Key Takeaways; Cannabis Sector

• Agrify converted $13.8m debt to equity to regain Nasdaq compliance.
• Glass House Brands is seeking Canadian funding through shelf prospectus.
• TILT Holdings’ cannabis sales are stable despite vape supply disruptions, debt and stock dilution concern; analyst says.

Key Takeaways; Psychedelic Sector

• Awakn recently concluded a feasibility study with Catalent Pharma.
• Lucy Scientific is on a surge despite mounting challenges and NASDAQ compliance pressure.

This week marked a significant milestone in the cannabis sector as the Drug Enforcement Administration (DEA) published its proposed rescheduling of cannabis and initiated a comment period ending on July 22nd. The most notable outcome of rescheduling cannabis from Schedule I to Schedule III would be the elimination of the burdensome 280E taxation. The end of 280E taxation is expected to boost cash flow and net income for companies that grow, process, or sell cannabis in the United States. This is why many stakeholders in the cannabis industry are closely monitoring this development.

Below is a weekly roundup of what happened this week in the cannabis and psychedelic sectors. In this ever-evolving landscape, we explore the major developments and groundbreaking initiatives happening among companies operating in these industries; from advancements in medical research, therapeutic applications to shifts in legal frameworks and current market trends.

Top Marijuana Companies for Week

#1: Agrify

Agrify Corporation (NASDAQ: AGFY), a cannabis technology company, converted approximately $13.8 million in debt to equity to comply with Nasdaq’s stock listing requirements. According to the company, this strategic move aims to enhance the company’s financial stability and ensure its continued listing on the Nasdaq exchange.

The conversion, which was announced on Wednesday, followed Agrify’s and Nature’s Miracle Holding Inc. (NASDAQ: NMHI) mutual decision to terminate a merger plan that would have allocated Agrify shareholders roughly 30% ownership in the combined entity. Both companies said that the cancellation was due to “unfavorable market conditions.”

Entities affiliated with Agrify’s CEO, Raymond Chang, played a significant role in this conversion. CP Acquisitions LLC, which is controlled by Chang and board member I-Tseng Jenny Chan, converted $11.5 million of senior convertible notes into pre-funded warrants, exercisable for up to 8.6 million Agrify shares. Additionally, GIC Acquisitions LLC, also associated with Chang, converted $2.29 million of junior secured notes into pre-funded warrants for up to 3.2 million shares.

This substantial debt-to-equity conversion boosted Agrify’s shareholders’ equity above Nasdaq’s minimum requirement of $2.5 million, which is crucial for maintaining its listing. CEO Raymond Chang highlighted the importance of this move, stating it demonstrated the management and shareholders’ dedication to Agrify’s future, and their desire to provide a cleaner balance sheet to fuel the company’s growth.

Agrify, which has been restructuring since 2022 following significant losses, ended 2023 with an accumulated deficit of approximately $265.8 million. Additionally, despite a 55% decline in first-quarter revenue to $2.6 million, cost reductions in administration and marketing resulted in a net loss of just $38,000.

Furthermore, the conversion included provisions for adjustments if Agrify undertakes equity financing within the next 12 months, pending shareholder approval. This strategic financial restructuring is expected to stabilize Agrify’s financial position and support its growth trajectory.

#2: Glass House Brands

Glass House Brands Inc. (OTC: GLASF), a cannabis company based in Long Beach, California, is exploring opportunities to raise significant capital by selling shares in Canada. The company announced on Wednesday that it has filed a shelf prospectus with Canadian regulators, aiming to issue up to C$782 million (US$576 million) in new equity shares by April 2026.

This strategic move provides Glass House with the flexibility to quickly raise funds through equity offerings if favorable opportunities arise. Despite no immediate plans to sell shares, the prospectus positions the company to act swiftly in the future. 

Chairman and CEO Kyle Kazan highlighted the company’s strong performance and growth potential, stating that the shelf prospectus will allow them to add growth capital and reduce capital costs; “With our strong operating performance, long-term growth prospects, and increase in share price over the past 18 months, having a base shelf will provide additional flexibility to add growth capital and lower our cost of capital when we judge the time to be right,” Kyle Kazan said in a statement.

Many US marijuana operators are in the pursuit of Canadian funding, due to the limited access to traditional financing sources like bank loans, because of the federal illegality of marijuana in the United States. Canadian investors, however, offer a viable alternative as the cannabis sector continues to navigate federal uncertainties in the USA.

Glass House ended 2023 with a revenue of $271 million, marking a 56% increase from the previous year. Despite being unprofitable and having an accumulated deficit of $209 million as of March 31, the 2023 financial results did not indicate any significant litigation or financial instability. Additionally, the company recently dropped defamation claims against Catalyst defendants and won a $2.865 million judgment in a fraud case involving its subsidiary GH Group.

