Shadow Coverage. Matica Enterprises Inc. (CSE: MMJ) January 8, 2015

Transcription

1 Khurram Malik, MBA, Analyst +1 (416) January 8, 2015 Matica Enterprises Inc (CSE: MMJ) Shadow Coverage What They Do Matica Enterprises Inc ( MMJ ) is in the process of divesting/spinning out all non-core assets with aspirations of becoming a pure-play MMPR producer It currently has an investment agreement in place for a 50% stake in a mature MMPR applicant with a ready-to-build letter called THC Dispensaries Inc ( THCD ) that is based in Nova Scotia Why Now MMJ shareholders of record as of January 15, 2015 will get a prorata share in the four new companies containing the non-core assets provided the plan of arrangement is approved Exposure to a compelling MMPR applicant for the following reasons: o Facility build is almost complete with an expectation of an inspection and cultivation license being received in February o o MMJ s first 50% stake in THCD was at a lower valuation than similar transactions we track in this space This coupled with a cultivation license being achieved in February and MMJ s current market valuation sets up a compelling near-term catalyst opportunity for MMJ shareholders The THCD facility is in a low cost environment that sits on over 20 acres of land that allows for large expansion potential without having to file a new MMPR application with Health Canada C$,000's (except share data) Price Close $ Wk Range $008 - $016 Market Cap, basic $5,612,152 Avg Trading Volume Fiscal Year End Dec 31 Shares OS (basic) 44,897,218 Shares OS (fd) 50,523,666 Float Net Debt (Cash) $345,830 EV $5,957,982 Historicals Revenue Q Q Q Q Year EBITDA Q1-25, ,167-61,453 Q2-101, , ,431 Q3-86, , ,271 Q4-219, ,189 - Year -433, ,615 - EPS Q Snapshot Q Q Q Year Description: Matica Enterprises is a holding company that is in he process divesting its non-core assets to become a pure-play MMPR producer in Canada with a facility based in Nova Scotia Jacob Securities Inc ( Jacob Securities ) does and seeks to do business with companies covered in its research reports As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report Investors should consider this report as only a single factor in making their investment decision For analyst certification and other important disclosures, refer to the Disclosure Section

2 Company Overview Matica Enterprises Inc ( MMJ ) is a holding company that currently has exposure to or is involved in several enterprises at this time On December 16, 2014 and January 6, 2015, MMJ collectively announced its intentions to spinoff or divest noncore assets into four new companies The core asset that will remain at the MMJ level is a 50% exposure to a Marijuana for Medical Purposes Regulation ("MMPR") applicant based in Nova Scotia called THC Dispensaries Inc ( THCD ) We agree with this approach as our experience has been that investors would prefer to invest in pure play opportunities when evaluating early stage and/or small cap stocks Having to evaluate multiple risk and fundamental profiles is just not a compelling investor proposition Also, the concept of diversification is more appropriately found in the overall construction of an investor portfolio and with larger/more mature investment opportunities What the Matica team has done is to retain the asset that we feel has the most compelling upside over the next 6-12 months Non-Core Assets Under the proposed plan of arrangement, Matica shareholders as of the share distribution date (January 15, 2015) will receive a pro-rata share of the common stock in the four new companies where the non-core assets will reside The plan of arrangement will be subject to a shareholder approval at a special meeting to be held on February 26, 2015 These non-core assets include two early stage mining properties in North America: The Grumpy Lizard Property: has 96 claims on a total of 1,920 acres in Nevada Observed occurrences include large flake graphite deposits The property, according to the company, is 60 kilometers from the Tesla s under construction Gigafactory Buckingham North Graphite Project: Also a graphite play that has 44 exploration permits in Western Quebec This area in the Ottawa valley has had several producing graphite mines in the past according to management The non-mining and non-core assets include: THCOca: a pre-commercial solutions provider that has developed a technology platform that allows patients, doctors, suppliers, and government agencies to interact in an accessible and efficient manner The platform is initially aimed at the MMPR program where it will serve as a commercial marketplace as well as an information gateway for participants Although this asset is in the same industry as THCD, we feel it is a downstream value chain participant that may have a perceived conflict of interest by being in the same corporate entity as THCD Ultimately, THCOca will match customers with a variety of medical marijuana suppliers under the MMPR program and not just an MMJ affiliated supplier Bellerosa Distributing Ltd: a pre-commercial enterprise that aims to market Chlorine Dioxide tables to the medical marijuana industry in North America following the completion of certain product licensing/verification steps The product is designed to eliminate biofilm, mold, and pest in highly controlled growing environments such as those subject to MMPR regulations These are significant and costly issues that licensed producers in North America are dealing with on a regular basis, and if the tablets deliver the marketed value proposition, come to market and are accepted by participants, it will add considerable flexibility in how these grow operations are run Once again, even though this business is part of the medical marijuana value chain in North America, we don t believe it is closely related to THCD s ambitions at this time to warrant being part of the same corporate entity Jacob Securities Inc, 199 Bay Street, Suite 2901, Toronto, ON M5L 1G wwwjacobsecuritiescom Page 1

