Devin Schilling, HERITAGE CANNABIS HOLDINGS CORP.cdn.ceo.ca.s3-us-west-2.amazonaws.com/1eh9sbo-cann-jun27... · 2019. 6. 27. · Strong Leadership. Clint Sharples, CEO, ... Outsource

Devin Schilling, CFA [email protected] 604.718.7557

Jason Zandberg, CFA [email protected] 604.718.7541

Fayassir Haqna, BBA [email protected] 604.718.7556

Company Statistics

Risk: SPECULATIVE

52-week High/Low: $0.72 / $0.15 Shares o/s (fd) ('000): 516,467 Market Cap (fd) ('000): $227,246 Market Float Value ('000): $194,342 Average Trading Volume: 1,677,828 Cash ('000): $18,331 Debt ('000): $215 CEO: Clint Sharples CFO: Erin Prohaska Shareholders: Mgmt/Insider 6% Institutional 1%

Financial Summary

(FYE Oct 31)

$CAD FY19e FY20e FY21e

Revenue ($K) 3,306 53,778 106,014 EBITDA ($K) (6,298) 11,299 32,003 EBITDA (%) -190.5% 21.0% 30.2% Net income ($K) (12,520) 2,168 16,754 EPS ($) (0.03) 0.00 0.03 EV/EBITDA na 16.5x 5.8x P/E na 103.6x 13.4x Quarterly EPS ($) Q1 Q2 Q3 Q4

FY19 (0.01)a (0.01)e (0.01)e (0.00)e FY20 (0.00)e 0.00e 0.00e 0.00e

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PI Financial Corp. has received compensation for acting as a fiscal agent for CANN in the previous 12 months. See the disclosure section for additional details.

Corporate Information

Heritage is a Canadian cannabis company that is focused on extraction and value-add products.

A Disclosure fact sheet is available on Pages 18-19

of this report.

INITIATING COVERAGE June 27, 2019

HERITAGE CANNABIS HOLDINGS CORP. (C-CANN) $0.43 (intraday)

RATING: BUY TARGET: $1.00 (initiating) (initiating)

Emerging From the Shadows

Heritage is a Canadian-based cannabis company focused on

extraction and value-add products. The Company consists of four operating subsidiaries representing different parts of the cannabis value chain with Purefarma Solutions being the Company’s award winning Extraction Company. Purefarma conducts its extraction services at both of Heritage’s licensed facilities (CannaCure and Voyage).

Award Winning Products. Purefarma’s extraction services have resulted in products that have won numerous awards including the High Times Cannabis Cup and the Emerald Cup for their premium vapes and concentrates. We believe the Company’s premium product quality creates a key differentiator from the competition.

Unmatched Experience. Purefarma has been conducting extraction activities for over 5 years which is significantly longer than most of the sector peers. This head start has resulted in the Company becoming experts across multiple methods of extraction including C02, hydrocarbon, and ethanol.

New Contracts and Customers Expected. We believe Heritage will onboard more customers in anticipation of the commencement of the edibles and extracts market in Canada as there is currently a shortage of extraction capacity and expertise across the industry.

Macro Trends Favouring Heritage. We are bullish on Heritage and the Company’s extraction services because of changing consumer preferences towards infused products vs. dried flower and the expected price compression in dried flower which could result in cheaper feedstock for the Company’s value-add products.

Strong Leadership. Clint Sharples, CEO, has an extensive background in building successful businesses through being a partner in a private equity management company where his primary roles were CEO of Modu-Loc Fence Rentals (named a Canada’s Best Managed Company) and Chairman of Strategic Aviation and Sky Café. Mr. Sharples track record provides us with confidence in our long-term outlook for Heritage.

FORECAST/OUTLOOK: We are forecasting revenue of $3.3M, $53.8M and $106.0M in FY19, FY20 and FY21 respectively. We believe EBITDA and EPS can reach $32.0M and $0.03 in FY21.

VALUATION/RECOMMENDATION: We are initiating coverage of Heritage Cannabis Holdings Corp. (C-CANN) with a BUY rating (risk: SPECULATIVE) and a 12-month target of $1.00. Our target represents an EV/EBITDA of 14x based on our FY21 estimates.

Heritage Cannabis Holdings Corp. (C-CANN)– June 27, 2019

2 | INITIATING COVERAGE Devin Schilling, CFA | Jason Zandberg, CFA | Fayassir Haqna, BBA

Table of Contents Overview ........................................................................................................................................... 3

Changing Consumer Preferences .................................................................................................. 3 Price Compression in Flower ......................................................................................................... 3 Explosion of CBD Products ............................................................................................................ 3 Extraction Expertise ....................................................................................................................... 3

History ............................................................................................................................................... 4 Operations ......................................................................................................................................... 4

Purefarma Solutions Inc. ................................................................................................................ 4 CannaCure Corporation .................................................................................................................. 6 Voyage Cannabis Corp. .................................................................................................................. 7 BriteLife Sciences Ltd. ................................................................................................................... 8

Initial Contracts ................................................................................................................................. 8 Outsource vs. In-house Extraction .................................................................................................... 9 Competition ..................................................................................................................................... 10 Financials / Outlook ......................................................................................................................... 10 Valuation .......................................................................................................................................... 12

Valuation Summary ...................................................................................................................... 12 Appendix 1: Key Risks ..................................................................................................................... 14 Appendix 2: Management ............................................................................................................... 15 Appendix 3: Share Structure ........................................................................................................... 17 Disclosure Fact Sheet ..................................................................................................................... 18


Devin Schilling, CFA | Jason Zandberg, CFA | Fayassir Haqna, BBA INITIATING COVERAGE | 3

Overview Heritage Cannabis Holdings Corp. is a vertically integrated Canadian cannabis company that is made up of four operating subsidiaries representing different parts of the cannabis value chain. Heritage has two Health Canada approved licensed producers (Voyage and CannaCure), a cannabis-based medical solutions provider (BriteLife Sciences), and most importantly in our opinion, a leading cannabis extraction company (Purefarma Solutions).