#3: TILT Holdings

TILT Holdings Inc. (OTC: TLLTF) recently reported stable first-quarter 2024 financial results, despite facing supply chain disruptions in its vape hardware segment, which contributed 71% of its 2023 sales. Analyst Pablo Zuanic highlighted that supply chain issues have temporarily hindered sales, but the company’s custom business and hemp-derived vape segments showed promise, mainly supported by TILT’s position as the largest CCELL distributor in the U.S.

Additionally, the company’s cannabis operations in Massachusetts, Ohio, and Pennsylvania remain stable despite market deflation and rising competition. Massachusetts, which is responsible for two-thirds of TILT’s sales, benefits from strong brand performance. Furthermore, TILT is eyeing expansion in Pennsylvania and Ohio through strategic partnerships.

As of March 2024, TILT’s net debt increased to $56 million from $49 million at the end of 2023. Moreover, concerns arise from the company’s break-even EBITDA, negative cash flow, and the potential for stock dilution due to debt. Nevertheless, Zuanic finds TILT’s valuation attractive, trading at 0.7 times EV/sales compared to the 1.8 times average for multi-state operators.

Despite the stock’s 25% decline over the past 90 days and low trading liquidity, Zuanic maintains an “Overweight” rating, citing TILT’s solid market positioning and growth potential in both vape hardware and cannabis segments.

Top Psychedelic Companies for Week

#1: Awakn

Awakn Life Sciences Corp. (CSE: AWKN) (OTC: AWKNF) in collaboration with Catalent Pharma, recently successfully completed a feasibility study confirming the stability of MDMA when applied to Catalent’s advanced Zydis® (ODT) technology. This development is significant as it affirms the compatibility of MDMA with pre-gastric absorption, addressing key pharmacokinetic challenges associated with the drug. 

MDMA, which is an Investigational Medicinal Product (IMP), that is known for its role as a serotonin, norepinephrine (NE), and dopamine releaser and reuptake inhibitor, has shown promising efficacy in clinical trials for treating Alcohol Use Disorder (AUD) and Post Traumatic Stress Disorder (PTSD), both conditions are often linked to trauma. The drug also holds potential for treating other trauma-related addictions and mental health conditions.

Awakn entered into an exclusive development agreement with Catalent to create and test a proprietary MDMA formulation utilizing Catalent’s Zydis® ODT technology. This collaboration aims to deliver a market-ready product with optimized delivery mechanisms.

Catalent’s Zydis® ODT technology features a unique, patent-protected freeze-dried oral solid dosage form that disperses almost instantly in the mouth, typically within three seconds, without the need for water.

The successful completion of the feasibility study marked a crucial step forward in the development of MDMA as a viable therapeutic option. Awakn Life Sciences, through its collaboration with Catalent, is poised to advance MDMA treatment by leveraging the innovative Zydis® ODT technology, potentially transforming the landscape of trauma-related mental health and addiction treatments.

#2: Lucy Scientific

Lucy Scientific Discovery Inc. (NASDAQ: LSDI), a company in the psychedelic sector, is facing a growing array of issues with limited solutions in sight. Recently, Lucy failed to file its first-quarter earnings for the period ending in March by the May 15 deadline, and it’s uncertain when these reports will be submitted. This delay was compounded by significant resignations, including that of CFO Brian Zasitko on May 3, effective May 17, and board member Livio Susin.

Adding to its woes, Lucy is under pressure from NASDAQ to maintain its listing. In February 2024, NASDAQ notified Lucy that it no longer met the $2.5 million stockholders’ equity requirement, with equity standing at just $81,158 as of December 31, 2023. The company also failed to meet alternative market value or net income criteria. After an unsuccessful appeal in March, NASDAQ planned to suspend trading on May 16, but Lucy’s request for a hearing allowed continued trading during the appeal process. 

Despite these setbacks, Lucy’s stock has seen a temporary surge recently, on May 16 LSDI traded 69 million shares versus an average of 1.2 million, hitting a high of $2.12 before falling back to $1.17. This spike led to its inclusion in the meme stock frenzy and received favorable ratings from trading programs like Stock Invest.

Nonetheless, Lucy’s path to financial stability remains unclear. A planned merger with Bluesky Biologicals collapsed in March, which was expected to be a significant revenue source. Furthermore, the company abandoned its Controlled Drugs and Substances Dealer’s Licence in Canada and discontinued the development of TerraCube. As a result, Lucy recorded a loss of $1.7 million from discontinued operations for the nine months ending March 31, 2024.

Moreover, the company’s potential deal with High Times Holding also remains uncertain, as the bidding period for High Times’ assets ended on May 17. Lucy’s financial outlook is bleak, with an accumulated deficit of $43 million and no clear revenue streams apart from issuing more shares and incurring additional debt.