Halo Labs Has an Early-Mover Advantage in Vape, Concentrates

Halo Labs Inc. (NEO:HALO) has established expertise in four major extraction methods and is undervalued compared with its peers

SmallCapPower | June 10, 2019: Halo Labs Inc. (NEO:HALO) (OTCQX:AGEEF) is an Oregon-based cannabis extraction company with additional expertise in cultivation, processing, and distribution. The Company has operations in three states, which include a 12,000 sq. ft facility in Oregon, 9,400 sq. ft in two facilities in California, and an 8,000 sq. ft facility in Nevada. The Company also has a strategic partnership (20% equity stake) with Bophelo Bioscience & Wellness (Pty) Ltd in Lesotho, Africa.

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Investment Highlights

Early-mover advantage in a low-risk, high-margin segment. According to data from BDS Analytics, the concentrates and vape markets have potential to reach revenues of US$14.9B in North America by 2022. We believe consumer preferences are driving growth in vape products and concentrates due primarily to three reasons:

  • Stronger potency and duration
  • More controlled dosage
  • Discreetness and safety

Moreover, concentrates have up to 80% THC/CBD content and can last up to 8-12 hours, which is suitable for many applications including: chronic pain, sleep disorders, anxiety/depression, and eating disorders. We believe concentrate sales should eventually surpass sales of dried cannabis. There is already some evidence to suggest this; data from the Washington Liquor and Cannabis Boards shows that ~18,000 kg of extracts were produced in 2017, a 353% increase from 5,100 kg in 2015.

DabTabsTM Ceramic Disks

Source: Halo Labs

Developing unique consumer products. Halo Labs has exclusive licenses for the DabTabsTM, proprietary ceramic discs that hold a pre-measured amount of CBD/THC. DabTabsTM provide a cleaner, smoother and mess-free way to smoke full-spectrum cannabis concentrates. DabTabsTM is a ceramic disk that has 5MG of concentrated preloaded and can be used with many vaporizers, pens and dab rigs available on the market. The ceramic disc is environmentally friendly and can be integrated with soil to act as perlite once used. We expect this product offering will provide Halo with a competitive advantage in being able to stand out against competitors.

Halo Labs Extraction Methods

Source: Company Reports

Established expertise in four major extraction methods. Halo Labs utilizes butane, CO2, hydrocarbon, and chemical extraction methods. Of the four methods, butane (BHO) and hydrocarbon (PHO) extraction provide the highest efficiency, defined as the amount of biomass that can pass through the system, and potency. CO2 extraction allows for the isolation of minor cannabinoids. The multiple extraction method should give Halo Labs the flexibility to create white-label products specifically designed to match the customers needs.

Through partnerships with Bophelo Bioscience, Halo Labs should be able to expand its presence in the lucrative European cannabis market. It is predicted that the European cannabis market will be the largest legal cannabis market in the world and could be worth up to €123.0B by 2028 (Prohibition Partners European Cannabis Report, 2018). Halo Labs is expecting to start operations in Lesotho by August 2019. This should make trade with Europe cheaper and more efficient. In our opinion, this positions Halo Labs quiet favourably to benefit from Europe’s growing cannabis market.

Source: Capital IQ, Ubika

Valuation

Undervalued compared with its peers. Halo Labs trades at a 2.6x 2019E, EV/Revenue multiple, compared with Canadian pure-play extraction and US-based MSOs, which trade at a consensus average of 10.5x and 8.5x multiples, respectively. We believe that this valuation gap should close once the Company ramps up production by the end of 2019.

Overview of Operations

Cultivation Facilities

Oregon

Halo Labs has Oregon Liquor Control Commission (OLCC) cannabis production licenses for outdoor cannabis cultivation on approximately four acres of farmland (~175,000 sq. ft). Additionally, the Company manages two adjacent acres of farmland under a third-party production license.

Nevada

Halo Labs plans to begin cultivating in Nevada pending the close of its cannabis license from Just Quality and proposed transfer of the license to Clark County, Nevada. In Nevada, the Company plans on cultivating cannabis with low cost light-deprivation hoop houses, which will be used mainly for the manufacturing of cannabis oils and concentrates. The Company estimates that the facility will be operational within two years of acquisitions and will have a full capacity of 50,000 lbs (~22,700 kg) annually.

Production Facilities

Oregon

Halo Labs has a 12,000 sq. ft indoor manufacturing space, 4,000 sq. ft of which is a segregated Class 1, Division 1 (C1D1) explosive-proof room for volatile extraction and 800 sq. ft is used for the Company’s wholesale-licensed business. Halo Labs operates two MEP Hydrocarbon Extractors with a throughput of ~28 kg/day per shift and can be run seven days a week. In addition to the indoor facility, the property has an enclosed courtyard of about 7,200 sq. ft. Halo also has six acres of outdoor canopy in Jackson Country.

Nevada

Halo Labs finances and advises Just Quality, the Company’s Nevada partner, on the operation of a manufacturing facility that is 2,000 sq. ft with an additional 8,000 sq. ft left to be designed. Just Quality has been permitted by the State of Nevada to build a 1,000 sq. ft non-volatile extraction lab that can use CO2 or ethanol. Upon completion of the purchase agreement with Just Quality, the Company plans to manufacture using both volatile and non-volatile methods of extraction. Currently, the facility is used mainly for the assembly of vaporizer cartridges and DabTabsTM, however after the acquisition is expected to begin producing a robust offering of cannabis oils and concentrates.

California

In California, the Company has two facilities: 1) the first is 1,600 sq. ft with about 500 sq. ft dedicated to volatile extraction as a Class 1, Division 1 (C1D1) explosive-proof room. This facility is used to supply ICL11 with bulk cannabis distillate for vape cartridges and disposable pens as well as resin concentrates for sale to licensed distributors. 2) The second facility is 400 yards from the first and is approximately 13,900 sq. ft, which is used for non-volatile extraction and light assembly.

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