MedMen reached an agreement with senior lenders to defer cash interest.
MedMen Enterprises Inc. (CSE: MMEN) today announced the execution of definitive agreements with certain lenders, including Gotham Green Partners, Stable Road Capital and affiliates, and the Company's most significant landlord, Treehouse Real Estate Investment Trust as part of a financial restructuring and turnaround plan to support the expansion of the Company's industry-leading retail footprint. The Plan will defer approximately US$32 million in cash commitments over the next 12 months and provide additional balance sheet flexibility.
We believe the widespread support we have received from our lenders and landlords will allow us to continue execution of the turnaround, continue to grow our best-in-class retail operations and drive towards positive free cash flow.Tom Lynch, Interim Chief Executive Officer
"Implementing our turnaround plan is the best way to ensure that MedMen continues on its path to building the leading cannabis retailer in the U.S.," said MedMen Interim Chief Executive Officer Tom Lynch.
Senior Secured Convertible Facility:
On March 30, 2020, MedMen announced the closing of US$12.5 million in additional gross proceeds under its senior secured convertible facility led by funds affiliated with Gotham Green Partners. As part of the plan announced today, the Company and GGP have further amended and restated the securities purchase agreement that governs the Convertible Facility to include, among other things, the following:
- Interest: All notes under the Convertible Facility will continue to bear interest at the higher of (i) 2.5%, and (ii) LIBOR, plus 6.0% per annum. However, the payment-in-kind feature on the Convertible Facility has now been extended, such that 100% of the cash interest due prior to June 2021 will be paid-in-kind, and 50% of the cash interest due thereafter for the remainder of the term of the Convertible Facility will be paid-in-kind. The PIK feature will expire if Section 280E tax reform occurs and the Company begins to be taxed similar to other U.S. corporations.
- Minimum Liquidity: The threshold for the minimum liquidity covenant, which was previously US$15.0 million, has been waived until September 30, 2020, resetting to US$5.0 million thereafter, to US$7.5 million effective on March 31, 2021 and then to US$15.0 million effective on December 31, 2021.
- Non-Core Assets: GGP has agreed to the release of certain assets from its collateral pool in order to provide the Company with greater flexibility to generate proceeds through the sale of non-core assets. On July 2, 2020, the Company received US$10.0 million at signing of definitive documents for the sale of one of its retail licenses outside of California.
As consideration for the amendment of the Convertible Facility, the conversion price for 52% of the existing notes outstanding under the Convertible Facility prior to the US$15.0 million advance under Tranche 4 of the Convertible Facility (including PIK interest accrued on such notes), being 52% of an aggregate principal balance of US$167.7 million as of June 30, 2020, was amended to US$0.34 per Class B Subordinate Voting Share of the Company. As additional consideration, a fee of US$2.0 million was paid to the lenders under the Convertible Facility through the issuance of additional notes, which notes have a conversion price per Subordinate Voting Share equal to US$0.28, which represents a 30% premium to the 5-day volume-weighted average trading price of the Subordinate Voting Shares as of and including June 30, 2020.
In connection with the amendments to the Convertible Facility, the Company is now subject to certain additional covenants thereunder, which are consistent with the Company's internal business plan. The Company is required to adhere to its Turnaround Plan for certain cash expenditures such as corporate expenses, capital expenditures, and leases. The covenants expire once the Company achieves two consecutive fiscal quarters of being free cash flow positive.
Senior Secured Term Loan:
On January 14, 2020, the Company announced the closing of definitive documentation for amendments to the terms and conditions of the US$77.7 million senior secured term loan with funds managed by Stable Road Capital and its affiliates. As part of the plan announced today, the Company and the Term Loan Lenders further amended the commercial loan agreement that governs the October 2018 Loan to include, among other things, the following:
- Interest: In the amendment to the October 2018 Loan completed in January 2020, the interest rate was increased from a fixed rate of 7.5% per annum, payable monthly in cash, to a fixed rate of 15.5% per annum, of which 12.0% was to be payable monthly in cash based on the outstanding principal and 3.5% was to accrue monthly to the principal amount of the debt as PIK. In connection with the Plan announced today, 100% of the total interest payable prior to June 2021 will be paid-in-kind and 50% of the cash interest due thereafter for the remainder of the term of October 2018 Loan will be paid-in-kind. The PIK feature will expire if Section 280E tax reform occurs and the Company begins to be taxed similar to other U.S. corporations.
- Minimum Liquidity: The threshold for the minimum liquidity covenant, which was previously US$15.0 million, has been waived until September 30, 2020, resetting to US$5.0 million thereafter, to US$7.5 million effective on March 31, 2021, and then to US$15.0 million effective on December 31, 2021.
As consideration for the amendment of the October 2018 Loan, the Company issued to the Term Loan Lenders a total of 20.2 million warrants, each exercisable at US$0.34 per share for a period of five years. As additional consideration, a fee of US$834,000 was paid-in-kind. The Company also canceled 20.2 million warrants of the total 40.4 million warrants already held by the Term Loan Lenders, which were each exercisable at US$0.60 per share.
In connection with the amendments to the October 2018 Loan, the Company is now subject to certain additional covenants thereunder, which are consistent with those included as a part of the amendments to the Convertible Facility.
Treehouse Real Estate Investment Trust:
The Company currently has lease arrangements with affiliates of Treehouse, which include 14 retail and cultivation properties across the U.S. As part of the Plan, Treehouse has agreed to defer a portion of total current monthly base rent for the 36-month period between July 1, 2020, and July 1, 2023. The total amount of all deferred rent accrues interest at 8.6% per annum during the deferral period. As consideration for the rent deferral, the Company has issued to Treehouse 3,500,000 warrants, each exercisable at US$0.34 per share for a period of five years. As part of the agreement, the Company will pursue a partnership with a cannabis cultivation company for the Company's Desert Hot Springs and Mustang facilities that are leased from Treehouse in order to continue the Company's focus on retail operations.
Please refer to the Company's documents available on the Company's profile at www.sedar.com for additional details as to Convertible Facility, the October 2018 Term Loan, and the lease arrangements with Treehouse REIT, including the amendments made thereto.
This press release shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the securities in any jurisdiction in which such offer, solicitation or sale would be unlawful. The securities being offered have not been, nor will they be, registered under the United States Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the United States Securities Act of 1933, as amended, and applicable state securities laws.
Related Party Transaction:
The portions of the Plan agreed to with GGP may constitute "related party transactions" within the meaning of Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions. The Board of Directors of the Company, acting in good faith, including all of the independent members of the Board, acting in good faith, have determined that the Company is in serious financial difficulty, that the Related Party Transaction is designed to improve the Company's financial position and that the terms of the Related Party Transaction are reasonable in the Company's circumstances. As such, MedMen is relying on the exemption from the minority approval requirements of MI 61-101 based on the financial hardship exemption set forth in Section 5.7(1)(e) of MI 61-101. The material change report for the Related Party Transaction will not be filed more than 21 days prior to the closing of the Plan, as the transactions that constitute the Related Party Transaction were effectively closed upon of execution of the amendments to the Convertible Facility, and until execution, there was no material change that could be disclosed.
To learn more about MedMen, visit the company HQ here.
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