February 4, 2020

Heritage Cannabis (CNSX:CANN) Cannabis 2.0 Full-Scale Production

Midas Letter
Midas Letter
Heritage Cannabis (CNSX:CANN) Cannabis 2.0 Full-Scale Production

Heritage Cannabis Holdings Corp (CNSX:CANN) CEO Clint Sharples joins Midas Letter to discuss the company’s cannabis 2.0’s full scale production. Heritage are currently filling and packaging vaporizer devices for the Canadian cannabis adult-use and medical market for Cronos Group Inc (NASDAQ:CRON) (TSE:CRON) (FRA:7CI). Heritage are currently focusing on providing extraction services and producing high-quality safe oils for other large licensed producers (LP’s) such as their future partnership with James E Wagner Cultivation Corp (CVE:JWCA) (OTCMKTS:JWCAF). As of the interview date, Heritage have a combined footprint of approximately 40,000 square feet which is entirely dedicated to production.

Midas Letter
Midas Letter
Heritage Cannabis (CNSX:CANN) Cannabis 2.0 Full-Scale Production

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James West: Clint Sharples joins me now. Clint, welcome back.

Clint Sharples: James, great to be here.  

James West: So Clint, how’s the 2020 treating Heritage Cannabis at this point?

Clint Sharples: So far it’s been busy. We’ve been in full-scale production getting product out the door; this launch of Cannabis 2.0 has been a big thing for a lot of companies such as ours who are, we’re starting out with putting out some vape pens for Cronos.

James West: Oh, okay.

Clint Sharples: Both their Spinach and their Cove brand, and they’ll be launching their Peace brand here shortly, and we’ll be doing that for them, too. So it’s been full scale production of vape cartridges for pretty much the last 10 weeks.

James West: Sure. And is that your preferred sort of MO going forward, is to provide white label production and packaging services for other LPs?

Clint Sharples: It’s definitely our core to start with. We’ll be producing vape – what we’re really known for with the Pure Pharma division that we have, is the ability to produce really high-quality oils. So when you’re looking at vape oils, they’re the highest quality you can, or indeed, in the industry. Because they’re being lit on fire and you’re sucking them into your lungs, you want to make sure that that oil is really pure and really good, and this is what our guys are good at.

James West: So, no Vitamin E, acetate…

Clint Sharples: No, no. [laughter]

James West: Great. And so, has the demand for vapes been negatively impacted by the negative press surrounding it last year?

Clint Sharples: Yes, very much so. Not necessarily with the people who are the consumer; it’s with the provinces, and when you look at Alberta and Quebec putting them temporarily on the shelf until more is known, and we’re very confident that once the information is found out, if you take a look at the number of people who have been affected by this, it’s down to almost nothing again.

So, something went awry. Something went wrong in a few months in late summer that affected a lot of people, but it’s not lasting. It wasn’t prior, and it’s not now. So we imagine that once the provinces get that information, they understand it, both Alberta and Quebec will green-light it. And that’s one-third of Canada’s population, so it’ll be nice to get them back onstream. That makes for a material difference in what we’re looking for in our sales.

James West: Sure. So what does the entire production footprint of Heritage Cannabis – production side and product side – at this point in 2020?

Clint Sharples: So between British Columbia and Ontario, we have combined a little bit north of 40,000 square feet, all dedicated to production. And right now, we have two Vitalis Q90s in British Columbia, two out in Cannacure in Fort Erie, with three more coming online in Cannacure within the next month or so. Yeah, three. Most people know about the two because we announced it; we have added a third one, and it will be brought onto production at the same time.

James West: Sure. What’s the throughput rate of a Q90?

Clint Sharples: Depends what you’re making.

James West: I see.

Clint Sharples: If you want to make tincture oil, it’s a lot quicker; it depends what the biomass is going into it, but we have a general understanding that each Q90 can produce annually somewhere in the neighbourhood of between 10 and 15 million of revenue, depending on what that product is going to be.

James West: Wow. Okay, so that’s substantial if you’ve got five machines. That bodes well for 2020!

Clint Sharples: Yeah, well, you need all the downstream processing that happens after that. You need all the distillate machines; you need all the de-carb ovens, you need everything that goes with it. So it’s not just that machine.

James West: Right.

Clint Sharples: And, for that matter, you need a big vault to put in your biomass, and a big vault to put in your finished product, too. It takes up a lot of room.

James West: Sure. And so do you have all that within the Heritage footprint?

Clint Sharples: Yes, we do.

James West: Wow, fantastic.  Okay, so the big question that all cannabis companies are facing this year is, do you have enough cash to continue operations and get to profitability?

