Cannabis Musings - February 25, 2025

How Jushi got some money.

Friends, last week, multistate operator Jushi Holdings, announced that it raised money through two interesting transactions, one of which provides us with a history lesson, the other showing us the merits of a close read.

Jushi’s press release heralded the news that it received “US$5.1 Million of Factored ERC Refund Claims Proceeds.” MJBiz Daily had a nice article on Monday explaining the ERC credit, which is basically a payment from the federal government under a pandemic-era stimulus program. Jushi hadn’t yet received its anticipated $6.0 million payment, so it sold off the right to receive that payment at a 15% discount, reflecting risks of not knowing the timing of the actual payment and the potential counterparty risk (i.e., the federal government not making the payment at all, which should be infinitesimally small, but, well, isn’t).

So, who buys that receivable payment? A factor. I love that word – it’s the kind of obscure and mostly pointless financial jargon that imparts immediate street cred (the same reason I still use my HP 12C calculator), like floorplanning (short-term inventory financing used by car dealers), backleverage (lenders borrowing against their loan portfolio to juice returns), contango (where the futures price of a commodity (usually energy) is higher than the spot price), and backwardation (contago’s opposite). Drop those at your next MJBiz afterparty.

Factoring also carries with it a deep history – it’s been used as a financing tool for centuries. Rather than lending against inventory and receivables, like a traditional bank loan, the factor actually purchases the receivable at a discount to the full amount (again, reflecting the risk of timing and/or not collecting). A company might do this instead of the bank loan for a variety of reasons – a bank loan simply may not be available or feasible (particularly when interest rates, including fees, to cannabis companies can exceed 20%), the company may not want to take on the long-term burden of paying interest, or it might not want the debt on its balance sheet.

So, Jushi got a nice cash infusion for selling off this anticipated receivable from the same government body that overtaxes its operations. It also borrowed some more money, receiving “subscriptions to sell approximately US$5.1 million aggregate principal amount of Second Lien Notes, from which the Company expects to receive net cash proceeds of approximately US$4.6 million.” As the press release explains, these are notes (basically loans that are sold to investors) that carry a 12% interest rate paid in cash and are due in 2026 (specifically, December 7, 2026, per Jushi’s annual report). The fact that they’re “second lien” means that they have a lien on Jushi’s assets that is subordinate to a $100 million bank loan (the bank loan gets paid back before these notes).

There’s a interesting features about these notes. The first is the warrant coverage, meaning that the investors buying the notes (making the loans) also receive warrants (options) to purchase Jushi stock at a calculated exercise price. This gives the investor some extra vig (incentive) for lending Jushi money – in this case, 75% warrant coverage, meaning that the investors will receive warrants to purchase about $3.825 million of Jushi stock at a price between $0.45 and $0.50 per share (specifically, a 50% premium to the 20-day volume weighted average price ending on the second business day following the filing of Jushi’s 2024 10-K, but within that range). This gives the investor some equity upside in case the financing works out well.

Notably, these notes are going to be sold to James Cacioppo, Jushi’s CEO, Chairman, and Founder, and Denis Arsenault, a Founder and “significant equity holder.” Since they’re insiders (meaning they have some sort of officer, director, or major stockholder relationship to the company), it’s considered a related-party transaction. From a legal perspective, that basically means that the rest of Jushi’s board needed to approve the deal (leaving the two investors out of the vote). From an outside business perspective, it’s another good example of third-party capital being hard to find in this industry.

Finally, the key point here is that the notes “will be issued at a 10.00% original issuance discount.” Two obscure financial terms in one press release - such a blessing! Original issuance discount (OID) basically means that debt is issued by the borrower for less than the face/principal/stated amount of the debt. In other words, Jushi is selling notes that require it to pay back approximately $5.1 million to the investors, but Jushi will only receive about $4.6 million from the investors. That 10% difference is the OID.

OID has some complex and very boring tax and accounting implications, but, from a business perspective, it’s a way to increase the returns to the lenders/investors without having to change the interest rate (here, the notes were issued under an existing credit document (indenture)). It also lets you kind of occlude the actual cost of the debt – in this case, by buying 15% debt at a 10% discount, with just under two years left until maturity, it works out to something closer to a 21%-22% interest rate (assuming Jushi makes all of its interest payments and pays back by the full amount at maturity). Pretty typical for cannabis, what with the industry’s looming Calamitous Cavalcade of Capital Catastrophe. Ven dos mazl kumt, shtel im a shtul (“If fortune calls, offer him a seat.”)

Jushi is by no means hiding the ball in its press release – all of this is disclosed and available, but it takes a little bit of work to figure out the actual cost of this capital. Public companies do this all the time – truth isn’t put into doubt like a Münchhausen trilemma, but it’s veiled behind a scrim that requires the a few tools to cut through (we also talked about this when looking at Trulieve’s March 2024 press release about its 280E-related tax refunds). Public reporting is notoriously opaque, despite the fact that, in theory, it’s supposed to educate investors about a company’s profile and risks. Probably because it’s usually written by lawyers.

Be seeing you.

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© 2025 Marc Hauser. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. The foregoing represents my own views and not those of Jardín.