demographics interested in the non-traditional form factors of cannabis, rather than the dry flower and smoking joints.

Most definitely, and our portfolio really was not structured for [dry flower consumers], but really structured for this next big group, and it's going to prove to be probably 40 to 60% of all cannabis sales.

Our portfolio is really positioned to take advantage of the US legalization, and the newer consumers coming in. And it's all on these very lean portfolio company operating structures that allows these companies, as revenue goes up, to keep those costs well controlled.

So MMJ is focusing on emerging cannabis consumers, would that be correct?

One hundred percent. We're looking for the 35 to 55-year-old professional who wants that clean, almost pharmaceutical-like delivery method. So that when they go to dinner, their friends aren't turned off or find it distasteful. Most of the time their friends won't even really know.

Instead of having two glasses of wine at dinner, you'll just have a glass of water with a small cannabis shot in it.

We believe these portfolio companies are going to start to continue to come out with innovative, faster-onset beverages and more controlled methodologies. These are the things that we think will continue to grow this product segment over time.

I agree, I definitely think we'll see advanced technology surrounding cannabis, where you can control the level of high you get more closely. Now, I want to touch upon your investments outside of the cannabis industry, because you mentioned at the outset of the call, there were a few industries that weren't specifically cannabis that MMJ was looking at. Firstly, why invest outside of cannabis?

So, it's great if you have a 100% cannabis portfolio and cannabis stocks are going up but it becomes exceptionally challenging if you're trying to work with those companies in that very rigid mandate.

In a continuing down cycle, which we've had for about the last 12 months, what we've done is made those changes into healthcare and renewable energy, and a few others, which will allow us to give us a little flexibility because it's better for investors to have a more pseudo-balanced portfolio in the areas that we're looking at. We prefer not to invest in all sectors, but we see that healthcare will continue to be a large investment focus for people over time.

I myself have spent about 20 years as a healthcare investment banker, so I know that sector exceptionally well.

As you've seen with Joe Biden coming in, they're pouring an exceptional amount of money into renewable energies and green energy technologies. So we'll continue to look at those and take advantage of them. And remember, we also have a unique mandate in the sense that we can take the knowledge, for example, of the Canadian sector and how it has gone along and take it to places like Europe and Australia and others that are a little bit behind.

We know how the sector tends to unroll and where the investable spots are and where we can make the most money. So we feel like these tweaks to the portfolio mandate give us enough flexibility if we have any situations like [the downturn] again.

Yes, cannabis is quite a volatile industry, because a lot of it is predicated on expectations of when the next level of legalization occurs.

Yeah, we try and focus on quality companies with quality management teams, as it's tough to make guesses on when regulatory things are going to happen. So, you know, if you look at Harvest One, for example, it now has a very good existing business that it can grow globally.

If it does get a partner in the cannabis sector, it will only benefit our investors and allow the company to generate revenue and a bigger market cap. So we try and navigate through what is as you said, a little bit of a complex sector and definitely a very challenging sector.

If you're a retail investor, it's probably a better idea with a cannabis fund to really get that diversified approach and understanding of the industry because while it is a little bit less so than it used to be a couple years ago, the industry is definitely a bit "wild west-y", especially in the United States.

What is the benefit of investing in a fund as opposed to it individual companies for, say, a new level investor?

Well, I think, first of all, if you have one or two names or three or four in your portfolio, and only one of those is cannabis, you have a very specific name focus. So you're exposed to what that company is doing on a day-to-day basis.

I think what a retail investor should really be focused on is how to take advantage of the cannabis sector in general so that you're not taking specific company risks. There's enough risk just in the regulatory and other areas. But at the same time, as we saw at the beginning of the year, as the regulatory framework tweaks a little bit, you can see these stocks up 50 to 120%, over what was probably a 14-day period. So the returns are there to be made, you just have to make sure you're around for those returns.

And what would you say, are some red flags? What do you see in cannabis companies that makes you say, "Okay, this is not something we want to get near."

So from our perspective, we can't invest in anything that's not federally legal. So it tends to take out a lot of the really early adopters. So those starting businesses that are maybe on the fringe of the legality, tends to take out a lot of those risks for investors. That's really if you're investing in an early-stage MSO. And in the United States, for example, as a retail investor, that's about as high risk and investment as you can really get.

That mandate generally allows us to clear out a lot of those red flags, and then we tend to rely fairly heavily on knowledge of management, past track record, on top of the business they have. So all those factors really need to come together into something that we're comfortable with.

We've seen a lot of very good businesses not be run well or not managed capital.

Where do you see the cannabis industry headed over the next 24 months? Are there any changes that MMJ is expecting to make to its portfolio to kind of meet those cannabis industry changes?

If we look back at as alcohol was legalized back a long time ago, it took about 18 to 20 years for the black market to entirely disappear. We're starting to feel like we're about seven or eight years into that cycle, and there's a lot more to go.

We'll continue to look aggressively to the United States. First on the CBD side, which is federally legal under the Farm Act, and we're continuing to wait for federal legalization to happen. We'll deploy into that with portfolio companies if they require additional expansion capital. And we'll just have a list of our best names that we're really focused on, whether we're buying them in the market or we're leading financings to make sure we can accelerate growth. Those are the areas we're really going to be focused on here for the next little bit.

To learn more about MMJ Group Holdings, visit their website here.

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Louis O'Neill
Louis O'Neill

Louis is a writer based in Sydney with a focus on social and political issues. Having interviewed local politicians and entrepreneurs, Louis now focuses on cannabis culture, legislation & reform.