Clint Sharples: So definitively, yes. We currently have a strong balance sheet; we’re sitting with give or take $8 million of cash sitting on our balance sheet, with strong inventory and no debt. We do intend to change the debt situation. I believe now is the right time to take on debt. Two years ago, obviously, was not. People would try to build a big footprint that has no market today, whereas today, now, you can bring varied products to market, and debt would help accelerate that.

So we’re not looking at taking a lot on, but we’re taking a look at something that could help us accelerate that, and I’m looking for decent terms, too. So I’m not doing anything on a convertible basis.

James West: Sure. What’s your long-term expectation for price pressure emanating from the black market?

Clint Sharples: Price pressure isn’t coming from the black market; that’s the one that sets the prices out there right now. What I’d like to see is a little bit more concerted effort on behalf of the provinces to price products that are in competition. Right now, the provinces are taking their pound of flesh, and they’re not being shy about it, and that’s being passed along to the consumer.

Doesn’t seem to be affecting too much right now; sales are robust in the stores that exist. That’s the problem. We need more stores. Ontario has to kick it up. I mean, 20 some-odd stores for 15.5 million people is ridiculous. So that needs to happen. 

Alberta has got a good model. BC is just starting to catch up. That needs to happen quickly within the next year if you’re ever going to take a dent out of that black market.

James West: Sure. Of every dollar that you take in as revenue, what percentage of that is taken by provincial taxes?

Clint Sharples: For us in revenue, the only thing is the excise tax. It’s because all of us in cannabis sell wholesale to the provinces. The provinces then take that and do their own markup. They have a goal of what they’d like to see; not necessarily are they able to hit that goal all the time, but it’s definitely not a small one.

James West: Sure. And in terms of expanding your markets, what are the opportunities for you at this point in 2020?

Clint Sharples: We have great opportunity both in Canada, with other LPs doing more products for them. We’ve already announced that we’ll be doing a new vape pen project with James Wagner; they grow some wonderful cannabis that would be, that’ll translate very well into a vape pen.

And we’ll have a couple of more coming up in the next 60-90 days that we’ll be announcing, and have a variety of products on behalf of others. 

Also looking at bringing some of our own medical tinctures to market for ourselves. We have a product line ready to go, need our sales license first, but we’ll be looking at introducing that. Our business plan calls for it in the late Spring, so we have some time.

And on top of all of that, what we’re really focusing on right now is the United States. We have orders that we can be filling right now for formulated product; we have quite a bit of demand. So in Oregon, we’re pushing forward with our joint venture down there with Empower Clinics, and then the business that’s being brought forward by EndoCanna Health, working in conjunction with Empower Clinics and on their own, they’re bringing plenty of opportunity for us down in the United States to really get going on a robust operation right up front.

James West: Wow. That’s fantastic. EndoCanna is the DNA test kit that gives the patient the ability to align their genetic predisposition to the right cannabis, given their condition.

Clint Sharples: Yes.

James West: And is that service something that has been extended to Canadians at this point, or is that still only in the US?

Clint Sharples: We launched it in Canada in December.

James West: Oh, okay.

Clint Sharples: And they’ve had a pretty decent uptake already of it. That’s really good to see. What now we’re being asked for is, okay, now that I have my results, what products are best for me? Where can I go and look for them? So, some help needs to be done there, and we’re building that up and working with others. They’re not going to be on their own; there’ll be some partnerships in there that will help people, in the end, find out the cannabinoid profiles and the products that work best for them. It’s a pretty new industry, and we’re finding things as they’re coming along.

Evidence is showing that certain things work better, and that seems to be in very, very high demand.

James West: So it seems like the strategy this year so far is for the large LPs, instead of building out capacity on their own, is to make partnerships with smaller producers like Heritage and sort of take advantage of the existing capacity?

Clint Sharples: Yeah. I think what you’ll see right now is almost a full halt on CapEx projects. We started slowing down our CapEx plans last summer; it was pretty easy to see that there was going to be a demand and supply issue coming up, and there will be a cash crunch coming.

And when you supply other LPs, you need to take their balance sheet into consideration as much as your own. So although yeah, we’re monitoring our own cash, I’m monitoring everyone’s cash. There’s only a few LPs out there who don’t need to worry about it, and, you know, the big ones that everyone knows has a lot of money in their bank. And it will be interesting to see what happens this year. 

The pain in our industry isn’t over. In fact, I hate to say it, but I think it’s just beginning. You’re going to see the real hard decisions being made on some – some you’ve already seen – that need to be really taking a hard look at how they’re going to survive.

James West: Sure. All right, Clint, that’s a great update as usual. Thanks very much for joining me today.

Clint Sharples: Great. Always great to be here.

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