Halo Labs Inc. (OTCQX:AGEEF) Q4 2019 Results Earnings Conference Call April 20, 2020 4:15 PM ET
Company Participants
Katie Field – President
Kiran Sidhu – Chief Executive Officer
Philip Van Den Berg – Chief Financial Officer
Conference Call Participants
Katie Field
Good afternoon. My name is Katie Field. I am the President of Halo Labs and I will be your conference moderator today. At this time, I would like to welcome everyone to the Halo Labs Corporate Update Conference Call. All lines have been placed on mute to prevent any background noise. Keep in mind this session will be recorded. After the speakers’ remarks, there will be a live Q&A answer session. And if you would like to ask a question, please submit it by pressing raising your hand in the right-hand side of the GoToWebinar attendee screen.
The format will be speaker’s presentation by Kiran Sidhu, our Chief Executive Officer; and Philip Van Den Berg, our Chief Financial Officer that has been pre recorded, and again, that will be followed by a live Q&A.
Before we segue into that next part, I would just also like to take a moment to extend on behalf of Halo Labs our heartfelt concern and sympathy for all the communities both in the U.S. the markets where we operate and internationally for those who have been affected by COVID-19.
With that being said, I would like to again just clarify that the speakers on today’s call will be Kiran Sidhu; and Philip van den Berg.
And I would like to remind listeners that certain statements made during this call may constitute forward-looking information and forward-looking statements within the meaning of applicable securities laws.
These statements involve known and unknown risks and uncertainties and other factors which may cause the actual results performance or achievements of Halo Labs and its subsidiaries or the industry in which it operates to be material different from future results, performance or achievements expressed or implied by such forward looking statements.
When used in this conference called presentation such statements use words such as may, will, expect, believe, plan, or other similar terminology. These statements reflect management’s current expectations regarding future events and operating performance, and speak only as a date here off.
Keep in mind these risk factors are discussed in detail under the headline Risk Factors in our annual information form dated April 16 2020 and filed on SEDAR. Numerous factors may arise from time to time and is not possible for management to predict all of these risk factors to the extent to which any factor or combination of factors may cause actual results, performance or achievements to be material different from those statements contained in the forward-looking financial statements.
Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Although, the forward-looking statements contained in this presentation are based on what management believes to be reasonable assumptions, Halo cannot assure investors that actual results will be consistent with these forward-looking statements.
The company undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise other than as required under securities legislation.
And keep in mind because many of you have tried to chime in registering after the fact, this will be recorded. So, again, this will be posted and be available going forward.
I will now turn the call over to Philip Van Den Berg, our Chief Financial Officer in the pre-recorded earning statement.
Philip Van Den Berg
Okay. Thank you, Katie. [Technical Difficulty] 2019 revenues increased with the 158% to $28.1 million. That’s reflected [Technical Difficulty] gross profit was $3.1 million, gross margin was 11%. The comparable gross profit for 2018 [Technical Difficulty] 2019 revenue was $10.9 million, a 6% increase. [Technical Difficulty] Adjusted gross profit was 24.5% [Technical Difficulty] 224% [Technical Difficulty] declined with 65% to $200,000 reflecting [Technical Difficulty] gross loss was [Technical Difficulty] In 2018 it was profit — gross profit was $75,000 [Technical Difficulty] gross profit was minus $340,000 and in 2018 $75,000. Impairments for this and bad tax for Q4 were $226,000. [Technical Difficulty] declined 26% over [Technical Difficulty]
Turning to [Technical Difficulty] 2019 revenue was $13.3 million and Q4 revenue was $0.6 million. [Technical Difficulty] reduce the exposure. In 2019, [Technical Difficulty] 2019 gross profit was $2.5 million, gross margin was 60.4% [Technical Difficulty]. Adjusted gross profit were $3 million, gross margin was 19.4% and Q4 was [Technical Difficulty]
Non-reoccurring items were $236,000 basically reflecting commission relating to Q2. [Technical Difficulty] were $191,000. This was [Technical Difficulty] $0.49.
