Earnings Transcript for HCANF - Q2 Fiscal Year 2020

Operator: Ladies and gentlemen, thank you for standing by, and welcome to Halo Labs Q2 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation if time permits there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator instructions] I would now like to hand the conference call over to Katharyn Field, President of Halo Labs. Thank you. Please go ahead.

Katharyn Field: Good afternoon everyone, and thank you for joining us. My name is Katie Field and I'm the President of Halo Labs. And I will be your conference moderator. At this time, I would like to welcome everyone officially and again let you know that yours line has been placed on mute. Basically how this will go is we will have speaker remarks both from Kiran Sidhu, our Chief Executive Officer; and Philip Van Den Berg, Chief Financial Officer and after both have given their remarks and presentation, there will be a question-and-answer session and you will able to submit questions. Before we get started, though, I would like to remind the listeners that certain statements made during this conference call presentation may constitute forward-looking information and forward-looking statements within the meaning of applicable securities laws. These statements involve known and unknown risks, uncertainties, and other factors, which may cause the actual results, performance, or achievements of Halo Labs and its subsidiary entities or the industry in which it operates to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. When used in this conference call presentation, such statements use words such as may, will, expect, belief, plan and other similar terminology and include among other statements regarding expected operating results, future growth, anticipated capital expenditures, corporate strategy and proposed acquisitions. These statements reflect management's current expectations regarding future events and operating performance speak only as of the date here of. Important factors that could cause Halo's actual results and financial condition to differ materially from those indicated in the forward-looking statements include among others economic and financial conditions, the ongoing impact of COVID-19, strategic actions, including acquisitions and dispositions and Halo's success in integrating acquired businesses. These risk factors are discussed in detail under the heading Risk Factors in Halo's annual information form dated April 16, 2020, and Halo's additional disclosure documents filed on SEDAR. New risk factors may arise from time-to-time, and it is not possible for management to predict all of those risk factors or the extent to which any factor or combination of factors may cause actual results, performance, or achievements to be materially different from those contained in forward-looking statements. Given these risks and uncertainties investors should not place on undue reliance on forward-looking statements as a prediction of actual results. Although the forward-looking statements contained in this presentation are based upon what management believes to be reasonable assumptions, Halo can not assure investors that actual results will be consistent with these forward-looking statement. 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. I will now turn the call over to Kiran Sidhu and Philip Van Den Berg who will, first Kiran and then Philip will be presenting the financial results for Q2. Thank you.

