Elixinol Global Ltd [ASX:EXL] share price is up today after agreeing to acquire Germany’s leading CBD brand.
In today’s ASX announcement, Elixinol Global Ltd [ASX:EXL] revealed it signed an agreement to acquire CannaCare Health GmbH (CannaCare) after a requested trading halt on 4 March.
According to Elixinol’s ASX release, CannaCare is the owner of CANOBO, ‘one of Germany’s leading CBD brands with #1 share in Germany’s drugstore channel.’
Elixinol shares are up 12.8% on the news at time of writing, trading at 22 cents per share.
The EXL share price was last traded on 4 March, when Elixinol requested a trading halt pending this announcement.
The EXL share price is now up 25% YTD, but still down from the 52-week high of 47.5 cents.
Elixinol: a brief overview
Elixinol operates in the hemp-derived CBD industry, developing and selling its Elixinol-branded and hemp-derived CBD products.
CBD — short for cannabidiol — is one of the cannabinoids found in cannabis.
CBD differs from the other cannabinoid, THC (tetrahydrocannabinol).
What did Elixinol announce?
Here are the key highlights from Elixinol’s ASX announcement.
The company today entered a binding agreement for its subsidiary (Elixinol BV) to acquire all the issued share capital of CannaCare, a company incorporated in Germany.
According to Elixinol, the purchase price of the acquired shares will be paid in two tranches.
The first tranche will comprise €3 million in cash funded from existing cash reserves, and a further €6 million paid by the issue of fully paid shares in Elixinol.
43,864,133 shares are proposed to be issued to CannaCare vendors, based on the agreed price of 21.05 cents per share (a 7.9% premium on EXL’s previous closing price).
This will represent 14% of Elixinol’s current issued capital and will be subject to shareholder approval.
On or around 31 March 2022, the second tranche of the purchase price will be payable.
According to the release, the second tranche of the purchase price represents an earn-out and will be structured by the issue of performance securities to CannaCare vendors.
These performance securities will convert into shares subject to CannaCare’s revenues in FY2021.
The maximum earn-out payable is €15 million and is, again, subject to performance targets relating to CannaCare’s FY2021 revenue and EBITDA.
One of these targets is FY2021 revenue of ‘at least €6.5 million for any earn-out to be payable.’
For context, CannaCare’s unaudited FY2020 revenue was around €2.6 million.
Importantly, the proposed agreement will entail that the maximum number of shares that can be issued on conversion of performance securities is 165,180,893.
If this number of shares is issued to CannaCare vendors on conversion of the performance securities then CannaCare vendors will hold approximately 39.98% of Elixinol’s total issued share capital, according to the company’s release.
Elixinol investor briefing
The company will hold a special briefing on Tuesday, 16 March, at 11 am AEDT. Elixinol’s Global CEO and Executive Director Oliver Horn will elaborate on the proposed agreement’s details along with Elixinol’s Global CFO Ron Dufficy.
Elixinol and CannaCare agreement subject to certain conditions
The agreement between the two companies is subject to certain conditions being satisfied or waived.
The key conditions include shareholder approval, the issue of the performance securities, and the first tranche shares.
Elixinol is also awaiting a response from the ASX to its request for advice regarding the issue of its performance securities.
According to the release, any changes to the terms of the agreement deemed necessary by the ASX must be implemented or the entered agreement will be annulled.
Outlook for Elixinol Share Price
In today’s announcement, Elixinol pointed to reports that Europe is the world’s second-largest CBD market after the US, forecasted to quadruple over the next five years.
According to Elixinol, Germany is also the second-largest market in Europe, forecasted to be ‘the fastest growing (47% 5yr CAGR).’
However, expanding markets do not necessarily confer expanding profits to each business operating in those markets.
It requires sound business strategy and solid fundamentals for a company to hitchhike on a market boom.
Last year, I covered Elixinol’s restructure challenges and how these may take a long time to fix.
For instance, last year saw Elixinol receive a ‘please explain’ from the ASX about its flagging revenues and cash flows.
Since then, Elixinol has tried to simplify its business model and reduce cash burn.
Elixinol’s latest FY2020 results release revealed that not all challenges have been overcome.
FY2020 audited revenue from continuing operations was down 51% to total $15 million.
The company attributed the decline to a strategic exit of bulk and private label channels, as well as COVID-19 retail impact.
Adjusted EBITDA losses came to $22.9 million, slightly improving upon the $24.6 million EBITDA losses in FY2019.
The company did point to its solid funding where net assets totalled $35.7 million and cash reserves reached $27.7 million.
Today’s announcement is an attempt by Elixinol to boost revenues.
For instance, in today’s release, the company noted that the agreement has ‘the potential to double revenue (based on Elixinol Group FY2020 revenue).’
According to the company, the CannaCare agreement is:
‘Expected to lead to a significant improvement in Elixinol’s EBITDA position and accelerate Elixinol’s pathway to profitability in the near-term.’
Investors were certainly upbeat on today’s release and have showed some support for Elixinol’s belief that, with CannaCare’s help, it can move towards higher revenues and profitability.
But there may still be a long slog ahead for Elixinol and EXL shares.
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For Money Morning