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MRRCF: Growing Canadian Medical Marijuana Company Targets European Expansion

09/04/2018


OTC:MRRCF

Toronto, Canada-based Maricann Group Inc. (OTC:MRRCF) is a vertically integrated company that produces legal marijuana-based products. Founded in 2013, the company has production facilities in Ontario, Canada, where it operates a medicinal cannabis business under a license from the Canadian government. The company believes its Ontario plant is a low-cost high-efficiency facility. The company has also implemented automation to constrain labor costs at this site. In addition, Maricann operates facilities in certain European markets, as discussed below. Maricann’s shares trade on the Canadian Securities Exchange under the symbol MARI and on the OTC Markets under the symbol MRRCF.

Originally licensed under Canada’s Marijuana for Medical Purposes Regulations (MMPR) in 2014, the company began producing and selling medical cannabis that year and cannabis oil – or CBD – in 2016. CBD is the non psycho-active part of the cannabis plant. A psycho-active chemical stimulates certain receptors in the brain. According to Forbes, CBD is typically used for health reasons instead of for recreational purposes.

Forbes indicates that, CBD “is a compound found in cannabis that has gained prominence in recent years for its therapeutic properties. Cannabis advocates have hailed the cannabinoid for its promise in combating seizures, anxiety and myriad other ailments.” Grand View Research notes that, “products like marijuana oil have started gaining traction over the past few years owing to increased effectiveness and safety as compared to smoking.”

Citing The Hemp Business Journal, Forbes notes that the CBD market is estimated to reach $2.1 billion in consumer sales by 2020. By comparison, the total CBD market was $202 million in 2015, according to Forbes. Overall, the legal global marijuana market is expected to reach $146.4 billion by the end of 2025, according to a Grand View Research report, driven by regulatory liberalization in a growing number of markets and rising use of marijuana for medical applications, including treatment of cancer, mental disorders, multiple sclerosis and chronic pain, among others. The report notes that “the number of conditions treated using medical marijuana is growing rapidly, as new patients are added to the market, the demand for medical marijuana is expected to increase multiple folds.” In fact, Grand View Research reports that “medical marijuana emerged as the largest marijuana type segment in 2016 and is estimated to be valued at $100.03 billion by 2025.”

Reflecting the sizable global opportunity, Maricann also aspires to benefit from first mover advantage in Europe, in addition to the opportunities in its home Canadian market. Forbes notes that, “countries in Latin American and Europe are increasingly adopting medical cannabis programs.” According to Grand View Research, “legal marijuana has started gaining traction worldwide due to very high demand among consumers and increasing legalization of recreational or medical marijuana in various countries. Additionally, high public and private investment for research and the development of safer forms of ingesting marijuana such as tinctures, oils, vapes and other edibles are expected to positively reinforce market growth.”

Canadian Operations: Expanding Production Capacity

The Canadian marijuana market is seeing strong growth. In its report, Recreational Marijuana Insights and Opportunities, Deloitte estimates the base Canadian market for recreational marijuana at $4.98 to $8.7 billion. To benefit from the expansion of CBD and other medical marijuana products, the company has signed supply agreements with major provinces in Canada, including Alberta, Manitoba and British Columbia.

Moreover, since commencing operations at its original Canadian plant, Maricann has embarked on an expansion program. In early 2016, Maricann purchased 97.5 acres of property adjacent to its existing plant and began construction of a three phase expansion. Once the new production capacity comes online, we would expect the company to boost its operating scale to meet market demand and simultaneously continue to expand its retail footprint in order to leverage industry growth.

Maricann has also obtained the global rights for the use of patented VESIsorb® technology with cannabis. According to VESIsorb, it is “the leading delivery system innovation for dramatically improving the bioavailability of poorly absorbed ingredients,” with both medical and recreational applications for beverages, edibles, capsules, and other products.

Another key part of the company’s strategy has been to introduce its products into the retail channel. In November 2017, the company formed an agreement with a pharmacy group that operates more than 2,000 retail sites. Subsequently in December of that year, Maricann signed a distribution deal with Lovell Drugs Limited, a leading independent drug store chain in Ontario, Canada. Maricann will be Lovell Drugs’ exclusive provider of medical cannabis products via a two-part initiative that includes educating patients. The company has earmarked $100,000 to develop patient and healthcare education programs for the sale and distribution of medical marijuana. Maricann was also chosen by the BC Liquor Distribution Branch to enter into a memorandum of understanding as a preferred licensed producer.

