Creso and Red Light Holland to merge into The HighBrid Lab

Creso Pharma Limited (ASX:CPH, FRA:1X8, OTC:COPHF), a developer of cannabis, hemp-derived therapeutic, nutraceuticals and lifestyle products has entered into a definitive agreement to merge its business with Red Light Holland Corp (CSE:TRIP, FRA:4Yx, OTC Pink:TRUFF), with a view to creating The HighBrid Lab, an entity that will be able to immediately commence selling in the US.

The US is the world’s largest cannabis market, expected to reach $53 billion by 2025.

Red Light Holland is an Ontario-based corporation engaged in the production, growth and sale of magic truffles to the legal recreational market within the Netherlands.

This represents another step in Creso Pharma’s expansion, having already made considerable ground with its target acquisition company Halucenex Life Sciences, an established psychedelics group focused on developing treatments for Treatment Resistant Depression in individuals suffering from PTSD, and other mental health illnesses.

These developments have expanded Creso Pharma’s product range, breadth of pharmaceutical relevance and geographic coverage - the merged HighBrid Lab will have a similar impact, paving the way for substantial growth and an enhanced industry profile.

Indeed, once the transaction is completed the HighBrid Lab will be the first fully complementary cannabis psychedelic company in the world.

Substantial benefits of increased scale

The HighBrid Lab would have increased scale, enabling it to accelerate growth and deliver improved margins across its recreational cannabis offering in North America by focusing on increasing market share in Canada.

Creso Pharma’s established manufacturing and marketing infrastructure and expertise, as well as its well sought after range of products relating to its traditional business is proving to mesh well with Halucenex’s psychedelics focused operations that are based in Nova Scotia, Canada where Creso is also active.

Creso Pharma has worldwide rights for several unique and proprietary innovative delivery technologies, which enhance the bioavailability, and absorption of cannabinoids.

The company is also progressing expansion opportunities into the North American recreational cannabis market through its wholly-owned subsidiary Mernova Medical Inc, as well as the emerging psychedelics sector through Halucenex Life Sciences Inc.

The merged group would increase vertical integration strategies from growing, harvesting, packaging, branding and distribution to potential bricks and mortar stores for increased sales focused on higher margins.

There would also be a focus on expanding their e-commerce presence and online store initiatives to help boost future sales of CBD, THC, psilocybin, and functional mushroom products, where permissible.

Strengthened management team to optimise returns from all businesses

Just as the collaboration between Creso and Halucenex has already made valuable progress, the amalgamation of Red Light Holland’s operations that aim to achieve safe and trustworthy access to psychedelic compounds appears to be strategically beneficial.

Red Light Holland is engaged in the production, growth and sale through existing Smart Shops and an e-commerce platform, of premium magic truffles to the legal, recreational market in the Netherlands.

Importantly, these activities are undertaken in accordance with the highest standards and compliance with all applicable laws.

Red Light's directors and advisory board members are all highly skilled executives with extensive expertise in growing, mass-producing, compliance, distribution, marketing and supply chain management, important factors in the proposed HighBrid Lab becoming a leader in an emerging market segment.

Leading cannabis and psychedelics entrepreneur, Bruce Linton, will be chairman of The HighBrid Lab's board of directors.

Looking across the individual strengths of the new board based on the roles they have played leading up to the proposed RTO, Creso Pharma’s management team brings a wealth of scientific experience and pharmaceutical background, while Red Light Holland’s team has significant expertise in marketing, branding and recreational product offerings.

Additionally, William Lay will lead the merged group’s overall corporate strategy development and will work on identifying and executing potential merger and acquisition opportunities in his capacity as Executive Vice President and Chief Strategy Officer.

Crunching the numbers

The definitive agreement that underpins this transaction is based on a reverse takeover (RTO) of Red Light Holland by Creso Pharma, with an implied premium to Red Light Holland Shareholders of 29.9% based on the 30-day VWAP of both companies as of 15 June 2021.

The HighBrid Lab is expected to have an implied pro-forma equity value of C$347 million (A$371 million) based on the closing price of the shares of Creso Pharma and Red Light Holland on 15 June 2021.

Breaking down those numbers, upon implementation of the Scheme and the Option Scheme, it is expected that the former Creso Pharma security holders will own approximately 57.4% of the pro-forma issued and outstanding Red Light Holland Shares.

Following implementation of the schemes, the combined company is expected to have a cash balance of approximately A$48 million (C$45 million), providing considerable financial flexibility to progress its growth strategy.

This will no doubt include an expansion of the combined group’s e-commerce presence and online store initiatives to help boost future sales of CBD, THC, psilocybin, and functional mushroom products.

With Creso Pharma and Halucenex having a robust base as one of the world’s most recognizable legal recreational psilocybin brands with cross marketing opportunities in the cannabis sector, the proposed HighBrid Lab will have a head start on most of its peers.

The equity transactions that will underpin the RTO are as follows:

‘’The transaction will be carried out by way of statutory schemes of arrangement under the Corporations Act 2001 (Cth), pursuant to which Red Light Holland will acquire (i) all of the issued fully paid ordinary shares of Creso Pharma (the “Scheme”), and (ii) all of the issued listed options of Creso Pharma (the “Option Scheme”) in exchange for the issue of common shares of Red Light Holland (“Red Light Holland Shares”) on the terms and conditions set forth in the Deed. Under the terms of the Deed, the shareholders of Creso Pharma (the “Creso Pharma Shareholders”) will receive 0.395 of a Red Light Holland Share for each fully paid ordinary share of Creso Pharma (each, an “Creso Pharma Share”) held immediately prior to the effective time of the Scheme. In addition, (i) holders of listed options of Creso Pharma (the “Creso Pharma Listed Optionholders”) will receive 0.257 of a Red Light Holland Share for each listed option of Creso Pharma (each, a “Creso Pharma Listed Option”) and (ii) holders of the various other classes of unlisted Creso Pharma securities will be offered Red Light Holland options or warrants based on ratios detailed in the Deed.’’

USOTC listing to provide further capacity for growth

Just last week Creso Pharma Ltd completed a dual listing in the US, elevating its profile in that geographic region and providing improved access to equity markets, including institutional investors.

The company is trading on the US OTCQB under the code COPHF.

The listing also provides additional opportunities to attract institutional and retail investors and for CPH to expand its investor base in the US.

Not only did the listing assist CPH to fast track its move into psychedelics as it looked to close out its acquisition of privately owned Halucenex Life Sciences, but it has no doubt streamlined the processes required to pull together the HighBrid Lab proposal.

Halucenex recently entered into a consultancy agreement with leading US-based scientific consultancy HeteroGeneity, LLC to progress a US market entry strategy for the potential use and licensing of its botanical psilocybin products and compounds.

After securing 10 grams of synthetic psilocybin just last month, Halucenex effectively doubled its inventory to 22.3 grams, providing it with the capacity to significantly expand its trials.

It is worth noting that Halucenex is now one of the largest holders of single batch GMP grade psilocybin in Canada.

Examining competition in psychedelics-related niche market, Compass Pathways plc (NASDAQ: CMPS) which has a market capitalisation of about US$1.4 billion used 10g for Phase I trials, and needs another 32g for Phase II clinical trials.

By comparison, Halucenex just advised that it is expanding clinical trials to include PTSD sufferers outside those who have participated in military duty or first responder roles.

This is just one example of how a larger and more financially robust group will be able to harness valuable growth opportunities and effectively be more competitive compared with industry peers.