Friends, today, for your Cannabis reading pleasure, I’d like to break down some key points on a convertible note offering just announced by Plus Products* in, yes, a press release (link), as a way to illustrate how investors and the markets view aspects of a public capital markets deal.
Plus is a California edibles manufacturer listed on the Canadian Stock Exchange.
o The CSE allows its issuers to engage in business that’s otherwise prohibited by US law (which is why so many Cannabis companies have listed there), while exchanges like the TSX Venture Exchange, as well as all of the US exchanges, do not. That, however, hasn’t kept some US Cannabis companies from listing on other exchanges, whether it’s the NYSE or the OTCQB (where, on the latter, listing and reporting requirements are much lower). For example, Plus just cross-listed its stock on the OTCQB, and Aprhia is now listed on the NYSE. How, you might ask, can these companies list in the US, even though Cannabis is still illegal? The short answer is that the exchanges are simply allowing it, just like some chartered banks are banking Cannabis companies and not saying anything about it. The cynical answer is that the exchanges are allowing it because, well, money.
Plus is offering up to C$20mm of 8% unsecured debt convertible into shares of its common stock. Each C$1,000 of notes comes with an attached C$8.00 5-year warrant for 77 shares of common stock. (Plus’ stock closed yesterday at C$6.50)
o The warrant is vigorish for the deal – additional incentive for taking the risk of making a loan to the company; however, since the warrant is “struck” with an exercise price of C$8.00, the stock price needs to go up within the next 5 years for the warrant to have value (be “in-the-money”).
o The warrant also has a feature that, if exercised within the first 12 months, the shares are locked up from sale for 365 days. This helps manage the dilution that’ll occur if the stock price spikes and everyone exercises immediately and 1.54mm shares hit the market (there were about 30mm shares outstanding on 9/30/18).
o One thing not apparent from the press release is whether the warrants are “detachable”, meaning whether the warrant may be sold/transferred separately from the note itself. Sometimes, issuers require that the warrants may only be sold with the note (they’re “attached”). This is usually negotiated in the offering itself.
The notes “shall be convertible” at a price of C$6.50/share, in 1/3 tranches “commencing on” 12, 18, and 24 months. The release also says that the notes “may be converted” at the greater of C$6.50 and 95% of the 30-day VWAP.
o This is where it gets confusing. From a drafting perspective, what’s the difference between “shall be convertible” and “may be convertible”? “Shall” suggests that the notes automatically convert at the fixed C$6.50 price in the three tranches**, but “shall be convertible” is not the same as “shall convert”. But then, why distinguish against “may be converted”, which suggests a separate optional conversion. This is a good example of why it’s important to read the documents, not just the press release. Sometimes, the summary doesn’t tell the full story (a point I’ve made before in my blog!).***
o From the holder’s perspective, it’s important to know when you may convert on your own terms, versus when the issuer is going to convert your note for you. For example, if, in a few weeks, the stock price jumped to an C$8.00 VWAP****, the holder could convert at a 5% discount to market price. However, if the note automatically converts at a C$6.50 price in 12 months, and the stock is trading at that point at, say C$4.00, the holder won’t be too thrilled with that trade. There are ways to “hedge” against that loss (swaps! options! swaptions!), but those aren’t usually offered for smallcap stocks, and the 8% interest rate also helps reduce the overall price paid, as do the warrants (if they’re in-the-money, of course). So, in a sense, a convertible note from a public company is a different way to bet on the future stock price.
The offering is being done on a “best efforts” basis by Cannacord Genuity and other placement agents.
o Cannacord Genuity and other placement agents are banks/brokers who get paid a delicious fee for finding people to buy newly-issued securities. There are generally two kinds of offerings – the kind where the underwriter agrees to take the success risk by agreeing to own all of the unsold securities (a “firm commitment” underwriting, or also known as a “bought deal”), and the kind where the underwriter doesn’t guarantee anything, but tries its darndest to earn that fee and sell everything (a “best efforts” underwriting). The difference is the degree of risk perceived by the underwriter that the market will take up all of the securities and whether the underwriter wants to sit on unsold securities (which it might, if it likes that trade and/or gets paid for it).
See? Aren’t securities offerings fun?
On a lighter note, the blockchain!(link)
*Plus is not a client, although, if they read this, I’m happy to talk to them about my wonderful legal services offerings….
**My favorite banking term – it means “bunches” (well, sort of). The important thing is that it makes banking lawyers sound fancy.
***Now, you may ask, gee, Marc, why didn’t you read the offering document? The answer is that it’s not yet posted to SEDAR (the public disclosure site for Canadian listed companies). And stop asking questions – this is a one-sided conversation.
****A cool-sounding securities term meaning volume-weighted average price, a way of calculating a securities price by looking at price and volume over a period of time, to smooth out price volatility.
Written by: Marc Hauser