Bottom Line

Debt renegotiations are becoming a theme across the cannabis industry.

Company’s overestimated their future cashflow and borrowed more than they could afford in 2018 and early 2019 when the industry was still drowning in money.

Now the bill is coming due and many companies are running out of options.

In TerrAscend’s case, the company negotiated a relatively decent deal, but only when compared to the truly terrible terms forced on other producers like MedMen or Green Growth Brands.

TerrAscend’s chairman of the board is both a major shareholder and also affiliated with the investment company that owns the debt.

With a substantial ownership interest in the company, it would make no sense for the lenders to force the company into bankruptcy when they can make more money by giving TerrAscend more time to grow and turn a profit.

This tight financial relationship explains the favorable terms of the new loan.

Even though shareholders are avoiding dilution, 12.5% interest on C$98 million of debt is not chump change.

C$12.3 million of interest is currently 50% of what the company generates after production costs and before we even subtract payroll and spending on research .

At the current gross margin of 22%, TerrAscend will need to generate C$380 million a year, up from C$108 million today to afford payroll and the C$12.3 million of interest expense from the debt.

TerrAscend just bought itself some breathing room but with only C$65 million of cash if they fully draw down the loan and a spending rate of C$16 million a quarter, management will likely be headed back to investors with hat in hand sometime next year.

Details of the Renegotiation

With the maturity date for a $75 million credit facility rapidly approaching, TerrAscend Corp. (CSE: TER; OTCQX: TRSSF) today announced the terms of that fundraising deal have been extended. 

With only C$30 million (US$23 million) of pro-forma cash as of November, the ability to repay the debt was in question.  

The credit facility acquired through JW Asset Management LLC was originally set to mature on December 18. A three month extension was just negotiated on the debt, with any outstanding amount past that point converted into a two-year loan due to mature in March of 2022. 

Jason Wild, chairman of the board at TerrAscend, serves as Chief Investment Officer for JW Asset Management and is a major shareholder in TerrAscend. 

In addition to being extended, the credit facility will now bear interest at 12.5%, a marked increase from the original 8.75% interest rate and TerrAscend must pay 1.5% of the $75 million as a fee upfront.

The deal is not yet closed and we won’t learn the final deal terms until March of 2020 at the earliest. 

Commenting on the change to the debt’s maturation date, TerrAscencd executive chairman Jason Ackerman had this to say: 

The extension of the credit facility and commitment of funds for two years allows TerrAscend a non-dilutive source of financing during a time when we expect regulatory, banking, and capital market improvement. We appreciate Jason Wild’s ongoing support and are fully focused on growing our California, Pennsylvania, New Jersey, Canada and hemp CBD market opportunities.

TerrAscend withdrew its original 2019 guidance of C$141 million last month due to lower than expected profit margins in Canadian operations. 

The company did see a big revenue increase quarter over quarter however, with revenue of C$26.8 million up 53% from C$17.5 million in Q2 2019. 

In other company news, TerrAscend recently struck a deal with Kindred Partners to serve as the broker for adult recreational products in Canada.  

The move comes as the licensed industry prepares for the impending launch of “cannabis 2.0” products later this month that include infused edibles and vape cartridges.

As of late October, TerrAscend had submitted 15 different products for approval to Health Canada under the new categories. 

TerrAscend stock is down 4% so far today after the news of the debt renegotiation broke early this morning.