Viridian Cannabis Deal Tracker - Week Ending January 7th, 2022
Transactional Activity: There were two fewer transactions but a $44.9 million higher volume this week than the prior week. Compared to last year's same week, two fewer transactions closed with a $19.7 million higher volume. The average deal size was $15.1 million this week vs. $8.0 million in the same week last year.
Issuance this week continued to be light, but it was more balanced between equity and debt than in the last four weeks. Two raises dominated the activity: a $61.5M follow-on equity offering for AFC Gamma and a rather complicated C$14M loan for Halo Collective.
We see capital raises continuing to tilt towards debt as stock prices languish and companies are loathe to issue stock at the bottom while hope of banking reform is still in the air. Since mid-December, the Real Estate Sector, one of the 12 subsectors into which Viridian Capital classifies cannabis companies, has accounted for approximately 89% of the $182M total equity capital raised. Equity issuance for these companies, including this week's $61.5 million deal for AFC Gamma, can be considered lending reserves and are precursors to further debt extensions. The Viridian Capital Graph of the week copied below showed that the capital providers have been doing better than their customers in the cannabis stock market.
Total capital raised in the first week of 2022 of $75.5M was approximately $19.7M higher than the same period in 2021. U.S. equity raises are up by $13.3M (27%), and U.S. debt raises are up by $8.1M (274%) compared to 2021. Meanwhile, Canadian equity raises are down $4.0M (100%), and debt raises are higher by $2.4M (from none). We tracked no cannabis capital raises for the rest of the world in the first week of 2022. We expect to see capital raises outside of the U.S. and Canada pick up as more countries liberalize their cannabis laws.
Cap Raises by Sector:Companies raising capital this week came from a diverse list of sectors.
Cannabis stocks were down for the first week of the year, with the AdvisorShares Pure U.S. Cannabis ETF off 4.5%. The S&P 500 was down 1.9%.
There were three equity deals for the week totaling $62.15M
Big gainers and losers for the week included:
Largest Equity Raise: On January 5, 2022, AFC Gamma (Nasdaq: AFCG), a leading lender to U.S. cannabis companies, closed a follow-on equity offering for gross proceeds of $61.5M.
AFCG sold 3M shares at $20.5 per share.
Jeffries, Cowen, and JMP Securities were lead bookrunners with EF Hutton and Seaport Global as joint bookrunners.
Proceeds will fund loans to existing and new customers and for working capital and other corporate purposes.
As of December 24, 2021, AFCG had a portfolio of loans to 15 different borrowers with a total principal outstanding of $366M and additional unfunded commitments of $55.5M. The estimated loan yields range from 11% to 29%, with an average of 19%. In November 2021, the company did a Senior Note issue at 5.75%, illustrating the sizeable lending spreads available in the cannabis market.
Public Company Listings: Four of the five companies that raised capital this week are public. Two trade in Canada (one on the CSE and one on NEO), and four trade in the U.S. (three on the OTC and one on Nasdaq).
Equity vs. Debt Cap Raises: Equity accounted for three out of five raises and 82.3% of capital raised.
Two companies raised debt this week, both with high-yielding transactions. Empower Clinics closed a convertible note issue with attached warrants, achieving a record total warrant coverage of 250%. The effective cost of the transaction was not calculatable because the option value (including both conversion options and warrant options) exceeds the proceeds of the deal. The primary driver of this phenomenon is discount conversion and warrant exchange pricing.
Debt has accounted for 91% of capital raised in the trailing four-week period as companies pull back from painfully low stock prices and aggressive debt providers continue to build their books rapidly.
Largest Debt Raise: "If it looks too good to be true….". On January 6, 2022, Halo Collective Inc. (NEO: HALO) (OTCQB: HCANF) ("Halo"), a vertically integrated cannabis company with operations in Oregon, California, and Canada, entered into an innovative C$14 million loan facility with Alpha Blue Ocean ("ABO"), a convertible arbitrage hedge fund. At first glance, the deal seems almost too good to be true.
The loan is structured in two tranches of $7M each.
8% interest rate (PIK features according to the Subscription Agreement)
Fully amortizes over six months with a level principal & interest payments of approximately C$2.39M (assuming all C$14M of the facility is drawn) per month for six months.
2.625 M warrants with a C$1.60 strike price (33% premium) and five-year expiration will be issued to ABO in conjunction with the deal. The warrants will be issued in three equal tranches: 1/3 on the loan agreement date, 1/3 after 30 days of the loan agreement date, and 1/3 60 days after the loan agreement date.