3 Ludwig Industrial Solutions: a commercial supplier and distributor of specialized conveying solutions that is based in Bangladesh Its customers operate in the tobacco production, food & agriculture manufacturing, tea drying and packing industries Its product line includes solutions that are anti-static, food grade, and/or FDA certified What is THC Dispensaries Inc THCD is a mature applicant under the Canadian MMPR program that has a ready-to-build letter We find this a compelling opportunity for several reasons: Stage of Application: We conducted a site visit on the property in December, 2014 Based on our analysis and that of a third party that previously visited the location, we estimate that it is approximately 90% finished The main remaining items include an HVAC system being purchased/installed, additional security hardware/systems being completed and final finishing work on the interior of the building Under the current MMPR application protocols, the following steps remain before such an applicant receives its full license: Complete the build on the facility and receive the local ESA certification on the electrical work in the facility Schedule a Heath Canada inspection Pass the Inspection Receive what we call a Cultivation License from Health Canada Completed the first grow and schedule a second Health Canada Inspection Pass the second inspection and get a full MMPR license that allows THCD to sell product to the end customer Based on our work with a number of clients in this industry, applicants with right-to-build authorizations typically sit in two buckets at Health Canada Applications in the first bucket, will receive that first inspection typically two weeks after requesting it Applications in the second bucket will not receive an inspection date after requesting it These second bucket applicants are currently sitting in limbo despite having a fully built facilities We are aware of several fully built facilities that have requested inspection dates as early as December, 2012 and still haven t received them The Matica team s due diligence on the matter has led them to believe THCD s application likely sits in the first bucket To get the build completed and to ask for an inspection date, we believe only a modest amount of additional capital expenditure is required Size of facility: The facility that is currently under construction is a 6,000 square foot retrofit of an existing commercial building It is not a large facility in this first stage but resides on an additional 20 acres of land currently owned by the founder This is critical since it will give THCD the ability to expand quickly and add large amounts of additional capacity in the future without having to file a brand new application with Health Canada Low Cost Environment: Being based in Nova Scotia, the CAPEX and OPEX (with the exception of power rates) considerations will be considerably lower than in other provinces such as BC and Ontario where most of the current licensed producers reside The ability to scale up quickly and cost effectively is important when investor capital is in play Moreover, being a potentially large scale producer operating on a 20 acre facility with a low growing cost model will position THCD well as supply/demand dynamics evolve in the coming years Jacob Securities Inc, 199 Bay Street, Suite 2901, Toronto, ON M5L 1G wwwjacobsecuritiescom Page 2

4 Matica_THCD Investment Agreement: The agreement calls for Matica to receive a 50% equity stake in THCD It will take two stages for this to occur 1) Matica makes an initial $325,000 cash payment and provides 1,000,000 common shares in Matica to THC This payment has already occurred 2) Once THCD receives what we believe is the Cultivation License, Matica makes a further $1,175,000 cash payment and 4,000,000 common shares in Matica Based on the recent Matica share price levels, this puts a total value on THCD of between $4-5 million We feel this is considerably less than precedent transactions in this space for applicants with similar fundamentals that are at a similar stage of the application and build process This fact alone is what initially drew us to this opportunity We would advise the Matica team to bring the remaining 50% of THCD on board if a license is achieved to realize full value of the underlying asset at the public company level It remains to be seen what the cost of acquiring the second half of THCD will be Since this will likely occur after a cultivation license is achieved, we would anticipate a much higher cost Timeline: Based on our analysis, if the plan stays on track and the application resides in that first bucket at Health Canada: February: Build completed and the first Health Canada inspection is passed February: Cultivation License is received and the grow operations are started using imported seeds May/June: First grow is completed and second inspection is scheduled and passed June/July: Full MMPR license is granted June/July: Construction begins on the first expansion phase (this could occur sooner) Jacob Securities Inc, 199 Bay Street, Suite 2901, Toronto, ON M5L 1G wwwjacobsecuritiescom Page 3

