Hygrovest (ASX:HGV) Shareholder Update Presentation, March 2022

Mike Curtis, Managing Partner, Parallax Ventures, Mohan Nair, Partner, Parallax Ventures and Jim Hallam, CFO, Hygrovest Limited (ASX:HGB) provide an update on the portfolio and on investment trends going forward.

Mike Curtis: Great. Thanks Matthew. I’m happy to be here today, and I think this is our first update, given our total change in terms of we were originally primarily a cannabis group, we’ve shifted now to really focus on high-growth investments, hence the name change. And I think what we’d like to do today is maybe talk a little bit about what we see out there from an investment perspective. And then talk a little bit about some of the new investments that we’ve made over the past three months, how they’re doing. And then talk a little bit about some of the other companies in the portfolio, more from an update perspective.

So, really what we see out there in the investment world, it’s a rapidly changing geopolitical environment that seems to be amplifying market trends that we’re really kind of out there from the COVID world. So, really, what we’re seeing is pandemic-driven raw material and labour shortages that are now kind of getting maximised by the war-time sanctions that we’re seeing out there. So what that really means for investors over the next at least 12-18 months is inflation is probably going to remain pretty high. We’re seeing it across the board in all the commodities. And they just seem to be continuing to make new highs. And I think we’re probably going to continue to see that for a while.

The central banks are definitely going to intervene into the system. We’re expecting multiple rate hikes, probably eight at this point in time, with the way inflation is coming in before the end of the year. So, that’s going to ratchet us up to 2, 2.25 per cent. So, hopefully that will at least start to slow some of the inflation that’s out there, but that remains to be seen.

Within the sort of Euro region or Western world, I think we’re probably going to see a real shift in policies. They’ve all really had a massive green focus, but as we’ve got oil trading over a hundred dollars US barrel, they’re really going to have to make some changes, restart some old energy opportunities, as well as they’re getting cut back from the supply of Russian oil and gas are going to make those problems worse. So, we’re continuing to think there’s going to be a shift in that. And that shift is really going to represent bringing on-stream a lot of new oil and gas production, but at the same time continuing to pursue the green agendas. So, we’ll continue to look for opportunities in both areas as we go along.

And I think probably the most shocking thing that we’ve seen over the past three weeks is really just a total shift in globalisation that we’ve spent the last 40 years building out. It’s clearly coming to an end as we’re kind of getting these multipolar sort of global partnerships of groups that really haven’t… we haven’t seen work together before. So I don’t think we really know how that’s all going to turn out. So we’re going to watch that closely, expect to see the situation in Russia and in Ukraine slowly start to kind of bring back, as it looks like we’re starting to get to a position where the sides have some reasonable things to talk about.

So, that’s really what’s affecting the market going forward. From the perspective of what’s changed over the last two years. Well, our belief is that COVID is going endemic. What that really means is the fervour for vaccinations and lockdown policies and all those other things that we’ve all had to deal with over the past 12-18 months, two years, for some of us even longer, those are probably going to disappear. But what it does mean is we’ve now entered a new realm of, you know, testing has become regular and understood, digitisation of health records. It’s going to continue down that path, we believe, and Mohan will be happy to talk about one of the investments we made to take advantage of that trend.

And, at the same time, the hybrid work environment, it’s here to stay. I don’t think that you’re going to get the bulk of people going back to nine to five work days, 40 hour weeks, etc. Everyone is going to have to shift. So technologies are going to continue to change to augment those principles.

And then, lastly, I think really people have really just come to the realisation that there’s a lot of things out there that are dangerous from a health perspective. So, our belief is that investment into next-generation therapies related to all kinds of different diseases is going to ramp up and continue to do that. We think we’ll probably focus on things where the probability risk is lower than other areas, and Mohan will be happy to talk later about an investment we’ve made in just one of those areas.

And then technology. I mean, as we’ve entered this sort of hybrid world, it’s increasingly become a part of it. But I think some of the changes we’re going to see is you’re going to see digital and cryptocurrencies increase in terms of dominance out there. You’re starting to see the US dollar, as Russia and India are talking about trades that are outside the US dollar and petroleum. I think the shift of the last 50 years that the US dollar was really the world’s benchmark seems to have changed pretty rapidly here over the past month or so. So, I think people will be shifting towards those and shifting to areas where government overreach can’t control their bank accounts and other areas.

