Three key executives at Harvest Health & Recreation will surrender a total of 2.4 million stock options back to the company – without compensation – so the options can be redistributed to employees throughout the business.
It’s a novel concept, but common equity holders will still be diluted.
By taking this action, Chair Jason Vedadi, CEO Steve White and operational leader Joe Sai are sending a message to employees and investors that they are focused on the long-term success of the Arizona company and willing to think creatively to provide incentives to their employees.
Distributing options more widely to employees will likely better align the interest of employees with that of equity shareholders: to move the stock price higher.
Surrendering the 2.4 million options to be reissued to employees helps reduce potential share dilution in the long term as there ultimately will be fewer options outstanding.
However, the reissued options have a much greater chance of diluting the share base in the near term because the strike price was set at the current market price (we estimate around $2.85) versus the surrendered options with an average strike price of $6.79 a share.
We applaud the management of Harvest Health for creative, outside-the-box thinking to solve difficult capital structure and employee compensation issues, but the fact remains that this is, in effect, a repricing of options to the detriment of common shareholders.
Surrendered options are nearly half of executives’ unvested options
Per Harvest’s filing (reprinted below) from Dec. 12, 2019, Vedadi and White have a combined total of 6.4 million options, not all of which are currently vested. We cannot find any information on Sai’s options, so the math below ignores his position. Including Sai’s options would reduce the percentages.
As of Feb. 4, 2020, we estimate that 5.15 million of Vedadi and White’s 6.4 million options have not vested. That’s about 80% of their total options.
The weighted average strike price of the 5.15 million unvested options is $6.85. However, 72% of the unvested options have a strike of $6.55, about 130% above the current $2.85 share price.
The company will take a $10 million noncash charge to account for the redistribution of the options, which on 3.0 million options implies a value of $3.33 per option. This also supports the assumption that the surrendered options are unvested, as they have not yet been charged to expenses.
| Jason Vedadi | Options | Strike Price | Issued | Vested |
| 20,746 | $7.21 | 11/14/18 | 5,187 | |
| 2,479,253 | $6.55 | 11/14/18 | 619,813 | |
| 17,905 | $7.65 | 3/13/19 | 0 | |
| 382,095 | $7.65 | 3/13/19 | 0 | |
| 2,899,999 | $6.71 | 625,000 | ||
| Steve White | Options | Strike Price | Issued | Vested |
| 20,746 | $7.21 | 11/14/18 | 5,187 | |
| 2,479,253 | $6.55 | 11/14/18 | 619,813 | |
| 17,905 | $7.65 | 3/13/19 | 0 | |
| 982,095 | $7.65 | 3/13/19 | 0 | |
| 3,499,999 | $6.87 | 625,000 | ||
| TOTAL (Vedadi & White) | 6,399,998 | $6.79 | 1,250,000 |
Mike Regan can be reached at miker@mjbizdaily.com.
Craig Behnke can be reached at craigb@mjbizdaily.com.
