Halo Labs Inc. (NEO: HALO, OTCQX: AGEEF, Germany: A9KN) today announced its financial and operational results for the third quarter ended September 30, 2019. For the three months ended September 30, 2019, the Company’s gross profit and gross margin were $2.9 million and 41% respectively, representing record quarterly results since the Company’s inception. For the nine months ended September 30, 2019, revenues were $25.4 million, a 223% increase from the same period last year (nine months to September 30, 2018: $7.9 million). The regulated cannabis market is maturing at an increasingly fast pace and Halo Labs has positioned itself to thrive in the new environment. Halo’s revenue centric strategy has shifted towards quality of revenue, increased profits, and reduced expenses, to maintain strong cash and working capital positions to take advantage of acquisition opportunities should they arise.
Halo’s primary business objectives for the remainder of 2019 and into 2020 will be to:
- Continue to build its cash position, with working capital of $19.1 million;
- Seek strategic acquisition targets that diversify revenue streams, create additional distribution channels, and add value to the Halo brands and product suite;
- Grow quality of revenue and focus on higher margin products like DabTabs™ and concentrates;
- Further increase margins in Oregon and California by improving efficiencies and reducing cost of goods sold;
- Continue the Company’s international growth trajectory with the anticipated signing and closing of the proposed acquisition of Bophelo Bioscience and the aggressive expansion of operations in Lesotho; and,
- Expand into cannabidiol (“CBD”) product lines.
Q3 2019 Financial Highlights
- Total revenue in the three months ended September 30, 2019 was $7.2 million (three months to September 30, 2018: $3.6 million), a 99% year on year increase, explained by contributions from Halo’s Oregon operations, ANM Inc (“ANM”) and the new operations of HLO Ventures, LLC in Nevada (“HLO”) and Coastal Harvest, LLC in California (“Coastal Harvest”).
- ANM revenue was $3.4 million in the three months ended September 30, 2019, while HLO generated revenues of $0.4 million and Coastal Harvest $3.4 million.
- Including a gain in the value of biological assets, cost of goods sold was $4.2 million (three months ended September 30, 2018: $3.1 million), and gross margin for the third quarter was 41% (three months ended September 30, 2018: 15%). ANM achieved a gross margin of 40%, Coastal Harvest achieved a gross margin of 26% and HLO achieved a gross margin of -7% in the nine months ended September 30, 2019.
- The cash used for operations in the three months ended September 30, 2019 was $3.0 million.
- As of September 30, 2019, the Company had a cash position of $5.8 million, which including restricted cash of $2.0 million. Total working capital was $19.1 million.
- The increase in revenue for the three months ended September 30, 2019 compared to the same period in 2018 was due primarily to an increase of 532,838 grams of distillate sold and an increase of 23,250 grams of shatter sold.
- The average price increase of shatter also contributed to the increase in revenue for the three months ended September 30, 2019. Excluding the contributions of the new operations, HLO and Coastal Harvest, the increase in grams of distillate and shatter sold in those periods in Oregon were 19% and a 13% respectively.
- Gross margin has seen an increase to 41%, up from 16% during the second quarter of 2019, throughout all operations as the Company experienced a gain in biological assets as well as streamlined processes and reduced direct costs.
- For the nine months ended September 30, 2019, revenue was $25.4 million, a 223% increase compared to $7.9 million in the same period last year due primarily to the revenues from Halo’s new California operation, Coastal Harvest.
On July 16, 2019, the Company entered into an agreement with Falcon International (“Falcon”) to buy out the entire rental premium of its California locations. Halo issued an aggregate of approximately 2.7 million common shares for the buyout of a portion of rent at these two sites, providing the Company a total savings of C$1.2 million and overall reduced rent expenditure of 26%.
On July 18, 2019, the Company announced its inclusion in the OTC Markets Cannabis Index which trades on the OTCQX Market under the ticker: .OTCQXMJ. The Index’s goal is to highlight for investors the diversity of Cannabis companies that meet the financial, disclosure, and corporate governance standards required to trade on the OTCQX Market.
On August 6, 2019, the Company entered into a distribution agreement with Nabis, to supply California dispensaries with Halo’s full assortment of branded products. This agreement provides Halo with distribution coverage across the entire state of California. Nabis currently distributes over 60 brands to more than 650 dispensaries throughout California while providing an intuitive online platform that brings simplicity and efficiency to the cannabis supply chain.
