Heritage Cannabis Holdings Corp (CNSX:CANN) Continuous Revenue Growth

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

Heritage Cannabis Holdings Corp (CNSX:CANN) (OTCMKTS:HERTF) (FRA:2UE) President Clint Sharples believes the company is beginning to look like an industry leader. In October, the company completed a definitive agreement to acquire CannaCure Corporation. In addition, Heritage Cannabis has three subsidiaries with licenses for production or extraction. Heritage has purchased 10,000 kilos of CBD concentrate, which it plans to sell to international markets at $40 per gram of CBD, potentially creating $40 million in revenue. Heritage is looking to partner with an EU GMP certified company and is also working with Canadian micro-cultivators to produce Heritage’s feed stock. Heritage is on target for continual revenue growth and 2019 revenue projections show the company being EBITDA-positive by the end of next year.

Transcript:

James West:   My guest this segment is returning for, I believe, the third time: Clint Sharples, President, Chairman and Director of Heritage Cannabis Holdings Corp., trading on the CSE under the symbol CANN. Clint, welcome back.

Clint Sharples:    Thanks. Great to be here again.

James West:   Yeah, so Clint, this company, Heritage Cannabis, is starting to take the form of a large-scale LP, and full disclosure, I own shares, I am likely going to be helping you on the marketing side, but I continue to accumulate shares because I see Heritage Cannabis as potentially becoming a very successful company based on what you’re doing. So let’s start with an overview of all the parts that make up Heritage right now.

Clint Sharples:    Sure. I’m not sure about large-scale, but we’re definitely aiming for mid-tier category or status in this Canadian cannabis market. If you remember the first time I was here, we had 75 percent of one late-stage applicant at the time, and a company called Fiomed out in Falkland, British Columbia. Fiomed got their license in July of this year, and has progressed and moved forward with building additional greenhouses, and now is taking a second step into extraction along with another deal we’re doing.

How you came to become a large shareholder of Heritage is, we completed an acquisition of CannaCure Corp., based in Fort Erie here near Niagara Falls. CannaCure, what it gave to us was a very large facility with a lot of options that can be had inside 122,000 square feet; the current (unintelligible) with their, with the cannabis that they’re growing right now, is one great section, but our expansion plans are pretty – are going to be pretty fun. We have some nice things planned there.

And then the third thing that we’re just in the process of completing, if I have a good day today, it’ll be done; if not, it’ll likely be completed next week, is finishing our definitive agreement with Pure Pharma. Pure Pharma is an extraction company based out of Kelowna, British Columbia; a group of guys who have been doing extraction for years, and are extremely good at what they do. They put out some fantastic products in the past, and we’re looking at taking their knowledge and their expertise, particularly in how they do things. They have a unique process, a unique set up, that we can take that, expand it into our CannaCure facility here in Ontario, and also expand it with Fiomed out in British Columbia.

So they have the two LPs – CannaCure got its LP here in October – so now Heritage has two subsidiaries, both with LPs. We’ll have a third who focuses on extraction, and that extraction will happen both out in British Columbia and here in Ontario.

James West:   Okay. So you’ve got, besides that, I saw a press release recently where you’re taking delivery of a large crop of hemp. So the thing that, you know, sort of made me pause about talking about the company at this point was that, you know, it’s going to be a little bit of time before you start producing product and getting it into the market; but turns out that you’ve actually got product on the way that’s going to be extracted by, I’m assuming, this deal finishes with Pure Pharma, and your’e going to have product available, December?

Clint Sharples:    It’ll be a little bit later than that; probably late January, early February. We do need some licenses in order to complete that. But yeah, there’s an absolute monstrous amount of hemp coming our way. Part of what Pure Pharma had that was really interesting to us was a long-term agreement with 1,600 acres – you think about that in terms of size, that’s a massive amount of hemp that’s currently harvested in Saskatchewan, being dried, being processed, and will be shipped into our facilities both in British Columbia and Ontario, once we’re set up to receive them.

James West:   Yield of biomass per acre, roughly?

Clint Sharples:    It depends on the strain, right now. They have a couple of different strains, but you can probably be safe somewhere in the 50 kilogram range per acre.

James West:   Okay, so 1,600 times 50 kilograms is 80,000 kilograms. Now, 80,000 kilograms takes roughly a ratio of 6 to 1 to create extract from that?

Clint Sharples:    Yeah. Again, it depends on what you’re producing, and how efficient it is. Internally, we use the numbers 8 to 1; we’re always conservative with what we do. But yeah, when you look at, that’s 10,000 kilograms of oil.

