ARENA Finance deal

Just been doing a little research around the $60M finance package with ARENA. My analysis may not be 100% on point, but it should put us in the right direction of understanding the deal. I encourage other to do some research to solidify our understanding and to reduce the misinformation circling around.

ELOC Agreement

On September 9, 2024, IXHL entered into an equity line of credit agreement (“ELOC Agreement”) with Arena Business Solutions Global SPC II, Ltd (“Investor”). Under the ELOC Agreement, the Company has the right to sell, and the Investor the obligation to buy, up to $50 million of the Company’s shares of common stock.

Key takeaways:

• IXHL doesn't have to take up this agreement, but in all likelihood, I'm pretty confident that they will go ahead and take up this funding in the coming months
• IMO, IXHL won't take up $50M straight away, but will take a sizable chunk of this to continue the clinical programs – especially phase 3 for OSA and to get the PsiGAD phase 2 off the ground. But maybe I'm wrong and they will take up everything.

There has been some chatter on HC that this deal is a death blow to the company. Maybe that will be correct, but maybe not. If you don't know what an ELOC agreement is, read this: The equity line of credit: a financing tool that is gaining ground in Canada – Lexology. This is the most important part of the article IMO: "if and when the company elects to draw down under the facility, it sends a notice to the purchaser. The purchaser then has a fixed period of time (usually 5-10 days) to sell the shares in the market."

I have seen many ELOC agreements and most are, indeed, the death blow to companies.

For example, a microcap stock signs an ELOC agreement for $15M. It draws down that $15M and issues the finance company (a.k.a ARENA) with shares, whereby the finance company sells those shares onto the market to get its money back and maybe a little cream on top. During this share sale process, as a large seller is in the market (i.e. the finance company), the company (i.e. IXHL) generally will see no share price uplift and, in many cases, the consistent selling will lead to a lower share price over time because the seller will suffocate the market buyers. If there's no large buyers to absorb all the selling, the finance company will drip feed its shares into the market and that will lead to death by a thousand cuts, which happens all the time.

Although this might sound bad for us, I think a deal like this is far better done on the NASDAQ than the ASX where there's almost no liquidity most of the time. More liquidity = more buyers to absorb the finance company's share sales. Admittedly, IXHL has almost no liquidity right now and if management took up this deal today, I think it would be death by a thousand cuts. But just because there's no liquidity today, doesn't mean this will be the case forever. We have lots of company making news event coming up (OSA phase 2b read out, PsiGAD phase 2 trial starting, RA phase 2a update, and I may be forgetting something?) and this news is a major factor why i think liquidity could increase over the coming months for us.

In short, if we're going to do a deal like this, I think this is the right time to do it – around liquidity events + on the NASDAQ (not ASX).

Secured Convertible Notes

On September 9, 2024, the Company entered into a Securities Purchase Agreement (“Securities Purchase Agreement”) with Arena Investors, LP (“Purchaser”). Under the Securities Purchase Agreement, the Company will issue secured Convertible Notes (“Notes”) for up $10 million, divided into three separate tranches that are each subject to closing conditions, with a 10% original issue discount.

Key takeaways:

• The $10M secured con note is broken up into three tranches and we have done the first one for a little over $3M.
• I expect the entire amount of this con note to be taken up at higher prices, coinciding with the ELOC agreement drawdown around the upcoming liquidity events

There has been some chatter on HC that this deal is another death blow to the company. I don't see it that way. Looking at Arena's website, it says "Arena’s Corporate Securities team invests in publicly traded bank loans, bonds, convertible securities, preferred shares and common equities." Arena does its due diligence on companies and invests in them, providing secured convertible securities with an average term lasting 2 years, for example. IXHL's convertible notes are secured over our IP.

Look up Fatfish Group (ASX:FFG) on HC: FATFISH GROUP LIMITED (ASX:FFG) – Ann: FFG secures A$8m equity line of credit & ext. of con notes, page-1 – HotCopper | ASX Share Prices, Stock Market & Share Trading Forum. Arena signed Convertible Notes with FFG for a 2-year term back in 2019, when i believe it was a crypto mining company or something. That didn't work out and they changed the business to a BNPL company and now they are doing something else. Arena rolled their con notes twice, once in 2021 and again in 2023. I don't know if the company has paid it off but maybe they have with the ELOC they signed back in 2023.

Key takeaways:

• The secured con notes are non-dilutive finance (at the moment). If IXHL's share price goes materially higher, the company can raise money and pay this con note back at higher price
• It looks like the debenture (con note) term is 18 months from the First Closing Date (page 11 of the 8K – or page 65 if you want to look in PDF)
• The interest rate looks like 0% (see page 59 of the 8K – or 113 if you're looking at the PDF. It says, "interest shall accrue on the outstanding principal amount of this Debenture from and including the Original Issue Date at the rate of zero percent (0%) per annum, or upon the occurrence and during the continuance of an Event of Default, two percent (2.00%) per month (“Default Interest”)"
• If the company wants to convert the con note into shares (instead of repaying it), the conversion price of each Note would be equal to 115% of the closing price of the Common Shares on the trading day preceding the date of the issuance of the Note. So this is negative for shareholders should the share price be at a materially higher price, but then again, it would prob raise money to repay the con note
• The con note is secured on our IP. This might sound bad, but it shows the management's confidence level of the OSA drug working out (prob why they issued themselves so many performance shares as well to take advantage of the potential pay off). I can speak for us all, that we are all confident in the drugs working otherwise we wouldn't be here tbh
• The con note is a debenture (debt-like-security) and, as such, nothing will be on sold into the market IMO

Summary

• I think this agreement is far better than doing a placement at these lower prices – especially to mates
• This agreement allows for share price uplift to minimize share holder dilution
• Whether or not, this deal is going to be death by a thousand cut remains to be seen. TBH, given the quality of assets we have and the news pending over the coming months, I'm leaning to the positive side and don't think it's going to be death by a thousand cuts – especially since we are on the NASDAQ, not the ASX
• Moreover, most companies which have death by a thousand cuts and do these kind of deals have shocking assets or are trying to put a mine into production and it fails. For example, Mustang Resources signed a con note agreement with ARENA back around 2018 to build a ruby mine or something, but it failed: Mustang in $24m funding deals (businessnews.com.au). So, no guesses why they failed – their agreement also had an interest rate of 11% p.a. Similar story for those companies that sign ELOC agreements and fail…the culprit at the end of the day is poor assets.
• So given we have stellar clinical assets and the market absolutely stinks for small cap biotechs today, if the market improves over the coming year, we could be in a much better position – even by early next year. But I guess time will tell and I really hope that management don't take advantage of us again by issuing themselves thousands and thousands of performance shares. This year has been an absolute disaster and it would be nice for us to see a win into early next year.