In this report, we are initiating coverage on Heritage Cannabis Holdings Corp. (C-CANN), a company we believe will benefit from their expertise in extraction services through their Purefarma Solutions subsidiary, which has won numerous awards for their best-in-class product quality and formulations across both medical and recreational product formats.

Heritage is heavily focused on cannabis extraction and value-add products. The Company’s cultivation footprint is anticipated to be used entirely for feedstock into value-add products and proprietary formulations. This strategy bodes well for where the cannabis market is trending and is central to our investment thesis. Below are the key reasons we are bullish on Heritage.

Changing Consumer Preferences

Sales of cannabis concentrates in mature US cannabis markets have been growing at a faster rate than dried flower and now account for ~50% of market share from just ~35% a couple years ago. We expect this trend to continue and anticipate that cannabis concentrates could eventually account for over 60% of the overall market. We envision the Canadian market will follow the same path once regulations permit the sale of these value added products (initial sales expected by December 2019). This bodes well for Heritage who we believe will be a leader in the extracts segment with the Company’s background in producing premium quality vape pens and concentrates.

Price Compression in Flower

The average price for dried cannabis in Oregon has declined by over 50% from $9.27 a gram in 2016 to $4.27 by the end of 2018. Outdoor grows have flooded the market in Oregon pushing wholesale pricing even lower as prices hit a new low of $1.33 per gram. A similar situation has occurred in Colorado and Washington. Prices of concentrates and edibles have only declined by ~20% over the same timeframe but the lower flower prices have benefited extraction-oriented companies with cheaper raw materials helping them to maintain or even expand their margins. Heritage is cultivation light and heavily focused on extraction and value-add products which should benefit the Company over the long-term.

Explosion of CBD Products

According to The Brightfield Group, the CBD market is growing at a faster rate than cannabis in the US and is expected to become a $22B industry. Since legalization in Canada, retailers have not been able to keep up with demand for CBD products as evidenced by persistent product outages. Heritage has extensive relationships with hemp producers in Alberta, Saskatchewan, and Manitoba giving them the ability to source hemp biomass that can be extracted into CBD product categories which could include vape pens, concentrates, and topicals. We note that Heritage has a proprietary hemp biomass compression system which is anticipated to significantly improve efficiencies in the extraction process leading to enhanced economics.

Extraction Expertise

Purchasing stand-alone extraction equipment does not require significant capital but the knowledge, skillset, and people required to run the extraction process are the main barriers to entry. We believe that Heritage’s extraction subsidiary (Purefarma) has one of the longest track records in the industry with ~5 years of extraction history across multiple extraction methods. This has resulted in the



Company being experts in their field whereas much of the competition is still early on the extraction learning curve.

History On January 9, 2018 Heritage Cannabis Holding Corp. began trading under the symbol C-CANN after completing a Fundamental Change of Business as a cannabis issuer. Previously the Company operated as Umbral Energy Corp. under the symbol C-UMB.

The Company received its Cultivation License in July 2018 for its Voyage subsidiary located in Falkland BC, and then went on to acquire CannaCure, a Licensed Producer with a facility located in Fort Erie, ON, in November 2018. In December 2018, Heritage completed their acquisition of Purefarma Solutions bringing in-house an experienced extraction team that is based in Kelowna, BC and will operate out of the CannaCure and Voyage facilities.

In March and April 2019, both Voyage and CannaCure received their Standard Processing License and Medical Sales License with the Processing License enabling the Company to begin conducting extraction activities at both facilities. Shortly after receiving this license, Heritage signed its first extraction agreement with Zenabis Global Inc. (V-ZENE) which calls for a minimum of 150kg of CBD or THC extracted distillate to be delivered by the end of 2019.

In late May, Heritage signed a Processing and Supply Term Sheet with Canntab Therapeutics Limited (C-PILL) for the purpose of capsule manufacturing. We believe that additional contracts will be announced over the short-term as there is currently a shortage of extraction capacity and expertise in Canada in the lead-up to Legalization 2.0 later this year.

Operations Heritage Cannabis Holdings Corp. is the parent company of four operating subsidiaries which include a leading cannabis extraction company, two Canadian Licensed Producers, and one medical cannabis solutions provider, all of which are detailed below.

Purefarma Solutions Inc.

Purefarma is an industry leading Extraction Company that has proven expertise in creating purified cannabis and hemp concentrates. Purefarma has been conducting extraction activities for over 5 years which is significantly longer than most of the sector peers and has resulted in the Company becoming experts across multiple forms of extraction inducing C02, Ethanol, and Hydrocarbon.

Award Winning Products

Purefarma’s extraction services have resulted in products that have won numerous awards including the High Times Cannabis Cup and the Emerald Cup for their premium vapes and concentrates. Notably the Company’s extraction services have resulted in products that have won the following accolades:

1st Place Best Sativa Concentrate (2017 High Times Cannabis Cup)

1st Place Best Vape (2017 High Times Cannabis Cup)

2nd Place Indica Concentrates (2017 High Times Cannabis Cup)

2nd Place Hybrid Concentrates (2017 High Times Cannabis Cup)

1st Place Best Hybrid Concentrate (2016 Emerald Cup)

1st Place Best CBD Concentrate (2016 Emerald Cup)

1st Place Best Sativa Concentrate (2016 Emerald Cup)



Purefarma also has experience in additional product forms including edibles, topicals, and other product categories in both recreational and medicinal markets.