Kiran Sidhu: Good evening, good afternoon, and good morning to everyone, depending on where you are in the world. My name is Kiran Sidhu. I am the Co-Founder, a Director and the CEO of Halo Labs. And what I'd like to do is change the way we've been doing these calls and focus more on overall strategy, where we've been and where we're headed before we get into results. It's been a very challenging time for us, which started with the vape crisis and is continuing with COVID. And COVID, I would say, has been a personal journey, definitely for myself and Andreas who both have knock on wood recovered from bouts with COVID. And so, I have a lot of sympathy and empathy for people who've suffered through this and what we're all suffering through, basically as humans with this pandemic. But the vape crisis and COVID has caused us to basically reshape the business. It was actually pivot or perish. And the first thing the vape crisis taught us was not to be solely dependent on our oil and concentrate business. So over the past three quarters, we have been aggressively diversifying our product offerings to include flowers, pre-rolls and edibles. The second thing it taught us was that, given market conditions to limit our scope. And what I mean by that is our geographic scope. So, as on a North America basis, we're pretty much focused on Oregon and California. That being said, we have excellent assets in Nevada. Nevada suffered a little bit more from COVID, where California shrunk a little bit, and Oregon's actually booming. So, we've diversified our product offering into flowers, pre-rolls and edibles. Edibles are with the COVID crisis, what I can say in general, and specifically in Oregon and California have been taking off. So we're really focusing, broadening our line there. The other thing I'm happy to report is a concentrate in oil demand has returned to normal levels in California and Oregon, in Oregon it’s actually growing, which has allowed us to turn back on coastal harvest, which was active in 2019 until about July or August of last year. Now with our super filtration in place and our B2B wholesale distillate business growing again, you should see some positive impacts from coastal harvest, which has essentially been sidelined since Q3 of last year and Q3 of this year. The other thing it's forced us to do, particularly in California is verticalize. As dispensaries have been hit by riots, had been hit by a delivery only business versus being able to bring in clients, which has vacillated back and forth in California. We thought to ourselves to verticalize there. So in California, I'm happy to announce that as I'm speaking, a press release is going out on the closure of UDI. So we have our first indoor cultivation facility in our system that we're going to begin actively building. And, we're doing that, which another press release is just going out with Terphogz. We're also looking at other cultivation assets in California, as you know, we have now manufacturing an oil capacity with UDI. We have cannabis processing capacity, with UDI and we have a large campus now in the Emerald triangle, in the heart of the Emerald triangle in Ukiah. And that’s going to really help us because physically our distance between our Oregon headquarters and our Ukiah headquarters as the crow flies is a couple of hundred miles. The other thing we're planning to do is get into the dispensary business in California. We really can't do this in Oregon. We're just too large and it would alienate some of our larger customers at Oregon, but in California while we're still smaller, say a top 20 player in the B2B dispensary sales business. We're finalizing our plans to we're looking probably now at, I don't know, close to 15 to 20 dispensaries that are for sale in California. And we're looking to open our flagship dispensary in Los Angeles. Hopefully by the end of this year and we're planning to commence build out at that new dispensary in Q3. So again, to recap what I'm saying about North America, we have California, we have Oregon. In Nevada, we have licenses, one that we've fully paid for that we're waiting to transfer, which is a manufacturing license and a cultivation license that we have optionality on. In Nevada we're also looking at pursuing joint venture opportunities or outright sale of those licenses. We're leaning more towards joint venture opportunities at this point. Like we've successfully done with TerpHogz now in California and in Oregon, like we've successfully done with OGE DNA in Oregon and in Lesotho, we're looking for a joint venture partner of that status also in Nevada. Turning away from North America and yes, we are actively looking to enter Canada, through the acquisition of KushBar from High Tide and those development permits. But when we look at Canada, we're looking at doing it front-to-back as opposed to back-to-front, because in Canada, it seems that the dispensary players Fire & Flower, High Tide and others are performing relatively better than their manufacturing and cultivating peers. A big focus for us now and it seems to be a big focus that you as shareholders who are listening are driving us towards is international. We need to put a lot more effort into our international business. And right now, honestly, it's tough. Just South Africa air space we were hoping this Sunday when the President of South Africa announced Phase II, that he would actually open-up the air space to commercial travel. It's my understanding that he did not. So, we're agreeing -- we're looking now at bordering countries of South Africa in order to fly people in and out of Lesotho as we need them, and then transport them overland into South Africa and then into Lesotho. For those of you who don't know, Lesotho is landlocked, and all port of entry and exit come through South Africa. So when South Africa says that their airspace is blocked, it blocks Lesotho’s airspace, as well as because Lesotho does not have many flights, if any from other jurisdictions other than South Africa, I believe they don't have many or any for that matter. So, there's a much more emphasis on Bophelo and international. Bophelo is really simple to us. We're cultivating there, we continue to grow. Now we have a large order from Medcan in Malta, and effectively we need to do two things there. We need to secure funding with that order in hand, Louisa is now our chairperson, the closing behind us. Louisa’s having an aggressive go is getting that funding done over there. Then we need to get our GACP certification, which we I -- personally and Andreas are working on every week. We hope to have that within let's say 8 to 12 weeks and then we're off to the races selling product from Bophelo. Canmart a lot of you have asked is really critical to us because again, as I say, we narrow our scope to Oregon, California and potentially Nevada in the United States, and then Canada, through the dispensary acquisition and then reversing back-in systematically into listing our products and selling them off to other dispensary's obviously we’ll have a good relationship with High Tide after this acquisition of KushBar. So that will be, I would say in the medium-term, something that we're also looking at the same way we have to focus ourselves in our international pursuits. We have Lesotho, we have the , arguably it's the large -- one of largest licensed grows in the world, if not the largest, we have to execute on that grow. You're not going to be seeing us buying other international grows abroad Lesotho will be our base. And then we need to export, we need to export into Europe and UK having Canmart is critical in that path -- pathway and then also looking at the UK at the EU continent is critical. That initial order with Medcan, we hope to get other orders within our system as well, but that's a large enough order for us to fulfil over the next let's say through the end of 2021. The one thing I'd like to favorably report is a Canmart is now live. So when we started the deal with Canmart, they were not live. They were licensed and ready to go. They are importing product and they are selling product to pharmacists -- pharmacies, who then deliver them to patients. We also are looking at some serious executive role changes to have more of an emphasis on international and when we close Canmart over the next few weeks, we'll have a good base in the UK, we have a great base now in Lesotho with Bophelo. So we're feeling very bullish on the international business and looking for significant contribution in 2021. So in terms of what I would call the three strategic focuses in the short-term for the company is to close Canmart and G-Eazy deal, which is called Feel Better. So we have a high end product line to compliment Hush and the Terphogz, what I call professional product line that will be developing and securing institutional and bank funding for the Bophelo expansion, as well as GACP certification and then consolidating and growing market share in Oregon and in California, looking to expand ourselves now that our manufacturing, our indoors check the box, looking at outdoor greenhouse cultivation in California, probably in a joint venture, and then also looking at acquiring more dispensaries within California to verticalize. Now I'm going to turn it over to Philip. A lot of people have been concerned about dilution, dilution, dilution, but they don't understand the concept of acquiring things to be accretive. Some shareholders have also mentioned to me that they feel that, myself and Philip and Andreas from time-to-time taking his salary and shares as dilutive. In my opinion, that aligns us with the shareholders and as a shareholder, not as a Director and as an officer speaking in my capacity as a shareholder, I believe that the current market cap of around $70 million Canadian does not even adequately reflect the value of Bophelo and the potential there, least of all Oregon, California, potentially Canada, the UK and other assets we have. But now, I'm going to turn it over to Philip, and then Philip will delve into the results, and also talk a little bit about this whole concept of dilution and how we view it as many of you have concerns about it.

