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Congress stripped the SAFE Banking Act from a defense spending bill this week, decreasing the possibility of meaningful federal marijuana reform before the end of the year.
While it’s not the holiday present many in the industry were hoping for, it’s not doom and gloom across the board.
Two key datasets so far in 2021 really highlight how, despite the ongoing banking and financial challenges – don’t get us started on the effect of Section 280E of the tax code – marijuana businesses in most markets are finding a way.
First, the number of depository institutions in the U.S. that are actively banking marijuana-related businesses has remained relatively steady throughout 2020 and 2021.
According to data from the U.S. Financial Crimes Enforcement Network (FinCEN), the number of banks and credit unions that have filed reports indicating such activity has remained around 700 for several consecutive quarters.
The second point: Debt financing has been hot this year.
So hot, in fact, that it has consistently accounted for more than 50% of the amount raised by cannabis firms this year, according to data from Viridian Capital Advisors.
Certainly, the debt still isn’t cheap, but it’s more readily available than it’s been in the past.
And that’s critical for giving more companies increased access to capital.
There’s only so much of your company you can give away before you get yourself stuck in a dire situation: the potential of losing control of your legacy.
The next FinCEN report is due out soon, and supporters of reform already have vowed to revisit the issue in 2022.
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Deal of the Week / In partnership with Viridian Capital Advisors
MassRoots leaves cannabis but continues to feel the effects
MassRoots (OTCQB: MSRT), which is in the process of changing its name to Greenwave Technology Solutions, closed a $37.3 million private placement of senior secured convertibles notes with warrants last week.
Top-level details (see below) don’t make the raise stand out, but the finer points make it one of the most expensive debt deals of 2021.
The combination of the original issue discount, discount conversion and coverage with low-premium, long-dated warrants creates an effect cost of more than 85%.
The Denver-based company also completely changed its business model, from a cannabis social media platform to steel recycling, though MassRoots’ history in cannabis played a key role in getting it to that rate:
- Greenwave is notorious for the late filing of financial statements. It was late on its 2020 10K (annual SEC filing) and each of the first three quarterly reports for this year.
- Each of the company’s most recent filings noted a severe working capital deficiency and “going concern” qualification. That means auditors believe Greenwave might not have sufficient funds or generate sufficient revenue to satisfy its existing obligations as they come due.
- Greenwave’s latest 10Q speaks in-depth about the failure of internal controls at the company.
- As of the company’s latest proxy statement, the company had two members on its board, neither of whom were on the audit or compensation committees – not exactly what Viridian Capital Advisors has come to expect in the corporate governance arena.
As of Nov. 1, Greenwave said, it “no longer has any exposure to the cannabis industry” after selling its social media assets.
Viridian believes Greenwave’s business shift is the most drastic evaluated by the financial firm to date.
- The $37.7 million issue was purchased with approximately $33 million in cash and $4.7 million of existing debt.
- Coupon rate is 6%.
- Original issue discount is also 6%.
- Conversion price is set at $0.05 (an 11.3% discount to the share price on closing date).
- Five-year warrants for 754.3 million shares included for total warrant coverage of 30% (exercise premium of 15%).
- Initial maturity is six months, extendible by the company to one year if no events of default are outstanding.
Completing this issue is truly a miraculous event. But perhaps we are just being too cynical.
After all, the market has rewarded Greenwave with a doubling of its share price since mid-September, and the company now believes that it qualifies for an uplisting to either the Nasdaq or New York Stock Exchange.