Auxly ($XLY) recently announced a $20MM raise (at $0.37) – that included a half warrant with a strike of $0.46, and packing a 3 year tenor. It closed this morning. I recently wrote a public piece on the ‘anatomy of a raise’, that tried to put some relative value around the components within an offering.
$XLY’s raise has ‘half’ warrants attached to each ‘Unit’ that’s being offered for $0.37 cents. As of the date the raise was announced, shares were trading at $0.42, up some $0.18 from the start of the year. $XLY was likely (more than) ready for an injection of cash, and I see their move as opportunistic. It occurred right after that recent run. That a company is raising at this low a relative share price (given historical levels), means they really needed the money.
Despite some share price decline during the period from announcement until close, shares have been bumming around the mid-30’s. I value the warrants attached at some ~=$0.25 per warrant, which, would add a notional cost to the raise of around $6.8MM ((54.395,000/2) * $.25). From a fee perspective, the raise wasn’t cheap:
I price the broker warrants at $0.28 cents each. In total, here’s what that ‘$20MM’ sent out the door in equity:
For about $10MM bucks, they added 87MM shares to the float, and handed out optionality to induce uptake….(I get the cost of that optionality to be around $9MM). There are many ways one can look at this, even imputing an effective interest rate on the capital. A reader could also infer that they realized about $0.09/share on this issue.
This should be troubling to a shareholder, in that a raise required this much value to be issued under a ‘bought deal’. The level of effort required by underwriters is far less than a ‘best efforts’ basis. And I see the cash fee at 6% to be compensatory beyond the issue, and in effect…..pricing company risk into the raise.
$XLY pulled in a 27% gross margin on operations last quarter. The cost of this raise far exceeds that.
I don’t see this as a good portent for $XLY, as it’s reminiscent of the cost I saw capital going for last spring. The use of the proceeds at $XLY is said to be for working capital. Normally, this would be financing during periods of growth – where a hard expansion of receivables/liabilities and inventory is required to be carried on the balance sheet.
Assuming that’s the case (and it very well might not be), crudely, one expects the margin underlying the business to be in excess of the cost of funds to perform it. It’s synonymous with the cost of capital in a company needing to be less than the rate of return (RoR) on the assets deployed. Banks make money on a net interest margin (NIM), the spread between what they pay for money, versus what they earn by using it. A cost of capital/RoR is the same idea.
If this is what it costs for one of the more promising 2.0 (and beyond) outfits in Canada for capital at this point, it doesn’t matter where share prices are. It means the people putting money into it are expecting a very large chunk of flesh to do so.
I see it as a negative sign for $XLY, as well as for other Canadian operations in Canada. GoBlue and I talked for awhile this morning about a few things. One of them is how interest in legal cannabis is bringing fresh cash into the sector. How a company like Harvest One (a true zombie) is now trading in the mid-teens. Or how a company like Sundial is trading at a $0.40 cent premium to a raise done just 2 weeks ago.
The worst of it will see these zombies lumber on. And on.
I don’t really case what the share prices are doing, inasmuch as TheCannalysts are a fundamental outfit. And we’re confident that fundamentals will always bear out in the long run.
The money says this sector is incredibly risky, and has priced it accordingly. Go against that, and you aren’t simply augering against an opinion of future state fundamentals….you’re going against folks who price risk for a living.
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author has held position in $XLY in the past, but has no position as of writing.