By August 24, 2022 (Investorideas.com Newswire) CAPITAL RAISES
Transactional Activity:
Eight capital raise transactions totaling $206.8M closed this week, five more transactions, and a $176.1 million higher volume than last week. Four more transactions closed than the previous year, and volume increased by $98.7 million. The $175M Senior Secured Term Loan by ATAI Life Sciences (ATAI: Nasdaq) dominated this week’s financings.
Cannabis capital raises are off 63.1% YTD.
Total Equity issuance is off 74.5% y/o/y, and total debt issuance is down 28.5%. U.S. debt is down only 14.1%, while Canadian debt is down a more significant 72.3%. At 55.3% of total capital raised, debt remains the highest in history for comparable periods. The graph below shows that U.S. activity dominated capital raises for the first thirty-three weeks of 2022, with 72.5% of all capital raised. Public companies accounted for 75.7% of total financing YTD, down from 83.3% in 2021.
The U.S. Cultivation & Retail sector has experienced the sharpest changes in capital raise activity.
Total capital raised is down 66.3%, but equity capital raised is down nearly 97%.
Debt financing is down 9.2% YTD and accounts for approximately 94% of all capital raised; private companies raised a record 36% of it.
63.5% of total capital raises YTD were completed by public companies, down from 80.7% in the same period in 2021.
OUTLOOK
Cannabis stock prices (measured by the MSOS ETF) were down 3.79% from last week.
The ETF is down 53.6% YTD compared to an 11.3% decline in the S&P 500. Discussion of Banking reform and federal legalization has died down and has moved to behind-the-scenes negotiations. The passage of a SAFE+ Act with relatively watered-down social equity provisions is the most likely case, although nothing is certain in an election year.
The market has moved beyond the Q2 earnings releases, but we continue to focus on the estimate revisions. The chart below the consensus revenue and EBITDA estimates for the ten largest MSOs indexed so that the forecasts on 12/31/21 equal 100. Note that revenue estimates have shrunk by 22%, while EBITDA estimates are down by 35%. The rate of downward revision increased with the Q2 earnings releases.
We believe that a recession is likely in 2023, although economists are sharply divided on the topic. The yield curve, particularly in the closely watched 2yr-10yr range, continues to be inverted, which has been a solid indicator of future recessions. The downturn, if it happens, won’t look like traditional recessions: low unemployment, high inflation, ongoing supply chain issues, etc.
High inflation is the most concerning aspect for cannabis since cannabis prices are unlikely to be able to rise to allow recovery of increased costs.
Meanwhile, significant downward wholesale pricing pressures in California, Colorado, Michigan, and other unrestricted cultivation markets continue in what looks like a classic commodity overproduction cycle. Cannabis has a built-in lower-cost substitute in the illicit market and a cost structure tilted towards fixed costs, exacerbating the downward pressure.
Cannabis consumption should hold up relatively well in a downturn; however, consumers are likely to trade down to lower price points and eliminate some discretionary purchases.
These forces suggest that significant additional downward pressure on margins may be possible.
YTD Returns by Public Company Category
The improved returns of Psychedelics and US Tier 2 companies moved both categories to the right on our graph.
Best and Worst Performers of the last week and YTD
Schwazze (SHWZ: CSE) was the week’s second-best performer, up 27%%, after beating revenue and EBITDA estimates.
Lowell Farms (LOWL: CSE) was the week’s worst performer, down 18.3% on completing a heavily dilutive $4.2M debt deal described in more detail in our debt section.
EQUITY RAISES
The Week’s Largest Equity Transaction:
On August 17, 2022, Avicanna Inc. (AVCN: TSX)(AVCNF: OTCQX), a commercial-stage biopharmaceutical company focused on the commercialization of cannabinoid-based products, closed a non-brokered private placement for gross proceeds of $2.17M.
7.95M Units were sold at $.27 per unit.