Figure 1 – Award Winning Extracts

Source: Clint Sharples Twitter

Expertise across Extraction Methods

Purefarma specializes in their proprietary methodologies and IP for premium extraction through the use of C02 with expectations to add hydrocarbon and ethanol extraction in the near future. Purefarma provides turn-key extraction and manufacturing solutions, contract and toll processing, as well as formulation developed internally and for external partners. Purefarma conducts extraction services at both of Heritage’s Licensed Producer subsidiaries (CannaCure and Voyage) who are both fully licensed for cultivation, processing, and medical sales.

Heritage currently has six Vitalis Q90 C02 extraction machines (four operational and two being commissioned) spread across the Company’s two licensed locations (CannaCure and Voyage). This ranks the Company near the top in potential extraction capacity in Canada. We note that throughput capacity across the industry is not easily comparable because Heritage makes premium quality oil which requires longer extraction runs compared to the mass produced flavoured distillate vape pens which some of its peers will be producing. We believe product quality is Heritage’s key differentiator.

Over the next couple of months, Heritage will look to add new value-add services that will position the Company for future product offerings. This will be accomplished through adding distillation and chromatography equipment to their facilities as well as gel cap lines and vape pen lines, all of which are expected to be installed by this fall. The addition of a proprietary hydrocarbon extraction machine is anticipated to be installed in October which will significantly increase the Company’s extraction capacity.

C02 Direct-to-Vape Oil and New World Oils

Purefarma’s award winning product quality is attributable to the Company’s C02 Direct-to-Vape Oil methodology which preserves sensitive compounds throughout the extraction process resulting in a product with a higher quantity of authentic terpenes and flavonoids. The ultimate objective is to preserve the starting plant material in terms of fragrance and flavour.



Purefarma’s Direct-to-Vape process preserves the input material’s terpenes, and at the same time eliminates the need for adding carrier oils to get the oil to the appropriate viscosity. Both of these attributes lead to Purefarma’s higher product quality. In comparison, the majority of competitors are selling (or will begin selling) flavoured distillate vape pens whereby low quality trim gets distilled down into a low quality concentrate that is then cut with carrier oils and artificial flavours in an attempt to “rebuild” a particular strain profile. This ultimately leads to an inferior product and is the equivalent in the alcohol industry as flavoured moonshine vs. cognac or scotch. Flavoured distillate vape pens often result in a lower potency of active ingredients due to being cut with potentially unhealthy carrier oils such as polyethylene glycol (PEG) and propylene glycol (PG). Purefarma’s Direct-to-Vape process has the ability to create higher potency oil enabling broader product capabilities and sets the Company apart from the competition.

Purefarma also has a proprietary hydrocarbon extraction technique used to create the Company’s New World Oils which are a planned premium line of in-house hydrocarbon vape pens. Purefarma’s proprietary New World Oil is a hydrocarbon extracted cannabis oil that matches the exact strain profile of the input material while maintaining a higher potency of active ingredient in comparison to C02 extraction. New World Oil also has the appropriate viscosity to flow in a standard ceramic vape cartridge without having to be cut with any carrier oils or additives. These characteristics result in a premium quality vape pen.

Bringing CBD to Market

Purefarma has an established supply network of hemp biomass from Alberta, Saskatchewan, and Manitoba that is available to be processed into various CBD concentrates. A proprietary biomass isolation and compression unit, supplied by Heritage, which removes undesirable plant material and results in higher percentages of CBD in the remaining biomass, will be used at the hemp farms prior to shipping to one of Heritage’s licensed facilities for extraction. Purefarma has the ability to selectively purchase hemp biomass when excess extraction capacity exists (that has not already been committed to other clients) for the production of CBD concentrates.

The Extraction Opportunity

Extracted oil is required for edibles, beverages, concentrates, vapes, and topicals which currently accounts for ~50% of the overall market in mature US cannabis markets. We envision the Canadian market will follow the same path once regulations permit the sale of these value added products (first sales expected by December 2019). Purefarma is core to our investment thesis

in Heritage Cannabis.

CannaCure Corporation

CannaCure holds Health Canada issued licenses that enable cultivation, processing, and medical sales. CannaCure operates out of a 122,000 sq. ft. facility located in Fort Erie, Ontario which is being retrofitted to GMP standards. The facility currently has ~16,000 sq. ft. that has been retrofitted for cannabis cultivation that is estimated to produce ~3,000kg of dried flower per year. Heritage will only grow unique strains with specific cannabinoid profiles that will be utilized in the Company’s proprietary formulations and value-add products.

Future phases will include ~30,000 sq. ft. of dedicated extraction space that will include hydrocarbon and ethanol extraction in addition to the Company’s existing C02 extraction equipment, and over 60,000 sq. ft. of room for contract manufacturing partnerships and joint ventures. Heritage envisions having 5-10 JV partners working out of the CannaCure facility across multiple product categories providing the Company with more potential upside than just being a 3rd party manufacturer.

CannaCure currently has four Vitalis Q90 extraction machines at their facility in Fort Erie, two of which are currently operating with the other two expected to be commissioned in July. Final



expansion plans for this facility will be based on the outcome of strategic partnerships expected to be evaluated in Q3/Q4 of 2019.

Figure 2 – CannaCure Facility

Source: Niagara This Week

Voyage Cannabis Corp.

Voyage is a Licensed Producer that is 75% owned by Heritage. Voyage holds Health Canada issued licenses that include cultivation, processing, and a medical sales license.

Voyage operates out of a 15,500 sq. ft. processing facility that is located in Falkland, British Columbia which has been built out with dedicated extraction space as well as a drying room, trimming room, and packaging area. Voyage currently has two Vitalis Q90 extraction systems installed at the facility enabling the Company to begin processing biomass.

