Cannabis Deal Tracker - Week Ending January 1, 2021
Transactional Activity: There were three fewer transactions and $30.7 million lower volume this week than in the prior week. Compared to the same week last year, there was one more transaction and $1.6 million higher volume. This week's average deal size was $1.6 million vs. 1.5 million in the prior-year period.
Largest Equity Raise: On December 31st, 2020, Innocan Pharma Corporation (CSE: INNO)(OTC: INNPF), an Israel based concern focused on the development and sale of CBD-integrated pharmaceuticals, announced the closing of a C$2.4 million (US$1.9M) non-brokered private placement of 10.3 million units at C$0.23 per unit (US$0.18). Proceeds will be used for working capital and other corporate purposes. Each unit was composed of one common share and one-half of one common share purchase warrant with a strike price of C$0.35 per share (US$0.28)(a premium of 4.4% to the closing price on the transaction date and 55.5% to the unit price) and a three-year maturity. We value the warrants at approximately US$0.006 per unit, giving a net share price of US$0.17 per share, a 33% discount to the actual closing price on the transaction date, which is significant given the relatively low increase of 5.8% in total outstanding shares. The deal implies a US$33.4 million market cap and a market to book ratio of approximately 13.9x, the 5th highest of the 30 Biotech companies we track with market caps under US$50 million. EV/Revenues and EV/ EBITDA multiples are not meaningful due to its pre-revenue and negative EBITDA status. Innocan has low market leverage, with debt/market cap after this transaction of only .02x. We expect to see more capital raises in the first half of 2021 as the company's cash, post this transaction, covers only about 2.2 quarters at its current cash burn rate.
Public vs. Private Cap Raises: Both of this week's capital raises were closed by public companies. Public companies accounted for 83% of all capital raises in 2020, vs. 64% in 2019. In 2020, public companies accounted for 81% of total dollars raised, vs. 69% in 2019.
Public Company Listings: Of the two public company capital raises, both are listed in Canada on the CSE, and both also trade on the OTC.
Equity vs. Debt Cap Raises: Equity-based capital accounted for one of this week's two closed raises and 60% of raised proceeds.
Largest Debt Raise: On December 31st, Canntab Therapeutics (CSE: PILL)(OTCQB: CTABF), a leading innovator in cannabinoid and terpene blends in hard pill form, announced the closing of a non-brokered private placement of a C$1.575 million (US$1.24 million) Secured Convertible Debenture with a two-year maturity, 10% coupon and conversion price of C$0.80 (US$.63) (a 0% premium to the closing stock price). The Debentures are secured by substantially all of the company's assets, and proceeds will be used for working capital and general corporate purposes. The Debentures' Purchasers also received 1.97 million two-year warrants at a premium of 25% to the closing price on the transaction date. The at-the-money conversion price and the high coverage (125%) of 3-year warrants at a relatively low discount combine to make this an expensive financing with an effective cost of 30.29%. The conversion feature accounts for 10.5% of the premium over the 10% coupon, and the warrants account for the remaining 9.8%. The high cost of the financing is consistent with the company's pre-revenue status and the fact that its cash position after this financing only represents about three quarters of liquidity at its current cash burn rate. The company has had negative cash flow from operations each of the last 11 quarters.
Cap Raises by Sector: The two capital raises this week were both in the Biotech/Pharma sector.
Mergers & Acquisitions
Transactional Activity: There were two completed M&A transactions this week, up from one in the prior-year period. The number of completed M&A transactions in 2020 was down 70% vs. 2019, but we have begun to see a definite acceleration of deal activity.
Largest M&A Transaction: On December 30th, 2020, Sundial Growers (Nasdaq: SNDL) closed on an acquisition of a special purpose investment vehicle that owns C$58.9 million (US$46.2 million) principal amount of a senior secured loan of Zenabis Investments, a subsidiary of Zenabis Global Inc. The loan has a 14% rate, matures on March 31st, 2025, and is secured by all of the cannabis-related assets of Zenabis. The loan also contains a royalty payment provision whereby Zenabis a royalty rate on its quarterly net revenues scaling down from 3.5% to 2% as revenues increase. Sundial purchased the loan at its face value of C$58.9 million (US$46.2 million ). We estimate that the royalty payments will raise the IRR of this loan to approximately 20%. While this may represent an attractive investment for Sundial's excess cash, Zennabis is a risky credit whose debt/ market cap is the 9th highest of the 115 Cultivation & Retail sector companies we track. We note that 6 of the eight companies with higher debt/market cap have defaulted on their debt. MedMen is one of the other two.
Public vs. Private: This week's two acquisitions were both made by public companies. Year-to-date, 92% of M&A transactions closed in 2020 have been made by public companies (up from 71% in 2019). Particularly with the recovery in stock prices and fundraising ability, public companies have been the dominant acquirers in the cannabis industry. Private companies remain the principal targets for acquirers.
M&A by Sector: One of the buyers in this week's transactions came from the Cultivation & Retail sector while the other came from the Infused Products & Extracts sector. One of the targets (a special purpose vehicle) was from the Investments/M&A sector, while the other was from the Cultivation & Retail sector.