Turning to operating expenses. 2019 OpEx was $37 million compared with $9.7 million in 2018. [Technical Difficulty] OpEx was $13.8 million when compared to $4 million in the previous year. [Technical Difficulty]
Katie Field
Thank you, Philip. Now I will turn it over to Kiran Sidhu, Chief Executive Officer.
Kiran Sidhu
Good afternoon, everybody. I first wanted to start by giving some cautionary notes on forward guidance. We as a company do not provide forward guidance. We were hoping to pick up some analyst coverage by the end of Q3. We are working diligently on that with some investment banks to encourage them to pick up analyst coverage. They themselves may give forward guidance but as stated we do not.
Also by the COVID-19 it’s hard to predict outcomes of certain events that we thought were probable before. So good example is the Central Bank of Lesotho giving us the final stamp for the approval of the acquisition of Bophelo.
For COVID-19 became a pandemic and Lesotho act of shutdown of the government offices except what they did as necessary work. We were in line to get the stamp within 24 hours to 72 hours. Now that the government offices are shut down, we are still being assured that we will get that stamp and it’s a matter of formality, but when it come is really at the mercy of the pandemic and not so much of the Central Bank anymore.
Another good example of how COVID has affected us is with our NOHO dispensary acquisition. The BCC again as we know is working remotely that would be doing necessary action, that’s the bureau of cannabis control. And the issue there again is trying to get someone to approve the transfer of the license so we can begin our construction and start producing revenue. Again, the timing of that is uncertain as a result of the pandemic. That being said, we again got very good news out of L.A., where there were positive results would be off which basically perfected the license that we have intended to purchase. Thanks Katie.
Katie Field
Okay. Great. Well, look, I just wanted to first say thank you all for joining us. That was – that portion was pre-recorded and we were having technical difficulties with the audio. So I just want to reassure everyone who is attending and everyone who registered that all of these recordings including that one will be available when you hear it in the context of just the recording itself, it’s going to come through very, very clearly for you. And as always we encourage you to submit your questions, if you have already done so.
And with that being said, we’ll get started with the live Q&A. And again, please submit your questions because we will continue to take them throughout the duration of our presentation here.
Question-and-Answer Session
A – Katie Field
Okay. Kiran, this question is for you. We are waiting. Okay. Good. We are waiting for Bophelo to close and we’ve been waiting for a long time. Why hasn’t it been done yet and is it something to do with COVID-19?
Kiran Sidhu
Well, I spoke to that during the pre-recorded point that we just went through. Katie, can you hear me clearly by the way, as am I coming through clearly?
Katie Field
I can hear you clearly and I will continue to…
Kiran Sidhu
Okay.
Katie Field
… monitor the questions just to make sure that.
Kiran Sidhu
Okay.
Katie Field
Yeah.
Kiran Sidhu
All right. So what I – what we’ve seen with Lesotho and the lockdown, the Lesotho lockdown and the South Africa lockdown are more along the lines of the Chinese lockdown than the U.S. style lockdown.
So with us where we are, we have to have special permits to continue work and those special permits are strictly monitored by local law enforcement at this time. So since they are monitored by law enforcement, that every day they actually come by and count how many people we have and to make sure that they do have permits at different times.
Our operations are not impacted materially. In terms of trying to get a CDL stamp of approval, Louisa and the team are pressing the Central Bank, but the Central Banks, governors and officers have said look, right now they’re operating in the skeleton staff and only doing essential services.
That being said, we’ll continue to persist on that. I myself, I’m frustrated by the situation as are many of our shareholders. But needless to say that, we were working diligently on that and everything is in place, and we’re just waiting. Thanks, Katie.
Katie Field
Okay. This is a quick follow-up question to that Kiran. A couple of our attendees here are savvy, they’re following the news and they did see that Canopy had stepped out of Lesotho. So how do we feel that this will create an opportunity for Halo and what would we be doing differently than Canopy as a result?
Kiran Sidhu
Okay. So I can’t speak to why Canopy or anyone elected to leave Lesotho. But I posted on Twitter a few times when I was in Lesotho and I went by their site, and what was interesting about their site was that it was rarely in operation. It was actually never in operation when I went by and it seems like they never really got started.
