Companies in the legal Canadian space are still able to raise (at least some of them), with Auxly’s ($XLY) recent offering as evidence of continuing appetite for equity. The Supreme Cannabis Company ($FIRE) joins them with an overnight raise announced today (January 25, 2021) after market close.

This one is expensive to existing shareholders, both in terms of cost and dilution. It also increases $FIRE’s vulnerability to predators and creditors.

The money side of it seeks to raise up to $20MM at $0.19, and each share bought will includes a 3 year half-warrant at $0.23. That’s offering is lower than market, and the dilutive aspect brings Zenabis to mind.

The offering saw full uptake (via underwriter BMO), generated gross funds of $20MM (~=$19MM net), and 105MM fresh shares went out the door (there’s also an over-allotment of 17MM shares). $FIRE states the money is to be used as (a) “…..reserve for strategic opportunities, and for working capital and general corporate purposes”. They had $20MM as of their last financials (September 30, 2020), and this raise signals they’re going to need more time to save the business, let alone improve quality of revenue.

A 125MM shares were added in the previous quarter when CEO Beena Goldenberg approached debenture holders and asked them for a re-price:

The remaining amount of that debenture issue ($36.5MM) was also re-financed, using an ‘accretion’ feature that automatically flips the optionality ‘value’ into cash monthly. It also wasn’t cheap:

Hey, money costs what it costs, and the implied interest rate reflects what the market will pay.

$FIRE’s in a tough spot. They’ve hammered (diluted) existing shareholders by increasing share count by 238MM shares in the past 2 quarters alone….ostensibly to just keep the boat afloat. That there’s demand out there for an underwriting….well…..I’m not of the mind that this represents a ‘good thing’ An existing shareholder has just been told that the priority of the company is now survival, not growth per se.

Share growth like this is distress manifested, nothing more. And in honesty….this is the direct result of the former CEO (now following a new career path as celebrity bud-tender, chronic, and sales rep for AgriPharm. While taking night courses for an MBA. Totally fitting.)

I’m expecting an announcement from Aleafia ($AH), obtaining capital – but using debt. They lack cash at the moment, having had debenture holders refuse to re-price their convertibles. That’s an assumption, but it’s also prima facie. There’s no way a legal weed company would use cash if they didn’t absolutely have to, especially with current credit availability (and its’ cost).

Given $AH’s operational state, they will need to approach creditors using the latest financials (yuck). Or, perhaps wait for better numbers at their year end. Given $AH’s proclivity to exaggerate business results (and hide forward product swaps) – it’s entirely likely they’ll pull the same stunt as they did in last year’s 4th quarter.

Potential creditors aren’t distracted by having lights shone in their eyes, and the effective interest rate will tell us exactly how dear it will cost $AH if they go that route. I’d expect something similar to $FIRE, and if $AH does take credit on, I anticipate an effective interest rate in the high 20’s (as a floor). If they go equity, it’ll be at a discount to market, and it’ll bring a heavy load of optionality. Either way, the cost will be high.

Despite $AH touting their current lack of debt and ability to offer assets as security, lenders don’t lend on the basis of whether or not they get to keep the china if Grandma flakes on the payments. They base it upon the probability of getting repaid, and the quality of cash-flow generation underlying the assets.

At the moment, I see both of these companies’ sitting side by side, right in the same boat.

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 holds no position in $FIRE nor $AH.