And then, lastly, I think from a sort of climate perspective and the green push that we’ve been seeing here over the last probably 5-10 years really kind of accelerating is you kind of come to the realisation that the existing technologies are not going to service the energy needs that fossil fuels currently do. So, I think we’re going to see a lot of technological advances here as people look to close that gap quickly. And I think, too, that’s going to just flow through into things as consumers increasingly kind of look to decarbonise themselves. And whether that’s through a trading strategy, other things that are coming to their houses, it’s really changing rapidly.

So I think, Matthew, that kind of lays out where we’re going from the perspective of an investment firm. And I think what I’d like to see is Mo’s got some great stuff to talk about. And maybe if Mohan can walk through a bit of the portfolio and then we’ll follow up with Jim.

Mohan Nair: Yeah. Thanks Mike. And thank you to all our shareholders who could join us today. Welcome. I think Mike’s given us a good idea on where we’re looking to invest going forward and what themes we can expect to be important over the next five years. So what I’ll do is I’ll focus on the current portfolio and what we’re seeing going forward from that perspective.

So, we can break down our portfolio into three broad categories, right? So, there’s new investments, current holdings and legacy investments. So, we can break it down into these three categories. So, new investments are companies we’ve recently funded and are in line with Hygrovest’s diversified investment mandate, and many of the themes that Mike spoke about earlier on. Current holdings are companies that offer some natural diversification to our existing cannabis portfolio on their own. And, finally, I’ll talk about legacy investments, which are cannabis-specific companies that we believe are undervalued and would eventually potentially look for some liquidity from.

And so what I’d like to do today is maybe highlight some names in each of those categories. So, if we move to the next slide… So, you’ll see there, these two companies are actually what Mike was referring to earlier on. So, first I’ll start with Medio Labs, right? This is a disease-testing company in which we made an investment about, oh, a little bit less than six months ago. And they’ve already achieved significant milestones in terms of sales, which we expect to be in the multiple millions over the next 90 days. So, when we originally made the investment, we assumed that disease-testing would be a new reality of the world that we would all be living under. And I think Mike did a pretty good job highlighting that. And we felt this company’s unique testing process, which reduces costs significantly per test, would give it a big leg up over the competition going forward.

So, we expected that our funding would help the company establish a lab and for them to establish some trial sales over the next year and maybe get a small taste of the COVID testing market. But what we did not expect was for them to do what they did, which is achieve some rapid sales growth so far. And we’ve been very pleased with their performance. The demand for COVID testing is actually a lot higher than we thought, to such an extent that even a new entrants with unique technologies like Medio Labs are finding significant success early on. And they’ve been especially successful in testing for various entities that sort of direct insurance company claims and Federal Government test claims directly towards Medio Lab. So, as the company realises cash flow from these sales, we’ll probably look to review our carrying value for the position. And so we’re pretty excited about Medio Labs.

And the next one I’ll talk about is the other name that Mike mentioned in the biotech sector, is Valo Therapeutics. This is another recent investment. We made this in November of 2021. Their main product line is in immunotherapy treatments, which will enter the clinic and treat their first patient… It was supposed to be before the end of Q1. So, basically end of this month. This is a major milestone for this company. And in conjunction with this milestone, they’re also making progress towards a stock market listing. And they’re likely to do a secondary financing some time later in 2022. So, we’ve been very pleased with the company’s progress on that front. And they’re doing all the preparatory work necessary to make that a success. So, with that, I’ll move to the next slide.

