TORONTO–(BUSINESS WIRE)–Halo Labs Inc. (“Halo” or the “Company”) (NEO: HALO, OTCQX: AGEEF, Germany: A9KN) today announced its financial and operational results for the three months ended March 31, 2020. Revenue for the three months ended March 31, 2020 were $4,449,098, a 49% decrease compared to $8,718,503 in the three months ended March 31, 2019. Revenues were comprised of $3,963,509 from ANM, Inc. (“ANM”) (three months ended March 31, 2019: $2,879,769), $111,263 from HLO Ventures (NV), LLC (“HLO”) (three months ended March 31, 2019: $511,096), $103,949 from Coastal Harvest LLC (“Coastal Harvest”) (three months ended March 31, 2019: $5,327,638) and $428,760 from Mendo Distribution and Transportation LLC (“MDT”) which was acquired January 9, 2020¹.

While overall revenue declined from the same quarter last year, compared to fourth quarter 2019, revenue increased 66.7%. Additionally; in Oregon, for example, Q1 2020 revenues increased by 37.6% compared to the same period in 2019. The most significant driver of revenue that declined was the shutdown of bulk distillate operations in Cathedral City, California, a conscious decision by the Company to curtail manufacturing to preserve working capital amidst challenging market conditions due to the vape crisis (“Evali”); Already in a reduced operating capacity, Nevada operations were further affected by the COVID-19 pandemic due to government regulations that closed dispensaries and only permitted home delivery. Accordingly, many Nevada operators suffered and according to BDS Analytics the legal cannabis market in Nevada was down 36.7% overall between January and April of 2020.

Halo made a clear and decisive pivot to reduce operations in Coastal Harvest and HLO to weather the unprecedented and challenging operating environment. Multiple factors including the vape crisis and the COVID-19 pandemic contributed to the uncertain climate. However, the Company is pleased to report its decision to focus on the preservation of working capital was successful and that, as of March 31, 2020, the Company had a working capital surplus of $8,765,461. As at March 31, 2020, the Company had $3,817,754 in cash, of which $1,549,658 is restricted compared to cash of $361,053 as at March 31, 2019.

¹ Net of intercompany eliminations totaling $158,384

Financial Results

• Compared to the three months ended March 31, 2019, in the three months ended March 31, 2020 overall the Company experienced a 35% increase in grams sold but also a decrease in revenue. A 60% decline in price impacted revenue and resulted from a higher percentage of grams sold that were flower (56%) than oil or shatter. Flower sells at a lower average price per gram ($1.07 vs. $5.85).

• Compared with Q4 2019, in Q1 2020, there was a 63.9% increase in grams sold to 1,481,756 grams (three months ended December 31, 2019: 903,907 grams) and a 4.7% increase in the average price to $3.16 (three months ended December 31, 2019: $3.02). Furthermore gross margin increased to 24.0% up from 9.8% in Q4 2019. It appears the trough in volume and price was reached in the three months ended December 31, 2019.

• Oregon- Compared with Q4 2019, in Q1 2020 there was a 11% decline in grams of shatter sold (267,807 vs. 300,205) and, due to decline in vape sales, a 33% decline in grams of oil sold (72,475 vs. 108,571). However ANM also experienced a 497% increase in grams of live resin sold (76,215 vs. 12,767), a 2,111%% increase in grams of flower sold (833,037 vs. 37,682), a 109% increase in grams of oil sold in tincture and gummy format (119,228 vs. 57,017) and 69,689 grams equivalent of pre-rolls (three months ended March 31, 2019, Nil).

• Coastal Harvest – In the three months ended March 31, of 2020, there was little activity. 26,232 grams of distillate and 11,031 grams of live resin were processed and transferred to MDT. Subsequent to the three months ended March 31, 2020, on April 24, 2020, the Company announced that it made its first sale of distillate that was cleaned using the Company’s proprietary Superfiltration™ Pilot Program. Halo intends to scale this process up to one hundred liters per week, which would triple current capacity and provide bulk distillate at reduced prices.

• MDT – In the three months ended March 31, 2020, MDT sold 26,232 grams of distillate and 11,031 grams of live resin. MDT was acquired by the Company on January 9, 2020.

• HLO – In the three months ended March 31, 2020, the facility in Nevada sold 1,515 grams of distillate (three months ended March 31, of 2019: 17,682 grams). The Nevada facility sold 1,305 grams of live resin (three months ended March 31, 2019: Nil) and 3,222 grams of shatter (three months ended March 31, 2019: Nil).