On August 19, 2019, the Company announced a collaboration with ilo Vapor™ (“ilo”) to launch Levätä™, an alternative wellness brand focused on utilizing DabTabs™ technology to create a unique measured dose CBD consumption solution. Halo expects to begin sales of the Levätä™ collection to retailers in the fourth quarter of 2019, leveraging its direct sales force in California, Oregon, and Nevada. Halo also intends to increase sales of Levätä™ through the online retail marketplaces and by partnering with large distributors of cannabis peripherals in the United States and Europe.
On August 26, 2019, the Company announced it had been awarded two permanent California state licenses: a Type 11 Distribution and a Type 7 Volatile Manufacturing, for the company’s second facility in Cathedral City (“ICL 9”). As previously disclosed, ICL 9 also has Cathedral City local cannabis business licenses for both manufacturing and distribution.
On August 28, 2019, the Company announced a proposed purchase of a 17.5% equity interest in Ukiah Ventures Inc (“UVI”). UVI is a cannabis distribution, processing and manufacturing company providing biomass procurement and value-added services such as drying, trimming, packaging, freezing and storing cannabis. As part of the transaction, UVI will assist Halo in securing a steady supply of biomass by issuing a right of first refusal to Halo for three years, up to a monthly quota of 15,000 pounds, on all biomass. UVI will also provide Halo with rent-free access to its Ukiah facility for the first year of the strategic relationship, allowing Halo the opportunity to manufacture closer to the source of its biomass.
On September 4, 2019, the Company provided an update on the previously announced Bophelo transaction. Halo and Bophelo are in the process of negotiating mutually agreeable definitive agreements. Bophelo has secured third party funding of over $1.0 million being used in part to erect and plant an initial hectare that is projected to be fully implemented in the fourth quarter of 2019. Additionally, Bophelo is in discussion with local South African banks to secure a term loan to fund all grow operations as well as an extraction facility build out. This extraction facility is planned to be established and operating in close proximity to the cultivation site in 2020. Completion of this transaction will be subject to the satisfaction of certain conditions including the receipt of any requisite regulatory, governmental and stock exchange approvals.
On September 9, 2019, the Company announced that the warrants issued in connection with Halo’s private placement which closed on June 29, 2018 and business combination which closed on October 2, 2018 were approved for listing on the NEO Exchange. The Warrants commenced trading on September 11, 2019 under the symbol HLO.WT.A.
On September 13, 2019, the Company entered into a bulk supply agreement with Caliva to provide bulk distillate, bulk live resin and live resin packaged as finished products. The Agreement specifies pricing and minimum quantities per order by product category of 5 kilograms or more. Caliva is a leading company in California’s cannabis industry, holding 14 total cannabis licenses, placing products in more than 200 stores statewide and servicing roughly 700,000 total customers throughout the state.
On September 18, 2019, the Company announced that it has entered into an unsecured debt financing agreement (the “Loan Agreement”) with a private arm’s length lender for a principal amount of up to C$10.0 million. The agreement is for an initial twelve-month term with interest accruing at a rate of 9% per annum.
October 11, 2019 the Company announced that it has closed the previously announced non-brokered private placement of Halo common shares at a price of C$0.31 per share for aggregate gross proceeds of C$3.0 million.
On October 16, 2019, the Company announced that it closed a second tranche of the previously announced non-brokered private placement of Halo common shares at a price of C$0.31 per share for additional gross proceeds of approximately C$965k. The Company anticipates closing a final tranche for aggregate gross proceeds of up to C$1.0 million.
Issuance of Additional Common Shares
The Company has issued an aggregate of 10,440,320 common shares (the “Compensation Shares”) to certain directors, employees and independent contractors of the Company in lieu of cash consideration. The Company issued the Compensation Shares in two tranches. The first tranche of 3,997,648 Compensation Shares was issued on October 15, 2019 at a price of C$0.30 per share and in satisfaction of C$1,199,295 of payables owed by the Company. An aggregate of 3,832,167 of the Compensation Shares issued in the first tranche were subject to a hold period of four months plus one day from the date of issuance. The second tranche of 6,442,672 Compensation Shares was issued on November 13, 2019 at a price of C$0.26 per share and in satisfaction of C$1,675,096 of payables owed by the Company. An aggregate of 6,333,088 of the Compensation Shares issued in the second tranche are subject to a hold period of four months plus one day from the date of issuance. An aggregate of 275,065 of the Compensation Shares were issued to related parties (within the meaning of Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions (“MI 61-101”)) of the Company at an average price of C$0.28 and in satisfaction of C$78,137 of payables owed by the Company.
