Last month, we highlighted Heritage Cannabis Holdings Corp. (CSE: CANN) (OTCQX: HERTF) as a North American operator that is flying under the radar.
We became increasingly excited about Heritage after we met with CEO David Schwede in Las Vegas and have since closely followed the business. We consider Heritage to be a multi-faceted growth story with leverage to both Canada and the United States (US).
Heritage Cannabis is a leading cannabis company offering innovative products to both the medical and recreational legal cannabis markets in Canada and the US. At this time, the company is operating two licensed manufacturing facilities in Canada and is focused on capturing additional market share in several provinces.
An Emerging US Multi-State Operator
Currently, Heritage is capitalizing on Missouri and West Virginia in the US and we are favorable on this part of the business. We consider the US to be the most attractive cannabis market in the world and are bullish on the management team’s focus.
Although Missouri and West Virginia are not considered to be high-profile markets in the US, we expect Heritage to use the markets as a launchpad to expand into other burgeoning markets in the US. In November, Missouri voted in favor of legalizing recreational cannabis and we expect the development to benefit Heritage.
A few months ago, Heritage commenced operations in Missouri after Como Health (doing business as 3Fifteen Primo Cannabis) was approved to operate. We consider 3Fifteen to be a strategic partner due to the number of its operational dispensaries.
According to the agreement, 3Fifteen allows Heritage to use its license to produce branded products for medical cannabis patients in Missouri. 3Fifteen also granted shelf minimums for Heritage’s branded products in its Missouri dispensaries and we will monitor how the relationship continues to support the growth of the business.
A week after it formed a relationship with 3Fifteen, Heritage started to operate in West Virginia and established a strategic relationship with Harvest Care, a grower, processor, and provider of premium quality medical cannabis products in the state.
Last year, Harvest Care was granted one of ten cultivation licenses and will contribute the cultivation and the processing license to the relationship with Heritage. Of the ten dispensary licenses that were granted, only two are currently in operation and we find this to be significant when we are analyzing the market opportunity for Heritage.
Through the relationship, Heritage can produce branded products to be offered to medical cannabis patients in West Virginia. The relationship also provides favorable shelf allocation in Harvest Care’s West Virginia dispensaries and we are favorable on the long-term value that is associated with the partnership.
An Underappreciated Canadian Growth Story
A few weeks ago, Heritage released an operational update which provided important information on its leverage to the Canadian cannabis market. At the time of the release, Heritage reported to have launched new products in Ontario, in British Columbia (BC), in Saskatchewan, in Manitoba, in Nova Scotia, and in Newfoundland.
So far, we have noticed that there is minimal brand loyalty in Canada’s cannabis market. We are of the opinion that Heritage is benefiting from this trend by consistently bringing new products to market. Going forward, Heritage is highly focused on furthering distribution in Canada with new and innovative products, ramping up the production of its best performing products, and capturing market share across North America.
Another reason for our bullish view on Heritage’s approach to the Canadian cannabis market is related to how it provides many of the largest Canadian Licensed Producers (LPs) with products. By working with LPs like Canopy Growth Corp (TSX: WEED) (Nasdaq: CGC) and Aurora Cannabis Inc. (TSX: ACB) (Nasdaq: ACB), the company has become one of the largest medical cannabis suppliers in Canada and we believe the market is not assigning any value to this accomplishment.
Building Valuable Brands Across North America
A key differentiator for Heritage is the brands that are owned and sold by it. The management team has been focused on launching new brands to capture market share in Canada and the strategy seems to be working.
RAD is the most valuable brand that is owned by Heritage and we are favorable on the amount of consumer demand for the product line. The brand is manufactured in-house and is sold in provinces across Canada. The management team is highly focused on bringing new SKUs to market and we believe the strategy has helped the business capture market share in Canada.
So far, the launch of the RAD brand has been nothing short of a success and we believe it created an additional high margin revenue stream for Heritage. Due to the success of the launch of the product line, we are bullish on the management team’s strategy for launching products that are in high demand.
By successfully making RAD a top performing brand in Canada, Heritage Cannabis has proven its ability to create brands that appeal to consumers. Heritage recently launched a new cannabis brand called Thrifty and we expect to see the product line gain traction with consumers.
Going forward, Heritage plans to launch additional brands and if those are received as well as RAD has been, the business should be able to generate more than $80 million of cannabis revenue in Canada per year. We will monitor how Thrifty is able to capture market share and how the management team is able to launch additional brands this year.
Over the next year, we expect Heritage to report a series of major developments and for the market to become more favorable on the business. We are of the opinion that Heritage is in the early innings of a major growth cycle and believe it possesses the resources that are needed to capitalize on North America and on strategic international markets.
A few months ago, Heritage secured an equity line of credit agreement from Obsidian Global Partners to purchase up to US$20 million of common shares through a private placement. Going forward, Heritage plans to use the proceeds for general corporate purposes and we will monitor how the management team deploys its capital in ways that are accretive to the business.
By having access to additional equity funds, Heritage can accelerate growth by adding new revenue streams, expanding across borders, and executing on a multi-national growth strategy. We believe the business has significant potential growth catalysts and find the valuation to be compelling at current levels.
If you are interested in learning more about Heritage Cannabis, please send an email to firstname.lastname@example.org with the subject “Heritage Cannabis” to be added to our distribution list.
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