• Overall gross margin in the three months ended March 31, 2020 was -3.9% (three months ended March 31, 2019: 25.0%). Excluding the loss on the value of biological assets of $289,553 and impairments of $951,813, the gross margin was 24.0% (three months ended March 31, 2019: 28.0%). The contribution came from ANM’s 23.8% gross margin, which adjusted for the loss in biological assets was 31.1%.

• Management anticipates Coastal Harvest and MDT to contribute going forward both to revenue and gross margin and that will positively impact the Company’s results. Temporary cessation of unprofitable sales in Coastal Harvest as a result of the vape crisis helped to preserve the Company’s cash position. Meanwhile, distillate operations re-started again with Superfiltration technology that has yielded preliminary but positive results.

Revenue / Sales Activity

ANM – Contributing to $4,449,098 in sales, Oregon experienced price increases in shatter which sold at $5.04 per gram (a 60.9% increase vs. three months ended March 31, 2019), cartridge oil sold at $11.05 per gram (a 27.0% decline vs. three months ended March 31, 2019), live resin sold at $6.96 per gram (a 11.8% increase vs. three months ended March 31, 2019), flower sold at $1.07 per gram (a 223.8% increase vs. three months ended March 31, 2019). Edibles sold at $4.94 per gram of oil equivalent in the three months ended March 31, 2020, a 17.8% decline in comparison with the three months ended March 31, 2019. Pre-rolls sold at $1.06 per gram equivalent in the three months ended March 31, 2020. There were no pre-roll sales in the three months ended March 31, 2019. These variables overall resulted in a 37.6% gain in revenues in Oregon.

The conversion yield of trim into oil was 7.4% in the three months ended March 31, 2020 compared with a yield of 7.1% in the three months ended March 31, 2019. 6,011,231 grams of trim were converted into oil in the three months ended March 31, 2020, a 97.4% increase in comparison with the three months ended March 31, 2019. The trim price declined to $32 per pound, a 50.3% decline.

Gross Margin

The cost of finished cannabis inventory sold was $4,331,725 in the three months ended March 31, 2020 (three months ended March 2019: $6,273,930). Cost of goods sold included $951,813 of impairments (three months ended March 31, 2019: $Nil). The loss in the value of biological assets was $289,553 in the three months ended March 31, 2020 (three months ended March 31, 2019: loss $267,758).

The gross loss for the three months ended March 31,2020 was $172,180 including an impairment at MDT of $951,813 and a loss on biological assets of $289,553. ANM generated a gross profit of $944,551 (three months ended March 31, 2019: $139,578), a gross margin of 23.8% (three months ended March 31, 2019: 4.8%) and adjusted for the loss on biological assets the gross margin was 31.1% (three months ended March 31, 2019: 14.1%). HLO generated a gross loss of $56,550 (three months ended March 31, 2019: gross loss $9,863). Coastal Harvest generated a gross loss of $103,670 (three months ended March 31, 2019: gross profit $2,027,374). MDT generated a gross loss of $956,511 though adjusted for impairments the gross loss was $4,698.

EBITDA and Adjusted EBITDA

In the three months ended March 31, 2020, the Company had negative EBITDA of $7,387,050 (three months ended March 31, 2019: negative EBITDA $1,638,064). Adjusted for specific items that are significant but not reflective of the Company’s underlying operations including depreciation, impairments, share based compensation, and biological assets, the adjusted negative EBITDA was $5,778,968 (three months ended March 31, 2019: negative EBITDA $553,122). This rise in expenditure was due mainly to an increase in professional fees relating to financing and M&A support. M&A activity increased professional fees at the corporate center. From a cash perspective, $2.7 million is attributable to share based payment for compensation, goods, and services.

EBITDA and Adjusted EBITDA are non-IFRS financial measures that the Company uses to assess its operating performance and do not have any standardized meaning prescribed by IFRS. EBITDA is defined as net earnings (loss) before net finance costs, income tax expense (benefit) and depreciation and amortization expense. Management defines Adjusted EBITDA as EBITDA adjusted for share based compensation and payment, foreign exchange loss, share based payments for goods and services, accretion expense, transaction expense in relation to RTO, fair value on intangible, values on biological assets and marketable securities. EBITDA and Adjusted EBITDA are provided to assist management and investors in determining the Company’s operating performance. The Company also believes that securities analysts, investors and other interested parties frequently use these non-IFRS measures in the evaluation of companies, many of which present similar metrics when reporting their results. As other companies may calculate these non-IFRS measures differently than the Company, these metrics may not be comparable to similarly titled measures reported by other companies. For a reconciliation of EBITDA and Adjusted EBITDA please refer to “Non-IFRS Measures” in the Company’s management discussion and analysis for the three months ended March 31, 2020.

