Well, the MedMen ($MMEN) show keeps rolling along. Somehow, someway, an additional $21MM USD came in the door late last week. I for one am a little surprised that some of it is ‘new’. Let’s price it out, and take a look at what could be in the mind of the lenders.

There’s three separate facilities that make up that $21MM (gross):

• $10MM in a new, 7.5% unsecured convertible loan. $1MM is going out the door right away, with subsequent tranches issued at the same amount, no sooner than 20 days after the previous one…..essentially making it a monthly drawdown. Credit wise, that’s a short leash. 55% of the total drawdown of each tranche will be issued additionally in 5 year warrants (that’s at $0.22/warrant), the initial $1MM tranche is convertible at current share price (subsequent tranches are at 120% of the day prior-to-issue price), which, equals some $0.13/share in optionality. Total dollar in capital issued in exchange for cash: $0.51 USD in equity value for cash cost of ~=$0.16CAD.
• An existing credit syndicate increased their facility by $5.7MM, which, not only goes out with an 18% interest rate (12% cash, 6% attaching to the principal), but also with 50MM 5 year warrants at $0.20 (!).
• Gotham Green (GG) is back under a facility they amended last December, issuing another $5MM in gross proceeds from it. Like the last draw from the facility, it’s an amendment, and it wasn’t cheap: triggering a $600k CAD fee for the amending (the fee is convertible too, natch ;)); and it comes with a reprice of some $10MM CAD in convertibles from the initial draw (taken down to $0.20 per share from a high orbit). Because GG was so magnanimous in picking up the phone, they also charged $MMEN 25MM/5 year/$0.20 warrants to pick up that very phone, and an additional 16MM warrants of the same for GG agreeing to cancel 1MM of previous warrants that had gone deep out of the money.

Ok, you get the idea. 100MM+ warrants at-or-near the money, 18% interest rates….yeah. And at a $0.20CAD share price, that will see an additional 60MM shares at-the-money added to the float – for a net amount of less than $9MM.

Liquidity convenants – waived through the end of this year – kick in and escalate quarterly beginning December 31st regarding the latter two of these facilities.

‘Death Spiral’ is a phrase that comes to mind. Yet the reader might be asking themselves: “Molly, you say they’re going under, and yet here they are with funding that even if expensive, it’ll allow them to continue to operate. Surely, these creditors aren’t dumb man. C’mon”.

Yeah, that’d be a logical assumption, if, lending and loans and ‘normal’ course commerce was taking place. It’s not. Sure, they’re selling weed (at a reasonably good clip too), but the leverage installed here – coupled with $38MM/Q in G&A against $45MM/Q in sales – means they lost $38MM last quarter. What’s at play here (in my opinion) is that GG and the syndicate are going to end up with the assets they want, sell what they don’t, all for a relatively fixed price that was determined through the restructuring last fall.

Bankruptcy isn’t necessarily the end state for pubco’s that have run onto the rocks….remember all of those fallow listings clogging up the TSX-V and CSE that made reverse takeovers by cannabis companies possible? They were largely outfits that went bust from the mining bull-run in the early years of last decade. They, and the retinue of lawyers and listing squatters waiting until the phone starts ringing again, are an industry unto themselves, and should their romp into the ‘next big thing’ fail to pan out, ‘time’ will become the listing’s primary asset until the next ‘big thing’ comes along. <For the speculators among our subscribers, I’d tend to think uranium could see a resurgence over the next 5 years or so. I think the world needs an honest conversation about energy needs and security – and regarding energy production, nukes are the alpha and the omega of the humanity’s future concerning it. I’d also suggest avoiding mushroom stocks. If you’ve followed our podcast, you’ll know why. Private conversations with Cyto have convinced me even more of the folly around viewing psilocybe as a serious investment at this time. Yes it may become a theraputic. And no, the companies in formation now are not going to benefit if that occurs.>

I don’t see a path forward for $MMEN based upon their financials, but having an income stream into 9 digits will give them a seat at a table, at least for awhile. $MMEN’s flushed the C-Suite, but thanks to delays in reporting, all we can see is stale data from March. Which is a lifetime to a company in this state. One may view it as a ‘win’ for those cheering for $MMEN I guess. But I see it as a slow absorption of the company by creditors – as they seek to keep themselves (and their capital) as whole as possible between now and the inevitable moment when $MMEN is forced to turn over the keys. Given $MMEN’s run rates, there is value in the property.

And the creditors will extract it until they are satiated.

We’ll be keeping an eye out across the US and Canada to see if there’s useful information to be taken away from this or other’s moves. That we’ve seen the ‘Retail’ part of the value chain in Canada set to a very expensive bar (to obtain capital) is a signal from lenders that they don’t trust regulatory.

Can’t say I blame them.

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A company that we’ve never really had a good look at – VIVO Cannabis – executed what I’d call a ‘stack and roll’. That’s trade jargon that essentially means ‘kicking the cat’, or, ‘buying time’.

Normally done with futures, it’s an action that takes exposure within the prompt month, and rolls it forward to the next month. Said in the kindest way possible: the exposure remains desired, trade just got there a month too soon. Let’s keep the exposure on, and it’ll sort next month/strip.

Risk types normally don’t cotton to this sort of thing because it can represent goalposts being moved. Equities are different than commodities though, and have more subjective considerations than just a single prompt month exposure, or even a strip.

They had some $22MM in cash last financials (as at June 30), and the net impact of this reprice is to reduce interest payments – which debt holders will do in exchange for some inducement to do so. This reprice cancelled $21MM in debt due this February 2021, extended the due date of the remaining by 18 months to September 2022, reduced the conversion price from $4 to $0.20, and all it cost them was 30MM at-the-money shares and 15MM in warrants at 120% of current price.

I peg the cost of this in the high 20’s – as a percentage of nested capital. That’s typical of this sector, and of loan sharks.

Having spent the last 30 minutes in their financials, I can see why it’s expensive. These guys are running a shop that looks like so many others in the Canadian space……sporting a capital structure that’s analogous to a small child wearing a suit that’s sized for an adult. Many of these companies can’t go forward with their cost of capital ‘as is’ – and either looking to shrink the suit or grow the child quickly.

Note if/when your investment heads to the friendly debt-holders seeking relief. Many creditors are willing to open up and work with companies. Always remember though: creditor’s wants aren’t aligned with shareholders, and they aren’t going to do it cheaply, nor without inserting conditions.

VIVO’s float has gone up by more than 15% with this single transaction. And the core of the transaction is defensive: this isn’t something a company would be led to in the absence of share price declines and burn rates that aren’t being grown into by the business.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $MMEN