Philip Van Den Berg: Okay. Thank you, Kiran. Before I do my presentation, let me just go into the subject that you just touched upon, the dilution. So the way we look at it as follows. In this year 2020, we have issued in relation to acquisitions. We issued 183 million shares and we break down our portfolio in three components

Operator: [Operator Instructions] So we have a couple of questions that we would like to take the last 15 minutes to answer. [Operator Instruction] Okay, so with that being said, Kiran, this question is regarding the $30 million off-take for Bophelo and whether there's capability to fulfill this off-take, can you answer that question?

Kiran Sidhu : So, there is capability today to fulfill that off-take over seven year period. That being said, Medcan is expressed to us that they want that off take fulfilled given the demand they have in Europe over the next 2 to 2.5 years. In order to do that, as I said, we need to either deploy capital from Halo. As Philip says, we have about 14 million. I'd say about what he said about US$12 million, available to us at this point, and our cash burn is going down. So I think that given Louise's background, she's now our Chairman. And I'm happy to say that, we have the first black African woman as a Chairman of a publicly listed cannabis company to the best of my knowledge. So, I think the GACP getting some funding in there, and then getting some people in there is all going to help towards execution. So right now we have product to ship, but we don't have product over the next two years to fulfill that contract over the next seven we do, and we just need to grow into it. And historically, we've always been good at doing that. So it's not something that I'm losing sleep over.

Katharyn Field: And then this next is sort of a follow up on Bophelo. Kiran, you talked about the bank. It says the bank department, but maybe its bank account. Not sure but for Bophelo a year ago, is this still in the works?