Each unit consists of one share and 1/2 share in warrants, which carry a $.31 exercise price (14.3% premium) and a three-year maturity.
The deal was sold at a relatively small discount of 16% relative to preannouncement levels, including the 9.2% value of the warrant package.
The transaction implies a market cap of $18.26M, an enterprise value of $22.4M, and an EV/annualized revenue multiple of 6.5x.
Avicanna’s free cash flow adjusted current ratio of 1.0x implies tight liquidity with a likely need for additional financing during the next 6-9 months.
Proceeds will be used for general working capital purposes, G&A expenses, and production and manufacturing support.
Public Company Raises:
All eight companies that raised capital this week were public. Seven trade in Canada (one on the TSX and six on CSE), and all eight trade in the U.S. ( one on Nasdaq and seven on OTC).
Equity vs. Debt Cap Raises:
Equity accounted for three of this week’s raises and 1.2% of the funds raised.
DEBT RAISES
Debt accounted for 81% of trailing 4-week capital raises, a drastic shift primarily due to the $175M ATAI Life Sciences Senior Secured Term Loan.
We expect this trailing average to return to its LTM average of approximately 60-65%.
The Week’s Largest Debt Raise:
On August 15, 2022, Life Sciences N.V. (ATAI: Nasdaq), a clinical-stage biopharmaceutical company engaged in the treatment of mental health disorders, secured a $175M Term Loan Facility from Hercules Capital.
$15M of the facility was drawn at closing, with an additional $20M available at the company’s option through December 31, 2023. The remaining $115M becomes available in tranches through December 15, 2025.
The loan is interest-only through month 30, after which it amortizes based on equal monthly payments.
Interest is calculated on a floating basis (currently 10.05%). An additional 6.95% “End of Term Charge” based on the original principal amount is payable at maturity or upon prepayment.
Prepayment penalties are 2% in year 1, 1% in year 2, or .5% thereafter.
The term loan matures on August 1, 2026.
The transaction is favorable for ATAI and ensures it will have sufficient liquidity to fund its ongoing development projects. The prepayment penalties are very reasonable, allowing the company to refund the outstanding should it finance at lower rates.
The chart below shows that ATAI already had one of the best liquidity positions in the industry before this financing, and this transaction ensures that it will not have a liquidity crisis similar to what is happening at Mydecine (MYCO: NEO).
The Week’s Most Interesting Debt Raise – Super expensive, but better than the alternative.
On August 19, 2022, Lowell Farms (LOWL: CSE)(LOWLF: OTCQX), a California cultivator and owner of the Lowell Smokes brand, closed on a $4.2M Convertible Debenture Financing.
The Debentures mature in October 2023 and carry a 5.5% rate.
The conversion price of $.2313 represents a premium of 17.2% from the stock price on the closing date.
The actual equity kick in the transaction comes from including two additional series of warrants. Both are struck at $.26 (a 32% premium) and have 3.5-year maturities. One series covers the same number of shares the convertible exchanges into, and the other covers 1.5x that many shares. Together these provide 282% warrant coverage.
The conversion option and the two series of warrants are worth nearly 40 points of bond value producing an extraordinary effective cost of 55%.
Lowell only had $2.2M of cash on its June balance sheet and a burn rate of nearly $3M per quarter. The current financing gives them sufficient liquidity to operate; however, Lowell’s proforma free cash flow adjusted current ratio is only 1.56x, not exactly a comfortable position. The balance sheet measure overstates Lowell’s true liquidity because the company has significantly more days of inventory on hand than other competitors.
The Viridian Credit Tracker model ranks Lowell as the #5 out of 9 in the peer group of U.S. Cultivation & Retail companies with market caps between $20M and $100M. We view the company as a potential acquisition target. It makes sense to do whatever is required to stay in the game until an upside catalyst occurs, whether SAFE or acquisition or some improvement in the California market.