James West:   Yeah, so 10,000 kilograms of CBD concentrate, exactly!

Clint Sharples:    [laughter]

James West:   And now, what’s the going price for CBD concentrate?

Clint Sharples:    That’s a good question, too. Because the market right now, twofold, number one, is just getting set up, and legalized, I should say, people are kind of feeling their way around in the dark. That’s one. Two is, scarcity of this product is unbelievable. We have no end of demand for producing this product; again, once we get licensed and can properly sell it, we’re internally budgeting somewhere in the neighbourhood of about $40 a gram.

James West:   Per gram? Not kilogram?

Clint Sharples:    Not kilogram, but we believe we can possibly get more, particularly internationally.

James West:   So, $40,000 a kilogram.

Clint Sharples:    Yeah.

James West:   So $40,000 times 10,000 kilograms biomass…unlike mining, where you can’t actually extrapolate what the value of this stuff is because you’ve got to dig it out of the ground, this stuff is already harvested, all you’ve got to do is extract it, 10,000 kilograms times 40,000 – I mean, I just love that math. $400 million.

Clint Sharples:    Well, actually, it’s $40 million –

James West:   40 million, sorry.

Clint Sharples:    But yeah.

James West:   See, I’m already trying to promote myself.

Clint Sharples:    I’m good with 400 million, I’ll take that.

James West:   Couple more crops till we get there. Okay, so great! So, where are you going to sell that CBD product?

Clint Sharples:    Lots of options. So we have options inside BC, inside Canada, down into South America, and a massive demand happening in Europe right now. As you know, Europe is probably the largest cannabis market in this world – not probably, easily.

James West:   But don’t you have to be EU GMP certified to ship into Europe?

Clint Sharples:    Yes you do. You need to be able to work with somebody who can get that certified, and that’s exactly what we’re looking at. We don’t need it – we can do everything that we produce, we can sell here in Canada easily. It’s going to be whether or not we can open up European markets, and if we can, are we supplying it here in Canada or are we going to supply it from somewhere else?

We also have, we’ve had many conversations with other cannabis producers who would like access to our extraction technology, and the guys’ know-how. When is ay that they’re good, they’re an extraordinary group of guys in what they know and how they’re putting things together. I shouldn’t just say guys, because they have a lot of women on their staff who are very talented too. And we can take that, and we can bring it down to, you know, just throwing out areas, Jamaica or Colombia or Portugal.

James West:   On the European doorstep! Okay, so the thing that also really impressed me when you acquired CannaCure, I thought, okay, well this will be interesting to see what happens. And then when you told me that you’re not really interested in becoming a large-scale grower, because there’s lots of large-scale growers from whom to purchase feedstock. And so is that kind of the business model of Heritage going forward where you’re not going to necessarily focus on becoming a grower so much as an extractor and producer of consumer branded products?

Clint Sharples:    That’s kind of up in the air right now for us. As it sits right now, we’ll be growing; we’ll be growing dried flower to fulfill current market demands and requirements. In the future, our internal grow, a lot will be focused on what we grow for extraction. Many people believe, and I did, too, until I really learned more about the business, was that you can extract almost anything; you can take any cannabis product, throw it into an extraction machine, go back eight hours later and there you’ve got some oil sitting there.

Yeah, that was wrong. This is no different from anything else; you need beautiful product going in to get beautiful product coming out, and it can’t just be anything. So we need a lot of raw material. We need a lot of feedstock coming in. so we will be doing it ourselves, we will be working with other growers, we will be working with micro-cultivators who want to get the various forms of oil, too.

James West:   Okay, great. Then what – you’ve got a pro forma sort of idea in terms of what you’re going to be producing in EBITDA in 2019 and 2020. What’s your target there?

Clint Sharples:    We haven’t talked publicly about this yet, so it’s – you know, we have a target. We would like to see our company, it’s a very staged approach to how we go. Q1, while we’re still working on extraction licenses, we’re still working on sales licenses, which we have the ability to sell LP to LP right now, both CannaCure and Fiomed have those licenses, and that’s great. But we will go and we will get our license to be able to sell anywhere.

That’ll come sometime in Q1. Right now, the process is largely out of our hands; I think it’s all within Health Canada’s processing ability. So our Q1, a little bit of revenue; Q2, significantly more; Q3, significantly more, and then Q4, it is –

James West:   Katie, bar the door.