In connection with the above transaction, certain “related parties” for the purposes of MI 61-101 received Compensation Shares and the issuance thereto is considered a “related party transaction” for the purposes of MI 61-101. The Company is relying on exemptions from the formal valuation and minority shareholder approval requirements available under MI 61-101. The Company is exempt from the formal valuation requirement in section 5.4 and the minority shareholder approval requirement in section 5.6 of MI 61-101 in reliance on sections 5.5(a) and 5.7(a), respectively, of MI 61-101 as the fair market value of the subject matter of, nor the fair market value of the consideration for, the transaction, insofar as it involves related parties, is not more than 25% of the Company’s market capitalization.
The Company is currently in a solid cash position in a challenging capital market environment where other companies in the cannabis industry have had to scale back growth plans. With working capital of $19.1 million and growing margins, Halo is positioned to acquire new assets when opportunities present.
California has undergone large market shifts in the demand for cannabis products, with the market for distillate products diminishing, shifting regulations, and recent issues surrounding the vaporization industry. However, the Company had seen this particular transition coming and over the past quarter began to constrict and conserve capital, to survive and thrive in this environment. While revenues have diminished somewhat, the Company has doubled down on increasing gross profits and reducing expenses to increase cash flow.
Halo intends to build up its cash position and focus on efficiency while vetting potential acquisition targets. The Company will continue to target turn-key operations, whereby the target company brings positive cash flow into the consolidated business. Additionally, the Company will consider acquisitions which may help it become more vertically integrated, which in turn will help secure the supply chain and improve gross margin. Furthermore, the Company will target acquisitions that diversify revenue streams, create additional distribution channels, and become value-adding propositions.
Bulk distillate sales are down in California due to issues in the vape industry overall. The Company has shifted its focus to building upon their established B2B sales of oil and concentrate products to dispensaries and will scale this through the first half of 2020. The branded product portfolio includes distillate and live resin products in addition to live resin dab tabs sold under Hush. Halo has also begun evaluating opportunities for vertical integration into the California market in a similar fashion as its Oregon operations. The Company is now analyzing cultivation and retail dispensary opportunities as potential additions and diversification.
Oregon has seen a successful third quarter of 2019, showing continued growth and increasing profit margins. The current issues with vape cartridges have caused the Company to pivot from a focus on distillate product to now providing the sale of flower and pre-rolls. Oregon did see a record harvest in the third quarter of 2019, which has allowed for strong sales in concentrates.
While the concentrate business remains strong, the Company is now developing strategies to rebuild the vaporizer business around cannabis derived terpene distillate as well as live resin sauce in cartridges. The DabTabs™ have also seen better traction with the introduction of premium live resin.
At this time, the Company has decided to halt and re-evaluate its entrance into the hemp extraction business, as the market has seen a massive price decline on hemp products. The Company however is seeking opportunities further down the value chain in potential partnerships and acquisitions of unique CBD products.
The Company has significantly scaled down the Nevada business due to ongoing lawsuits surrounding additional dispensary licenses at the state level. Securing a retail footprint is a significant factor in driving revenue and profit in this market. The Company is currently evaluating the future of the Nevada operations but plans on retaining licenses for the time being as they have significant monetary value.
Lesotho continues to be the future of the Company’s international growth, unlocking access to one of the World’s largest cannabis grows of up to 205 hectares. Completion of the transaction is near and will be subject to the satisfaction of certain conditions including the receipt of any requisite regulatory, governmental and stock exchange approvals.
Bophelo has secured third party funding of over $1.0 million being used in part to erect and plant an initial hectare that is projected to be fully implemented in the fourth quarter of 2019. Additionally, Bophelo is in discussion with local South African banks to secure a term loan to fund all grow operations as well as an extraction facility build out that is expected to begin operations in 2020.
With the issues facing the vaporization industry, the Company has refocused on DabTabs™, concentrates and products outside the vaporization line. On August 19, 2019, the Company announced the launch of Levätä™, an alternative wellness brand focused on utilizing DabTabs™ technology to create a unique measured dose cannabinoid (“CBD”) consumption solution. Halo also intends to increase sales of Levätä through the online retail marketplaces and by partnering large distributors of cannabis peripherals in the United States and Europe.
On July 22, 2019, Halo launched the Shatterizer™, the first custom vaporizer device designed for the DabTabs™ Dablets™. The Company launched the initial rollout of the Shatterizer™ in Oregon and projects strong growth with the device as demand for DabTabs™ continues to increase. In addition, the Company offers the Dablets™ Go and the Dablets™ All In One to promote consumer adoption at the point of sale. The Dab Tab Go is compatible with any 510-thread battery while the All In One offers consumers a vape pen like device to vaporize the Dablets™.
