A cannabis growth story to get behind

Nutritional High International Inc. (CSE: EAT, OTCQB: SPLIF, Forum, Frankfurt: 2NU) is a Canadian publicly listed cannabis company with its operations based in the U.S. Founded in 2014, the Company’s focus is all about high margin segments and an aggressive expansion strategy.

EAT is presently active in four U.S. jurisdictions: Colorado, Illinois, Nevada, and Oregon. Colorado, Nevada, and Oregon already have legalized recreational markets for cannabis consumption, while Illinois presently has only authorized medicinal use. Management already has active plans for expansion into additional U.S. states.

The Company’s product strategy is centered on cannabis extracts and cannabis-infused products, which command premium pricing compared to dried flower. The reason for focusing on extracts and infused products can be summarized in two words: higher margins - much higher. Nutritional High owns several edibles and oil extract products lines, including its own FLï brand and exclusive rights to sell certain Jimi Hendrix branded products. The Company has also acquired facilities and production expertise to manufacture its products in states where permitted by the State law.

Nutritional High was the first US-focused marijuana company to successfully complete an IPO in Canada. To this day, Nutritional High has raised more than $12 million to fund cannabis operations. Stockhouse recently had the opportunity to delve into EAT’s operations with the Company’s CEO, Jim Frazier.

1. Please introduce yourself and company for the benefit of newer investors.

Nutritional High is a company focused on the highest margin segments of the medical and recreational cannabis industries in the United States. We’re focused on establishing manufacturing facilities in the states where permitted by state regulation. I’ve been with the company for approximately one year and was brought on to oversee the establishing of operations in different states and contribute the expertise that I acquired over two decades in the food industry. Since I came on board the Company completed the build out of Illinois and commenced operations, completed the build out of Pueblo, staffed Pueblo, acquired equipment, trained staff and commenced operations, developed edible products, developed branding and packaging, took steps to expand into Oregon and Nevada, made strategic investments in Aura and Lakeside, and secured a significant financing.

I’ve been in the food industry for almost 26 years and built two successful companies, primarily in the chocolate manufacturing space, one of which is still one of the largest private label chocolate manufacturing companies in the United States. My background spans from corporate QC control , large scale operations , product development , overseeing buildouts, developing national sales accounts, and training employees to developing and executing sales strategies.

We feel that the industry is still in the infancy stage and there is a large market gap for high quality products with consistent dosages with every batch.

2. What other factors led the Company to focus operations on extracts and marijuana-infused products?

The primary reasons for our product focus are:

1. High margins – since we don’t grow, drops in prices of the raw cannabis actually benefit us; as we’re able to reduce the cost of goods sold, while maintaining the topline sales price. We found that extracting oil from cannabis and infusing it into products provides much higher margins per product, when compared to dried flower.
2. Scalability – our manufacturing philosophy is to remain at the forefront of the innovation and automate as much of the process as possible. While there are interesting technologies emerging that can automate the cultivation processes, we feel that extracts and edibles are the value segment chains where we can achieve maximum economies of scale.
3. Branding – the brand presence is extremely fragmented in the cannabis industry, mostly due to restrictions on interstate commerce in the United States, and so the brands that are widely known in WA or OR, might not be known in CO or NV. We’re building brands with a view of having them recognized nationwide in terms of user experience, packaging, texture, and dosing consistency. We want to build widely recognized brands that have the potential to become buyout targets down the road.

3. Can you discuss Nutritional High’s current geographic footprint?

We currently have active operations in Colorado and Illinois, and are in the advanced stages of establishing operations in Nevada and Oregon.

We own a facility in Colorado, which is leased to a licensed operator – Palo Verde and is currently manufacturing bulk oil extracts and vape pen cartridges.

In Illinois, we own 50% of the dispensary in the City of Effingham (ISP District 12), which has been operational since Sept 2016. We’ve been very pleased with the dispensary’s performance to date.

In Nevada, we’re finalizing the acquisition of two licenses and a real estate property in the City of Henderson. We’ve been in touch with local contractors and suppliers and anticipate starting the build-out process once we receive approval from the local authorities for the transfer of license and the property, as well as securing the permits from the local building department.