Kiran Sidhu: Yes, so, Louisa, so people don't know Louisa's background. I mean, she is a private equity. She runs a very large private equity fund in South Africa. She is very deeply rooted in the African let's call it banking, institutional equity and private equity communities. She's a bit effectively said to us what she needs to be able to undertake a fund raising exercise during these times. We're providing her those things that we need, which is getting that GACP we've obtained an off-take, we've actually successfully produced product that is flawless and clean. And so she has not flawless but I mean, no mold, no pesticides, clean product. So, now given her background, I'm fairly confident if not highly confident, despite these challenging times, that she's going to be able to raise that money, hopefully within the next three to five months.

Katharyn Field: And then this next one is still regarding Bophelo, do you have a build out plan? Or are you flexible to meet upcoming demand?

Kiran Sidhu: So, we have a very detailed build out plan. Andreas met our Co-Founder, COO and Director has been very active with it. We have an issue where we've made a deposit on a one hectare greenhouse. And that is sitting in, I believe Australia or someplace waiting to ship. We have alternate plans to do, California style hoops and we keep putting them up until that large greenhouse ships. And we just keep growing that operation right now, as aggressively and as best we can. But to be quite honest, there have been challenges in the past and there’re challenges in the future just even with the physical movement of people and goods in and out of Lesotho at the point given the COVID pandemic.

Katharyn Field: True. So this next question is regarding Canmart and the timing and why it is overdue?

Kiran Sidhu: So Canmart and the timing, as I said is over the next few weeks. And again, to be frank, I mean, COVID has affected us and affected Canmart's ability to close this deal. And, now everything is sort of on track. The agreements are pretty much finalized and, we're actually working with them actively on our slack channels, and what have you operationally as well. So, inevitably, the vision is to be able to grow very high quality OG DNA genetics, and our standard style on cannabis in Lesotho at GACP standards, ship that into Europe, through Malta and Medcan. And then inevitably, when people transform it into CGMP medicines, move those into the UK, which would give us a substantial, competitive advantage over any and all competitors there. So, I mean, that's the vision for 2021. So, yes, Canmart is a critical piece to us of that vision. And I think it's one of the only few distributors in the UK of cannabis medicinal products that can say that, they're active and effectively making sales to pharmacies.

Katharyn Field: And then, we have a couple for Philip, but before we get there, Kiran, there's one more regarding the stock and the range that it's been trading in, and whether it would make sense to consolidate the number of shares in order to get the share price higher in a more serious range. What are your thoughts about this?

Kiran Sidhu: We have no intention to reverse split or consolidate the stock. I mean, to be quite frank, people don't invest in a company like Halo, when they can invest in a company like Apple or Facebook or a tech company, and maybe get a double in a year. People are looking at Halo to do it 5x to 10x as many what many investors have told me. And a lot of people, including me sort of view the stock at $0.10 is a call. So, if we execute the way we should execute, our multiple should rise up to the level of other MSOs. And if that does, if you just look at an apples-to-apples basis, so stocks should be trading around $0.20 to $0.25 today. And so, if we continue this positive trend that we've seen in Q3, I mean Q4 to Q1 to Q2 to Q3 to Q4, I think this stock can substantially appreciate.

Katharyn Field: Okay. Good. So, Philip these questions are regarding

Philip Van Den Berg: Right. I think with everything that as we're doing right now, I think it's fair to say that in Q4, we should be cash flow and EBITDA positive. Yes. ANM is already cash flow positive. MDT is improving rapidly. We are taking a closer look from standstill to actually growing again, we're focused on corporate overhead and new acquisition so that start to ask to, then I think, yes, we should be cash flow positive and EBITDA neutral by Q4 this year. Or just, if you just think about it and that's kind of for this year, but it's for next year. One harvest of Bophelo makes the entire company cash flow positive.

Katharyn Field: Yes. Okay. Q4 of which year a variance about?

Philip Van Den Berg: The 2020.

Katharyn Field: Okay, great. And the follow-up question was when will Halo be break even, but I mean, you touched on EBITDA neutral there as well. So maybe this means a full investment, but anyways, is there anything that you'd like to add? The question was when will Halo be break even.

