Silo Wellness Inc. (CSE: SILO) (OTCQB: SILFF) has killed its deal with Marley Green, LLC because its subsidiary SW Holdings (SWHI) did not pay its guaranteed minimum royalties of $600,000 that were due as of August 15, 2022. The company also failed to obtain relevant insurance coverage minimums of $10 million.
On November 20, 2020, SWHI signed a license agreement with Marley Green effective through July 31, 2025, with automatic renewal if minimum net sales were met, and licensee was not otherwise in material breach. The agreement was intended to provide recognizable branding for functional mushroom products as well as psilocybin microdosing products to be launched.
Sales Were Sluggish
The company said it began attempts to renegotiate the contract in April, but they were ultimately unproductive. The company’s statement read, “With sales not meeting the expectations that were set forth in the other previously announced distribution contracts, the licensing contract had remained a liability due to expenses far exceeding projected revenue. As mentioned in the previous MD&As, the goal of the Company was to amend the contract to defer payments out of future sales of licensed products in order to conserve cash to be used for inventory and marketing, or, alternatively, to terminate the contract and negotiate a payment plan for the remaining balance.” Silo said it made several proposals to Marley to put funds to marketing and inventory rather than upfront royalty expenses, which was rejected. Silo says it didn’t want to continue unless funds could be used for marketing rather than upfront royalty fees.
Silo was unable to satisfy the additional licensing payments and remained in default. In March 2021, Silo said that C$634,476 was deployed out of the C$640,000 estimated as an advance royalty payment of $500,000. This payment satisfied the guaranteed minimum royalties payment for the first year. However, sales apparently did not meet projections and no additional royalties were paid.
Silo said it ceased additional functional mushroom product development given the contracted royalty fees to Marley and the slim margins for many products, and management considered the functional mushroom market too saturated and costs too high to adequately compete with a risky and unknown rate of return if such resources were deployed. The company also said it plans to announce and launch a microdosing psilocybin mushroom product line in Jamaica by the end of 2021 but was unable to secure product liability insurance that covered psychedelic mushrooms, as that was a contractual requirement in the licensing agreement.
The company said it may launch and offer the products under a different brand but only in jurisdictions where they would be legal if time and resources permit. Also, Silo said that the $3 million national distribution agreement with Texas-based distribution and advertising company One Light Enterprises LLC, expired with no revenue received. Silo noted that it has stopped looking for other distribution agreements for the licensed products given the status of the outstanding licensing fees that were described above.