In February, High Tide ($HITI) announced it was disgorging it’s branded ‘KushBar’ assets to Halo Labs ($A9KN) for some $12MM. It was to be settled with equity: 46MM shares at a notional price of $0.26/share.

There were 5 stores under the original agreement (3 operating, 2 permitted):

So, $HITI operates for a fee, Halo gets some Canadian exposure, and life goes on. Except now, it looks like Halo has run out of money.

The deal was revised, and changes to it were announced this morning. It boils down to Halo balking at acquiring the 2 permitted-but-not-yet-open locations due to ‘capital preservation’. While this amendment infers Halo’s low on funds, a quick trip to their financials confirm this (I’ve spent 10 minutes on them, and that’s all they’ll get. They’re packing some 470MM shares; another 120MM in warrants; 34MM options; leases and goodwill comprise 57% of total assets – $4MM PP&E is simply in grow equipment; inventory is at 7x sales; $3MM in cash/AR, yet $7MM in payables. Oh, and $6MM in SBC has flown through over the 2 quarters of this fiscal year. Halo’s also got covenants on their convertibles that places restrictions on cash to satiate interest payments – which could be viewed as a good demonstration of forward thinking by lenders).

Raj seems intent on sticking to the ‘Canna-Cabana’ formula. From that Reddit AMA last week, I’d asked if he was going to keep the $META branded ‘New Leaf’ stores post acquisition. His answer?

With this sale to Halo, KushBar also doesn’t fit within Raj’s vision of where $HITI is going to land (KushBar is described by $HITI as an ‘elevated, refined concept’) – and is strictly focused on the Canna Cabana concept for the moment. He has to navigate Albert’a rules on ownership concentration, and with the $META store additions…..these stores might have had to go anyway.

No doubt about it, this is a haircut for $HITI. A store up and operational – with sales data – is worth a heck of a lot more than looking for a lease holding a permit. The share price adjustment isn’t as important as the delta in the total price, and to keep the deal intact, Raj had to drop it and move the goalposts. It’s hard to think that 2 non-operational stores were initially valued at $5.3MM, which means that there was a big discount given in this amendment.

As for Halo, late last year they went on a shopping spree (ala’ $CXXI) and put it all on the credit card. They now own an amalgam of companies that range from a cannabis distribution company, some sort of dabbing technology (under development), a software platform for dispensaries, an extractor in California, production in Oregon, to some sort of “all natural and refreshing personal nasal inhalers” in something called Nasalbinoid. And….subject to this deal closing, 3 retail stores in central Alberta. The credit card is maxed for now until more capital comes in.

From a quick glance, calling Halo ‘speculative’ would be a pretty flattering take.

Halo has had some resilience in raising via private placements this year – they might have a good lock on a prime investor. Either or, with $5MM in sales in their last quarter (that’s down 50% from year prior) their SG&A is 2.5x gross margin. If Halo becomes anything, that’ll be something. Which means that selling these stores was more important to $HITI than who they were being sold to.

A curious bit of language is included in this amendment:

It’ll be ‘Fire & Flower’ ($FAF) versus ‘Canna Cabana’ for the contender of largest retail chain in Canada for the next while. Look for $FAF to be active with press releases and perhaps deals over the next couple of quarters. Now that Ontario has announced they’re speeding up retail permitting, the major catalysts for Canadian retail (ie: Ontario) are taking shape. Don’t be surprised to hear about $ISH or $YSS (or perhaps even Westleaf….the ‘Sphinx’ of Canadian retail) over the same period. Public companies without the store count to hit critical mass will be intent on finding a way to make it happen. Margin constraints are a major inhibitor at this stage for consolidation.

White label promises margin expansion using in-house branding, and a way for retailers to emulate verticality (to a degree). A chain with enough brand heft and throughput could alter industry sales dynamics quickly.

Retail’s finally about to get interesting.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds a position in $HITI only.