Cann Group talks up potential capital raise as the ASX probes possible solvency

The medicinal cannabis company talks up a potential major equity injection after being asked to defend its solvency by the ASX.

Cann Group is a medicinal cannabis grower and manufacturer.

Cann Group, which lost its chief executive last week and which has had its shares suspended from trade for most of the month, has defended its solvency, and says a major capital injection could be in the offing.

The medicinal cannabis pioneer, whose shares more than doubled from their 30c issue price on listing back in 2017, on Monday responded to questions from the ASX over its solvency, and why it did not reveal the breach of a debt covenant.

Cann Group shares were suspended from trade on March 1, with the ASX seeking clarity over the company’s solvency and matters relating to disclosures in its half year report.

On the solvency front, the company said on Monday that it had several fundraising options on the table, which in the directors’ opinion would provide sufficient capital for the company to keep operating.

“Cann Group has received an indicative, non-binding, term sheet from Obsidian Global Partners, which provides terms for Obsidian to invest up to $15m into Cann Group as part of an equity placement facility,’’ the company told the ASX on Monday.

“Cann Group is also in active discussions with several interested parties to provide additional funding to the company to fund its operations as it continues to scale up its facility and become a profitable business.

“These additional funding options currently being pursued include a convertible note issue, sale and leaseback of Cann Group’s Mildura facility, and a refinancing of existing debt.

“If any of these options are successful, in particular the last two options, Cann Group has every reason to believe it will meet the gearing ratio covenant in the next 12-month period from 6 March, 2024.’’

Cann Group raised $2m from Obsidian in a convertible note issue late last year.

The gearing covenant referred to was the subject of a breach which the company did not previously disclose to the market, despite reporting its half year results after the breach was flagged, the letter shows.

While Cann Group did not reveal the breach of the debt covenant, it did tell shareholders in its recent half year report that the NAB had agreed to a deferral of the quarterly loan payments for its $49m construction facility, with payments to be pushed back a year, from May 2024, to May 2025.

Cann Group said in Monday’s letter to the ASX that it received notification from the NAB on February 13 that it had breached the terms of its debt covenant with the bank, but also said that “NAB confirmed that despite the non-compliance with the gearing ratio financial covenant, they ‘will not be taking action at this time’.

“Cann Group notes that the failure to meet the gearing covenant does not of itself go to solvency.

“Further, Cann Group has discussed, and continues to discuss the same with NAB, and as indicated by the waiver, NAB does not intend to take any action on the historical breach at this time.”

Cann Group said it gave “due consideration’’ to its disclosure obligations regarding the breach, and discussed it with its lawyers.

“Given that the half year accounts were still in the process of being prepared and finalised when it first became aware of the likely breach (as this occurred before half year ended on 31 December, 2023), Cann Group relied on carve-outs to ASX Listing Rule 3.1, under ASX Listing Rule 3.1A, namely that the accounts were not yet finalised and incomplete at that point in time.

“It was also not aware at that time, what position NAB would take as a result of the breach.

“Upon receiving official notification from NAB of the breach in February 2024, Cann Group considered that as NAB had confirmed they were taking no action as a result of the breach, and therefore there was no material impact to Cann Group’s financial position, Cann Group considered the breach was not information that a reasonable person would expect to have a material effect on the price or value of Cann Group’s securities.”

The company said it had announced on March 18 a $1.7m sale agreement with Biortica Agrimed for surplus equipment and had also recently received the final payment of $1.9m from SatiVite for the sale of assets at its formerly-owned Southern cultivation and manufacturing facility, both of which deals would help shore up its balance sheet.

In response to a question from the ASX as to whether Cann Group’s financial situation warranted its continued listing on the ASX, the company said cash burn in the start-up phase was common.

“Cann Group’s activities are currently loss-making as it ramps up its operations, which are not yet at full scale,’’ the company said.

“This means Cann Group requires additional capital to fund its operations until scale up can be completed. This is quite common with many start-up/growth companies listed on the ASX.

“The company is currently pursuing additional capital options, and at the date of this response, reasonably believes it can secure additional funding. Cann Group is also actively exploring a sale and leaseback of its facility, which will free up a material amount of capital, however this process is expected to take at least six months.”

The company said its Victorian facility was valued in 2022 at $120m, and was mortgaged to the NAB for $65m.

Cann Group in late February reported revenue of $8.5m for the first half, up 46 per cent, and a net loss of $14.3m, down from a loss of $18.8m.

CEO Peter Koetsier, who had only been in the top job since January 2023, resigned last week “for family reasons’’.

Cann Group shares last traded at 6.2c, valuing the company at $27.1m.

Originally published as Cann Group talks up potential capital raise as the ASX probes possible solvency