While psychedelics have been the darling of alternative plant medicines lately, the companies in the industry are coming down from a great trip. The realities of producing revenue when the runway to commercialization is a long way off have caused several companies to rethink finances.
Paying debts with stock, pushing out debt maturities, and layoffs quickly throw water on a promising new class of stocks.
Psychedelic medicines were never going to enjoy the quick flip of cannabis. Cannabis laws were changed with almost lightning speed, and programs were established in a matter of years. Crops were grown and harvested, stores opened, and thousands of licenses were awarded. Revenue began pouring in, and it was up to individual companies to manage balance sheets responsibly.
Psychedelic medicine companies never promised a fast return on investment and stressed that the path to profitability would be a long one. Revenue streams are future dreams.
Most have traveled the path as standard biotech companies where returns can take up to 12 years according to a report, “Early-Stage Biotech Companies: Strategies for Survival and Growth,” by Wendy Tsai and Stanford Erickson. Funding a company for 12 years is not easy – and that is what these psychedelic startups are learning. In the past few months, several have had to take serious measures in order to keep the companies stable.
This week Mydecine (OTC: MYCOF) announced it had paid off some debt with stock. The company eliminated approximately $752,160 of liabilities and an aggregate of 1,299,998 settlement shares were issued in satisfaction of the debt.
With shares trading at 44 cents, that works out to roughly $571,999. It’s laudable to pay off debt, but using shares to do so is typically viewed as a move from a weakened company. However, Mydecine isn’t the only psychedelic company to take this path.
Silo Wellness Inc. (CSE: SILO) (OTCQB: SILFF) took a similar trip to pay off debts. Silo also recently announced it too converted C$40,680.00 of accounts payable debt into common shares on March 5, 2023.
Year-to-date, Silo has converted total debt of over C$1 million. The conversions were made at a previously approved 20-day VWAP share price of $0.011. Debt holders must figure it’s better than nothing.
The company is also late to deliver audited annual financial statements and its management discussion & analysis (MDA) due Feb. 28, for the financial year ended Oct. 30, 2022, as required by Canadian securities regulators. The company has said it hopes to file those financial reports by March 20.
“The reduction of debt and the reduction in the percentage of our public float is a strategic decision that we believe will benefit our company and our shareholders over the long-term,” said Silo Wellness founder and CEO Mike Arnold. “By limiting the number of shares available for trading on the market, we hope to create greater scarcity and demand for our stock, potentially leading to increased value for our shareholders.”
During 2022, Havn Life Sciences (CSE: HAVN) (OTC: HAVLF) also found itself unable to pay its debts. At the end of October 2022, the company had cash of only C$8,631 and total liabilities of C$673,754.
The company has been converting its convertible debentures into stock – which is certainly an option, hence the name convertible. However, the company is also trying to restructure and is also late to file its financial documents.
Havn said in January that it issued 2,702,211 shares to a number of consultants for services rendered. Another sign of weakness is paying vendors in stock versus cash.
Core One Labs
Core One Labs (OTC: CLABF) also spent time in 2022 issuing shares to settle debts, some for amounts as low as C$5,000. More recently, on Feb. 7, the company issued 46,154 common shares to settle a debt of $30,000.
The company said in March 2022 that it wanted to be acquired “by strategic psychedelics or pharmaceutical companies.” The announcement was updated in October 2022 with no offers from any companies, but Core One assured investors it was taking steps to prepare itself for an acquisition.
There’s absolutely nothing wrong with issuing shares to pay debt. It gets the liability off the balance sheet and other than stock dilution, the cost is minimal.
However, solid companies – those with lots of revenue will do the opposite. They will buy back shares instead or pay off the debt with earned income. So, while these companies are addressing bills and debts (which is a good thing), investors need to be aware that it could be a sign of weakness.