Opportunities in Europe

Expansion within Europe is an integral part of the company’s growth strategy. The company has entered several European markets either independently or through acquisitions or partnerships. We would not be surprised to see Maricann enter additional markets that liberalize the use of medical marijuana, as well.


View Exhibit I

Highlights – Recent European Initiatives

‣ April 16, 2018 – permit to export packaged dry cannabis flowers to Germany
‣ April 18, 2018 –plants first cannabis seeds on 405-acres in Saxony, Germany
‣ May 10, 2018 – acquires Swiss-based Haxxon
‣ May 16, 2018 – letter of intent to acquire Malta-based Medican Holdings Ltd
‣ July 17, 2018 – Maricann’s license approved by the Maltese government
‣ Aug. 28, 2018 – strategic JV with Italy’s San Martino

Maricann intends to pursue new opportunities in Europe and has expanded its European management team and hired a European General Manager. Maricann anticipates continued rapid growth in the European medical cannabis market and has targeted Germany as a key growth market. “Germany's medicinal cannabis market has grown rapidly since legalization in 2017. But as demand increases, importers and producers are grappling with a shortage in supply and many patients are forced to pay a premium,” notes DW Akademie.

To help address the shortage, Maricann applied for and obtained a permit from Health Canada to export packaged dry cannabis flowers to Germany. The company’s German subsidiary Mariplant GmbH planted cannabis seeds on a 405-acre agricultural tract in Saxony, Germany in April 2018 and in August, MariPlant began to harvest. The company has been optimistic about the hemp harvest, which exceeded its original expectations. In August, Maricann introduced its marijuana-based nutraceutical product line in Germany, which utilizes the above-noted VESIsorb technology adapted for cannabinoids. Forbes notes that “Germany is poised to be the leader of the European cannabis market, and Italy [which Maricann is entering] is expected to be second with $1.2 billion in sales by 2027.”

In May of 2018, the company acquired Regensdorf, Switzerland-based Haxxon AG for C$8.0 million. Haxxon operates a 60,000 sq. ft. facility where it cultivates cannabis plants that contain less than 1% tetrahydrocannabinol or THC. This acquisition enables Maricann to manufacture low-THC strains of cannabis in Switzerland, which it can then convert into finished products. More recently, the company purchased Swiss-based Proimaging for €3.0 million. Proimaging operates a clean-room cultivation, processing and extraction plant in Ebersbach, Germany.

In addition, the company submitted an application for a license to the government of Malta. The company notes that, “Malta comprises an integral part of Maricann’s long-term development strategy, with finished goods manufacturing, including its patented VESIsorb CBD and THC softgels to take place in Malta. VesiFact produces the world’s first dosage controlled soft gel capsules with enhanced bio-availability and rapid onset.”

Maricann's application in Malta has been approved, which will help Maricann deliver a full suite of products to European markets that have liberalized their medical marijuana laws. The company has committed to invest at least €9.5 million in improvements to its Maltese operation and to employ at least 28 people.

Separately, in the Italian market, Maricann recently entered into a non-binding term sheet to form a strategic joint venture with San Martino S.S., a large scale agricultural company in Piedmont, Italy. The two companies will jointly develop cannabis products in association with the University of Eastern Piedmont. Their plan is to produce high CBD content for the medical market initially, and to then expand into THC production for the European market. The joint venture contemplates marijuana-based products beyond the medical marijuana space, including for the cosmetic, food and beverage, veterinary, pharmaceutical, and recreational niches.

2Q18: Y/Y Improvements

The company recently reported 2Q18 results that reflect the benefits of its strategy. For the quarter ended June 30, 2018, Maricann recorded revenue of $1.16 million, up from $661,602 registered in the same period of 2017. This represents a 75% year-over-year increase, mainly reflecting two large bulk supply orders that were completed during the period. However, during the first six months of 2018, the company’s revenue declined 3% compared to the same period of 2017 to $1.8 million, most likely, we believe, reflecting timing and fluctuations in order flow. Overall, the company believes that its expansion strategy and industry forecasts of robust advances for marijuana products create a positive backdrop for its growth prospects.

Summary: Company Expects Expansion to Drive Growth

Maricann aspires to benefit from the expansion of the legal marijuana industry. A key part of its strategy has been to grow its European footprint. Management believes its expansion and anticipated robust growth of legal marijuana products auger well for the company’s prospects. At the same time, the expansion of the legal marijuana market has drawn other players into the space. Thus, among other risks, Maricann faces competitive risk, as well as potential regulatory risk as it enters new offshore markets, we believe. The company’s ambitious expansion plans have also created the need to raise new capital. For instance, the company invested $35.2 million in its initiatives during the first six months of 2018.

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