Maybe not the best title, but it conjures an accurate mental image. Plus Products ($PLUS) is an edible manufacturer in California.

Someone mentioned this company on our subreddit, and to be honest, I’d never heard of them. The comment referenced a convertible debenture reprice.

The company makes edibles in California, and has been operating for a couple of years. It came through the typical RTO process, and ended up on a listing in Canada. The same way most weed companies with operations in the US goes public. And they do a trade, with an annual run rate of about $15MM USD/yr. They’d been capitalized on their IPO with some $20MM back in late 2018, and subsequently offered convertible debentures a couple of months later in early 2019, netting about $25MM for them in the end.

So, with some $38MM in cash, they went and built out their kitchen. Trim.

Things hadn’t gone as well as expected though, and went out and lost some $45MM over the next 18 months. Yes, they have sales. Unfortunately, even sporting a 36% margin, it wasn’t enough to carry the weight of the financing. Revenues seem stuck and unable to grow. Despite keeping as much cash as they could (they still had $12MM of it in late Nov), those convertible debentures were coming due on Monday (Feb 28th), and they could not afford to pay the debt. They mentioned this very thing back in November 2020. So did the auditors:

They’d fallen victim to pricing the warrants of the debentures (the core of a convertible’s upside) at some $6.50 – which ended up waaaaay out of the money. It’s a pratfall of raising in a frothy market: expectations are high, less attention is paid to reality, and besides, “we’ll worry about that later”.

See, when warrants are that far out of the money, debt holders haven’t been able to crystallize any upside. And the interest they’ve been receiving – 8% – isn’t much when facing the loss of principal. Debentures aren’t bonds – in that debentures typically aren’t secured against assets (I say ‘typically’, but in legal cannabis, there’s many one-offs out there).

So, $PLUS had an issue. Raise to pay of the debt, or talk to the lenders and see if they’d be willing to negotiate.

On our next podcast (Episode 44, coming out today), you’ll hear GoBlue and I talk about raises, and that they should be put in context of what the cash is to be used for. We’ve seen $OGI and $ACB raise simply to pay off debt. In that case – from an investor standpoint – your investment is neither adding assets (that would presumeably make returns), you’re also suffering dilution…..and a reduced ownership stake in the assets that do exist. It’s more pronounced when share prices have taken a beating, and many more shares proportionally are issued for any new dollars coming in.

In $PLUS’ case, they hadn’t hit the larger rise/interest in cannabis stocks to initiate a raise in time. So, they were left with ‘Plan B’: plead with the lenders.

So, in early February, they announced an extraordinary meeting with debenture holders, presumeably offer coffee and danishes, and ultimately to stave off the wolves. Companies are loathe to go this route for a couple of reasons. Mainly, it’s because emotions can run high, and unpredictability of outcomes becomes equally high. Businesses far prefer to stage manage outcomes (it makes them look like they know what they’re doing). $TGIF ran into this same issue last summer, ending up with a renegotiation of the debt, but claimed two of management’s heads in the process.

Like I said, management doesn’t want to actually serve those danishes, and $PLUS announced a late in the day (only 3 days prior to the meeting) resolution with creditors to defer repayment. Like all things granted, they usually cost money to get. $PLUS was able to extend the payment date….what did creditors get for their largesse?

• the interest rate went up 33%, from 8% to 12%.
• securitization of the assets. If there’s a next time, they won’t have to go through bankruptcy, they’ll just take the keys.
• A 30-day in-the-money call on a quarter of the total debt, and able to trade right away
• A reprice of the base conversion price to the same.
• An increase in redemption price of 8% higher than original. Should this thing ever bear fruit (or an angel fly in), it’ll cost more to buy out the debt.

There’s more:

• The ‘consent fee’ adds new warrants, I price them out at $0.61 each. That means (assuming all debenture holders elected to take free stuff) $PLUS is giving out $6.9MM ($25MM/1000*454*$.61) in free options.
• The delisting/relisting is houskeeping, as debenture value would whipsaw under the new terms.

So, $PLUS will likely see their $12MM bank account halved, 11MM warrants added to any existing ones, and finance charges – which are currently at 60% of gross margin now become 75% of gross margin.

The company is now working for the creditors. Shareholders….well….management might have ‘saved’ you company. I think it’s better to look at it as analogous to keeping a terminal patient alive until the life insurance can get reassigned.

Perhaps their fortunes will turn around, they’ll be able to quadruple sales, higher margins will appear, and they’ll be able to do it all on a dime.

I think this is a great example of how creditors work to their own interests, and not the company’s, nor shareholders. This thing is on a choker leash, and it’s not going to be let off anytime soon. The upshot is that I’m gonna run through $PLUS’ financials for abit…it’s giving me an ability to look into California, a land that’s often as hard to look into as North Korea from a legal cannabis business perspective.

One last thing: also on our subreddit this morning, a person commented on a press release by MedMen to disgorge its’ New York assets. Not for cash mind you, but for debt assumption. The original lenders had obviously had enough and wanted out, and an operator saw an opportunity to acquire assets. The deal was spun as part of MedMen’s ‘turnaround plan’ in action. I have no clue about how asset disgorgement could ever be phrased as a ‘turnaround plan’, but there it is. And it’s being repeated in many corners of the internet.

Stay safe out there.

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 or $PLUS