Upon completion of the acquisition of the Purchased Debt, Halo Winberry, a wholly-owned subsidiary of the Company, will become the senior secured creditor of Herban OR. Pursuant to the Debt Purchase Agreement, Halo will issue 169,916,339 common shares of the Company (“Halo Shares“) to the Seller in exchange for the Purchased Debt. Immediately following closing of the Debt Purchase Agreement, Halo Winberry, a wholly-owned subsidiary of the Company, will enter into an asset purchase agreement pursuant to which it will acquire certain assets of Herban OR (collectively the “Winberry Assets“) in exchange for the cancellation of a portion of the Purchased Debt. While the balance of the Purchased Debt will remain outstanding, Halo does not anticipate receiving any further payment or recovery on account of the Purchased Debt other than the Winberry Assets. The Winberry Assets include, but are not limited to, a turnkey outdoor Tier 2 cannabis production (cultivation) facility; an operational cannabis wholesaler in Eugene, Oregon; the Winberry Farms trademark; and six delivery vehicles. Completion of the acquisition of the Winberry Assets is subject to approval by the Oregon Liquor Control Commission (“OLCC“).
Oregon Pro Forma Combined Historical Numbers1
Unaudited financial results of Halo’s Oregon subsidiary ANM, Inc. (“ANM“) and the Winberry Assets for the nine months ended September 30, 20202 for selected income statement items on a Pro Forma combined basis are set forth below, and include revenue of $20.9 million, a gross profit margin of 41%, and an operating profit margin of 16% after the consideration of certain anticipated synergies.3
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For the 9 Months Ending September 30, 2020
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ANM, Inc.
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Winberry Assets
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Combined
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Combined (Adjusted)3
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Revenue
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$12,040,833
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$8,864,016
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$20,904,849
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$20,904,849
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COGS
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$7,727,776
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$5,462,057
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$13,189,833
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$12,303,431
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Gross Profit
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$4,313,057
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$3,401,959
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$7,715,016
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$8,601,418
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Gross Margin
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36%
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38%
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37%
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41%
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Operating Expenses
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$3,219,510
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$2,397,310
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$5,616,820
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$5,173,619
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Operating Income
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$1 ,093,547
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$1,004,649
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$2,098,196
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$3,427,798
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Operating Margin
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9%
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11%
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10%
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16%
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Picking up another acre of cultivation to add to the existing 6 acres Halo already owns and/or manages in Oregon, further solidifies the Company’s supply chain and increases its variety of cannabis strains. Furthermore, the potential to use Winberry’s existing warehouse located in Eugene, Oregon for distribution of Halo’s products is expected to result in additional cost savings. In addition, the Winberry team’s long-standing relationships with Oregon cultivators should provide Halo with additional opportunities to acquire biomass.
Leading Oregon Market Share on a Combined Pro Forma Basis
According to BDS Analytics (“BDSA“), total retail sales throughout Oregon in the first 9 months of 2020 was estimated at $824 million with the top company accounting for $23.6 million (2.8%) of total revenue.4 On a combined basis over the same period, the Halo and Winberry brands are estimated to have generated approximately $41.8 million (5.1%) in retail sales, a 177% increase over the current top brand in Oregon.5 Currently, there are only approximately 121 out of approximately 660 dispensaries in Oregon carrying both Winberry and ANM products. Therefore, the Company believes that there is considerable growth potential for both the Halo and Winberry sales teams.
