Supreme refinances its convertibles, amends credit facility in Q4

By Devika Patel

Knoxville, Tenn., Sept. 25 – Supreme Cannabis Co., Inc. significantly strengthened its balance sheet by refinancing its convertible debentures and amending its credit facility following the end of the last quarter.

As a result, there are no debt maturities for two years, and total debt was reduced by C$69.8 million. Also, cash interest expense was significantly reduced as a result of the reduction in the principal amount of the convertible debentures and the credit facility.

“The company’s balance sheet continues to be strengthened with purposeful actions taken by the management team and, subsequent to quarter-end, we took major steps towards bolstering the balance sheet,” chief financial officer Nikhil Handa said on the company’s fourth quarter and year ended June 30 earnings conference call on Friday.

“Subsequent to quarter-end, we increased the company’s financial flexibility by refinancing its convertible debentures and amending its credit facility,” he said.

The company refinanced its convertible debentures, reducing debt and extending its maturity profile.

“In September, Supreme completed the refinancing of its convertible debentures, which helped optimize our balance sheet by reducing debt,” Handa said.

“As part of this refinancing, C$63.5 million of the C$100 million principal amount of the debentures were converted to equity by issuing 117 million common shares to debenture holders, a conversion that reflects a significant premium to the current share price.

“Amending the debentures was an efficient use of the company’s share capital and gave the company a tremendous amount of financial flexibility.

“Not only did it reduce the company’s debt load by C$63.5 million, but it also lowered our interest payments by over 50%, freeing up cash to invest in strengthening the business and capturing value-generative opportunities.

“We also pushed back the maturity on the remaining C$36.5 million of principal from October 2021 to Sept. 1, 2025.

“So, instead of having C$100 million coming due in October of next year, we have the lower refinanced amount maturing in five years.

“This refinancing was a crucial step in strengthening the balance sheet of Supreme,” he said.

Supreme also amended its credit facility, giving the company more time before it has to comply with cash flow covenants, such as leverage metrics.

“Also subsequent to quarter-end, the company amended its senior secured credit facility,” Handa said.

“The amendments provide Supreme with a longer runway to execute on its business plan before the credit facility converts to cash flow covenants, such as leverage metrics.

“Specifically, the debt to EBITDA and fixed-charge coverage ratios were extended by one year to begin in calendar year 2022.

“In turn, the credit facility’s sizing was optimized and the interest rate was increased by 75 basis points to reflect current industry dynamics.

“With the refinancing of our convertible debenture and the amendment of our credit facility, Supreme has reduced its overall leverage, reduced its cash interest expense and has no maturities for the next two years.

“Thus, we have ample runway to execute on our business plan,” he said.

Supreme ended the quarter with a total cash balance of C$28.4 million.

“Supreme’s cash and liquidity position means the company has current resources available to settle its current liabilities and we’re fully funded to execute on all our planned initiatives for fiscal 2021,” Handa said.

On Aug. 31, Supreme announced that holders of its outstanding 6% senior convertible debentures issued in October 2018 have approved an extraordinary resolution to approve amendments to the terms of the convertibles.

Some of the amendments approved are

• Reduction of the total principal amount of debentures outstanding to C$36.5 million from C$100 million;

• Extension of the maturity date of the debentures to the date that is five years plus one day from the closing date unless repurchased, redeemed or converted prior to maturity, from Oct. 19, 2021 previously;

• Reduction of the conversion price of the debentures to C$0.285 per share from C$2.45 per share;

• The right to force the conversion of the remaining principal amount of the debentures outstanding at the conversion price on not less than 30 days’ notice if the daily volume weighted average trading price of the common shares of Supreme Cannabis is greater than C$0.45 for any 10 consecutive trading days;

• Amortization of the principal amount of the remaining debentures at 1% per month over the 24-month period prior to maturity;

• Reduction of annual interest payments to C$2.9 million from C$6 million; and

• The remaining debentures will accrete at a rate of 11.06% per annum, compounding on a semiannual basis commencing on the closing date of the amendments and ending on the date that is three years from the closing date.

The accreted portion of the principal is payable in cash upon maturity but does not bear cash interest and is not convertible into common shares.

In consideration of the reduction of the principal amount of the debentures by C$63.5 million, among other consideration, the company will issue a total of 116.6 million common shares to debenture holders.

Supreme Cannabis is a Toronto-based B2B wholesale marijuana company.

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