From our perspective and Lesotho is our view in Lesotho and maybe it wasn’t Canopy’s view that Lesotho is really our breadbasket or what we’re focusing on outside of Canada in the United States. So we really believe from Lesotho in terms of biomass or material initially, GACP material, we would be able to supply high quality material at effective prices and nothing that we have seen to-date has made that condition adverse at this point.
In terms of Canopy leaving, the day I heard the news, I spoke to some of our shareholders in Bophelo, the fellow shareholders in Bophelo who had spoken — that they actually spoke to Canopy’s local partners who are taking over the operation and they are interested in working with us, particularly on combining our efforts around exports.
What’s interesting is what we learned is that the local partners there have shifted or pivoted a lot of their output to CBD which in certain markets does not require GACP certification. It’s a loser market. So they are — they’ve been more focused on CBD. We’ve been more focused on THC. So we’re going to talk over the next couple of months. I would say, nothing in Africa happens in days or sometimes weeks on how we can work together. They also have beautiful facilities even though they haven’t been utilized. So, hopefully, maybe we can utilize some of that in the future together with that.
Katie Field
Okay. Great.
Kiran Sidhu
Katie?
Katie Field
Yeah. No. That was great. Thank you. Okay. So the next question was just generally about the fourth quarter and 2019 and that it was not as good as the other quarters, so — in 2019. So what is our outlook then our expectations for Q1 this year and beyond into 2020?
Kiran Sidhu
Okay. So we do not give guidance, but that doesn’t stop me for pointing out some of our news that we’ve released and some of what we have said to our shareholders at large. So, we have clearly stated to all shareholders that in Q1 2020, we had discontinued our wholesale distillate operation at Coastal Harvest in Cathedral City. And the reason that we closed it was due to price depression as a result of EVALI or the vape crisis. Keep in mind that wholesale distillate in Q1 of 2019 was a major driver of revenue, which we do not have in Q1 of 2020.
In 2000 — also in Q1 2020, I don’t anticipate that there’ll be any large extraordinary items. It was a fairly clean quarter. In terms of what we’re doing in Cathedral City is we’ve restarted our operations in Cathedral City using the super filtration technology that we initially alpha-tested in our labs in Medford and we’re running pilots right now in Cathedral City.
I am physically on my way down. I’m right now in Mendocino to Cathedral City to see those pilots in action. So far the results have been promising and we’ll continue to provide updates as I – as is feasible or as possible. So revenue should start accelerating again in Q2. But in Q1, obviously, we did not have the wholesale distillate operation to generate revenue.
Katie Field
Okay. Great. All right. So this next question is regarding the Superfilter technology that you just mentioned in Cathedral City. So, isn’t this already as somewhat existing technology, and if so, what direction are we going in? Are we going to just buy dirty oil and refine it? Will we be doing it for others, for ourselves and what is the total market potential for it?
Kiran Sidhu
So, it is not an existing technology, most pesticide remediation is currently done using mass spectrometry or actually different types of technology where the machines can cost anywhere as low as a million dollars and I’ve seen machines upwards of $5 million using mass spectrometry. Our technology is a different technology which is part of the blasting process actually that we’ve added on to.
Right now, we have over 1 million grams of worthless product ourselves to go through, that is product that we have written off. We have received a few inbound queries from larger California players about either giving us oil on a toll processing basis or selling us oil that we could clean up and sell.
There seems to be a large demand for pesticide remediation. Ours cost effective. Effectively, our cost is $0.75 a gram right now, we haven’t optimized it, we’re in pilot phase and we are pricing that when people ask at a buck 50 a gram. So we’re trying to make what’s known as a keystone margin or a 50% gross margin.
There seems to be potential for remediation at that cost. But one thing I want to emphasize is recapturing the written-off product directly takes revenue down to gross profit effectively as we capture that product, we have negligible incremental costs, other than our cost of remediation at $0.75 per gram plus whatever we lose in the remediation process.
So what you do is you see a substantial gross margin increase in California as we start to utilize that oil and sell it through in our own finished goods. The other thing I want to emphasize about this is that we’re taking waste products or byproducts and filtering them using primarily organic material, which is also reduces our environmental footprint overall. It’s sort of a form of recycling is another way to look at it. Katie?
Katie Field
Sure. Okay.
Kiran Sidhu
Okay, Katie.
