Back in late March, Nutritional High (CSE:NHL, Stock Forum) hit the public markets like a bullet train through a cow. The company dominated trading volume across the junior space and ran from $0.05 up to $0.15 quickly, before settling back around the $0.08 range more recently.
Predominantly focused on the creation of an automated edibles-processing plant in Colorado State, and an entry into that area’s surging medical marijuana market, NHL put a lot of pieces in play in very fast time.
But more recently the company talked up a project in New Mexico, which promised to bring the growing or marijuana, and the adoption of value-added products, and a whole new customer base, into the mix.
That deal turned sideways last week, and another deal that was expected by management to be a big announcement was passed over by the retail market without much fanfare.
With the company transitioning, refocusing, and peeling off any deal that isn’t an inside the park home run, investors want to know… what’s next?
So we asked CEO David Posner.
Q: Tell us about the New Mexico deal: What was it that made you decide to back up the bus on that one?
While the New Mexico opportunity looked attractive at first, through our due diligence we determined that the cost of entry into the market and the regulatory complexity did not justify the revenue potential. In addition, as we set out on day one, we want to limit our exposure to the growing side of the business, as we believe it has a different risk/return profile compared to edibles and oil extracts. While New Mexico has a relatively established medical marijuana market, given its smaller size compared to some other opportunities on our plate, we decided to redirect our resources. We are, however, continuing to look at cost effective ways to enter the New Mexico market which we think is underservices with regard to edibles.
Q: Obviously you don’t want to be spending too much time, sweat and treasure on a deal that isn’t going to significantly impact the bottom line – is that the thinking behind the disposal of your Canadian health clinic assets?
We liked the Canadian clinic opportunity when we first launched the initiative last year but the market is taking time to develop. Given the regulatory landscape in Canada we saw no immediate catalyst of being able to pursue this high-margin business in Canada. As such, we’ve decided to keep a narrow focus on the US market. As we embark on pursuing the royalty and roll-up model, a disciplined M&A approach is imperative to successfully positioning the company as a future market leader. We remain interested in Canada as a market, but decided it was best to focus our efforts solely in the United States for now.
Q: So Colorado was what got you here; do you have an update on the ramping up of the facility there, and any progress on the branding and recipe front?
I will address the two questions separately; Colorado is progressing very well and we are excited about the progress Palo Verde continues to make on the ground. We’re currently on track with the original plan and have been quick to tackle any hurdles that arose along the way. We’ve completed a number of design and engineering steps, have sourced machinery, further developed our process plan and Palo Verde is working through the final local building permit process.
On the branding side – we’re proud to have announced a partnership with Purple Haze Properties LLC to manufacture and distribute various marijuana and hemp-based edible products using the song titles and bearing the likeness of iconic guitarist Jimi Hendrix. This partnership is an example of how Nutritional High is building its intangible asset base to position itself as a leader in the long-term, and we hope this partnership will be the tip of the iceberg.
Q: And with the existing move towards a Heisenberg Blue brand, that puts you right in solid pop culture territory.
Q: Medical marijuana markets keep opening up quickly. Is it possible to keep an accurate thread on where the best deals are when everything is changing so often in the US?
The only constant in the industry is change, which is why our business model requires maximum flexibility to identify the opportunities which have potential for most optimal risk-adjusted returns. In addition to Colorado and Illinois where our efforts are significantly underway, we are currently targeting various other states – five in particular – which we believe to have great attractive potential. We conduct a very thorough legal, financial, market, operational and business due diligence before committing the company’s resources to any of the opportunities we explore, and each state requires a custom approach to structuring and executing deals.
Q: The Hendrix deal; Celebrity licensing plays are never bad news, but I would have put Jimi Hendrix in the top 3 of my ‘celebrities synonymous with weed’ list. Do you think the market needed more information on how that deal is going to look when it goes into production, or the potential finances of it, or is this just a really bad time in general to be looking for investors right now?
We believe Jimi Hendrix’s name has significant influence on the market in the US and is widely recognizable in jurisdictions we’re targeting. We’re frankly a bit surprised at the lack of immediate market reaction, as we see clear fundamental long-term value of the deal for Nutritional High given Jimi’s legacy. At the current stock price, the company’s market capitalization is approximately $8 million, which we believe to be attractive given the access to an instantly recognizable name and the milestones Nutritional High continues to accomplish on the ground.
On the other hand, we continue to have strong volumes, a big win for any small-cap company, and are working on many exciting projects. Rome wasn’t built in a day – we’ve been listed only for about 10 weeks and in existence for just over a year – and we are sure the market will reward results as we continue to roll out our business plan. We are very proud of what we have accomplished to date, but there is much more to do.
Q: When we last talked, you said there were some early investors that were taking profits off the table as the stock price moved lower. At today’s price, those investors are looking at a 50% profit on their investment, which is pretty nice. What does NHL need to do to not just retain those investors, but get them back?
It’s some of the early investors who participated in private financing rounds, sure. The principals are holding firm and, in some cases, taking advantage of dips to buy more stock. We believe that the current valuation levels do not do justice to the full potential of the Company, especially now that we have the deal signed for branded Jimi Hendrix products. The founders did not put in time and money to “flip paper” at a 50% profit, but to establish an enterprise with nation-wide presence by using an innovative expansion strategy.
In terms of keeping investors retained (and getting earlier ones back), we keep moving forward with the mandate we set out for the Company, communicate relevant progress when an update is due and keep an open line of communication with the shareholders. This is a complex and emerging industry and there will be many ups and downs, but we have achieved a lot in a short time.
While, there was some investor rotation earlier, we believe that Nutritional High has now developed a strong shareholder base and a loyal following from key stakeholders.
Q: Whenever we’ve talked, it’s been clear there are about a dozen potential deals on the burner, going through due diligence, working through lawyers.. a lot of US growers and retailers are struggling to find capital to build and grow. Some would suggest it’s a positive that you’ve been willing to pivot, backtrack, even dump out of a deal that wasn’t a gamechanger. A lot of CEOs would continue in a bad deal just to avoid looking like they made a mistake. Do you think the market understands the potential value in a terminated LOI?
We believe the market does understand. The purpose of an LOI is, after all, to determine the feasibility of the proposed transaction in the context of the market. Stock price volatility around the time of both announcing and terminating the New Mexico deal remained reasonable, which in our opinion is a testament to the market’s understanding.
There are many deals available and we only want to do the ones that speak to our core competencies – being the edible and oil extract segments, and some retailing (rather than cultivation) – and which are financially accretive to the Company and justify the risk in the long term. The termination of the New Mexico deal was a calculated decision focused on building shareholder value, demonstrating a disciplined approach to M&A and managing risk.
Q: Can you taste that first dollar of revenue yet? As Colorado builds out, are you white knuckling the desk, counting down the days until your products are out there?
We look forward to giving our future customers the full Nutritional High Edibles “Experience” once the products hit the shelves.
FULL DISCLOSURE: The author of this story has purchased shares in the company on the open market.