Cultivation will be conducted in 16,000 sq. ft. of greenhouse space which is expected to produce ~2,000kg of cannabis per year. Voyage expects to begin cultivation operations in Q4 2019 (fiscal) with unique strains and specific cannabinoid profiles for the Company’s proprietary formulations and value-add products again being the focus.

The Voyage facility sits on 13 acres of land but future cultivation expansion will be dictated by market conditions.

Figure 3 – Voyage Processing Facility

Source: www.shuswappassion.ca



Figure 4 – Voyage Greenhouse

Source: Clint Sharples Twitter

BriteLife Sciences Ltd.

BriteLife is a wholly owned subsidiary of Heritage that is focused on advancing the companies medical cannabis footprint. The Company will assist in the development of Heritage’s medical-related branded products through their existing formulations and IP. BriteLife will include an educational component that will be targeted at assisting patients with individualized customer solutions.

Heritage recently announced that it has entered into a Letter of Intent to acquire 30% of Endocanna Health Inc. for US$3.0M in cash and shares. Endocanna has developed a home-based saliva collection kit (Endocannabinoid DNA) to identify genetic variants related to cannabinoid receptors and metabolism for an individual. The results from this test will provide consumers with information on terpene and cannabinoid combinations that may work best for the specific individual and is expected to complement Heritage’s in-house medical cannabis formulations.

Initial Contracts In early May, Heritage announced that it has entered into a Mutual Supply Agreement and a Services Agreement with Zenabis Global Inc. (V-ZENA). The agreement calls for Heritage, through its wholly owned subsidiary Purefarma Solutions to provide both toll extraction services and various formulated extracted oil products to Zenabis. As per the agreement, Zenabis will be supplying Heritage with dried flower and trim for extraction and Purefarma will conduct the extraction services at both its Voyage and CannaCure locations.

The initial agreement is expected to have Zenabis deliver a minimum of 500kg of dried flower and trim to Heritage, and in return Heritage will supply Zenabis with a minimum of 150kg of CBD or THC extracted distillate. This is expected to occur by the end of 2019. We believe this initial contract with Zenabis could be worth ~$5.0M to Heritage and is expected to grow in both size and scope.

The agreement also includes an option for both Heritage and Zenabis to jointly pursue the co-development of formulated CBD distillate, CBD isolate, Liquid oil THC distillate and THC and CBD concentrates with the intent of having approved products available for sale by December 2019.

At the end of May, Heritage signed a Processing and Supply Term Sheet with Canntab Therapeutics Limited (C-PILL) for the purpose of capsule manufacturing. This agreement calls for Purefarma to provide processing services for hemp supplied by Canntab for the production of Canntab’s ingestible oral cannabis products. Heritage will also provide strategic support including



packaging and distribution. This agreement is expected to start immediately and is open-ended subject to a 120 day cancellation notice from either party. The potential value of this contract will depend on the markets uptake for Canntab’s product.

We believe that additional contracts with new partners will be announced over the short-term, with vape pens and gel caps being the initial focus. There is currently a shortage of extraction capacity and expertise in Canada in the lead-up to Legalization 2.0 later this year and we believe that Heritage will emerge as a major player with their best-in-class product quality and unmatched extraction history.

Figure 5 – Announced Customers to Date

Source: PI Financial Corp.

Outsource vs. In-house Extraction We expect some of the largest LP’s to eventually bring extraction in-house once they are finished with their expansion plans and can begin to devote the time and resources necessary to build out the required infrastructure and hire a team with the specialized operational knowledge. With that being said, Canopy Growth Corp. (T-WEED) has signed extraction agreements with numerous extraction companies highlighting that even the largest companies cannot produce enough cannabis oil concentrates over the short-to-medium term to fulfill expected demand.

We believe small-to-medium sized LP’s will always outsource their extraction needs as building out an extraction lab and hiring a dedicated extraction team does not make economic sense without the large quantities of biomass required to keep the facility running on a continual basis.

CPG companies looking to enter the cannabis sector represent a large opportunity for Heritage as getting the required licenses can take up to two years which makes partnership agreements the most viable way to get products to market. CPG companies could prove to be a sticky customer base with less pricing power due to licensing requirements limiting their ability to take extraction and manufacturing services in-house. Health Canada Regulations also prohibit manufacturing cannabis edibles in the same facility where regular food products are manufactured. This leads to a situation where CPG companies are more likely to partner with a company like Heritage than construct a new manufacturing facility dedicated to cannabis infused food products.

With these dynamics in mind, we highlight the importance for extraction oriented companies to provide value-add services which can include providing a streamlined process for companies to get higher margin products to market at a reasonable cost. This can include direct-to-market vape pens, capsules, edibles, concentrates, topicals and other product categories.

We believe Purefarma’s experience and expertise in extraction services will lead to a long-

term competitive advantage as their premium award-winning product quality is not easily

replicated and sets the Company apart from its peer group.



Competition The cannabis extraction sector is currently made up of a handful of public and private companies that are at various stages in the licensing process. We note that Heritage is not a pure-play extraction company as they have some internal cultivation but extraction services and value-add products are their primary focus. Heritage’s cultivation footprint is anticipated to be used entirely for feedstock into value-add products. Below we highlight a few extraction competitors in this cannabis sub-sector as they represent the best public comparables.

Figure 6 – Key Competitors

Oil Processing

License

Cultivation

License

Number of Partners

Announced

Last Qrt

Revenue

Market Cap.