In Oregon, we’ve just acquired a property in the City of LaPine in Deschutes County and are finalizing the bids from the contractors. We expect to start the buildout in the next 30-60 days.

4. What is your expansion strategy and how do you mitigate the financial and regulatory risks?

Our focus is only on the operations, which operate within adequate licensing frameworks and are in compliance with the requirements of the Cole Memo, which is a memo by the former US Attorney General James Cole to all US attorneys outlining a shift of government priorities away from strict enforcement of federal cannabis prohibition in the case of jurisdictions that have enacted laws legalizing marijuana in some form and that have also implemented strong and effective frameworks.

At this time, we are looking for potential “bolt-on” acquisitions in the active states and are also looking for acquisition and partnership opportunities in WA, CA, PA, AZ, MD, FL and MI.

We’re also keeping a close eye on the states and countries that are coming up on the licensing front, and are positioning the company to tie down the real estate and submit an application for a license. We allocate a very limited amount of capital to opportunities that still have licensing or regulatory risk associated with them in order to protect shareholder capital.

5. In some of the states that you are focused on, the cannabis markets seem to be relatively saturated. What’s your approach to securing a competitive advantage in these markets?

We remain at the forefront of technological innovation and position every operation to address the changing market dynamics. We believe that in the future the “craft” producers will lead the extracts and edibles segments in the legal US states. Our team continues to look for ways to improve the extraction and manufacturing processes, and we believe that the innovators will pave the way, as the regulations continue to evolve. We also put emphasis on branding and ensure that each batch of products has the same consistency in every state.

We also pride ourselves on being innovative in the processes that we use such as ethanol based method and short path distillation, rather than CO2. There is a learning curve since not too many doing this yet, but leads to a better product at better volumes for the time spent. There have also been studies speculating that Co2 denatures the cannabinoids, while our process helps preserve them.

I am also bringing conventional confectionery expertise, know-how, ideas and approach to the marijuana market, which I’ve developed during my career in the food industry. This approach doesn't just relate to product types, manufacturing processes, non-marijuana materials supply and quality control, but also support for dispensaries. We also intend on implementing innovative marketing approaches to accelerate sales such as direct sale system and use of appealing displays, which have been proven to work in other industries.

6. What about the much anticipated expansion into the State of California and Canada? Surely Nutritional High wouldn’t want to miss out on these opportunities.

You are absolutely right. California remains one of the largest markets in the US and we got some clarity regarding the regulatory framework with the bills that were tabled last week. Our approach in California has been opportunistic, such that we can mitigate licensing risk before committing significant shareholder capital. We’re in discussions with property owners in cities and counties where the licensing climate is favorable to cannabis operations, and will provide updates in short order.

Regarding Canada – we remain very encouraged by the announcements from Justin Trudeau’s administration and believe that Canada will be a very lucrative market. We are currently evaluating potential partnership opportunities with ACMPR companies and late-stage ACMPR applicants. Our approach to Canada has been relatively measured, as we are still waiting to see how the manufacturing and distribution regimes will shape out. Our plan is to stick to our disciplined expansion strategy and opportunistic approach of always seeking potential acquisition or partnership opportunities.

7. How do you conduct business in the states with residency requirements, where NH is not permitted to own a license?

In states with residency requirements it is necessary to own the real estate, which allows us to monetize the project through leasing fees and have some checks and balances, as the license is almost always tied to the real estate. Other ways to monetize the projects include equipment leasing fees, consulting fees, lending funds to the licensee company, royalty/licensing fees (where permitted) for products sold, and selling non-marijuana items to the licensee (packaging, solvent material empty cartridges, food ingredients, etc.). Non-for profit states (MA, AZ, NM, CA) work almost identical to states with residency requirements - in most cases the financial backer would establish a management company that will provide the services listed above. It’s difficult to determine the exact portion of the benefit these agreements derive, but these commercial terms are being modelled very carefully for every project to be in compliance with local laws. In every case the focus is to get sufficient benefits to cover the cost of funds and provide an economically acceptable rate of return to the Company, in a manner compliant with state regulations.

8. Some of our readers are curious about the advantages of first purchasing the real estate. Is there a benefit to allocating shareholder capital for fixed assets, which traditionally have had lower returns compared to higher growth industries?