The Company’s ambitious leadership has positioned the business to benefit greatly from the structural changes the global cannabis market is contending with.
In the United States, Halo Labs will continue to build on its prevailing position as one of the country’s leading cultivators, producers and manufacturers of high-quality cannabis and cannabis related products. Meanwhile, the Bophelo acquisition holds a huge amount of promise to propel the Company forward.
Capital Markets Listings
Halo is now trading on multiple exchanges including a recent up listing to the OTCQX. Halo is part of the Horizon US Marijuana ETF (HMUS for Canada and HMUS.U for the United States).
Investors can call in and Q&A with Kiran Sidhu, the Chief Executive Officer, and Philip Van Den Berg, the Chief Financial Officer, at 9 a.m. EST on Friday, November 15, 2019:
Participant Toll Free Dial-In Number: (866) 211-3166
Participant International Dial-In Number: (647) 689-6581
Conference ID: 9063097
ABOUT HALO LABS
Halo is a cannabis extraction company that develops and manufactures quality cannabis oils and concentrates, which are the fastest growing segments in the cannabis industry. Halo is a global leader in cannabis oil and concentrates, having produced over 4.5 million grams of oils and concentrates since inception. The Company has expertise across all major cannabis manufacturing processes, leveraging a variety of proprietary processes and products. The forward-thinking company is led by a strong management team with deep industry knowledge and blue-chip experience. The Company is currently operating in California and Oregon, as well as in Nevada with our partner Just Quality, LLC, and in Lesotho with the Bophelo strategic partnership. With a consumer-centric focus, Halo will continue to market innovative, branded, and private label products across multiple product categories. Halo recently acquired Dispensary Track platform which will alleviate customer flow constraints experienced by dispensaries and enable direct consumer interaction.
For further information regarding Halo, see Halo’s disclosure documents on SEDAR at www.sedar.com.
Cautionary Note Regarding Forward-Looking Information and Statements
This press release contains certain “forward-looking information” within the meaning of applicable Canadian securities legislation and may also contain statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking information and forward-looking statements are not representative of historical facts or information or current condition, but instead represent only Halo’s beliefs regarding future events, plans or objectives, many of which, by their nature, are inherently uncertain and outside of Halo’s control. Generally, such forward-looking information or forward-looking statements can be identified by the use of forward-looking terminology such as “plans”, “expects” or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases or may contain statements that certain actions, events or results “may”, “could”, “would”, “might” or “will be taken”, “will continue”, “will occur” or “will be achieved”. The forward-looking information and forward-looking statements contained herein may include, but is not limited to, references to the ability of the Company to identify and complete acquisitions, the ability of the Company to increase revenue and margin on products sold by the Company, the ability of the Company to expand into CBD product lines, timing of the Company’s sales of Levätä™ and sales of Levätä™ through online retail marketplaces, the ability of the Company to negotiate mutually agreeable definitive agreements with and complete the proposed acquisition of Bophelo Bioscience, the ability of the Company to maintain or increase its current cash position, the future performance of capital markets and the future availability of capital to the Company, the development of the cannabis market in California, Oregon, Nevada, and other jurisdictions in which the Company operates, the ability of the Company to generate positive cash flow, the ability of the Company to improve the efficiency of its operations, the development of the market for concentrates and distillates, the ability of the Company to develop strategies to grow its business, the development of the market for hemp-based products, the ability of the Company to secure a retail footprint in Nevada, the development of the Company’s operations in Lesotho, and the ability of the Company to generate revenue in Lesotho.
By identifying such information and statements in this manner, Halo is alerting the reader that such information and statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results to be materially different from those expressed or implied by such information and statements. In addition, in connection with the forward-looking information and forward-looking statements contained in this press release, Halo has made certain assumptions. Although Halo believes that the assumptions and factors used in preparing, and the expectations contained in, the forward-looking information and statements are reasonable, undue reliance should not be placed on such information and statements, and no assurance or guarantee can be given that such forward-looking information and statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such information and statements. The forward-looking information and forward-looking statements contained in this press release are made as of the date of this press release, and Halo does not undertake to update any forward-looking information and/or forward-looking statements that are contained or referenced herein, except in accordance with applicable securities laws. All subsequent written and oral forward-looking information and statements attributable to Halo or persons acting on its behalf is expressly qualified in its entirety by this notice.