Winberry Highlights
- Winberry’s Tropical Trainwreck is the highest grossing cartridge SKU of all time in Oregon.6
- Winberry is the 4th all-time cartridge brand in the Oregon market per BDSA with over $22 million in sales since its inception in 2016.6
- Winberry has 4 of the Top 10 all-time, best selling products in the vape cartridge category.6
- Current distribution operation reaches more than 500 Oregon dispensaries7 with almost $8.9 million in wholesale revenue through September 2020. 8
- Expected year over year revenue growth of 30% from 2019 to 2020. 8
- Winberry is in the Top 5 for infused pre-rolls in the Oregon market.9
- Winberry Infused Pre-rolls are 3 of the Top 10 best selling SKUs in Oregon.9
- Winberry Sweet Leaf 10-pack pre-rolls are the #2 best selling SKU in Oregon.10
Background on Winberry
In 2016, Winberry was one of the first nine companies in Oregon, and the second in Lane County, to receive a Recreational Marijuana Producer License. Sitting on 10 acres total, Winberry’s cultivation site is comprised of 1 acre of licensed cultivation; a 1,800 sq. ft. drying facility; a 1,000 sq. ft. cloning facility; and a 1,600 sq. ft. greenhouse. The farm is located 30 miles southeast of Eugene, Oregon and is named after Winberry Creek, a water source that flows through the property and naturally nourishes its fields. Winberry uses quality genetics and cultivates a variety of sun grown flower strains that supply the materials necessary to make its premium products.
The outdoor farm began operations with a Tier 1 license, but has since expanded to a Tier 2 license as of June 2017. Then later in 2017, Winberry obtained its wholesale license, which allowed the company to launch its first cannabis vape cartridge line. In 2018, Winberry continued to grow across the state of Oregon establishing its own in-house sales and distribution teams. Winberry currently operates its wholesale business from a 2,500 sq. ft. warehouse, located in Eugene, Oregon. This site houses its pre-roll production, and serves as a hub for its distribution business.
What started as single line of distillate cartridges for vape pens has now grown to a full suite of Winberry products that includes multiple varieties of award-winning THC and CBD cartridges, infused pre-rolls, as well as cold-pressed, full-spectrum oil cartridges, and gummies. Leafly named Winberry’s ‘Tropical Trainwreck’ one-gram cartridge the ‘Fastest-Trending Cannabis Product for Oregon‘ in 2017, and the same product won the award for ‘Best Distillate Cartridge’ in the 2018 Dope Cup in Oregon.
Transaction Details
Pursuant to the terms of the Debt Purchase Agreement:
- Halo Winberry will acquire the Purchased Debt totaling approximately $18.4 million of principal and accrued interest and the associated security interest in the assets of Winberry, in exchange for 169,916,339 Halo Shares. The security interests include blanket liens on all of the assets of Winberry, evidenced by UCC-1 financing statements on file with the Oregon Secretary of State. Completion of the acquisition of the Purchased Debt is subject to the satisfaction or waiver of any conditions precedent in the Debt Purchase Agreement, including the receipt of the approval of the Neo Exchange Inc. and is expected to close in December 2020.
- In connection with the Debt Purchase Agreement, the Company will also enter into an escrow agreement (an “Escrow Agreement“) with Odyssey Trust Company and the Seller pursuant to which 12,916,339 of the Halo Shares issued at closing will be held in escrow for eighteen months to satisfy any indemnification obligations of the Seller, as well as any purchase price adjustments pursuant to the terms of the Debt Purchase Agreement.
- From and after the acquisition of the Purchased Debt, Halo will provide operational services to Winberry to assist with the day-to-day operations of its production facility and distribution facility, and Halo will also purchase and distribute Winberry’s inventory, all pursuant to a services agreement, offtake agreement and IP licensing agreement.
- Immediately following the acquisition of the Purchased Debt, Halo Winberry, a wholly-owned subsidiary of the Company, will enter into an asset purchase agreement pursuant to which it will acquire the Winberry Assets in exchange for the cancellation of a portion of the Purchased Debt. While the balance of the Purchased Debt will remain outstanding, Halo does not anticipate receiving any further payment or recovery on account of the Purchased Debt other than the Winberry Assets. Completion of the acquisition of the Winberry Assets is subject to the satisfaction or waiver of any conditions precedent in the Debt Purchase Agreement, including the receipt of the approval of the Neo Exchange, as well as the satisfaction or waiver of any conditions precedent to the consummation of such acquisition (including the receipt of the approval of the OLCC) and is expected to close within six to twelve months.