Most assets in the ‘MSO’ space are currently priced relatively ‘equal’. That is they are coupled, and exposure to legal cannabis in any given company isn’t a wild walk in the park just yet. If one goes up, another does. All led by the standard bearing bell-weather MSO of them all…Trulieve ($TRUL).
Marimed is only available on OTC Markets for Canadian investors. And TheCannalysts took a look at their undercarriage not too long ago.
Many raises around US legal cannabis asset of late have been at-the-money, with seemingly enthusiastic uptake by investors. That a company with also seemingly rock solid margins presenting investors financial exposure across 6 states, $MRMD should for all intensive purposes…. be in fashion (as it were). In operations only, they appear grand.
If only their CEO hadn’t chased a hemp company’s skirt without doing a credit check first…….things would be much better. There’s probably much more to the ‘Kind’ story – I’m not close enough to get the skinny, nor inclined to hunt it. Past outcomes are simply historical reality.
MRMD already has mezzanine financing in place…I didn’t delve into it last time around. I have offered up some thoughts on streaming and it’s use as a financial vehicle. I don’t recommend taking on financial exposure to it to anyone who isn’t knowledgeable about it. If someone is selling to to you…..it’s analogous to the folks who peddle ‘option trading’ as a way to get rich. It’s not that it isn’t a useful tool to gain financial exposure – it’s that those exposures are not like simple equity. A large piece of the exposure options bring are centred on volatility of share prices – not absolute price. This is a big distinction. If you think a share price is going to go up, buy the stock. If you think the volatility of share price movement is going to increase, one would want to be long options (cet par).
<I’ve seen many people in my life believe they have a handle on options when they genuinely don’t. I’m not being cute or condescending here. Honest. It’s analogous to someone who can drive a car (equity) assuming they can operate a backhoe (options). Options are not equity, they are a derivative. Options are used extensively in hedging, which, seeks exposure for different purpose…..a key distinction. They can also be used to acquire leverage, another distinct purpose. Options are simply a tool. Just…please….caveat emptor the use of options when acquiring financial exposure>.
The mezzanine that Marimed’s into is locked down in two ways: one as primary creditor, and two, a firm strike option of either a) profit, or b) capital reclamation. This stuff is complex.
It’s no fun chasing financials via 10-Q filings that aren’t on SEDAR. Maybe I’m being a little precious here….but still.
Today, $MRMD announced that they had secured ‘new funding from a long-term capital partner’ – which caught my eye. We’d predicted they’d need to get fresh $dough$ in soon…and this seems to be that moment. Let’s take a look at the deal.
In this ‘raise’, $MRMD claims a ‘$46 Million Dollar Financing Facility to Accelerate Company Growth Strategy‘. Ok.
For that ‘$46MM’….well, that’s a total, and not what’s coming in. Initially, the counterparty is giving $MRMD $23MM for:
- A new class of shares has been created – Class ‘C’. $MRMD issued 6.2MM of them at $3.70 each
- Class C shares hold 5 common shares each (25MM shares) , as well as 2.5 warrants (15.54MM incremental shares)
- Should the second tranche of Class C be purchased, these numbers will double. That second tranche is contingent upon milestones being hit. Sadly, the schedule outlining them are absent in the SEC filings. I can’t see any of the future gates, and there’s references to being multiple gates.
- Hadron gets to sit in in any and all Board and Committee meetings until that second tranche is made. I suspect they’ll get permanent representation should that happen.
Fair enough. Most of the contractual verbiage subordinates all other equities that exist to the Class C’s. Everything is convertible immediately, both the Class C’s and the warrants. There is a clause that Hadron can’t short or execute an arbitrage on $MRMD’s stock….which is a positive.
As to cost….the deal is for $0.70 per common share, which, was probably around market when this thing got started:
As to optionality….I value the warrants between $0.40-$0.50 each, so, a total of about $7MM USD.
Thus, for $23MM USD, $MRMD sent out $30MM in equity, subordinated and assigned all of their assets, gave Hadron sign-off on use of funds, and, put milestones/performance metrics around business performance. Sounds like a creditor arrangement to me.
I’d expected something more usurious when I first looked this over. It’s not inordinate in terms of total cost as we’ve seen in the Canadian space over the past couple of years. But, it is really expensive compared to most ‘MSOs’ recent raises. And proof positive of gentrification of assets and companies in the US space.
Ultimately, the money and equity from the Kind hemp investment and sales is long gone. CEO Fireman acknowledges it in a year end shareholder letter – speaking about the year ahead – he references it pithily: “With our foray into the hemp industry behind us……it was our goal (to) …..re-establish the Company’s image…..”. Yeah.
$MRMD has a decent enough looking core business (from a distance), but expansion is going to be key. Perhaps having a capital fund making decisions for them will help. For $30MM/yr in expected EBITDA run rate….and now 350MM shares outstanding…. expansion is the only way this thing is going to fill the gap between the value of existing assets and a relatively high flying share price.
Like some companies in the US space I’ve looked at – there’s core business within this ($PLTH is another). But that assumes nothing much is going to change in the market for retail weed, and that incremental assets will perform like existing ones. I think that’s a lot of risk to assume relative to downside. Many in the market don’t share my view.
This deal – while being short of acquisition – is essentially taking $MRMD into the realm of an investment bank play. Which I expect we’ll see much more of as companies try to maximize the value they can given current and future expected demand for cannabis assets. And that’s a different exposure than simply buying into a weed company.
To close this off, I want to point out something mentioned in the press release. That “…..if Hadron exercises all of the warrants for cash, MariMed will receive additional proceeds of approximately $34 million”. Yep.
The warrant indenture contains a provision for a cashless exercise of the warrants if $MRMD doesn’t have them listed for trading. In other words….no additional cash will come in unless they’re listed immediately, and stay there.
An important part of all this is the ‘why’? Like why – with profitable looking operations and good thing’s coming in the year ahead – would CEO Fireman take an expensive route for cash? Because companies do that when there’s no other options available. Anything else would be irrational.
While kind of obvious, it spells out that there’s not enough ‘normal buyer’ interest in the equity. That brings in Money Mart type ‘lenders’. While this deal is described as an ‘equity partner’, its’ ostensibly a creditor securing a loan against assets. Also fair enough. I certainly don’t think it’s something common shareholders should be very thrilled about.
They didn’t have a choice.
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 $MRMD.