(Jun. 26, 2019)

MediPharm (V‐LABS) ✓ X 10 $22.0M $640M

Neptune (T‐NEPT) ✓ X 3 $5.7M $466M

Valens GroWorks (C‐VGW) ✓ ✓ 10 $2.2M $444M

Radient (V‐RTI) ✓ X 1 N/A $212M

Nextleaf (C‐OILS) X X N/A N/A $53M

Heritage (C‐CANN) ✓ ✓ 2 N/A $210M

Source: PI Financial Estimates and Company Filings

We believe that Heritage is relatively undervalued compared to the peer group. Heritage is fully licensed across both facilities with extraction capacity (by machine count) in-line with the largest extraction peers. As the Company on-boards new customers and reports first revenues later this year (expected in Q419) we believe that this valuation gap should narrow.

Financials / Outlook Historical financial results for Heritage are limited at this time as the Company was pre-revenue during its most recent reported quarter (ending January 31st, 2019). This was expected as the Company did not receive their Processing Licenses until March and April 2019, which was followed up by their first awarded extraction contract in May 2019.

We have estimated that FY19 revenue (Year-end October 31st) will be $3.3M which will represent Heritages first quarter of revenue. The timing of revenue recognition could potentially shift some of this revenue to the following quarter as Health Canada regulations will not permit first sales of legalization 2.0 products until mid-December which falls after the Company’s fiscal year end. We forecast initial revenues will be driven entirely from tolling services with white label services and branded products coming online in Q1 FY20 and Q2 FY20 respectively.

For FY20 we forecast revenue will grow to $53.8M as we are assuming the Company will be able to process 27,923kg of biomass during the year. We forecast a sales channel mix (on a revenue basis) of 17% tolling, 63% white label, and 20% branded products by Q4 FY20.

For FY21 we forecast revenue increasing to $106.0M as we are assuming the Company will be able to process 42,951kg of biomass during the year. We forecast a sales channel mix shifting to



9% tolling, 65% white label, and 25% branded products by Q4 FY21 as white label services further ramp up and demand for the companies premium branded products continues to grow.

Our FY19, FY20, and FY21 EBITDA projections are ($6.3M), $11.3M, and $32.0M respectively. We anticipate EBITDA margin will improve from 21% in FY20 to 30% in FY21 as the Company shifts its revenue mix from tolling services to higher margin white label services and increases its market share for in-house branded products. Also factored into our estimates is the assumption that raw materials costs (dried flower/trim) will decrease by ~20% while pricing of concentrates will only decline by ~10% over the same timeframe similar to what we have seen in mature US markets.

Figure 7 – Revenue Forecast

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Figure 8 – EBITDA Forecast

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As of January 31st 2019, Heritage had $5.5M in cash and short-term investments and $0.3M of debt outstanding. Subsequent to the quarter-end Heritage closed a bought deal offering of 32.7M units of the Company at a price of $0.53 per unit for total gross proceed of $17.3M. Use of proceeds is expected to go towards increasing extraction capacity and further advancing existing subsidiaries, as well as new domestic and international opportunities, working capital and general corporate purposes.



Valuation We are projecting a 12-month target price of $1.00 for Heritage Cannabis (C-CANN) shares.

Our target is based on peer target multiples and discounted cash flow analysis. We recognize that peer multiples are very high and there is a material risk that the momentum in the cannabis sector slows down and these valuations retreat. We use a DCF calculation that uses an 8x terminal value multiple, 10% discount rate and 10 year time horizon. In our valuation models for cannabis companies there is a growing divide between our DCF valuation and the peer multiple valuations. Our valuation calculation is shown in Figure 9.

Valuation Summary

We used our forecasted revenue, EBITDA and EPS out to FY21 and applied the current trading multiples using a blended average of cannabis producers, extraction peers, and small cap growth comparable companies. We note that our extraction peer group is limited and as such we have included the other peer groups to get a more comprehensive data set. We understand that valuations are significant for Cannabis peers but there are few industries that can realistically grow from a few hundred million to our estimated $10.2B in a couple years.

Figure 9 – Valuation Summary

Peer valuation

EV/EBITDA Multiple Weighting Weighting

Cannabis Average 11.2x 33%

Extraction Peers Average 15.7x 33%

Small Cap Growth Average 13.1x 33%

Average 13.3x 100%

FY21 EBITDA 32.0M

Valuation based on 13.3x multiple $0.94 40%

P/E

Cannabis Average 28.4x 33%

Extraction Peers Average 37.1x 33%

Small Cap Growth Average 32.4x 33%

Average 32.6x 100%

FY21 EPS 0.03

Valuation based on 32.6x multiple $1.06 40%

Discounted cash flow

Valuation based on 10% discount

rate and 8x terminal multiple $0.80 20%

Overall forward valuation $0.96 100%

Price target $1.00 (rounded up)

Source: PI Financial Corp. and Thompson EIKON



Figure 10 – Peer Group

EV/EBITDA P/E

Symbol Price MC ($M) FY20 FY20CannabisCanopy Growth Corp WEED.TO 51.46$ 17,728 na naOrganiGram Holdings Inc OGI.V 8.16$ 1,278 14.1x 26.1xAphria Inc APHA.TO 9.17$ 2,299 na naAleafia Health Inc ALEF.TO 1.14$ 310 7.7x naAurora Cannabis Inc ACB.TO 9.75$ 9,887 na naCannTrust Holdings Inc TRST.TO 6.59$ 931 14.9x 24.0xCronos Group Inc CRON.TO 20.65$ 6,877 na naSupreme Cannabis Company Inc FIRE.TO 1.54$ 452 10.1x 70.0xGreen Organic Dutchman Holdings Ltd TGOD.TO 3.13$ 862 8.2x 78.3xVivo Cannabis Inc VIVO.V 0.44$ 130 4.9x 12.6xBeleave Inc BE.CD 0.08$ 39 na naEmerald Health Therapeutics Inc EMH.V 2.33$ 346 na naHarvest One Cannabis Inc HVT.V 0.66$ 123 14.8x naInvictus MD Strategies Corp GENE.V 0.40$ 49 5.2x 6.7xWayland Group Corp WAYL.CD 0.74$ 176 na 7.4xHexo Corp HEXO.TO 6.77$ 1,738 28.1x 56.9xTHC Biomed Intl Ltd THC.CD 0.21$ 30 na naWeedMD Inc WMD.V 1.39$ 159 2.9x 6.0xDelta 9 Cannabis Inc NINE.V 0.97$ 85 na 5.0xVillage Farms International Inc VFF.TO 14.91$ 733 7.6x 12.2xFlowr Corp FLWR.V 6.00$ 535 15.7x 36.4x