Clint Sharples:    [laughter] I hate using the term hockey stick, because everyone brings financial projections as a hockey stick curve, and puts a lot of pressure on the tail end. But we really do have the inbound product that can be producing the outbound product. It will come to fruition.

James West:   And the thing I like most about this whole transaction is that without the CapEx requirement, so you’re not going to build a 970,000 square foot ultra state of the art greenhouse anytime soon; you’re not going to need $100 million to get to positive EBITDA.

Clint Sharples:    No, no. All of our money, we’ve done a recent raise; we just completed a raise of about $7.5 million. After lawyers and fees and stuff like that, given what we had previously in our bank, we’re sitting with about $8 million in cash right now. That will be deployed based on best ROI. I come from a private company background, and you live and die by your cash positions and your return on your investment. And I do relay the same thing into what we’re doing right now with Heritage. So we will get ourselves to the point that we’re on the trajectory of continual revenue growth, and I mean continual, not just for 2019, through 2020, and then be able to demonstrate to the market that that is exactly what we’re doing; this is how much we’re doing to do, and by when.

And then if we need to go out and raise more again, I certainly don’t want to do it at my current prices, because I am not happy with where our stock price is, and you and I have had this discussion. I believe we are not just undervalued, but grossly undervalued. So if we’re ever to go and look for additional capital, we would like to get some revenue through the door and demonstrate to the market how more is going to come through and how profit is going to be achieved.

James West:   Sure. Okay, so you are not new to building companies; tell me about what’s the global annual revenue of all of the companies that you have built and currently manage right now?

Clint Sharples:    Well, hmm, okay. Yeah, Heritage will be the fifth or sixth, depending on how you look at it, because I built one business twice; fixed it when it fell down again. So Heritage, call it the fifth company that myself and my group will be behind. Somewhere we’ll be around a little north of $100 million in annual revenue with what we’ve done, just north of 2,000 employees, so building businesses is exactly what we do, and I think when you look at cannabis – and I tell this to everybody when I’m talking to them, because everyone was surprised that come October 17th, or even a month later, there’s massive product shortage.

Well, that’s because you had an industry worth billions of dollars that, on October 16th, technically didn’t exist. October 17th, now you have billions of dollars worth of potential revenues to be had and to be grabbed, from an infrastructure that is unbelievably incapable of filling that pipeline. They will fill it; it will take time. The problem is, you need to build a business, then. You’re not just talking about building or growing plants, here; you’re not just talking about throwing up a bunch of greenhouses or building a million square foot facility. These are building actual businesses, hiring real people, having HR departments in place, getting your accounting systems set up. All the stuff that, if you haven’t done this before, if you’ve never built a business before, you’re in a for quite a ride.

James West:   Right.

Clint Sharples:    there’s a reason why not everybody goes and does this out there, because it’s hard, and those people that go and talk to them, anyone who’s ever built a business, they say the same things, is yeah, it’s difficult.

James West:   Okay. Where are the big risks in this whole grand plan?

Clint Sharples:    You know, so we talk about it constantly internally within Heritage. You can be distracted every single day. Opportunities come every day in this industry; we’ve talked about it yesterday, when you and I were talking about an opportunity. We call it chasing squirrels; you’re walking down a path and all of a sudden a great opportunity comes and complete focus shifts somewhere else. You can’t have that. You need to be able to focus on what you’re doing, go through, accomplish, get it behind you, move on to the next.

However, you have to do that without losing the potential for a great opportunity. So it’s being able to nurture and to keep things bubbling on the outside, while you’re completing your core business and getting to achieving the goals you’ve set forward. Which is why in Heritage, we separated, we sat down as a management group, I tweeted out a picture of that showing us meeting as a management group; we have a 60, a 120 and a 180-day plan, and those plans include us completing very integral parts to be able to handle the growth that we’re expecting as a company.

And we will complete those, however, at the same time, if opportunities come along that we feel are important to us, that we want to continue to add to what it is we’re doing, as long as it’s – you know, we look for evolutionary, not revolutionary. So we don’t want to change everything we do every time you see a great opportunity, but I don’t mind tweaking things along the way as we find something comes along that looks like it’s worthwhile.

James West:   You bet. Okay, so great. So the 60, 120, and 180-day plan sounds like you’re going to have revenue, you’ve got feedstock coming, so the next time we chat, which I guess will be probably within a couple of weeks, we’re going to see where you’re doing. Thank you very much for joining us today, Clint.

Clint Sharples:    Yeah. Always happy to be here. Thanks, James.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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