Katie Field
Yeah. Okay. So the next question is regarding the FlowerShop deal. And many of the attendees have been excited about it and they’ve commented positively about it, but they are wondering how significant G-Eazy’s involvement will be to promote the actual brand in cannabis products. Will it be fully committed and what can we expect?
Kiran Sidhu
Okay. So it took a while, I’d say for Gerald and Gabe and Isaac to get comfortable with us and for us to get comfortable with them. And working with an A list celebrity like Gerald or G-Easy is not a — it’s kind of tricky as we’ve learned in terms of management, legal clearances and all sorts of other clearances that they themselves have on their side.
As part of the deal, this is an exclusive sort of venture in cannabis is going to be Feel Better. That is what he is fully committed to. And again we at Halo plan to promote Feel Better as our higher-end brand. So G has already announced the venture on its Instagram. So people can go to his Instagram and see that. And I think if you look at this relative to other deals, again, I can’t comment on Drake and Canopy, I cannot comment on Cleve and G-Easy.
I don’t know if they were active the day of announcement on Instagram and how active those celebrities really were. But with G, we wanted to make sure he was active and he also is a part owner in the venture.
The last thing is all monies raised by Feel Better are going to Feel Better. G-Eazy has agreed that any expense he incurs over 1,000 bucks that the Feel Better Board will pre-approve or Feel Better management will pre-approve which we’re going to be part of. So it’s not like we’re giving money to a celebrity for an endorsement. We’re going into partnership with Gerald, with Gabe and with Isaac.
And part of what’s important, really important to Gerald, Isaac, Gabe, and myself is the ability to create jobs. And so part of what we’re doing here is as we build Feel Better, we’re going to build the direct sales force for Feel Better, we’re going to build specific techniques and manufacturing for Feel Better. And so, again, here in Mendocino, we’ll be hiring people for the Feel Better venture in and of itself.
Lastly, barring any COVID-19 travel restrictions, I plan to go down in the next two weeks and meet with Gerald and his management in L.A. to continue the discussions on actually the launch and getting the documents all signed over the next four weeks to six weeks.
Katie Field
Great. Well, this next…
Kiran Sidhu
Okay.
Katie Field
This next question Kiran is regarding another expansion of product in California. This time though, they are wondering about edibles noting that there’s actually a pretty fragmented space, there are a lot of competition. So why Halo Edibles and both the value edibles offering are more of a premium luxury type offering?
Kiran Sidhu
Okay. So our roots at Halo vis-à-vis ANM have always been on the value side, given Andreas’s background as a Co-Founder with Walmart. I mean, he’s really ingrained that in our culture. So in terms of Edibles in Oregon in terms of unit volume, I think, we’re one of the largest players in the state.
And what we are there is again, we’re a value brand. So now in California, through the reestablishment of the Superfiltration process and the re-launch of Coastal, oil which is the highest cost of goods sold up in edible really becomes a low cost for us, which we believe to be as low if not lower than anyone in the state. So the concept there is to produce the same lines that we’ve produced in Oregon, which is our hush chews or gummies in our syrup or tincture and have a release scheduled late Q2 early Q3.
And think of edibles as a substrate. In our mind edibles, I mean, our edibles tastes great. I’ll probably post the picture of some samples coming off the line here in MDT later today or this week in Twitter as I sit here at MDT.
But think of edible or a tincture or a syrup as a delivery mechanism. So if your cost of goods sold, which is principally oil is low, then it’s just a question of how effectively you can manufacture the delivery substrates in order to have a competitive cost advantage that you can sustain over time in California.
Katie Field
Agreed. All right. So then another question that we’ve been getting is regarding some of the newer sort of product and development type acquisitions including Nasalbinoid? And how fast could this product which is in development beyond the market, either in Canada or the U.S.?
Kiran Sidhu
So, the goal is by Q3, again, depending on supply chain of actually getting the nasal delivery device, which is quite generic. It’s not in the device here, but it’s in the formulations. The goal is by Q3, the launch in California and Oregon.
And just by way of background, COVID-19, there’s a lot of talk about ACE receptors. Again, I’m not a doctor, but it seems that the lungs are compromised by COVID-19 and that smoking or carbonization or vaping or vaporization has a certain effect to amplify the virus through something called the ACE receptors.