Average 11.2x 28.4x

Extraction PeersValens Groworks Corp VGW.CD 4.13$ 449 5.7x 10.9xNeptune Wellness Solutions Inc NEPT.TO 5.70$ 464 31.2x 82.1xRadient Technologies Inc RTI.V 0.80$ 212 na naMedipharm Labs Corp LABS.V 4.98$ 646 10.0x 18.3x

Average 15.6x 37.1x

Small Cap GrowthPhoton Control Inc PHO.TO 1.12$ 120 7.3x 18.7xAlcanna Inc CLIQ.TO 5.73$ 213 8.9x naWaterloo Brewing Ltd WBR.TO 3.51$ 124 12.4x 25.1xSiyata Mobile Inc SIM.V 0.49$ 57 na naXebec Adsorption Inc XBC.V 1.59$ 93 9.6x 12.5xBlackline Safety Corp BLN.V 5.61$ 267 32.2x 93.5xEnwave Corp ENW.V 2.21$ 244 11.7x 18.4xRedishred Capital Corp KUT.V 1.04$ 69.2 9.2x 26.0x

Average 13.0x 32.4x

Source: PI Financial Corp. and Thompson EIKON

We believe Heritage (C-CANN) provides investors with a target return of 133% based on our target price. We are initiating coverage with a BUY rating (risk: SPECULATIVE) and a 12-month target

of $1.00. Our target represents an EV/EBITDA of 14x based on our FY21 estimates.

The biggest risk to our valuation is the potential of capital retreating from the cannabis market. The Canadian public companies are currently the only established legal market for cannabis companies and these stocks continue to receive investment dollars from around the globe. We also believe that Canadian cannabis companies have the potential to become global brands which further increases the market potential. See Appendix 1 for a full list of risks.



Appendix 1: Key Risks Limited Operating History. Heritage has a limited history of operations and is in the early stage of development. Heritage will therefore be subject to many of the risks common to early-stage enterprises, including under-capitalization, cash shortages, limitations with respect to personnel, financial, and other resources and lack of revenues.

Competition. There is potential that Heritage will face intense competition from other companies, some of which can be expected to have longer operating histories and more financial, production and marketing resources and experience than Heritage.

Dependence Upon Key Management Personnel. The success of Heritage is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management team. Heritage’s future success depends on its continuing ability to attract, develop, motivate, and retain the Key Personnel. The loss of the services of Key Personnel, or an inability to attract other suitably qualified persons when needed, could have a material adverse effect on Heritage’s ability to execute on its business plan and strategy.

Additional Financing. From time to time, the Company may require additional financing. The Company’s ability to obtain additional financing, if and when required, will depend on investor demand, operating performance, the condition of the capital markets and other factors. If the Company raises additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences, or privileges senior to the rights of holders of Common Shares, and existing holders of such shares may experience dilution.

Reliance on Licenses. Heritage is dependent on licenses to operate which are subject to ongoing compliance and reporting requirements. Failure to comply with the requirements of these licenses or any failure to obtain or maintain those licenses could have a material impact on the business, financial condition and operating results of Heritage.

Reliance on Facilities. The Company’s existing facilities in Falkland, British Columbia and Fort Erie, Ontario are integral to the Company’s grow operations and its ability to integrate the extraction capabilities of Purefarma. Any adverse changes or developments affecting either facility may impact the Company’s ability to produce cannabis and cannabis products, its business, financial condition and its results of operations.

Regulatory Risks. The Company’s subsidiaries operate in a new industry which is highly regulated, highly competitive and evolving rapidly. As such, new risks may emerge, and management may not be able to predict all such risks or be able to predict how such risks may result in actual results differing from the results contained in any forward-looking statements.

Product Recalls. Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labelling disclosure. If any of Heritage’s products are recalled due to an alleged product defect or for any other reason, Heritage could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall.

Risks Inherent in an Agricultural Business. The Company’s business involves the growing of cannabis, which is an agricultural product. As such, the business is subject to the risks inherent in the agricultural business, such as pests, plant diseases and similar agricultural risks. Although the Company grows its products indoors under climate controlled conditions, and carefully monitors the growing conditions with trained personnel, there can be no assurance that natural elements will not have a material adverse effect on the volume, quality and consistency of its products.

Source: Heritage Cannabis Holdings Corp. & PI Financial Corp.



Appendix 2: Management Clint Sharples, President, CEO, & Director

Mr. Clint Sharples is a partner in a private equity management company formed in 2005. His primary roles are CEO of Modu-Loc Fence Rentals a Canada’s Best Managed Company, and Chairman of Strategic Aviation and Sky Café. He is responsible for over 1,200 employees and $80 million in annual revenues. His primary role with Heritage is to lead the overall corporate development and implementation of the strategic direction.

Erin Prohaska, Chief Financial Officer

Ms. Erin Prohaska is a dynamic business professional with over 15 years of experience leading finance and operations teams in diverse industries. Prior to joining Heritage, Erin was the CFO of a multinational consulting engineering firm with over 2500 employees. Further, Erin has managed and advised notable Family Offices on their finances and business holdings, including venture capital funds.

