CannaRoyalty (OH.C) subsidiary Trichome Financial completed a merger with 22 Capital to produce a credit-providing company called Trichome Private Credit that will provide a means of capital financing for the cannabis industry.
The cannabis markets are down and it’s getting hard for companies to raise needed capital. That’s why we’re seeing a lot of warrants and convertible debentures appearing on balance sheets, keeping stock price charts looking like ski-hills. The new company is a provider of solution capital, assisting their clients on capitalizing on the opportunities and challenges of the cannabis industry.
“Having experienced first-hand the complex capital needs of the cannabis sector and difficulty accessing credit alternatives, I believe that Trichome Financial is a unique investment opportunity given its defensive nature and long runway for growth. Given the challenging market environment, it is exceptionally well positioned to capitalize on opportunities in the marketplace today,” said Marc Lustig, chairman and co-founder of CannaRoyalty.
Trichome Financial is a specialty finance company offering capital solutions to the global legal cannabis market. They were created by Origin House and Stoic Advisory, seeking to capitalize on deals and industry insight while developing their own first mover advantage as a finance company in the global cannabis space.
The company’s story began a year and a half ago, when few lenders had the desire, mandate or guts to handle the volatility of the cannabis sector, and the amount of non-equity financing alternatives were limited. Trichome recognized the opportunity, and started providing services to the nascent industry, offering cash for support, working capital, capital projects and M&A.
There’s definitely demand for this type of financial assistance. Since Trichome finished their first external financing in September of last year, they have reviewed over 330 opportunities, representing more than a billion dollars in financing requests. The company estimates that %20 of these opportunities either have met, or may in the future, their underwriting criteria.
The company has already closed six transactions and signed term sheets for three others. Their present portfolio has a weighted average contractual effective cash interest yield, including interest payments and fees, of %14.5 a year.
The company is banking on their ability to offer third party capital, hoping to use the regular interest payments to scale their business, generate consistent and recurring fee revenue and minimize their own share dilution.
The company’s value proposition includes touching everything from cultivation, processing, retail, distribution, consumer products and technology. But it’s also counter-cyclical in that it earns contractual cash flows and derives potential upside from underwritten secured loans, a service that will increase in demand as the risk-averse take their exits.
What else is especially interesting about this arrangement is how OH raised the cash necessary to fund this merger.
There’s this from the press release:
“As a condition to closing the Amalgamation, Trichome Financial completed a non-brokered private placement financing of 7,849,707 subscription receipts at $2.10 per subscription receipt and raised gross proceeds of approximately $16.5 million. Upon completion of the Amalgamation, the subscription receipts converted into 7,849,707 common shares of the Corporation. On a fully diluted basis, the Corporation has 27,415,343 issued and outstanding common shares, restricted share awards and options upon completion of the Amalgamation.“
That’s right. This company took on more debt to offer debt to other companies. There’s something unwholesome about that—kind of like taking out a credit card so your friends can pay off their line of credit.
The chart shows that OH itself hasn’t exactly been exempt from some of the pitfalls common to companies operating in the cannabis industry. The general ski slope (and subsequent bounce) show a company that hasn’t been able to part itself from the general industry-wide downtrend, but are clearly hoping that this diversification will spell a change in their fortunes.