Please no one quote me on this. So a lot of people now are interested in edibles. But the issue with edibles has to do with the type of high you receive and the latency. So even with the greatest nanotechnology, it’s going to take up to 10 minutes for an edible to onset. However, nasal delivery is also an instant effect like smoking or carbonization through the nasal passages, without carbonization or without vaporization.
I put on Twitter a little just a really simple example or just not even an example of exactly how the Nasalbinoid product is used with the CBD Eucalyptus formulation if anyone wants to see it. So a lot of people said, a lot of people were critical and said, God you paid so much, and you move so quickly on that deal and the way I look at it was really simple.
We have five tested formulations, we plan to launch 15 SKUs, five CBD, five THC and five one-to-one CBD THC of those formulations. If let’s say by the end of Q3, hypothetically, we could do $500,000 of incremental gross profit, excuse me, of incremental revenue at a 40% margin. That’s roughly $200,000 of margin contribution a month and it gives our salesman another differentiating factor in our bag.
So if that’s $200,000 — if we can get up to a $200,000 rate that effectively gives us a payback of less than two years. So hence that was our thought process behind it. And sometimes in life, it’s much better in my opinion to build versus buying because right now we don’t have the staff or the bandwidth to build these things. So it’s much easier to buy them and deploy them.
Similarly, people have been asking about our software acquisitions. And the key to our software acquisitions right now is getting our dispensaries up in order to pilot our own software before we start rolling it out.
So the critical thing is getting some of our dispensaries up, seei how our software fits in, optimizing it and then rolling it out or keeping it ourselves in the markets we serve for our own competitive advantage. Katie?
Katie Field
Okay. Great. Yeah. So I think we have about one more question here, which was regarding the Los Angeles dispensary and about when construction would start and what is missing in order to really commence with this. So I can address this.
Primarily, we’ve done everything that we need to do in the sense that the merger agreements been executed. And the only thing that we’re pending is the actual transfer of the ownership and the license to Halo and that is really up to the City of Los Angeles and the regulating body. Although, we’ve submitted all the documentation, our principles and our company, in our licenses that are already in California are already approved by the State of California.
So in theory, it should be a more seamless process. But I think again with COVID-19 that has placed some of these regulatory approvals on the back burner, not necessarily the back burner, but just slowed it down. So that’s the timing is a little uncertain and we are waiting anxiously as well as we are with Bophelo and just getting that last approval.
That being said, we have already lined up all of the other aspects to do with building the dispensary out, such as all of the plans are in place we ever contractors lined up, we’re looking towards getting some inspections that are involved with the process and expediting those, and we potentially think that this could shorten the timeframe so that once we do get that final green light, the dispensary could be built out within 45 days. So that is something that again, we view is very important. And right now it’s just a matter of getting that green light again from the City of Los Angeles.
So that being said, I believe that we’ve covered most of the questions. We again apologize for the technical difficulties earlier in the presentation. We want to assure everyone though, both to the ones that attended the call, the ones that registered for the call, that all of the recordings are going to be available both in terms of that will be posted on our website, but we will also be sending those directly around to everyone that registered and attended and or attended.
So you should be able to get that and we encourage you listen to it again. We appreciate your time. And if you have any further questions, you can feel free to submit that to our Investor Relations email or you can message us on Twitter or any of the social media accounts. We really do welcome your questions and we value you as shareholders of our company.
So, Kiran or Philip, do you either of you have any further comments or any closing remarks?
Kiran Sidhu
Phillip, I think, one thing that’s important that was a little muddled during the first part is, if you have a chance, can you go over the state of our balance sheet, because really in Q4 and Q1, we didn’t manage so much by income statement, but we really managed much more so by balance sheet and then looking at cash on cash. So if you can explain to people, the state of our balance sheet as of Q4 and how we really emphasize that?
Philip van den Berg
Can you hear me?
Katie Field
Yes. Philip, we can hear you.
Philip van den Berg
Sure. Okay. Well, the balance sheet, at the end of the year, we had net debt of $10 million and net cash of $24 million, so our net debt to equity was only 17%. So, basically, we have a very healthy balance sheet. Also we have 15 — more than $15 million [ph] of capital of which half is inventory that we can use, we have a very, very healthy working capital situation.
And in terms of the capital structure in the balance sheet, even earlier we had 280 million shares at the year end and we issued 123 million shares during the year of which 60 million — 70 million were issued in Q4 and it was all related to M&A activity.
So to give you an idea, we issued 47 million shares in relation to acquisitions, of which the fair value of the capital contribution was $11 million and that were basically all non-cash, so we didn’t spend any money, any cash on acquisition was all done with issuing shares.
Same with our consultants who have been working with us on the advisory side for M&A, we had about — in our corporate center, we had about $7.5 million of call it non-cash payments to consultants, that was all M&A related. So you really should make an adjustment in the corporate center for about $7.5 million of that.
What that did is we issued 28 million shares in relation to that. That was basically saving of in fair value to $9 million. In Q4 that was like 30 million shares at value of fair value of $3 million. All that is all cash that has to be preserved has not been spent so being done in issuing shares. That’s why we have a pretty healthy balance sheet.
We also — we didn’t really burn as much cash for adjustable for non-cash items. So we were in a pretty good position. Basically the key of how we have done earnings threshold that on reserve as much cash as we can going into 2020. And that is pretty much it.
Katie Field
Okay. Great. I’m glad that you discuss that Philip because that is a question that was that some of the attendees had asked in the question panel here. So I’m glad that we got to that. Kiran is there any chance that we can comment on the U.K. and some of the press that we’ve disclosed around that?
Kiran Sidhu
Sure. So I think today or tomorrow needs to get an extension from the Principals of Canmart, which were in the process of securing. The U.K. is a longer term investment. So I’m not really expecting any substantial and material cash drain, cash investment or cash coming in from the U.K. in 2020.
The key is to get that distributor up for what I believe they call CMBPs or whatever for Cannabis Medicinal Based Products is the acronym they use in the U.K. So to be in shape to actually begin getting that chain established, it sort of reminds me of when we did it early on in Oregon, when we were one of the first distributors and how that was very critical in order to maintain share in Oregon.
Similarly, in the U.K., the goal is with non-material cash investment to be able to get that business up and running. And then look in 2021, 2022 when prohibition partners and other sources were the equivalent, I believe not the equivalent, but they’re like BDS in Europe say that that market is going to dramatically increase. So it’s just having a seat at the table and it’s connecting the dots from what I call feed all the way to sale.
And what I mean by that is speed, sort of being the DNA in our seeds in Lesotho and the sale being let’s say in the U.K., in Malta, in Spain, in Greece, in Australia, potentially even in Israel is where you want to start developing sale.
And I think the U.K. in terms of cannabis consumption is one of the top markets in Europe currently and will continue to be so in the future. It’s just like the U.S. come 2012 and that is shifting that demand from the gray or black market to the white market, which as we’ve seen in the U.S. just takes time and being having a seat at the table as that happens.
Katie Field
Okay. Well, I think that that about covers it. Philip, Kiran if you have any further questions or remarks or anything else that you think we need to address now would be the time to do so.
Kiran Sidhu
No. I just want to thank everyone for attending the call. I want to apologize to everyone for the technical difficulties in the beginning. Part of what I think happened is we actually maxed bandwidth which I think is just the sign of the times.
As Katie said, every recording, all the recordings will be posted online. We’ll try to be as responsive as we can to questions to a lot of people who follow me on Twitter. I have not been as active on Twitter as I normally was.
I think that was a source of frustration for a lot of people and that has to do with the fact that earnings were coming out during a period right before earnings are coming out, we prefer to be a little bit more quiet. Now that we’re 72 hours — or soon will be 72 hours after earnings, you’ll be seeing a lot more responsiveness from us to the extent we can be responsive.
Katie Field
Okay. Exactly. So, again, thank you all. I encourage you to reach out to us directly. But please be assured that we will compile the recordings both what we had done over the weekend in addition to today and we’ll make those available to you and ensure that they’re easy to listen to and understand format. So, again, thank you so much for joining us and we look forward to continuing to hear from you and thank you again for being our shareholders.
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