The proposed $48.8 million merger of medicinal cannabis firms Cannasouth and Eqalis and subsequent capital raising found favour with the independent adviser gauging the deal’s merits, which give the enlarged company funding for the next 12 months.
NZX-listed Cannasouth is buying Eqalis in an all-share deal, issuing almost 147.9 million shares at a notional price of 33 cents a share, then plans to raise between $7m and $11m selling new shares at 29 cents apiece.
Cannasouth shareholders will vote on the various proposals at a special meeting in Auckland on April 28, and while the board obviously endorsed all the resolutions, independent adviser Simmons Corporate Finance also said the positive aspects of a bigger player with enough funds for the near term “significantly” outweighed the negative aspects of getting diluted down by the new Eqalis shareholders.
“In our view, when the existing shareholders are evaluating the merits of the restructure, they need to carefully consider whether the negative aspects of the restructure, particularly the dilutionary impact, could justify voting against the restructure resolutions with the outcome that the company will remain in its current form as to size and capabilities and will need to raise additional capital in the near term to continue to be able to fund its operations,” the Simmons report said.
The advisory firm said the “merger of equals” will create a vertically integrated business generating revenue from biomass and premium flower production, manufacturing of cannabis-based ingredients and medicines under good manufacturing practice, and will be able to accelerate its research and development.
“In our view, the rationale for the restructure is sound. Cannasouth and Eqalis are complementary businesses and merging the two businesses will create a more resilient entity that has the critical mass to compete more successfully in the medicinal cannabis industry,” the report said.
“Furthermore, the 2023 capital raise will ensure that Cannasouth will be adequately capitalised in the near term.”
The two companies are sitting on about $4m in cash combined, and after the enlarged entity’s raised money, will have between $11m and $15m. The board’s received $3.3m of binding commitments so far, and expects more to emerge in the coming weeks.
“Securing these firm commitments so early in the capital raise and merger process is an excellent outcome for both CBD (Cannasouth) and Eqalis, and confirms the support that investors have for the proposed merger with Eqalis,” said chair Tony Ho, who retains the chair through the deal.
That gives them a runway of about 12 months before they’ll need to raise more money, with Cannasouth’s annual operating and investing cash outflows at almost $5.7m in calendar 2022, while Eqalis burned through almost $5.3m of cash on its operations and investments in the March 2022 year.
Both firms have managed to attract funding in recent years, with Cannasouth raising $24.2m since its 2019 initial public offering and Eqalis tapping investors six times to raise $19.8m since 2019. The capital raising also includes issuing one option for every two shares sold.
Those options carry an exercise price of 29 cents and will be able to be exercised six months after their date of issue and before three years are up, meaning the enlarged entity may raise a further $3.5-$5.5m.