5 Appendix: Important Disclosures Shadow Coverage: Analyst Certification: This Shadow Coverage is part of a market support advisory package the issuer subscribes to on a monthly basis Each authoring research analyst and associate of Jacob Securities Inc ( Jacob Securities ) whose name appears on the front page of this investment research hereby certifies that (i) the recommendations and opinions expressed in this investment research accurately reflect the authoring analyst s personal, independent and objective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoring analyst s coverage universe and (ii) no part of the authoring analyst s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the authoring analyst in the investment research The compensation of Research Analysts is intended to reflect the value of the services they provide to the clients of Jacob Securities As with most other employees, the compensation of Research Analysts is impacted by the overall profitability of the firm, which may include revenues from investment banking activities of the firm's Corporate Finance department Research Analysts' compensation is not, however, directly related to any specific corporate finance transactions Company Disclosures: 5, 7, 8 1 The cited issuer currently is, or in the past 12 months was, a client of Jacob Securities During this period, Jacob Securities provided some or all of the following services: A) Investment banking services B) Non-investment banking services C) Non-securities related services 2 In the past 12 months, Jacob Securities has received compensation for Corporate Finance/Investment Banking services from the cited issuer 3 In the past 12 months, Jacob Securities has been a lead manager, co-lead manager, or co-manager of a public offering of securities of the cited issuer or any publicly disclosed offer of securities of the cited issuer or in any related derivatives 4 Jacob Securities acts as a corporate broker for the cited issuer and/or may have an agreement with the cited issuer relating to the provision of Corporate Finance/Investment Banking services 5 Jacob Securities is a liquidity provider in the securities or derivatives of the cited issuer 6 In the past 12 months, Jacob Securities, its partners, officers or directors, or any authoring analyst involved in the preparation of this research has provided services to the cited issuer for remuneration, other than normal course investment advisory or trade execution services 7 Jacob Securities intends to seek or expects to receive compensation for Corporate Finance/Investment Banking services from the cited issuer in the next six months 8 The research analyst(s) and/or associate(s) have visited material operations of this issuer, and/or have performed specific examinations of the issuer s products, patents or other proprietary processes significant in an evaluation of the company and its prospects 9 A partner, director, officer, employee or agent of Jacob Securities or its affiliated companies, or a member of his/her household, is an officer, or director, or serves as an advisor or board member of the cited issuer and/or one of its subsidiaries, and such person s name is disclosed above 10 As of the month end immediately preceding the date of publication of this research, or the prior month end if the publication is within 10 days following a month end, Jacob Securities, in the aggregate, beneficially owned 1% or more of any class of the total issued share capital or other common equity securities of the cited issuer or held any other financial interests in the cited issuer which are significant in relation to the research (as disclosed above) Jacob Securities Inc, 199 Bay Street, Suite 2901, Toronto, ON M5L 1G wwwjacobsecuritiescom Page 4