Cash

In the three months ended March 31, 2020, cash outflow was $2,250,660 (three months ended March 31, 2019: cash outflow $361,596).

• Cash used in operating activities was $6,949,066 (three months ended March 31, 2019: $2,057,852). The increase in cash used in operating activities was due to a net loss of $11,693,186 (three months ended March 31, 2019: net loss $2,979,294), the reversal of non-cash items in the amount of $4,972,341 (three months ended March 31, 2019: $1,742,325) and an increase in working capital of $106,525 (three months ended March 31, 2019: increase of $820,884).
• Cash provided by financing activities was $4,698,406 (three months ended March 31, 2019: $2,043,377). The cash flow from financing activities in 2020 was comprised of net proceeds from issuance of common shares (“Common Shares”) in the amount of $4,839,172 (three months ended March 31, 2019: $574,780), a repayment of loans in the amount of $129,077 (three months ended March 31, 2019: increase in loans $1,634,136) and $11,689 was paid as share issuance costs (three months ended March 31, 2019: $165,539).
• Cash used in investing activities was $Nil (three months ended March 31, 2019: $347,121). Capex in relation to the acquisition of MDT and the increase in leased assets were non-cash items.

Over the last three months, management has positioned the Company to focus on cash preservation and maintaining a healthy balance sheet to operate throughout 2020. New initiatives and acquisitions have typically been financed by the issuance of Common Shares and have not absorbed cash. Cash used in operations benefited from a release of working capital in the amount of $1.5 million. At the Q1 burn rate, the Company has approximately 11 months of funding in place.

Q1 2020 Corporate Highlights

1. On January 9, 2020, the Company closed its acquisition of MDT.

2. On January 15, 2020, the Company announced that it has exercised MDT’s option to purchase award winning Outer Galactic Chocolates LLC (“OGC”), holder of a Type N manufacturing license and this transaction expected to close in Q3 2020 (the “OGC Acquisition”).

4. On February 12, 2020, the Company announced that Katharyn M. Field has been promoted to President of the Company. Ms. Field was previously the Chief Strategy Officer of the Company.

5. On February 14, 2020, the Company announced that it had entered into an asset purchase agreement with High Tide Inc. and affiliates thereof for in connection with the proposed purchase by Halo of three licensed retail cannabis stores, five development permits to build new cannabis stores in Alberta, and a number of trademarks, copyrights and digital assets (the “High Tide Acquisition”). Closing of the transaction is subject to the review and approval of the Alberta, Gaming, Liquor, and Cannabis Commission and the satisfaction or waiver of other customary conditions.

6. On March 5, 2020, the Company signed definitive agreements to acquire a controlling interest in LKJ11, LLC (“LKJ11”) a North Hollywood cannabis dispensary applicant and to acquire 100% of the outstanding membership interest in LKJ11’s retail manager, Crimson & Black, LLC (“C&B”) for total consideration of $11.5 million to be paid in Common Shares (the “NOHO Acquisition”). . Upon closing, the Company will issue $2 million in Common Shares and the Company will issue a further $9.5 million in Common Shares to be held in escrow and issued to the vendors based on completion of the certain milestones. These transactions are expected to close in June 2020.

7. On March 10, 2020, the Company completed an acquisition of Cannalift for aggregate consideration of 31,000,000 Common Shares. Cannalift is a software company that is developing an application to introduce a new and convenient method for obtaining cannabis products. Once functional, the application will deliver any products from local dispensaries to consumers through an intuitive application and website, subject to regulatory approvals. Concurrent with the closing of this transaction, Halo closed a non-brokered private placement of Common Shares at a price of CAD $0.11 per share for aggregate gross proceeds of approximately CAD $700,000. 

11. On April 17, 2020, the Company announced it has entered into a letter of intent to acquire a 25% membership interest in Feel Better, LLC, dba FlowerShop for $1.5 million, payable primarily in Common Shares at a deemed price of $0.0971 per share (the “Flowershop Investment”). FlowerShop is a lifestyle brand that will be promoted by recording artist, G-Eazy. Halo and FlowerShop will also execute a licensing, manufacturing, and distribution agreement for FlowerShop branded products.

