Halo Collective Inc. (“Halo” or the “Company”) (NEO: HALO) (OTCQB: HCANF) (Germany: A9KN) today announced its financial and operational results for three months ended March 31, 2022 (“Q1 2022”). Halo’s book value- booking investments at actual adjust costs basis after impairments per IFRS guidelines- is $80.7 million. These actual results validate that the Company’s fundamental shift in strategy to incubate and spin out cannabis related companies is expected to create significant value for shareholders.
“Marked to market the Company’s estimated unrealized gain before taxes at March 31, 2021, on Halo’s investment in Akanda was approximately $74.6 million,1” said Kiran Sidhu, CEO, and Director. “We expect that if the intended acquisition and subsequent spin out of PhytoCann SA (“PhytoCann”) is completed, it will also create substantial value by delivering meaningful revenue and operating profit contribution.2”
- Akanda Corp. (“Akanda”), Halo’s first incubated company, completed its initial public offering and the listing of its common shares (the “Akanda Shares”) on NASDAQ in March 2022.
- Halo’s consolidated Q1 2022 revenue of $7.6 million declined $2.4 million, or 23.9%, compared to revenue of $9.9 million in Q1 2021. Revenue was impacted by a significant downturn in both the California and Oregon markets. The flower category, which is a leading indicator, sharply declined, with sales falling by 23% in California and 26% in Oregon year over year.3 Adjusted gross profit4 was $1.4 million, or 18.7% gross margin, compared to $2.2 million, or 22.1% gross margin, in Q1 2021.
- Halo’s California Wholesale business segment posted positive EBITDA in Q1 2022.
- As of March 31, 2022, the Company had a book value of $80.7 million ($1.65 book value per share).
“In 2022, we intend to develop, grow, and ultimately monetize assets by incubating promising cannabis related businesses while remaining laser focused on optimizing West coast cannabis operations. The planned spinout of Halo Tek Inc. is expected to result in a distribution to all Halo shareholders. The intended acquisition of Phytocann is expected to add significant revenue and EBITDA to the Company in late 2022,” said Katie Field, President, and Director.
“Halo’s California wholesale business segment is EBITDA positive and scaling. We expect to re-achieve positive EBITDA contribution from the Oregon wholesale business segment in the latter half of 2022,” added Joshua Haddox, Chief Operating Officer.
“The Company’s California dispensary business segment officially opened in Q1 and is growing quickly. After a six-month ramp-up period per dispensary, we expect the Los Angeles dispensaries in North Hollywood, Westwood, and Hollywood to contribute positive EBITDA,” commented Beau McKeon, Senior Vice President of Retail Operations.
- Akanda successfully listed the Akanda Shares on the Nasdaq Capital Market on March 15, 2022, under the ticker symbol “AKAN .”As of March 31, 2022, the Company held a total of 12,674,957 common shares of Akanda, and based on Akanda’s listed stock price per NASDAQ of $7.94 per share on March 31, 20225, the Company had an estimated unrealized gain from Halo’s Akanda investment of $74.6 million.
- Halo Tek Inc. (“Halo Tek”), a wholly owned subsidiary of Halo, filed a preliminary long form prospectus with the securities regulatory authorities in each of the provinces and territories of Canada, other than Québec, for the purpose of qualifying the distribution by Halo to holders of Halo’s common shares (“Halo Shares”) of all of the issued and outstanding common shares in the capital of Halo Tek (the “Halo Tek Shares”) as a return of capital (the “Distribution”). Prior to the Distribution, Halo intends to reorganize its technology assets so that Halo Tek is the owner of all the outstanding shares of Halo DispensaryTrack Software Inc., Halo AccuDab Holdings Inc., Halo Cannalift Delivery Inc., Nasalbinoid Natural Devices Corp., 1265292 B.C. Ltd. (d/b/a Cannafeels), and 1275111 B.C. Ltd.
- Halo signed a letter of intent and entered into exclusive negotiations to acquire Phytocann, one of Europe’s leading wellness CBD companies. Upon closing the acquisition of PhytoCann, PhytoCann is expected to add substantial net revenue and EBITDA and an impressive CBD-based product lineup to Halo.
- The Company also expects its holding in Elegance Brands, Inc., now known as Sway Energy Corporation (“Sway”), to be listed on a major North American exchange in 2022. Halo holds 9,333,333 shares in Sway, and the listing would allow Halo to monetize the position. The Company further holds 5,000,000 Sway warrants exercisable at a price of $0.75 per Sway share.
