Viridian Cannabis Deal Tracker - Week Ending April 2, 2021
Transactional Activity: There were seven more capital raises and $6.80 million higher volume this week than in the prior week. Compared to the same week last year, fourteen more transactions closed with a $58.5 million higher volume. The average deal size was $4.1 million this week vs. $2.4 million in the same week last year.
Cannabis traded sideways this week, and the price of our basket of 25 cannabis stocks was down 0.1%.
We were surprised by the market's ho-hum response to the passage of adult legalization bills in both New York and New Mexico. While neither state is likely to be selling recreational weed in less than a year, we would have thought the sign of continued momentum towards legality would have gotten cannabis stocks out of their funk. 2021 is still on a record capital-raising pace, but its lead has shrunk.
Largest Equity Raise: On March 30th, 2021, GTEC Holdings (TSXV: GTEC)(OTCQB: GGTTF), a small Canadian LP that recently divested its retail operations, closed a bought deal public unit offering of 28.75 million units at US$.63 per unit for total proceeds of US$18.2 million. Each unit includes a three-year term, 30% exercise premium warrant worth approximately $.07. The transaction values the company at roughly $77 million, representing 11.2x annualized sales. Proceeds will be used to repay indebtedness, fund expansion of the company's operating capacity, fund product development and international expansion opportunities, and general working capital purposes.GTEC's stock is up over 500% since the beginning of February.
2nd Largest Equity Raise: On March 31st, BLAZE, a fast-growing enterprise resource planning and point of sale software, closed an $8 million Series A funding. Delta Emerald Ventures led the round with participation from Act One Ventures, the lead investor in the previous seed round.
The cannabis software industry is poised for rapid growth spurred by newly legalized states, MSOs unifying their systems across all their holdings, and tier two competitors outgrowing their Quickbook based accounting systems and installing integrated ERP systems. While the number of transactions in the industry has not yet exploded, we do see a steadily increasing average transaction size as the industry consolidates.
Public Company Listings: All thirteen of the public companies that raised capital this week are listed in Canada (eleven on the CSE and two on the TSX), and eight of them also trade on secondary markets (seven on the OTC and one on the FSE).
Equity vs. Debt Cap Raises: Equity-based capital accounted for eleven of this week's fifteen capital raises and accounted for 82.2% of the total capital raised.
Largest Debt Raise: On April 1st, Heritage Cannabis Holdings closed a US$5.58 million 18 month loan agreement with BJK Holdings. Approximately 2/3 of the proceeds were used to pay off a Trichome Credit Facility set to mature on January 30, and the loan was priced at prime +1.25%. (we wondered if it was an April fools joke when we saw that pricing!). The ultra-tight spread is somewhat explained by the US$769,298 "setup fee" being charged by the lender. You can view this as an OID to calculate the actual cost of the financing at 14.2%. Still, pretty great execution for a $70 million market cap company with less than $5 million in LTM revenues.
The chart below looks at the effective cost of the last eight cannabis debt financings, with the most recent at the right. We calculate these effective costs by explicitly valuing the embedded options in the transactions and subtracting them from the proceeds received along with OIDs etc., before calculating yields. We hesitate to claim that eight deals make any trend. Still, there are two salient points about the graph worth noting 1) Smaller companies and especially smaller private companies like Leafwire and PPK are still paying extremely high effective debt rates, principally due to the terms of the attached warrants or convertibility features. These rates have not come down nearly as much as we would have expected, given the improvement in cannabis equity prices since the beginning of the year. 2) Some companies like Heritage and Harborside (neither of which strikes us as particularly strong credits) have managed to get floating-rate bank or (bank-like) financing at quite attractive terms. The spread between the have and have-nots rivals the large vs. small company valuation gap we have noted previously.
Cap Raises by Sector: Of the fifteen companies which raised capital this week, seven came from the Cultivation & Retail sector; five came from Infused Products & Extracts; and one each came from Software/Media, Biotech/Pharma, and Consumption Devices.
Mergers & Acquisitions
Transactional Activity: Five M&A transactions were completed this week, up from one in the prior-year period. We have tracked 71 transactions YTD in 2021, compared to 21 in the same period last year. Public companies were the buyers in 80% of 2021 deals YTD compared to 90% in 2020. our of the 21 deals in 2021 where the acquirer was private.
Largest M&A Transaction: On March 30th, Ayr Wellness Inc. (CSE: AUR/A)(OTCQX: AYRWF), the sixth-largest U.S. MSO by market cap, announced the closing of its purchase of 100% of the membership interests of Parma Wellness Centers LLC Ohio along with associated real-estate.
The total consideration of $17 was all cash and allocated $13 million towards the membership interests and $4 million for real estate.
Ayr expects to spend an additional $20 million to complete the initial construction of 25,000 sq ft of canopy inside a 58,000 sq ft building.
The acquisition gives Ayr one of only 19 level 1 cultivation licenses (the largest granted) in the state. It is consistent with Ayr's expansion in limited license medical states with significant populations and reasonable potential to turn adult legal in the next year.
Public vs. Private: All five of this week's acquisitions were made by public companies.
M&A by Sector: Four of this week's five buyers came from the cultivation & retail sector, with the other from Biotech/Pharma.