12. On April 20, 2020, the Company announced it had completed the acquisition of Nasalbinoid Natural Devices Corp. for aggregate consideration of 34,000,000 Common Shares. Concurrent with the closing of this transaction, Halo closed a non-brokered private placement of Common Shares at a price of CAD $0.11 per share for aggregate gross proceeds of approximately CAD $425,000.

13. On April 24, 2020, the Company announced that it made its first sale of distillate that was cleaned using the Company’s proprietary Superfiltration Pilot Program at Coastal Harvest in Cathedral City, California.

18. On June 4, 2020, the Corporation announced that it had entered into an exclusive strategic partnership with Terphogz™, LLC (Zkittlez™) to develop and commercialize new and unique cannabis genetics in Oregon.

19. On June 8, 2020, the Corporation announced that it had entered into an amended and restated promissory note (the “Amended & Restated Promissory Note”) for a principal amount of up to $10 million. The Amended & Restated Promissory Note amends and restates the unsecured debt financing agreement that the Corporation entered into with a private arm’s-length lender, as previously disclosed in the Corporation’s press release dated September 18, 2019.

Outlook

Halo’s Primary Business Objectives for 2020

In order to drive financial results in 2020, the Company intends to focus on the following strategic principles as well as market specific applications:

• Continue targeted approach to acquire assets that come with working capital in all-stock transactions – where possible – that verticalize the Company’s operating footprint, and preserve the Company’s cash position.
• Close the proposed acquisition of Bophelo Bioscience & Wellness (PTY) Ltd. (“Bophelo”) and complete the build out of a 120,000 sq. ft. Phase 1 canopy project in Lesotho, as well as develop regional and international distribution for Lesotho flower and concentrates through supply agreements in federally legal countries in the European Union, the United Kingdom, Australia, Israel and within the African continent.
• Close transactions that will lead to revenue improvement in 2020, including the NOHO Acquisition, the OGC Acquisition, the Flowershop Investment and the High Tide Acquisition.
• Where possible, continue to preserve cash by paying senior management in stock, and issuing share based payments to contractors and advisors.
• Continued focus on cost controls and savings/reductions.

California

Cannabis sales stalled in California during the COVID-19 pandemic. According to BDS Analytics April 2020 California cannabis sales declined nine percent decline from the trailing month in retail delivery sales and declined ten percent in concentrate sales. Despite the flat market, sales of Hush™ vape cartridges grew steadily with unaudited wholesale sales in April of $298,000⁽¹⁾. Unaudited May 2020 wholesale sales of Hush™ branded products were $417,002⁽¹⁾.

The Company expects verticalizing further in California to mitigate the stalled market growth. Halo also anticipates continued discussions and license agreements with leading brands and branded packaged products to garner higher price points on distributed products. One or all of these brands could be utilized for brick and mortar locations including the North Hollywood dispensary the Company intends to open in 2020.

Oregon

Oregon fared better during the COVID-19 pandemic. According to BDS Analytics compared to April 2019, April 2020 retail cannabis sales overall grew by almost 40 percent. In this same time period, retail sales of Hush™ branded concentrates grew 180% year over year. In addition, retail sales of Hush™ branded edibles also significantly increased, growing at 353% year over year when compared with April 2019⁽¹⁾. The Hush™ brand ranks #3 in concentrate category market share and #7 in edible category market share in the state of Oregon for the month of April. The Company believes that these figures provided by BDS Analytics do not include Halo’s Exhale™ and Mojave™ branded sales of concentrates as well as the Company’s white label sales of concentrates, edibles, pre-rolls and flower. To continue building on this success in Oregon, the Company plans to expand its product line up and amplify flower products sold including prerolls and infused prerolls.

International

Halo believes a foothold in the international market is critical as countries worldwide legalize cannabis at the national level. At that point, cost of production will determine optimal manufacturing footprint and the cost to produce in Lesotho is among the world’s lowest. Currently, the Company is focused on closing its proposed acquisition of Bophelo and developing the manufacturing site in Lesotho, Africa. This transaction has the potential to unlock a 200+ hectare cultivation operation, which would make Halo one of the world’s largest growers and suppliers of medicinal-grade cannabis.

To capitalize on growing exports market, Bophelo is also undergoing a quality manufacturing program to meet Good Agriculture and Collection Practices (“GACP”) guidelines in order to seek applicable licenses to ship flower grown in Lesotho to the United Kingdom and a range of European countries including Spain, Greece, Malta as well as Australia and Israel.