The initial phase of Halo’s retail rollout is almost complete. As of May 16, 2022, Halo has opened its North Hollywood dispensary under the Budega brand. The Company’s flagship Westwood dispensary is expected to open by May 27, 2022. The Hollywood location is planned to open by the end of June 2022. After a six-month ramp-up period per store, collectively, dispensaries are expected to contribute $27 million of net revenue and $4 million of operating profit contribution annually.6 The Company is in discussions with numerous other dispensary acquisition targets, but there is no assurance that any transaction will be completed.
In Q1 2022, the California wholesale business segment reported revenue of $2.0 million, gross margin of 20.1%, and Adjusted EBITDA7 of $0.1 million. These promising results resulted from:
- Expansion of California’s product line to 77 SKUs, including product categories gaining market share.
- Increased distribution from 142 dispensaries on December 31st, 2021, to 163 on March 31 st, 2022. Bad debts have been reduced, and accounts receivable days have decreased.
- Overhauled social media platforms and added brand ambassadors to increase retail sell through and demand at the consumer level.
- Increased white label business reducing fixed overhead costs and contributing to positive net income
- As of April 2022, discontinued operations at Coastal Harvest and consolidated to Outer Galactic Chocolates/Mendocino Distribution and Transportation LLC, which will reduce overheads and increase profitability in Q2 2022.
The Company anticipates Governor Newsom’s tax proposal- which would eliminate cultivation tax starting July 2022– if passed, would further increase profitability and growth of the California business segment.
Consolidated Oregon wholesale revenue was $4.9 million with a gross profit of $0.7 million, representing a 13.8% gross margin. Notable operating highlights from this quarter include:
- Increased Oregon’s product lineup to 422 SKUs targeting growing market categories by March 31st, 2022.
- Decreased distribution of our products to Oregon dispensaries from 478 on December 31, 2021, to 464 on March 31st, 2022; bad debts have been reduced, and accounts receivable days have decreased.
- Further reductions planned of production overheads and “right sizing” of the business for current revenue and future projections.
- Reduction in outdoor cultivation operations both in scope and cost for the 2022 growing season to decrease working capital expenditure and improve cash flow.
In March 2022, the Oregon legislature signed HB4016, a moratorium that inactivates all marijuana license applications received after January 1, 2022, until March 31, 2024. Additionally, it allows the Oregon Liquor and Cannabis Commission to refuse to issue any new marijuana licenses until further notice. Halo anticipates this favorable policy change will decrease saturation and lead to rising wholesale cannabis prices over time. The net effect of this bill is expected to result in an increase in product profitability in the State of Oregon.
Halo Kushbar Retail Inc. (“Kushbar”) reported $0.6 million in dispensary revenue and a gross margin of 32.2%. Combined, the three Kushbar stores had $1,678 in adjusted EBITDA8. As Halo assumes management of the Kushbar locations, the Company expects this segment to contribute to profitability. Management has devised a roadmap to improve the three Alberta stores and increase margin.
- Brand: Management intends to rebrand the stores from Kushbar to Budega. While the stores are aesthetically pleasing, the Company believes that the Budega brand promise — superior quality product, community-centricity, and sunset vibes – will resonate well with Canadian consumers. To achieve this, each store will be refreshed by the end of 2022 with mini makeovers that will reflect that of Budega’s U.S. operating retail outlets.
- Performance: To drive sales performance, the Company plans to methodically assess and rationalize the product assortment to ensure the store stocks the highest velocity items. SKUs held in inventory past 30 days must be sold through and replaced with products that our consumer base desires most.
- Experience: The Company intends to implement proprietary operational systems to shift the focus of frontline employees from “clerking” to ensuring customers leave with every need filled and expectations exceeded. In both U.S. and Canadian operations, we will continue to be laser focused on ensuring each guest interaction is thoughtful and complete. Upon exit, the consumer should not have to stop at any other dispensary for cannabis products.
- Loyalty: Halo believes the current Kushbar loyalty program can be improved by applying the successful Budega approach. By implementing the Budega loyalty program, the Company anticipates Kushbar stores will experience improved sell through, overall guest experience leading to more frequent purchases, larger basket size, and higher average ticket size.
Halo corporate overheads were $10.6 million in Q1 2022 compared to $10.9 million in Q4 2021, a 3% decrease. The Company expects more significant reductions through 2022. These reductions include, but are not limited to:
- Professional and legal fees are expected to decline as Halo Tek spins out, the pace of smaller acquisitions declines, and more professional and legal services have been brought in house.
- Executive salaries are expected to be paid in cash by Q3 2022, reducing aggregate costs by 50%.
- General and administrative costs are expected to decline as travel costs abate.