6 Site Visit Disclosures: The fundamental research analyst(s) and or associate(s) have visited the material operations of this issuer The visited sites include the corporate headquarters and one of the key assembly/fabrication facilities located in Ontario and Nova Scotia Ratings & Risk Rankings: Research Distribution: Analyst Trading: Risk Qualifier: Each analyst assigns a rating that is appropriate to the analyst`s view of how that stock will perform (total return basis) over the next 12 months on an absolute basis At times the anticipated total returns may fall outside of the general ranges stated below due to near-term events, market conditions or stock volatility or, in some cases, company-specific corporate structures that result in consistently high yields Ratings Buy: Anticipate total return appreciation generally in excess of 15% over the next 12 months Speculative Buy: Anticipate total return appreciation generally in excess of 25% over the next 12 months, however, the company is either pre-revenue, has negative cash flow, or a major unpredictable event may occur within 12 months Hold: Anticipate limited total return (general appreciation less than 15% [or 25% for speculative rated stocks] or decline less than 10%) over the next 12 months Reduce: Near term price outlook is for a negative return; however the long term outlook is for a positive return Sell: Near term and long term return is expected to be negative Risk Rankings Low: Low financial and operations risk, high predictability of financial results, low stock volatility Medium: Moderate financial and operations risk, moderate predictability of financial results, moderate stock volatility High: High financial and or operation risk, low predictability of financial results, high stock volatility Jacob Securities distributes research through Bloomberg, Thomson One, Capital IQ and client lists Jacob Securities does not permit analysts to own or trade securities of the companies they cover The information contained in this investment research has been compiled by Jacob Securities from sources believed to be reliable, but no representation or warranty, express or implied, is made by Jacob Securities its affiliated companies or any other person as to its fairness, accuracy, completeness or correctness Jacob has not independently verified the facts, assumptions, and estimates contained herein All estimates, opinions and other information contained in this investment research constitute Jacob Securities judgement as of the date of this investment research, are subject to change without notice and are provided in good faith but without legal responsibility or liability This investment research is provided for information purposes only and does not constitute an offer or solicitation to buy or sell any designated investments discussed herein in any jurisdiction where such offer or solicitation would be prohibited As a result, the designated investments discussed in this investment research may not be eligible for sale in some jurisdictions This investment research, is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction To the fullest extent permitted by law, none of Jacob Securities, its affiliated companies or any other person accepts any liability whatsoever for any direct or consequential loss arising from or relating to any use of the information contained in this investment research Jacob Securities Inc is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Investor Protection Fund (CIPF)This research report is intended for Institutional and Accredited Investors Please do not forward without the expressed written consent of Jacob Securities Non-Redistribution, Disclosure for Clients Outside of Canada, and Copyright: Jacob Securities is a registered entity in Canada only As such, this research report was prepared subject to disclosure or disclaimer requirements in Canada See below for additional requirements prepared for US persons This material is not directed to, or intended for distribution to or use by, any person or entity if Jacob Securities is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to such person or entity This report may not be reproduced, re-distributed or passed to any other person or published in whole or in part for any purpose without the prior consent of Jacob Securities Additional information is available upon request Jacob Securities Inc is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Investor Protection Fund (CIPF)This research report is intended for Institutional and Accredited Investors Please do not forward without the expressed written consent of Jacob Securities Specific and Important Disclosures for US Persons This research report was prepared by Jacob Securities, a company authorized to engage in securities activities in Canada Jacob Securities is not a registered broker-dealer in the United States and, therefore, is not subject to US rules regarding the preparation of research reports and the independence of research analysts This research report is provided for distribution to major US institutional investors in reliance on the exemption from registration provided by Rule 15a-6 of the US Securities Exchange Act of 1934, as amended (the Exchange Act ) Any US recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through Mercator Associates, LLC, a registered broker dealer in the United States Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through Jacob Securities Mercator Associates, LLC accepts responsibility for the contents of this research report, subject to the terms set out below, to the extent that it is delivered to a US person other than a major US institutional investor The analyst whose name appears in this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority ( FINRA ) and may not be an associated person of Mercator Associates, LLC and, Jacob Securities Inc, 199 Bay Street, Suite 2901, Toronto, ON M5L 1G wwwjacobsecuritiescom Page 5

7 therefore, may not be subject to applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account Additional Disclosures for US Persons Ratings Distributions: Buy: 68% (as of Nov 17, 2014) Speculative Buy: 0% Hold: 32% Reduce: 0% Sell: 0% Restricted: 0% Tender: 0% This research report is for distribution only under such circumstances as may be permitted by applicable law This research report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient, even if sent only to a single recipient This research report is not guaranteed to be a complete statement or summary of any securities, markets, reports or developments referred to in this research report Neither Jacob Securities nor any of its directors, officers, employees or agents shall have any liability, however arising, for any error, inaccuracy or incompleteness of fact or opinion in this research report or lack of care in this research report s preparation or publication, or any losses or damages which may arise from the use of this research report Investing in any non-us securities or related financial instruments (including ADRs) discussed in this research report may present certain risks The securities of non-us issuers may not be registered with, or be subject to the regulations of, the US Securities and Exchange Commission Information on such non-us securities or related financial instruments may be limited Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effect within the United States The value of any investment or income from any securities or related financial instruments discussed in this research report denominated in a currency other than US dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related financial instruments Past performance is not necessarily a guide to future performance and no representation or warranty, express or implied, is made by Jacob Securities with respect to future performance Income from investments may fluctuate The price or value of the investments to which this research report relates, either directly or indirectly, may fall or rise against the interest of investors Any recommendation or opinion contained in this research report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein Jacob Securities Inc All rights reserved Jacob Securities Inc, 199 Bay Street, Suite 2901, Toronto, ON M5L 1G wwwjacobsecuritiescom Page 6