On July 25, 2019 Heritage Cannabis (CANN.C) announced a vape-device deal with the $6.6 billion Cronos Group (CRON.T).
Heritage will fill and package vaporizer devices for the Canadian rec and medical markets. Specifically, vape fulfillment for the Spinach and PEACE NATURALS brands, “utilizing multiple unique and proprietary formulations provided by Cronos Group.”
The deal has “an annual potential contract value of $35 million”.
Heritage Cannabis has two Health Canada approved grow-ops, through its subsidiaries Voyage Cannabis and CannaCure. The company also has two additional subsidiaries, Purefarma Solutions, which provides extraction services, and a Health Services division.
Starting at the 1:59 mark of the video below, Heritage CEO Clint Sharples articulates the vision and the business strategy of CANN.
Cronos Group controls an iconic brand portfolio. Cronos’ Q1, 2019 results included the closing of a $2.4 Billion strategic Investment from Altria Group, establishment of device labs, and the launch of a vaporizer R&D initiative.
Heritage/Cronos Deal Summary:
- Two-year term with an option to extend.
- Heritage responsible for cannabis biomass supply
- Heritage to carry production costs of vaporizer devices
Heritage will execute its obligations though its two licensed subsidiaries, CannaCure in Fort Erie, Ontario, and Voyage Cannabis in Falkland, British Columbia.
Purefarma Solutions, CANN’s extraction subsidiary, will oversee the extraction operations in these facilities, with first deliveries expected in December 2019.
CannaCure’s 1st harvest successfully passed all tests including microbiology and pesticides and recorded an average THC content between 17-22%.
Four months ago, CANN announced that CannaCure has received both its Standard Processing Licence and Medical Sales Licence from Health Canada.
With the award of these licences, CannaCure can execute its downstream extraction, distillation and purification objectives.
Heritage’s subsidiary PhyeinMed obtained its standard processing licence on March 1, 2019. The extracted cannabis will be formulated for use in medical sales, adding significant value compared to wholesale dried flower revenues.
“Working with the Heritage group of companies gives us the quality and optionality that we are looking for as we introduce our proprietary vape pen formulations.” states Mike Gorenstein, CEO of Cronos Group “We are committed to continuing to the lead the industry responsibly as derivative products are introduced to the expanding Canadian marketplace.”
Heritage has a market cap of $258 million. Cronos’ market cap is 25 x bigger.
Typically, when a smaller company does a revenue-generating deal with a larger company, the smaller company will experience an immediate share price bump.
By mid-morning on July 25, 2019, Heritage is down 7% on 2.9 million shares traded.
“Excellent news today, as the vape pen market is only growing,” stated Inviolablspirit on an investor bullboard, “However, it’s definitely one of those buy on rumor, sell on news type of days. If you can time the ups and downs, all the power to you. It’s always up to the institutions to decide how the stock moves.”
This counter-intuitive SP movement, follows a 2019 trading pattern where investors pile in and out of CANN stock, driven more by “investor sentiment”, than any identifiable change in the valuation or prospects of the company.
With the pending introduction of new cannabis regulations in Canada this October, the availability of additional cannabis derivative products and format factors will result in a more diverse and expansive market for Canadian consumers.
CANN anticipates that vape pens will form a substantial part of this new market, in addition to edibles, topicals and beverages. It is Heritage’s goal to focus its future expansion on taking advantage of these growth segments.
“According to research from GMP Securities, extracts will eventually account for half of Canada’s legal cannabis market,” writes Equity Guru’s Sam Bourgi, “And vape pens alone will represent 20% of the extracts sector.
“We already have evidence of this, state-side,” continued Bourgi, “In California, vape cartridges accounted for nearly a quarter of legal marijuana sales in 2016.
Extracts are a gateway to many value-added segments of the legal marijuana sector, one that extends to oils, edibles, topicals and even infused beverages.”
“We are excited to be working with Cronos Group,” stated Sharples, “We believe CRON has an exceptional vision for the vaporizer category, and Heritage will be a key partner in helping them achieve their goals in the Canadian market.”
Full Disclosure: Heritage Cannabis is an Equity Guru marketing client