Silver Spike Investment Corp. (NASDAQ:SSIC) is a specialty finance company that invests across the cannabis ecosystem through direct loans and equity ownership in privately held cannabis companies. The company's investment objective is to maximize risk-adjusted returns on equity for its shareholders by generating current income from debt investments and capital appreciation from equity and equity-related investments.

Business Overview

SSIC was formed in January 2021 as a Maryland corporation and structured as an externally managed, closed-end, non-diversified management investment company. The company has elected to be treated as a business development company (BDC) under the Investment Company Act of 1940. For U.S. federal income tax purposes, SSIC has elected to be treated, and intends to qualify annually, as a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code, commencing with its taxable year ended March 31, 2022.

SSIC is externally managed by Silver Spike Capital, LLC (SSC), a registered investment advisor. The company primarily seeks to partner with private equity firms, entrepreneurs, business owners and management teams to provide credit and equity financing alternatives to support buyouts, recapitalizations, growth initiatives, refinancings and acquisitions across cannabis companies, including cannabis-enabling technology companies, cannabis-related health and wellness companies, and hemp and CBD distribution companies.

Under normal circumstances, each such cannabis company derives at least 50% of its revenues or profits from, or commits at least 50% of its assets to, activities related to cannabis at the time of SSIC's investment. The company is not required to invest a specific percentage of its assets in such cannabis companies and may make debt and equity investments in other companies regardless of sector.

Financials

For the fiscal year ended March 31, 2023, SSIC reported annual net income of $7,340,108, annual revenue of $11,722,133, annual operating cash flow of $7,977,439, and annual free cash flow of $7,977,439.

In the first quarter of fiscal year 2023, the company generated gross investment income of $2.8 million, compared to $2.5 million in the prior year period. Excluding transaction expenses related to the Loan Portfolio Acquisition, operating expenses were approximately $0.8 million, resulting in net investment income of negative $0.1 million for the quarter. On a per-share basis, investment income excluding transaction expenses was $0.33, compared to $0.22 in the prior year period, while net investment income was negative $0.01 per share.

As of March 31, 2023, SSIC's investment portfolio had a fair value of approximately $54.8 million, comprised of $46.6 million in first lien, senior secured loans and $8.2 million in senior secured notes across five portfolio companies. The portfolio was weighted 85.0% towards senior secured first lien term loans and 15.0% towards senior secured notes. Geographically, the portfolio was diversified across the West (46.5%), Midwest (45.8%), and Northeast (7.7%) regions of the United States.

Loan Portfolio Acquisition

In February 2023, SSIC announced that it had entered into a definitive agreement to acquire a portfolio of loans from Chicago Atlantic Loan Portfolio, LLC in exchange for newly issued shares of the company's common stock. The transaction, which is subject to customary closing conditions, including shareholder approval, is expected to close in mid-2023.

The Loan Portfolio Acquisition would add approximately $130 million in loans to SSIC's investment portfolio, further diversifying the company's holdings and expanding its lending activities. The transaction is viewed as a strategic move to capitalize on the company's expertise in the cannabis industry and leverage its existing investment management platform to drive growth and enhance shareholder value.

Regulatory Developments and Industry Outlook

The recent announcement by the U.S. Department of Health and Human Services (HHS) recommending the rescheduling of cannabis from Schedule I to Schedule III under the Controlled Substances Act has been a significant development for the industry. This change, if implemented, would eliminate the 280E tax burden for cannabis companies, significantly improving their cash flows and financial profiles.

While the rescheduling process may take several years to complete and faces potential challenges, SSIC views the news as a positive step for the industry. The company believes that the current capital constraints and competitive dynamics in the lending market are unlikely to change significantly in the near term, as the federal illegality and complexity of the industry remain the primary barriers to capital inflows.

Nonetheless, SSIC remains optimistic about the industry's growth prospects and the opportunities for the company to partner with well-capitalized and well-managed cannabis operators. The company's active pipeline of over $425 million in potential investments reflects the strong demand for credit and financing solutions within the industry.

Liquidity

As of March 31, 2023, SSIC had cash resources of approximately $33.2 million and no indebtedness. The company's primary uses of funds include investments in portfolio companies, dividend payments to shareholders, and the payment of operating expenses.

SSIC's balance sheet and liquidity position remain strong, providing the company with the flexibility to pursue new investment opportunities and support the growth of its existing portfolio companies. The company's conservative leverage approach and focus on secured debt investments have contributed to its financial stability and resilience.

Risks and Challenges

SSIC's investment activities are subject to various risks, including market risk, credit risk, liquidity risk, interest rate risk, and regulatory risk. The company's concentration in the cannabis industry also exposes it to industry-specific risks, such as the evolving regulatory landscape and the potential for volatility in the performance of its portfolio companies.

Additionally, the fair value of SSIC's investments may fluctuate due to the inherent uncertainty in the valuation process, particularly for investments that do not have readily available market quotations. The company's reliance on its external investment adviser, SSC, also presents risks related to the continuity and quality of its investment management services.

Conclusion

Silver Spike Investment Corp. has established itself as a leading provider of credit and financing solutions to the cannabis industry. The company's disciplined investment approach, diversified portfolio, and strong financial position position it well to navigate the evolving regulatory landscape and capitalize on the industry's growth opportunities.

The Loan Portfolio Acquisition, if completed, would further strengthen SSIC's position and expand its lending activities. While the industry faces ongoing challenges, the company's experienced management team, robust deal pipeline, and commitment to maximizing risk-adjusted returns for shareholders make it an attractive investment proposition for investors seeking exposure to the cannabis sector.