We’re seeing a lot of cannabis companies inflicting friendly fire on themselves these past few months, as companies dependent on big financings find the market isn’t as enamored with growth at all costs as they are.
We’ve seen big write downs based on assets purchased with debentures that later convert to shares at unhelpful prices, companies with debenture debt due soon that they’re going to have to dilute hard to cover, we saw Livewell change to Eureka 93 (ERKA.C), halt for eight months, and rollback the day it came free trading, causing a shareholder bailout that cut its own throat to the tune of a 90% value drop.
And then there’s Flowr (FLWR.V).
Flowr wanted to buy 100% Holigen Holdings, which it already held a chunk of. The deal was for stock, some debt payment, and future capital investment in facilities.
“The full acquisition of Holigen is a natural evolution of our global cannabis strategy. The combination of Flowr’s leading cultivation know-how and facility design with Holigen’s global footprint, expertise in GMP and deep pharmaceutical experience is an excellent fit. The opportunities in the European and Australian-Asian medical cannabis markets are enormous and Holigen brings unmatched scale to service these regions,” said Vinay Tolia, Flowr’s chief executive officer.
Problem was, investors weren’t keen on the $235 million price tag, nor the infusion of 32m shares into the company float.
So the share price dropped.
From $7.10 to $5.70. In one day.
Now the company was making a $190 million deal, not a $235 million deal.
The stock rallied for a hot second, but sector dynamics soon saw it headed lower.
The Flowr offering was supposed to be underwritten by Credit Suisse Group, Barclays and BMO Nesbitt Burns. In May, Credit Suisse was part of the syndicate of banks that underwrote a $195.5-million (U.S.) financing by Canntrust, less than two months before Health Canada began its investigation. “In the case of Canntrust, the financing that they did right before the entire episode had substantial, highly credible syndicate partners, and those partners now have egg on their face. That is super negative for the entire sector and will have ripple effects that will play out over months and years,” said Tantalus Labs boss Dan Sutton.
So Flowr was faced with a decision; re-price their financing at a lower price level and soldier on regardless (downside: even more dilution of the stock), or back out, an option entirely possible through an out that was part of the initial deal.
If the closing has not occurred on or before July 15, 2019 (which date may be extended by mutual agreement of the parties), and if such outside date has not been extended by the parties, Flowr or the vendors may terminate the agreement.
The company is not proceeding with the offering due to prevailing market conditions, which were not conducive to the completion of the offering on terms that would be in the best interest of Flowr’s current shareholders. Flowr will continue to monitor market conditions as it evaluates options to drive long-term growth.
Huzzah! Share price rallies from $4.00 back up to $4.80, a level it maintains for a week as the sector in general swooned.
I absolutely love what @FlowrCanada mgmt did here!
Filed their final short form prospectus mid-day yesterday.
Stock then plummeted on anon volume.
Then next morning (today) mgmt pulls the deal, creating a squeeze.
— Kelly Brown (@rubiconcapital_) July 19, 2019
A great day and a return to investor sentiment oh god they’re going to fuck it all up again, aren’t they?
The Flowr Corp. has entered into an agreement with a syndicate of underwriters led by GMP Securities LP, pursuant to which the underwriters have agreed to purchase, on a bought deal basis, pursuant to the filing of a short form prospectus, an aggregate of 10.61 million units of the company, at a price of $4.10 per unit for aggregate gross proceeds to Flowr of $43,501,000.
$4.10 was more than $0.70 per share below the closing price of the previous day.
Why does Flowr need $43m raised at nigh half the share price the company enjoyed less than a month ago?
The company intends to use the net proceeds from the offering to finance, in part, its acquisition of the approximately 80-per-cent equity interest of Holigen Holdings Ltd. that it does not already own, working capital required for the construction and development of certain of Holigen’s and the company’s cultivation and production facilities, and for general corporate purposes.
They’re still into that deal, only now they’re paying a higher price for it, getting less, and shredding their share price once again.
How’d that stock end the day?
How is this even legal???? @IIROCinfo
— Seb Tarte (@seb_tarte) July 22, 2019
Remember, when they started this journey, the offering was $7.10. Less than a month later, the company has nothing to show for its moves except a self-slashed share price close to half what it was.
$FLWR Man oh man, it simply doesn’t get much worse than this. Announce a “priced in the context of the mkt” deal at $7.10, let the shorts destroy you, cxl the deal and then do the raise at $4.10 with a 1/2 warrant? BRUTAL>NO POSITION. pic.twitter.com/7ANteAxUkU
— Robert (@theHallowedgold) July 22, 2019
When a raise is announced at less then the market price, investors will often sell their stock so they can rebuy it cheaper. In fact, they’ll often do that if the offering and the stock are level, because they’ll receive warrants in the financing, which can bring a second bite at profits down the line.
For that reason, companies are usually careful with where, and when, and how they announce these deals.
Flowr is so convinced what they’re buying is incredible, they’re prepared to burn down the house to get it. But the markets aren’t seeing that value. What they are seeing, now more than ever, is a downward trajectory and just a little desperation.
Which would explain their recent discussions of a possible NASDAQ uplist… good grief.
If they’re going to complete than Holigen deal, they’re going to need a lot more finance/paper out there than this deal permits, and this deal is already killing them.
— Chris Parry
FULL DISCLOSURE: No dog in the fight.