Seed upbeat on Northern Leaf, writes down value of SWB

Health, wellness and medical cannabis investor Seed Innovations updated the market on two of its portfolio companies on Friday, being Northern Leaf and OTO International.

The AIM-traded firm said Northern Leaf, operating out of Jersey as a medical cannabis producer, had reported encouraging news on both its operational and financial fronts.

It said the company received a Good Manufacturing Practice (GMP) accreditation from the UK's Medicines and Healthcare Products Regulatory Agency (MHRA) in May.

Further, in June it secured the Good Agricultural and Collecting Practice certification from the Control Union Medical Cannabis Standard (IMC-G.A.P) for its cultivation facility in Jersey.

Seed said those certifications could potentially pave the way for Northern Leaf to tap into the burgeoning Israeli medical cannabis market.

Northern Leaf had also established initial supply agreements for sales in Germany and Australia, with talks ongoing to expand those agreements into other jurisdictions, signifying a potentially broader global reach.

The company had also raised an additional £1m in pre-IPO funds, building on the £3m fundraise from earlier in the year.

Seed said Northern Leaf’s latest fundraise was constructed as a loan note with rights for conversion at a discount to a potential initial public offering price.

The round was still open for final subscriptions until mid-September, suggesting a probable boost in the total raised, with the capital infusion set to aid the firm’s progress towards a potential AIM IPO.

Seed said its stake in Northern Leaf totalled 1,236,331 shares, or 2.2% of its issued share capital before the most recent fundraising.

“I am pleased to share Northern Leaf's recent developments,” said Seed chief executive officer Ed McDermott.

“As a company focussed on becoming a key player in the European medical cannabis supply chain, the addition of GACP accreditation to the Home Office permissions and GMP accreditation already granted, puts Northern Leaf in a good position to sell products more widely, already evidenced with an uptick in supply agreements with a number expected to follow.

“To date, Northern Leaf has delivered on its plans and with additional pre-IPO funding also secured and working towards an AIM IPO picking up pace, we believe that Northern Leaf has potential to deliver real growth to our portfolio.”

Looking at OTO International, Seed said that after the acquisition of former portfolio company South West Brands (SWB) in April, the premium OTO wellness brand had expanded its business spectrum.

It said OTO had initiated a fundraise through a convertible instrument, designed with both floor and ceiling prices.

The fundraise offered a significant discount of between 70% and 90% on the £29.5m indicative enterprise value reported for OTO post the SWB acquisition.

It said those funds were meant to sustain working capital until the end of 2023.

Seed said it had also started receiving repayments from the SWB convertible loan note totalling £0.17m, with complete repayment expected soon.

Given the challenging market conditions and OTO's likely need for more funding in 2024, Seed said it was adopting a conservative valuation approach, marking down the combined loan and equity position by around 75%.

The company said it remained optimistic that the valuation would rise as OTO's business and market conditions improved.

As at 31 March, the SWB position was valued at £0.59m, which was expected to be adjusted to around £0.15m in Seed’s interim financial statements for 30 September.

The revaluation would be due to repayments on the loan and an investment value write-down, equating to around 3% of the net asset value of Seed’s investments as at 31 March.

“We are disappointed to note the dilution resulting from a down round at OTO so soon after the acquisition of our original investment SWB,” Ed McDermott added.

“We acknowledge the challenges of raising capital in the current market environment and are hopeful that OTO has secured the funds it needs at this point.”

McDermott said Seed understood that OTO was making some good progress operationally, adding that it hoped to share altogether more positive updates shortly.

“Seed has adjusted the valuation of OTO equity against our net asset value at this time but maintains the expectation for the eventual full repayment of our loan, albeit within a lengthened timeframe.”

At 1303 BST, shares in Seed Innovations were down 0.07% at 2,43p.

Reporting by Josh White for Sharecast.com.