MedMen offers vendors equity, IIPR yield declines & Falcon wants $50M from Harvest

MedMen confirms it is reworking vendor terms with equity

MedMen (OTC: MMNFF) confirmed to Marijuana Business Daily and Investor Intelligence that it is indeed attempting to extend payment terms with vendors and, most alarmingly, using equity to settle vendor balances.

Using equity as payment will further dilute shareholders, possibly by up to 25% on top of the current 607 million pro forma shares outstanding.

Worse than the dilution is the signal that they might not have enough cash to ensure continued product supply, which can lead to a retail death spiral akin to Toys R Us in 2017.

Our detailed analysis is available here, and our primer on analyzing working capital and the cash conversion cycle can be viewed here.

Surterra stops delivery in Florida. Will Trulieve benefit?

Surterra Wellness (owned by Parallel) – the second-largest medical operator in Florida, behind Trulieve (OTC: TCNNF) – announced it will stop delivery in the state except for in the Florida Keys.

Per our market share tracking and analysis of the Florida market, Surterra added 15 stores since May, bringing its count to 38 today for 17% market share of stores. Trulieve has 20% share with 43 stores. Surterra is targeting 50 stores over the next year.

Surterra appears to have used delivery as a means to build market share and is shifting to a brick-and-mortar retail business model now that it has a critical store base.

Delivery models generally have higher variable costs than brick-and-mortar retail, which has high fixed costs.

Even if Surterra loses sales, the sales it does convert to brick-and-mortar sales will leverage the fixed store expenses and expand margins at basically the gross margin, which should probably increase profit and margin. 

The question for the market is how much of the delivery sales will be successfully converted to brick-and-mortar sales rather than lost to other delivery services, including Trulieve.

We will be tracking the Florida data to see if Surterra experiences a drop off in product sold or if Trulieve (or others) experience a boost.

Surterra recently changed its corporate name to Parallel, with gum scion Beau Wrigley as its CEO and major investor.

Falcon seeks $50 million breakup fee from Harvest

The dispute between Harvest Health & Recreation and Falcon International over a failed deal continues to heat up, with Harvest now apparently fighting over a $50 million breakup fee and the two heading to arbitration.

Falcon filed a request for dismissal of the Harvest complaint, originally filed Jan. 6. (Falcon’s court filing can be downloaded here, and Harvest’s original complaint is available here.)

See our detailed Rapid Reaction for more insight.

IIP yield declines implying recent loss, announces 2 million share ~$160 million offering

Publicly traded cannabis REIT Innovative Industrial Properties announced an offering for 2.0 million shares, which would raise about $159 million.

The average yield has been coming down since November 2019, but it appeared to go negative in the last month. The current average yield is now 13.3%, down from 13.6% on Dec. 23, 2019 and 13.8% on Oct. 30, 2019.

Innovative Industrial Properties (NYSE: IIPR) seems to be making $1 million less in dollar yield on $7 million more in capital deployed – which implies a loss somewhere in the portfolio.

Obviously the firm would not underwrite a new project at a -13.9% rate, so it implies that existing leases somewhere in the portfolio have declining or negative returns.

As MedMen’s issues attest, the sector becomes more capital constrained and weaker operators perish, we would expect real estate returns to decline as existing leases go bad.

This offering will bring the total shares outstanding to 16.7 million; note this excludes the 2.1 million shares from the company’s exchangeable notes with a strike of $69.58. Despite these convertible notes being in the money today, the company states in its most recent 10Q that it has “the intent and ability” to settle these notes in cash on Feb. 21, 2024, rather than convert them to shares.

It now is issuing equity at about $79, which would more than pay off that debt due in four years.

Cresco to draw $100 million credit agreement next week

Chicago-based Cresco Labs secured a credit agreement of $100 million that the company expects to fully draw on Jan. 30. This credit agreement also contains an option to expand by another $100 million to $200 million and carries an 18-month term at 12.7% or a 24-month term at 13.2% – at the option of the lenders.

This is impressive in that Cresco has convinced a syndicate of institutional investors to agree to this loan – on terms both shorter and at a lower rate than sale-leasebacks.

While Cresco will have to refinance these in mid-2021 or 2022, the legal and funding environment for cannabis could look very different then, especially if the SAFE or MORE acts are signed into law and more sources of capital appear.

Securing capital at lower rates for shorter terms highlights how generating positive EBITDA and clearly articulating the company’s strategy can lead to a lower cost of capital.

Aphria issues $76 million and warrants to private investor

Aphria announced the pending sale of 14 million shares at CA$7.12 and 7 million warrants striking at 30% premium of CA$9.26 ($7.04), to a single strategic “institutional investor.”

These 14 million shares would make this single investor the largest shareholder in Aphria, 42% larger than the current single-largest shareholder (founder John Cervini with 9.8 million shares) and 7.7X larger than the largest actively managed institutional shareholder (Norges Bank Investment Management with 1.8 million shares).

The insiders collectively own 19.3 million shares, so this strategic investment will not give the new investor control.

The company said this investor wishes to remain anonymous, but we suspect that an institutional investment of this size will eventually have to become public.

With this 14 million share sale, Aphria now has 268.8 million in the money shares outstanding, with the $350 million convert counted as debt given the strike of CA$9.38 ($7.14). The stock rising above CA$9.38 would convert both these new warrants and the convertible debt for shares outstanding of 314.1 million.

Mike Regan can be reached at [email protected].