And so while we’re looking to diversify our new investments away from being solely cannabis-focused, we will continue to invest in companies that are truly exceptional in the cannabis space, right? So which, brings me to Weed Me. So, last month we made a second one-million dollar investment into Weed Me, and that completes our two-million dollar convertible to venture investment into the company. So we negotiated the terms of both these tranches in the summer of 2021. So it sort of works out that our second tranche comes at a significant discount to the present value of the company, because they’ve continued to outperform throughout 2021 and well into 2022. They’ve beaten their budget forecasts, showing significant month over month sales increases on what were already pretty high monthly revenue figures. So, we’ve been pretty pleased. So when you combine this investment with our prior investments in the company over the years, our current carrying value for the position I believe is nearly 15 million bucks, which you’ll see later on when Jim presents the portfolio. So, at this point Weed Me is one of the premier recreational cannabis companies in Canada, and has sales that are higher, actually, than many industry bellwethers which with much bigger market caps. So, we’ve been, again, quite pleased with Weed Me as well.

And so that’s the first sort of section, which is more recent investments. And so, if you go to the next slide, we’ll talk about some current portfolio investments that sort of provide some natural diversification, as we transition from being MMJ towards being Hygrovest.

So, Vintage Wine Estates is an investment we made several years ago. It was into an at-risk capital round of the bespoke capital partners’ SPAC. That SPAC very successfully raised 300 million dollars. They acquired Vintage Wine Estates and publicly listed on the NASDAQ. The SPAC, then, it had a whole lot of… It already owned some of the most distinguished wine brands in North America. And they acquired a few more with the capital that they’d raised. So, the recent market volatility that we’ve seen has presented the company with an opportunity to conduct a buyback for some of the shares and warrants, which is encouraging to see, as it’s a sign the management sees value at present prices. And so we’re encouraged by that, and we like how it’s performed, actually. It’s held in quite well, despite what you’ve seen in the broader markets. We expect our position to become liquid once the 18-month SPAC hold period is over at December 2022.

And next I’ll talk about Southern Cannabis. Long-term medical cannabis play based in Australia with a solid clinics business that continues to grow quite nicely. However, what’s been really exciting is the company’s recent entry into the online prescription vaping business. So, the new online segment, it’s not constrained by the limitations of the clinics business in terms of growth. So to grow the clinics business, you need more real estate, you need more doctors, etc. Whereas the online business can be much quicker to ramp up. And so, as such, we’re pretty excited to see the month over month growth the company has experienced in that segment since launching in November. While revenues started small, we love the growth rates that we’re seeing in month over month. And we expect this to drive… Longer term, we expect this segment of the business to drive most of the value for them. So we’re pretty pleased to see that.

And finally, if we move to the next slide, I just wanted to sort of briefly touch on some of the legacy investments that are cannabis-specific, including Entourage Health and BevCanna, right? So, we continue to hold our full position in these companies and believe they’re undervalued at current levels, but we would look to slowly position out of them as markets begin to recover possibly later this year. And that would sort of finalise our transition… or transition our portfolio into the Hygrovest portfolio. We would be less… We would truly be diversified away from cannabis at that point. And so, with that, I’d like to pass it over to Jim to show you the portfolio and give you his update. Jim.

Jim Hallam: Thanks very much, Mohan. I’ll just touch on a couple of things that have come out of our latest portfolio report that we released last week.

We’ve got the portfolio table there and, again, this may be found in the monthly report that we released to the stock exchange. A couple of points. The biggest position we have is 15 million in Weed Me. Mohan’s given an overview of that company. It’s performed very well and has been compensating largely for the fall in the listed cannabis business. You also notice we’ve got cash and tax receivables of about three million dollars. So, we’re well funded, both from an operating cost point of view and also making allowance for future investments. Mohan’s already identified and reinforced that the board’s identified assets which we’d like to sell, and they will provide additional capital for future investments. So, there’s no need for the business, obviously, to raise any new equity capital.

We think that there’s an opportunity for new investors, and obviously existing investors, to add to their positions. The share price is trading at approximately 60 per cent to its net asset value. We’ve recently had our half-year audit completed where we had unqualified accounts. And, in particular, the auditors reconfirmed the position that we’ve taken on the valuation methodology of our assets — in particular, the unlisted assets.

In terms of what might happen in the next three or four months, again, we might find an opportunity for some unwinding of a couple of assets, but it’s more likely to be in the second half of the year. So, we’ll have another update in July. More than welcome to take any questions from investors via our email, and we’ll feed those into future publications. Thanks very much.