Earlier this month, we featured Halo Labs (HALO: NEO) (AGEEF: OTC) as a company that has been capitalizing on the cannabis oil opportunity in the United States and we hope that you paid attention to this.
Halo Labs recently reported several significant developments and the market has responded favorably to these announcements. When we look at this United States cannabis oil company, we see a business that is in the early innings of a major growth cycle and are favorable on this opportunity.
In late 2018, we started covering Halo Labs and we are impressed with how the fundamental story has advanced since then. When we began to follow Halo Labs, the company was only capitalizing on the cannabis oil opportunity in Oregon and was just starting to look at new markets. A lot has changed in less than a year, and the company is also capitalizing on the cannabis oil opportunity in Nevada and California.
The United States cannabis market has been generating considerable traction and this is a trend that we have been closely following. California and Nevada are the most attractive cannabis markets and we are favorable on Halo Labs’ leverage to these opportunities. Over the next year, we expect these markets to continue to become even more significant for Halo Labs and we are bullish on this.
Halo Labs is the perfect example of an under-appreciated opportunity that was flying under the radar. When you look at the performance of the stock so far this year, you will see that the company’s daily average volume has been increasing while the price has been trending higher. We believe that Halo Labs has an attractive chart and expect that this opportunity will be flying under the radar for only so much longer.
Earlier this month, Halo Labs announced that it was added to Horizons’ US Marijuana ETF. This is a testament to the company’s recent performance and we expect this inclusion to further improve market awareness. We are excited about Halo Labs for several reasons and want to briefly highlight these: 1) The company has been reporting record revenues on a month-over-month basis and this is a trend that we expect to continue; 2) We are seeing increasing demand for cannabis oil in every cannabis market and Halo Labs will benefit from this trend; and 3) The valuation is attractive when compared to its peers.
Expanding into the CBD Market
Although Halo Labs has been highly focused on the sale of cannabis oil that is high in THC, it recently announced a binding letter of intent to secure a purpose built hemp processing facility in Southern Oregon to expand its production capabilities into manufacturing cannabidiol (CBD) isolate and distillate. The company expects to commence production in the third quarter of 2019 and we will monitor how the team is able to execute on this.
One of the most exciting trends in the cannabis industry has been the increasing demand for CBD products and we are glad to see that Halo Labs is focusing on this opportunity. During the last few years, the CBD industry has become a multi-billion-dollar market and we believe the industry is reaching an inflection point. Last month, CVS Health Corporation (CVS) reported that it would start selling CBD products and this was a major milestone for the cannabis industry. The day after this announcement, Walgreens Boots Alliance, Inc. (WBA) also reported that it would start selling CBD products and we are favorable on the change in sentiment.
Once Halo Labs is operating at full capacity, the facility will be able to process approx. 10,000 kilograms of hemp per month (expected to yield 700 to 900 kilograms of high-grade distillate or isolate). At current wholesale prices, the company expects to generate more than $3.5 million in revenue per month and we are favorable on this potential revenue stream.
Halo Labs is a proven operator when it comes to cannabis extraction and the company provides its cannabis oils on a white label and on a business-to-business basis in California, Nevada, and Oregon. We are favorable on the proposed entry into the CBD hemp market due to Halo Labs existing position and expect to see the company leverage its manufacturing and distribution capabilities to expand its in-house brands as well as pursue additional white label opportunities.
The CBD market represents a massive opportunity after President Trump signed legislation in late 2018 that legalized domestic hemp and we believe that this was a major catalyst for the cannabis industry. The legislation effectively removed CBD derived from hemp from the DEA’s list of controlled substances by changing how cannabis is defined in the Controlled Substances Act. The legislation also makes hemp farmers eligible for federally subsidized crop insurance and we think this is something that investors need to be watching.
The Brightfield Group expects the size of the CBD market to grow from $594 million in 2018 to $22 billion by 2022, representing a 147% CAGR during the time period. Halo Labs is well positioned to benefit from the increasing demand for CBD products and this is an market that we are excited about. We believe that the market is not taking this growth opportunity into account and are of the opinion that this focus further enhances the fundamental story.
Expanding its Branded Product Business in California
The focus on the development and distribution of proprietary brands is one of Halo Labs’ most exciting initiatives. Earlier this month, the company issued an update on its California operations and we found the information pertaining to the sale of its branded products to be significant. In addition to providing bulk and white label products to its California customers, Halo Labs is also offering its own branded products to dispensaries through C4 Distro in Southern California.
The performance of Halo Labs’ branded products during the initial launch was impressive and we will monitor how the products continue to gain traction. More than 40 dispensaries in Southern California began to carry Halo Labs branded products during the first two days and this number is expected to significantly increase.
Through C4 Distro, Halo Labs is executing on a targeted launch strategy with key dispensary partners and expects to expand distribution of its branded products into approximately 200 dispensaries by the end of the second quarter. Once Halo Labs hits this level of distribution, the company’s branded products will be generating significant revenues and we are bullish on this.
Later this month, C4 Distro expects to launch its Gilt branded DabTabs product line to Southern California dispensaries and this could prove to be a significant catalyst for Halo Labs. The margins associated with these products are much more attractive than the white label business and we are favorable on this. Over the next year, we expect to see the company significantly advance its branded products business and this is an opportunity to watch.
Halo Labs: A Stock that is on the Move
One of the reasons we were initially favorable on Halo Labs was due to its planned expansion and this has already proven to be a major value driver. In 2019, the United States cannabis oil company has been generating significant traction in new markets and has been reporting record revenue numbers on a month-over-month basis.
In January, Halo Labs reported record monthly revenues and then reported even stronger results for the month of February. In March, the company announced a new revenue record where it generated $2.8 million ($3.7 million CAD). Halo Labs has been benefiting from having several revenue streams that we expect to become even more significant over the coming months.
When compared to its peers, Halo Labs has an attractive valuation and we are favorable on this due to its growth prospects. Over the next year, we expect this disparity to change and this is something that investors should be watching. If you look at the recent performance of Halo Labs, it is easy to understand that this is a company on the move.
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