Daniel Phaure, Chief Operating Officer

Mr. Daniel Phaure has held key leadership roles with a number of companies within the renewable, technology and infrastructure sectors. Over his 20 year career, he has consulted and advised numerous companies in North America, Europe and Asia, providing strategic guidance in relation to M&A activity, capital transactions and operational changes. As a result of his corporate and capital markets background, he brings a senior leadership skill set to Heritage that will drive the buildout of their current and future opportunities as well as the diligence and execution of their partnership strategy. Mr. Phaure has also served on various boards with exposure to both Canada and US.

Dr. Chris Spooner, Chief Science Officer

Dr. Chris Spooner has over 20 years of clinical and business experience. He operates one of the largest integrative naturopathic care clinics in the Okanagan and Southern Interior of BC. He is on the Medical advisory board of Atrium Innovations, a division of Nestlé Health Sciences and works in an advisory capacity for Kisameet Glacial Clay. He is post-doctoral Fellow in Environmental Medicine at the Southwest College of Naturopathic Medicine Environmental Medicine Center of Excellence.

Donald Ziraldo, Chairman of the Board

Mr. Donald Ziraldo is a historic Canadian winemaker and a Member of the Order of Canada. He and his co-founder were the founders of Inniskillin Winery in Niagara. Mr. Ziraldo was granted the first winery license in Ontario after prohibition. His talent and perseverance have helped to make Canadian icewine a globally recognized luxury brand. Mr. Ziraldo built his own brand of icewine and Riesling table wines under his name, "Ziraldo“ and continues to be hailed as one of the most important figures in Canadian wine history.

Debra Senger, Chief Strategy Officer & Director

Founder and CEO of PhyeinMed Inc., a Health Canada Licensed Producer. Ms. Debra Senger has over 30 years public company experience in various capacities including Co-Chair of the Board, Director, CEO and CFO functions. She served in several key executive senior managerial roles with a Toronto Venture Exchange company and several of its subsidiaries for over 22 years. She is an Owner, Shareholder, Director of several private companies in Cannabis, Transportation, E-Commerce, Property and Business management.

Céline Arsenault, Director

Ms. Céline Arsenault is an experienced financial executive with more than 20 years’ in international business and financial management. Her vast experience stems from several senior financial



executive positions with various public and private companies in renewable energy, insurance, private equity, electricity and telecommunications sectors. In addition to her extensive background, she brings disciplined financial reporting and governance skills to the board, having served on numerous non-profit boards and committees.

Graeme Staley, Director

Mr. Graeme Staley is the CEO of Purefarma Solutions Inc., a wholly owned subsidiary of Heritage. He began extracting over 5 years ago via his personal license, where he designed extraction and formulation processes. Utilizing his background in refrigeration and mechanical engineering and winery operations he has developed commercial standardized processes relevant to the new cannabis industry.

Source: Heritage Cannabis Holdings Corp. & PI Financial Corp.



Appendix 3: Share Structure Heritage has 470.8M shares outstanding and on a fully diluted basis 513.7M shares. Insider ownership accounts for approximately 4% of shares outstanding. The figures below illustrate the common share ownership and dilution.

Figure 11 – Common share ownership

Common stock % of Total

Market value

(as of Jun 17, 2019)

Mgmt. & Employees 17.3M 3.7% $8.8M Institutions 5.4M 1.1% $2.3M Other 448.1M 95.2% $187M Total 470.8M 100% $198M

Source: Company filings and PI Financial estimates

Figure 12 – Individual/Insider Holdings

Individual Common stock % of Total

Graeme Staley, Director 6.7M 1.4% Clint Sharples, President, CEO, & Director 4.0M 0.9% Daniel Phaure, COO 3.0M 0.6% Debra Senger, CSO & Director 2.4M 0.5% Donald Ziraldo, Chairman 1.1M 0.3% Erin Prohaska, CFO 0.1M <0.1% Total 17.3M 3.7%

Source: Company filings and PI Financial estimates

Figure 13 – Timeline for Share Structure

Options Outstanding Warrants Outstanding

# of Options Outstanding

Weighted average exercise price per share

# of Warrants Outstanding

Weighted average exercise price per share

12,180,003 $0.20 33,469,607 $0.24 Source: Company filings and PI Financial estimates



Disclosure Fact Sheet

Ratings Price Volatility / Risk BUY : recommendation: stock is expected to appreciate from its current price level at least 10-20% in the next 12 months. NEUTRAL : recommendation: stock is expected to trade in a narrow range from its current price level in the next 12 months. SELL : recommendation: stock is expected to decline from its current price level at least 10-20% in the next 12 months. U/R : Under Review N/R : No Rating TENDER: Investors are guided to tender to the terms of the takeover offer. Analyst recommendations and targets are based on the stock’s expected return over a 12-month period or may be based on the company achieving specific fundamental results. Under certain circumstances, and at the discretion of the analyst, a recommendation may be applied for a shorter time period. The basis for the variability in the expected percentage change for a recommendation, relates to the differences in the risk ratings applied to individual stocks. For instance stocks that are rated Speculative must be expected to appreciate at the high end of the range of 10-20% over a 12-month period.

SPECULATIVE : The Company has no established operating revenue, and/or balance sheet or cash flow concerns exist. Typically low public float or lack of liquidity exists. Rated for risk tolerant investors only. ABOVE AVERAGE : Revenue and earnings predictability may not be established. Balance sheet or cash flow concerns may exist. Stock may exhibit low liquidity. AVERAGE : Average revenue and earnings predictability has been established; no significant cash flow/balance sheet concerns are foreseeable over the next 12 months. Reasonable liquidity exists. Price Volatility/Risk analysis while broad based includes the risks associated with a company’s balance sheet, variability of revenue or earnings, industry or sector risks, and liquidity risk.