In North America, Halo will continue to build on its prevailing position as a leading cultivator, producer and manufacturer of high-quality cannabis and cannabis related products.

About Halo

Halo is a leading cannabis cultivation, manufacturing, and distribution company that grows and extracts and processes quality cannabis flower, oils, and concentrates and has sold over 5 million grams of oils and concentrates since inception. Additionally, Halo has continued to evolve its business through delivering value with its products and now via verticalization in key markets in the United States and Africa with planned expansion into European and Canadian markets. With a consumer-centric focus, Halo markets innovative, branded, and private label products across multiple product categories.

The Company has entered into binding agreements to acquire a dispensary in Los Angeles, 3 KushBar branded dispensaries, five development permits in Alberta Canada, and Canmart which holds wholesale distribution and special licenses allowing the import and distribution of cannabis based products for medicinal use (CBPM’s) in the United Kingdom. Halo is led by a strong, diverse management team with deep industry knowledge and blue-chip experience. The Company is currently operating in the United States in California, Oregon, and Nevada while having an international presence in Lesotho within a planned 200+ hectare cultivation zone via Bophelo as well as planned importation and distribution in the United Kingdom via Canmart.

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, the intended deployment of the Company’s current funds, the intended timing of Bophelo’s initial cannabis exports, the timing and completion of the Company’s ongoing acquisitions, the timing and ability of the Company to complete its initial exports to the United Kingdom, Halo’s primary business objectives for 2020, the ability of the Company to grow revenue and gross margin, the completion of certain acquisitions by the Company, the Company’s intention to produce flower product categories year-round, the Company’s views regarding the competitive landscape of the international market, the expansion of Bophelo’s licensed growing capacity, the Company’s cash needs for fiscal 2020, and the ability of the Company to continue to build on its current market position.

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.

Among others, the key factors that could cause actual results to differ materially from those projected in the forward-looking information and statements are the following: unexpected costs or delays in the completion of the Company’s ongoing acquisitions; negative results experienced by the Company or potential acquisition targets as a result of general economic conditions or the ongoing COVID-19 pandemic; delays in the ability of the Company or Bophelo to obtain certain regulatory approvals, including, the GACP certification, local licenses or the necessary import and export permits; unforeseen delays or costs in the completion of the Company’s construction projects; unwillingness of employees or consultants to accept shares in lieu of cash consideration; an inability to identify suitable brands for acquisition; adverse changes to demand for cannabis products; ongoing projects by competitors; adverse changes in applicable laws; adverse changes in the application or enforcement of current laws, including those related to taxation; increasing costs of compliance with extensive government regulation; changes in general economic, business and political conditions, including changes in the financial markets and in particular in the ability of the Company to raise debt and equity capital in the amounts and at the costs that it expects; risks related to licensing, including the ability to obtain the requisite licenses or renew existing licenses for the Company’s proposed operations; dependence upon third party service providers, skilled labor and other key inputs; risks inherent in the agricultural and retail business; intellectual property risks; risks related to litigation; dependence upon senior management; and the other risks disclosed in the Company’s annual information form dated as of the date hereof. Should one or more of these risks, uncertainties or other factors materialize, or should assumptions underlying the forward-looking information or statements prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected.

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.

Financial Outlook

This press release contains a financial outlook within the meaning of applicable Canadian securities laws. The financial outlook has been prepared by management of the Company to provide an outlook for certain sales figures for April and May 2020 and may not be appropriate for any other purpose. The financial outlook has been prepared based on a number of assumptions including the assumptions discussed under the heading “Cautionary Note Regarding Forward-Looking Information and Statements” above and assumptions with respect to market conditions, pricing, and demand. The actual results of the Company’s operations for any period will likely vary from the amounts set forth in these projections and such variations may be material. The Company and its management believe that the financial outlook has been prepared on a reasonable basis. However, because this information is highly subjective and subject to numerous risks, including the risks discussed under the heading ” Cautionary Note Regarding Forward-Looking Information and Statements”” above, it should not be relied on as necessarily indicative of future results.

Notes:

(1)

These preliminary and unaudited financial results are subject to customary financial statement procedures by the Company and its auditors. Actual results could be affected by subsequent events or determinations. While the Company believes there is a reasonable basis for these preliminary financial results, the results involve known and unknown risks and uncertainties that may cause actual results to differ materially. These preliminary fiscal results represent forward-looking information. See ” Cautionary Note Regarding Forward-Looking Information and Statements “.