Heritage Cannabis: A Thirty Second Review

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The last time we took a look at Heritage Cannabis Holdings Corp (CSE: CANN), was a day short of just one month ago. However, in that time frame the entity has completely changed itself. It went from being halted under the name Umbral Energy Corp, to flying high with a new branding strategy.

In our last report, we identified the company as being one of the few that missed out on the bull run of 2017. This turned out to be only a partial truth, which is basically just due to a technicality. Upon coming off its extended halt, the company more than made up for it. From its final close as UMB on the CSE to its opening as CANN, the share price rocketed from $0.14 to $0.55 on open. This in turn provided an excellent return for those who had bought in to a private placement shortly before the halt.

In addition to the large rise in share price, lets take a look at what else has arose for Heritage Cannabis over the last month.

 

Heritage Cannabis: A Thirty Second Review

 

Heritage Cannabis has a stake in the blockchain sector

Less than a week after the halt was lifted for the company’s change of business, Heritage Cannabis made an announcement. It had taken a stake in the blockchain sector. To do so, they would be acquiring a 20% stake in Stanley Park Digital, a Vancouver based firm.

Heritage Cannabis' letter of intent with Stanley Park Digital
Heritage Cannabis’ letter of intent with Stanley Park Digital

The deal, currently established as a letter of intent, is your typical cannabis-blockchain agreement. Within, it identifies that a new system will be developed which tracks items from “seed to sale”, which is nothing new to the sector at this point in time. In fact, we’ve covered similar companies here at The Deep Dive that intend to do the same process, however with a higher chance of success.

Noting the timing of the news release wasn’t entirely ideal, the company then went on to make it clear to shareholders that they are committed to becoming a licensed producer. There are however interested in any investments related to the sector. Specifically, they identified the technology related to the sector that has seen minimal development as of yet.

 

The planned 3 million sq ft Heritage Cannabis facility

One of the most significant developments for Heritage Cannabis, is the release that was issued just one week ago. While the current facility under development is located in British Columbia, Heritage has elected to purchase a parcel of farmland in Southern Ontario near Collingwood.

Heritage Cannabis' announcement of a new future facility.
Heritage Cannabis’ announcement of a new future facility.

The key figure in this news release however, is the anticipated size of the facility. When its all said and done, Heritage Cannabis is aiming for the facility to consists of 3,000,000 sq ft in growing capacity. This will consist of a mix of indoor and outdoor growing. Roughly translated, this is the equivalent of 68 acres of pure cannabis plantings.

In addition to the future facility though is another key item identified by the company. They plan to move in to edibles and consumables, which typically has a higher margin on each sale than dried cannabis flower alone. This is inline with an outdoor growth strategy, as company’s frequently use lower quality plants for their oils due to a high product grade not necessarily being required. This in turn only increases the potential margins seen through this revenue stream.

On a purely dried cannabis flower basis, they expect to produce roughly 300,000 KG of product annually if the facility is completed as anticipated. Utilizing the current average sale price of $7 per gram, this gives us a staggering annual revenue figure of $2,100 million. There is however, a fallacy in this. As a result of the product being grown outdoors, the product would likely sell for a below average price. Additionally, this is a planned expansion over an undefined time period – it could be two years, or it could be twenty. Furthermore, it is still unclear whether outdoor growth will be permitted in the country.

The land itself was purchased for $1.3 million, and the deal is expected to close by June 30. Heritage Cannabis intends to immediately apply for a second production site license with Health Canada for this location upon receiving certification at its Falklands facility.

Initial construction at the facility is scheduled to begin in early 2019.

 

Heritage Cannabis’ move into the dispensary field

Earlier this week Heritage Cannabis released the news to investors that they intend to vertically integrate their company. To do so, they have begun the process of applying for three retail dispensary licenses in the province of Alberta.

Heritage Cannabis intends to vertically integrate itself through the use of dispensaries.
Heritage Cannabis intends to vertically integrate itself through the use of dispensaries.

Although all levels of government are not yet ready to receive such applications, the company has stated that they intend to be ahead of the game. Through their current method, they’ll be able to submit the required documentation the day that applications begin being accepted. Additionally, it appears that the company has already been in talks for establishing leases, which will be signed upon the receipt of government approvals.

The one interesting item regarding this, is that currently Heritage Cannabis has no operations in the province of Alberta. Rather, it appears that it was forced in to the province as a result of British Columbia’s recent announcement. This announcement by the government made it clear that licensed producers can not sell their product at their own dispensaries in the province. In turn, this forced Heritage Cannabis to look to the closest neighbour to establish its vertical integration. Thus, it landed on Alberta.

At the current point in time, the company has not disclosed where it intends to establish its future retail locations. A fair assumption would be Calgary and Edmonton, with the third location being questionable. Alternatively, they may look to entirely corner one potion of the market initially before expanding into another major center.

 

Closing Remarks

If you didn’t catch it, there’s one constant among all three of the above releases. They all will require significant cash to execute upon. Something in which Heritage Cannabis doesn’t presently have a lot of. Their last raise was closed on August 31, and consisted of $2.62 million. Two of the above proposals require a collective $1.55 million in cash outlay before anything else is done. This doesn’t factor in construction or development costs of any of these facilities.

It’s also not hard for the company to have burned the remaining $1.1 million in the time since the last raise. In the last six months, they have acquired PhyeinMed Inc, as well as conducted a change of business. Both of these would have required additional cash outlays.

The short of it? Dilution is likely well on it’s way for Heritage Cannabis Holdings. The only thing holding that at bay right now, is the $2.2 million from the exercise of derivatives. We have a feeling that it won’t last long.

Crunch the numbers. Be critical. Dive Deep.

 


Information for this analysis was found via The CSE, SEDAR, Stanley Park Digital Ltd, and Heritage Cannabis Holdings Corp. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security.