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Marijuana Producer

If demand for higher-profit-margin marijuana edibles, tinctures, softgels, vape pens and so on continues to rise, this company is well positioned to profit. Meanwhile, though, it could face new competition from bigger rivals.

HALO LABS, $0.68, symbol HALO on the Aequitas NEO Exchange (Shares outstanding: 181.1 million; Market cap: $123.1 million; TSI Cannabis Quality Rating (CQR): ; www.halocanna.com), is a U.S. cannabis-extraction company formed in April 2016 in Medford, Oregon. Halo Labs is focused on the development and manufacturing of cannabis extract and concentrated products.

This stock trades on the Toronto-based Aequitas NEO Exchange, which is recognized by the Ontario Securities Commission. The exchange is also backed by major financial firms such as Barclays and Royal Bank. You can look up stocks on this exchange at www.aequitasneo.com.

The stock also trades on the U.S. over-the-counter market under the symbol AGEEF. You can look up stocks on that exchange on websites such as www.marketwatch.com or www.bigcharts.com

Halo Labs’ business strategy centres on the belief that demand for cannabis-extract products, such as edibles, tinctures, softgels, vape pens and transdermal patches, will outstrip demand for dried cannabis. In particular, the company anticipates that vaping (short for vaporizing), will soon become the preferred alternative to smoking; it is developing products to meet that expected demand.

Vaping refers to the conversion of a substance from a solid or liquid state into gas by the application of heat. As it relates to cannabis, vaping involves the use of convection- or conduction-heating methods to safely bring dried cannabis to an optimal temperature (just below the heat required to cause combustion). It then releases cannabis compounds in the form of a vapour. Vaping cannabis is perceived to be a cleaner, safer and less-harmful alternative to smoking marijuana.

The company has invested in four extraction technologies, each of which produces specialized, higher-profit-margin products: BHO, a process that yields high-potency products such as shatter and wax; PHO, a less efficient process that yields similar products from unique marijuana strains; CO2, a process that uses supercritical CO2 (a liquid form) to yield smoother and milder edibles; and an exclusive extraction process that yields high-purity cannabinoid crystals of THC-A and CBD.

While cannabis concentrates vary, most undergo the same basic development process. First, a solvent (usually butane, CO2, or alcohol) is run through the cannabis flower or buds to extract all of the chemicals from the plant. The solvent is then evaporated from the compound and what’s left are the plant’s resins—the psychoactive chemicals in marijuana. These compounds, including those responsible for the high associated with cannabis, are much more potent than just the flower alone.

Concentrates takes several forms. Shatter, for instance, is a solid substance, which resembles a honey-colored glass shard. When tapped firmly, it breaks into pieces or “shatters.” Wax concentrates resemble the texture of candle wax.

These products are typically consumed by “dabbing”. This is the flash vaporization of cannabis concentrates and involves applying heat to hard surfaces.

Halo Labs sells over 50 products, both private label and branded, to dispensaries and large wholesalers. Its private-label sales account for roughly 35% of current revenue and the company expects that figure to increase to over 50% in 2019.

A flagship manufacturing facility in Medford, Oregon, provides Halo Labs with 12,000 square feet of indoor manufacturing space and seven acres of outdoor growing space. The company holds a 20% market share for wholesale concentrates in Oregon. This provides a steady revenue and cash flow base. In November 2018, Halo Labs launched a line of edible products in Oregon. Edibles are one of the fastest growing segments in the cannabis industry and has high profit margins.

In September 2018, the company acquired the assets of Just Quality for $4.9 million. The purchase gives Halo Labs cultivation, production, and distribution licences for Nevada as well as an 8,000-square-foot processing facility. Just Quality is licenced to produce 15,000 grams per day. The Nevada operation alone is expected to provide the company with revenue of up to $1 million per month.

Halo Labs made another key acquisition in September 2018 when it purchased L9. The company paid $2.0 million plus shares for that cannabis producer and distributor based in Cathedral City, California. The firm’s 9,400-square-foot facility can produce 30,000 grams of marijuana per day.

In October 2018, Halo Labs announced a cannabis oil distribution agreement with Falcon International Corp., a producer and distributor of some of California’s leading brands. Falcon currently distributes cannabis products to about 70% of California dispensaries. The deal has an initial term of six months (extending indefinitely on rolling six-month terms) and is expected to add $1.6 million to $2.2 million in revenue per month.

In November 2018, the company partnered with ILO to produce DabTabs, a concentrated extract delivery system, which it hopes will revolutionize the practice of “dabbing.” (As mentioned, that’s the vaping of concentrated cannabis.) DabTabs are cannabis-infused ceramic matrixes that are used in a vaporizer and provide a clean, more effective, combustion-free dabbing experience. This product was introduced in California and Nevada in February 2019.

In December 2018, the company partnered with Bophelo Bioscience and Wellness Pty Ltd., a Lesotho, Africa-based cannabis company. Halo Labs will provide management services and expertise to build, design and operate several cultivation and extraction facilities in exchange for a 20% equity position. The company also gets a royalty on future extracted products. The deal gives Halo Labs an international presence and positions the company to expand into new markets as they open up.

The company’s products are now for sale on online cannabis marketplace Eaze, which sells direct to consumers in California and Oregon. Meanwhile, in May 2019, Halo announced that its products will be sold through High Tide. That company is an Alberta-based, retail-focused cannabis corporation enhanced by the manufacturing and wholesale distribution of smoking accessories and cannabis lifestyle products.

In the three months ending March 31, 2019, its overall revenue jumped 302.0%, to $8.7 million from $2.2 million a year earlier (all figures except share price and market cap in U.S. dollars). The company lost $3.0 million, or $0.02 a share, in the latest quarter, compared to a loss of $1.9 million, or $0.07 (on fewer shares outstanding).

On March 31, 2019, Halo Labs held $361,053 in cash.

The company is less geographically diversified than some of its rivals. As well, it is focused on high-profit-margin cannabis oils, which is eventually likely to attract considerable competition from much larger firms. Any move by the U.S. federal government to legalize cannabis would only heighten their interest.

In addition, Halo Labs’ main Oregon market is currently oversupplied and as a result cannabis prices have fallen sharply.

These are all factors that go into limiting the company’s Cannabis Quality Rating. However, in the near term, Halo Labs’ focus on higher-profit-margin concentrates is a plus, and its expansion into California and Nevada should help offset its risk.

Moreover, the gap between the company’s market cap and its sales isn’t as big as it is for many of its competitors. That could make it a potential takeover candidate. While that alone is not reason enough to buy the stock, it adds to its appeal.

Halo Labs has a 2.5-Leaf Cannabis Quality Rating (CQR). The stock is a speculative buy for highly aggressive investors who want exposure to the marijuana industry.