Analyst Certification I, Devin Schilling, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this report. I am the research analyst primarily responsible for preparing this report.

Research Disclosures Applicability

1) PI Financial Corp. and its affiliates’ holdings in the subject company’s securities, in aggregate exceeds 1% of each company’s issued and outstanding securities. 1) No

2) The analyst(s) responsible for the report or recommendation on the subject company, a member of the research analyst’s household, and associate of the research analyst, or any individual directly involved in the preparation of this report, have a financial interest in, or exercises investment discretion or control over, securities issued by the following companies. 2) No

3) PI Financial Corp. and/or its affiliates have received compensation for investment banking services for the subject company over the preceding 12-month period. 3) Yes

4) PI Financial Corp. and/or its affiliates expect to receive or intend to seek compensation for investment banking services from the subject company. 4) Yes

5) PI Financial Corp. and/or its affiliates have managed or co-managed a public offering of securities for the subject company in the past 12 months. 5) No

6) The following director(s), officer(s) or employee(s) of PI Financial Corp. is a director of the subject company in which PI provides research coverage. 6) No

7) A member of the research analyst’s household serves as an officer, director or advisory board member of the subject company. 7) No

8) PI Financial Corp. and/or its affiliates make a market in the securities of the subject company. 8) No

9) Company has partially funded previous analyst visits to its projects. 9) No

10) Additional disclosure: 10) No

General Disclosure The affiliates of PI Financial Corp. are PI Financial (US) Corp., PI Financial Services Corp., and PI Capital Corp. Analysts are compensated through a combined base salary and bonus payout system. The bonus payout is amongst other factors determined by revenue generated directly or indirectly from various departments including Investment Banking. Evaluation is largely on an activity-based system that includes some of the following criteria: reports generated, timeliness, performance of recommendations, knowledge of industry, quality of research and investment guidance, and client feedback. Analysts and all other Research staff are not directly compensated for specific Investment Banking transactions. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of PI Financial Corp. PI Financial Corp.’s policies and procedures regarding dissemination of research, stock rating and target price changes can be reviewed on our corporate website at www.pifinancial.com (Research: Research and Conflict Disclosure).



The attached summarizes PI’s analysts review of the material operations of the attached company(s).

Analyst Company Type of Review Operations / Project Date

Devin Schilling Heritage Cannabis Holdings Corp. Site Visit Falkland, BC 03/19 Devin Schilling Heritage Cannabis Holdings Corp. Site Visit Fort Erie, ON 05/19

Disclosure to US Residents PI Financial (US) Corp. is a U.S. registered broker-dealer and subsidiary of PI Financial Corp. PI Financial (US) Corp. accepts responsibility for the contents of this research report, subject to the terms and limitations as set out above. U.S. residents seeking to effect a transaction in any security discussed herein should contact PI Financial (US) Corp. directly.

Recommendations Number of Recommendations Percentage

BUY 62 82.67% NEUTRAL 10 13.33% SELL 0 0.00% TENDER 2 2.67% U/R 1 1.33% N/R 0 0.00%

TOTAL 75

Stock Rating and Target Changes For reports that cover more than six subject companies, the reader is referred to our corporate web site for information regarding stock ratings and target changes. www.pifinancial.com (Research: Research and Conflict Disclosure).

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

Heritage Cannabis Holdings Corp. (Initiated Coverage: Jun 27/19 Date Rating Change Target Change Share Price

Jun 27/19 Buy $1.00 $0.43

Participants of all Canadian Marketplaces. Members: Investment Industry Regulatory Organization of Canada, Canadian Investor Protection Fund and AdvantageBC International Busi-

ness Centre - Vancouver. Estimates and projections contained herein are our own and are based on assumptions which we believe to be reasonable. Information presented

herein, while obtained from sources we believe to be reliable, is not guaranteed either as to accuracy or completeness, nor in providing it does PI Financial Corp. assume any

responsibility or liability. This information is given as of the date appearing on this report, and PI Financial Corp. assumes no obligation to update the information or advise on

further developments relating to securities. PI Financial Corp. and its affiliates, as well as their respective partners, directors, shareholders, and employees may have a position

in the securities mentioned herein and may make purchases and/or sales from time to time. PI Financial Corp. may act, or may have acted in the past, as a financial advisor,

fiscal agent or underwriter for certain of the companies mentioned herein and may receive, or may have received, a remuneration for their services from those companies. This

report is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities and is intended for distribution only in those jurisdictions where PI Financial Corp.

is registered as an advisor or a dealer in securities. Any distribution or dissemination of this report in any other jurisdiction is strictly prohibited.

For further disclosure information, reader is referred to the disclosure section of our website.

Capital Markets Group

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Special SituationsBob Gibson, B.Comm, CFA416.883.9047

MiningChris Thompson, P. GeoHead of Mining Research604.718.7549

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Special Situations & CannabisJason Zandberg, B.BA, CFA604.718.7541

Devin Schilling, CFA604.718.7557

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Research AssociatesAkin Akinwale, B. Eng647.789.2415

Fayassir Haqna, B.BA604.718.7556

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Scott Brophy416.883.9043

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Vay Tham647.789.2417

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Trina Wang604.664.3637

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Aaron Eisenberg647.789.2411

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Documents

Devin Schilling, HERITAGE CANNABIS HOLDINGS CORP.cdn.ceo.ca.s3-us-west-2.amazonaws.com/1eh9sbo-cann-jun27... · 2019. 6. 27. · Strong Leadership. Clint Sharples, CEO, ... Outsource