This is a good question. All of our expansion endeavors start with real estate, which we acquire once the project is de-risked from the licensing perspective. Going after real estate first has a number of strategic advantages:

1. Flexibility – building out and establishing operations is often not a very straight forward process. We think that dealing with third party landlords would be very difficult and costly if we didn’t own our own facilities.
2. Cost – we focus on acquiring facilities outside metropolitan areas, which allows us to acquire them at competitive rates on $/sf basis. Eg. in Pueblo we acquired the property for ~$34/sf and are charging annual rent of $15/sf. The paybacks should be evident. If we wouldn’t own the property, this is additional cash that Palo Verde would have to pay out to third parties.
3. Leverage – we’ve developed good relationships with private institutional investors, who agreed to back us on real estate acquisitions at very favorable LTV rates. This provides us an opportunity to leverage our projects, which further enhances our return on equity.
4. Regulatory Advantages - in states such as Colorado, widely held companies such as NH can’t own a license directly. Owning real estate provides a mechanism to derive additional return on capital.
5. Lower Operating Costs and Potential for Future Capital Gains – properties that have been licensed for cannabis use command a premium to comparable non-cannabis properties. Building a portfolio of real estate properties also presents a potential for a future spin-off, and also allows us to save the costs that would have been paid as leasing fees to third parties.

9. Nutritional High has pursued opportunities with several companies such as Aura Health and Lakeside Minerals. What are the strategic and financial advantages of these partnerships?

With Aura Health, we’ll be able to obtain good insight into the retail end of the market and understand consumer preferences. We’ve also made a financial investment into the Aura, which we believe to have great potential for value appreciation.

We’ve partnered with Lakeside Minerals (to be renamed) to optimize our current and the future projects that we will undertake. In many cases a “perfect property” is not available and in some states, the licenses for cultivation and extraction activities are grouped and issued together. We will share the capital cost of acquiring the building in Nevada, and in Colorado, Lakeside will utilize the two indoor facilities that we own to build-out a state of art cultivation facility. This will ensure consistency and the quality of the raw materials that is supplied to Palo Verde. Nutritional High also has a financial interest in Lakeside, which in itself has financial value.

10. There has been some concern regarding the federal status of cannabis in the United States and the potential risk presented by federal enforcement. How does Nutritional High mitigate such risks?

All our operations are in compliance with the guidance of the Cole Memo, which is the communique that was sent from the previous US Attorney General to individual state Attorney Generals regarding the enforcement of cannabis operations in legal US states.

On Wednesday, May 3, the US Congress has passed The Consolidated Appropriations Act, 2017 (H.R. 244), which prohibits the US Department of Justice from enforcing federal laws in the states which have implemented their own state-mandated cannabis laws. The Act extends the protections afforded by the CRomnibus bill that was passed in December 2014.

We also note that there have been a number of positive developments that move the United States closer to ending the prohibition on cannabis, including a recent bill introduced on February 7, 2017 by Rep. Rohrabacher, Dana [R-CA-48] coined as H.R.975 - Respect State Marijuana Laws Act of 2017.

However, we also benefit from the federal prohibitions in that it keeps out big money competitors and allows us the breathing space and time to innovate, experiment and brand build.

11. Some shareholders have expressed concern regarding the company’s share count. Are you planning to consolidate the stock anytime soon?

We don’t have any plans to consolidate the stock, unless there is a significant catalyst to do so. The proper way to evaluate companies in this space is on the basis of market capitalization and we believe Nutritional High’s valuation remains attractive at the current levels.

Our focus is to build shareholder value in a systemic and risk-mitigated manner. We believe that the amount of capital that we raised is relatively modest to the milestones we have achieved and we only aim to deploy capital in a manner that is accretive to shareholders.

12. What are some of the things that the shareholders should look forward to?

In the short term, we expect to announce additional developments at our core projects in CO and IL, and also continue to provide updates on our projects in NV and OR as they develop. We also continue to monitor and anticipate licensing application opportunities as the new US States or other countries move towards legalization. We’ll pursue these applications following the model we employed in other states.

Nutritional High’s management team remains focused on driving performance of our active projects. We invite our shareholders and followers to continue staying tuned to the developments in the key markets and also the new opportunities as they become available.