MERGERS & ACQUISITIONS
Transactional Activity:
One M&A transaction closed this week with a total disclosed transaction value of $3.8M compared to seven transactions for $170.1M in the prior year.
Total YTD M&A volume is down 79.7% from 2021, with $4.10B in consideration and 123 deals closed versus $20.23B in transaction value and 177 closings in 2021.
Last year’s total included two of the largest M&A transactions ever done in cannabis, the $4.5B Tilray acquisition of Aphria and the $7.2B Jazz Pharma acquisition of GW Pharma. Without the two megadeals mentioned above, the volume in 2022 would trail 2021 by 51.9% YTD.
U.S. volume is down 61.9%, with 39.0% fewer transactions.
The average transaction size of $33.5M is down 37.5% from 2021. Still, it is expected to grow considerably as large public/public transactions like Cresco/Columbia Care and Verano/Goodness Growth close in the 4th quarter.
Major Pending Deals Risk Arb
The Cresco/Columbia deal spread narrowed by 250bp to 9.8% on 8/19/22. The deal still requires some state approvals and the completion of significant asset sales, which may be more difficult in the current financing environment. Investors were reassured by management comments during their earnings call, which suggested that buyers for the duplicative assets had been mainly lined up. Still, we have to believe that Ascend walking away from the MedMen deal, and an additional set of NY assets on the market, has caused some doubts.
The Verano/ Goodness Growth spread widened by 190bp to 13.92.0% as of 8/19/22. We think the drama surrounding Ascend and MedMen may have had something to do with this widening.
Valuation Gap
The valuation gap widened to 3.94 on 8/19/22 compared to 3.63 last week. The valuation gap is the difference between the EV/NTM EBITDA multiple for the largest MSOs and the multiple for the less than $300M market cap group, which are their primary targets. This measure has been a significant driver of M&A activity since a larger gap creates an opportunity for more accretive transactions. The gap, which has averaged around 4 points in 2022, tends to increase in improving markets while declining in retreating markets. A four-point gap is conducive to accretive transactions between the largest MSOs and smaller competitors. At the same time, a tighter financing market makes it more challenging for small companies to finance the growth of their business.
The Largest M&A Deal of the Week:
On August 15, 2022, Luff Enterprises (LUFF: CSE), a $5M market cap hemp and wellness company that offers premium quality products across the U.S. through its online store, completed the acquisition of National Green Biomed, a British Columbia-based company that manufactures cannabis products.
Total consideration of $3.78M consists of $3.06M in stock, $.18M cash and the assumptions of $.55M of liabilities.
VIEW DEAL TRACKERS
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.
Launched in January 2015, and having analyzed more than $60B in deals, the Viridian Cannabis Deal Tracker is a proprietary data service that monitors and analyzes capital raise and M&A activity in the legal cannabis and CBD industries. Each week the Deal Tracker provides proprietary data and market intelligence on transactions, including:
Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors – from Cultivation to Brands to Software)
Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A)
Principals to the Transaction (Issuer/Investor/Lender/Acquirer)
Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)
Deals by Location of Issuer/Buyer/Seller ( To Track the Flow of Capital and M&A Deals by State and Country)
Credit Ratings (Leverage and Liquidity Ratios)
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About Viridian Capital Advisors, LLC
Viridian Capital Advisors (www.viridianca.com) is a financial and strategic advisory firm dedicated to the cannabis market. We are a data- and market intelligence-driven firm that provides investment, M&Amp;Amp;A, corporate development, and investor relations services to emerging growth companies and qualified investors in the cannabis sector. Our banking practice, through broker-dealer Bradley Woods & Co. Ltd. (Member FINRA/SIPC), provides capital and M&Amp;Amp;A services to fund the growth of our clients, while our advisory practice helps to position and build their businesses. Our team’s decades of high level operating and transactional experience on Wall Street in a variety of emerging sectors, allows Viridian to provide comprehensive strategic and financial solutions that assist cannabis enterprises in realizing their full potential.
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