Philip Van Den Berg: So I think it will be breakeven by Q4.

Katharyn Field: Right. Why is there an impairment for every purchase? That's something that they were asking about.

Philip Van Den Berg: Okay. It's very much an accounting treatment. When we acquire something, sometimes you actually use a process called the depreciating replacements value approach. And really what you do there is you just try to value, everything that was being done to get the asset where it is, but it doesn't really say anything about its potential. So if you have to hire a program, if you have to hire this stuff, whatever, and it gets you to a certain value, that cost is the value that under IFRS you have to use to value the acquisition. That may not actually be the price you pay, because we think that if we pay more than it is because we think more happened, but something has kind of come out of this. So therefore I would be in and there's a difference. Accounting tells you impair it and then as we see it progressing, then we kind of unimpair it, you start to add it back. It's like we had the same issue with MDT, read it like the close acquisition we had in Q1. We have an impairment of some inventory. That's just an accounting measure because the inventory is still there and we are alluded in the earnings call for Q1. We may actually use inventory in the super filtration program. And it will be reappraised so the impairment could be reappraised. So it's just accounting nothing else.

Katharyn Field: Okay, great. So this last one Kiran, the audience is wondering about old partnerships, and if we have an update on them, such as Caliva or any of the others that you wanted to comment on?

Kiran Sidhu: Well, I think people have addressed three specifically, Caliva, I think remains a client of the company. I'd have to check with the salespeople in California. As we've mentioned before, we've substantially grown our sales force in California. I think Q1 or two salespeople now I think we're up to six to eight in California. What else? Falcon? Falcon, now that we're starting to sell bulk distillate given the fact that two out of three of their principals are shareholders of Halo, I think that's helpful. So as we have distillate coming off the lines now and coastal harvest again, I think that partnership will be reengaged. Just according we looked at BDS data and if you add up a flower and pre-roll data in California combine it looks like Falcon is probably the number one company in both of those categories. So maintaining that relationship with Jim Edlund and Ryan is pretty key. The third thing is that a lot of people have been asking about CBD and greenie and other of our CBD ventures, we announced last year, as a result of our sort of narrowing of focus, we don't have any initiative to go into CBD. That being said, I'm right now pressing the OG DNA guys for some of their high yielding cannabis CBD strains, because we have a unique position in Lesotho and the only other place in the world, I think you're able to do this is Vermont ironically, where I can grow a cannabis plant that yields high in CBD, or we can and THC, and I can strip both. THC I sell through the INCB or UN protocols, off to Malta or other African nations, but the CBD is much more of a free market and that CBD product I can actually even sell into South Africa. So, I mean, there is still opportunity in CBD but for us to start meant -- putting in CBD manufacturing CBD working with CBD websites is not something that we plan to do at this point. That being said, if we can grow plants and on the same stick as we call it or plant, we can extract high levels of CBD and just call it the C-type oils, as well as THC at some point, that would be that was that's very attractive to us, in Bophelo or in Lesotho.

Katharyn Field: Great, well, it looks like we're -- we've already taken up the hour, but I did want to make sure that no one had further questions. So, if the host can chime in here, it didn't look like anyone was in the queue. But it would be nice to confirm that before we concluded.

Operator: There are currently no questions over the phone.

Kiran Sidhu: Yes, I'd like to thank everyone for attending. We're working diligently. We're working diligent and hard. Right now despite the fact that, a couple of us have come down with COVID. We haven't had sort of a material adverse change to the company as a result of it, nor do we anticipate it. And what we've done is actually sort of increase staff, as because we're not the type of business where people can stay at home. I mean, we're a cultivator. We have people out in the fields. We're a manufacturer, we’re a distributor and we have direct sales into dispensaries and soon at dispensaries. So we've been very proactive there. With us right now it's just a question of focus and execution, we've narrowed our focus our results, Q4, Q1 and Q2 show our ability to continue to improve on an executional basis. So, I thank you all for your continued support. And hopefully we can continue to deliver positive results as we have been doing over the last three quarters.

Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. And you may now disconnect.