Proceeds will "be used to support Halo's expansion into nutraceutical products (including Hushrooms™), the completion of Halo's Budega™ retail stores in North Hollywood, and Westwood, California, and for general corporate purposes."
It seems curious that these capital projects would be funded with a six-month loan, begging the question of whether this is a bridge to a longer-term deal? But, at first glance, it seems like a curious structure for a bridge: unsecured and only 8% coupon?
But, remember, Halo is giving away five-year warrants for a six-month loan, and it turns out these warrants are quite valuable.
Black Scholes indicates that each warrant is worth approximately $0.23. The total warrant package is worth $603,750, or around 4% of the principal.
The loan has an average life of only 3.5 months, given its amortization.
The combination of the short life and warrant value, along with the 8% coupon, produce an effective cost of 22.9%.
Alpha Blue Ocean is getting paid quite well for extending 3.5-month average life credit to Halo!
But here's where the deal gets more interesting. Simultaneously to the loan above, Halo entered into a Subscription Agreement with ABO that allows it to issue up to 15 Convertible Debentures, each with a principal amount of C$1.23M. Halo paid ABO a C$650,000 commitment fee in connection with the Agreement.
Halo will have the option to make payments under the 8% loan by issuing Convertible Debentures under the Subscription Agreement. It would require two new Debentures to make each monthly payment on the loan, assuming that the full $14M is drawn.
The Convertible will be issued at 97% of par, and the discounted amount of two such converts matches the amortization payments of the $14M loan.
The Convertible Debentures carry no interest rate and have a 24-month maturity.
They are convertible at any time (and automatically at maturity) at the lower of C$1.25 or the stock's closing price on the conversion date.
If the stock price on the conversion date is higher than the lowest price in the 15 days before conversion, Halo will be required to make a "Make Whole" payment to compensate the lender for the difference. This payment assures ABO that it will always be able to convert at or below the market price of the stock.
Halo can force conversion if the five-day VWAP of its stock exceeds C$2.60.
There are two ways to look at this overall transaction:
Convertible arbitrage funds typically short a company's stock against a long position in the convert, exerting downward pressure on the stock. ABO is not at risk: it is buying the converts at a 3% discount, and it has an at-or-below market conversion price which it can exercise at any time. ABO will make money regardless of whether Halo's stock goes up or down.
If Halo's stock begins to decline, it will need to issue an increasing number of shares, exerting more pressure on the stock. In the worst scenario, this can spiral the stock downward.
The C$14M loan is quite large relative to Halo's market cap of C$34M, so a significant number of shares would need to be issued at current prices and proportionately more if the stock declines.
Furthermore, Halo has a 30-day average trading volume on the NEO of only approximately 113,000 shares per day. Selling $14M of stock would be difficult without affecting the price.
Halo's stock is down 61% since the beginning of November 2021 versus a decline of 13% for the MSOS ETF.
Mergers & Acquisitions
Transactional Activity: Seven M&A transactions closed this week with a total transaction value of $256.6M compared to two transactions with a total value of $16.25M in the prior year. Public companies were the buyers in five of the seven transactions closed this week.
The valuation gap we have discussed between the most prominent companies and everyone else continues to be a prime driver of M&A activity. Cultivation & Retail companies with over $750M in projected 2022 revenues are now trading at a median of 7.48x 2022 consensus EBITDA. In contrast, companies with less than $300M projected 2022 revenues are trading at a median of 3.89x 2022 EBITDA. Over the last two weeks, this spread has widened by approximately 70bp and represents an enormous funding advantage for large MSOs. Larger companies can also access the debt markets at much more attractive rates adding to their advantage as an acquirer.
Largest Closed M&A Deal of the week: On January 3, 2022, Emerald X, LLC (private), a wholly-owned subsidiary of N.Y. based business to business event and media company Emerald Holding (NYSE: EEX), closed its acquisition of Denver based MJBIZ. Total consideration included $120M in upfront payment and earnouts which are expected to range from $30M to $50M.
The upfront consideration of $120M was paid in cash.
The acquisition includes MJBizCon, the oldest and largest trade show in the cannabis industry, and leading publications MJBizDaily, Hemp Industry Daily, and MJBizMagazine.
MJBizCon attracted more than 1,200 exhibitors and over 27,000 attendees at its Las Vegas event in October. The conference was held virtually in 2020.
The transaction value represents 4.4x 2021 revenues and 8.8x 2021 EBITDA.
Public vs. Private: Five of this week's seven acquisitions were made by public companies.
M&A by Sector: The buyers and sellers in this week's deals were from the followingsectors: