Cannabis-focused specialty finance company XS Financial Inc. (CSE:XSF) has raised $43.5 million via its previously announced private placement of unsecured convertible notes.

Transaction Details

Based in Los Angeles, the company said Monday that it has closed the transaction. In addition, $33.5 will be funded at closing and $10 million is available on a delayed draw on the same terms until June 30, 2022.

The notes will mature two years following the closing date of the offering, subject to a one-year extension at the option of the company upon providing at least 30 days prior notice and issuing additional notes to the holders on a pro-rata basis in an aggregate principal amount equal to 1% of the aggregate principal amount of notes outstanding as of the date of the extension notice.

In addition, interest on the notes will accrue at the rate of 9.5% per annum, of which 7.5% shall be payable in cash and the remaining 2% shall be payable in kind by the issuance of additional Notes as well as in the event of the shares commence trading on a market tier of the Nasdaq Stock Market LLC  8% per annum, of which 6% shall be payable in cash, and the remaining 2% shall be payable as PIK Interest.

The financing was led by a large institutional investor, with additional participation from an existing XSF Strategic Partner, urban-gro (NASDAQ:UGRO), Landrace Financial, Bengal Capital, and KEY Investment Partners.

urban-gro launched its financial services division and entered into a strategic agreement with XS Financial to provide its clients with CAPEX leasing solutions last month.

XS Financial also issued an aggregate of 16.75 million share purchase warrants, being one warrant for each $2 principal amount of notes, with each warrant entitling the holder to acquire one subordinate voting share of the company at CA$0.45 ($0.36) until October 29, 2024.

Why It Matters

The company said that the net proceeds from the offering would be utilized to finance capital expenditure (CAPEX) and equipment purchases for existing customers and the strong demand from the growing pipeline of credit-worthy cannabis operators nationwide.

The company’s pipeline currently exceeds $100 million in CAPEX financing demand, and it has reviewed over $300 million of transactions in 2021.

David Kivitz, CEO of XS Financial, called the transaction “a transformative step” for the company.

“We are excited to have received this investment from a prominent institutional asset manager and numerous cannabis industry-focused investors, who we believe will add significant value to the company,” Kivitz continued.

What’s Next?

The company reported that it will appoint a nominee of a lead investor in the offering to its board of directors, as long as the investor beneficially owns at least 10% of the securities entitled to vote in the election of the company’s directors.

In addition, XS Financial also agreed to enter into a registration rights agreement in connection with the offering. Under the deal, the company opted to file a shelf registration statement as soon as reasonably practicable following the qualified offering and take other necessary steps to register the resales of the shares issuable upon conversion of the Notes and exercise the warrants in the U.S.

“With this completed $43.5 million financing and our recently announced $15 million line of credit, XS Financial is well-capitalized to expand our position as the industry-leading source for non-dilutive CAPEX and equipment funding for the rapidly growing U.S. cannabis market,” Kivitz said.

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