Nanalyze

MedMen Stock Slides Amid Rapid Expansion

Pliny the Elder isn’t just a craft beer revered by hipsters, it’s also the name of a famous Greek naturalist and philosopher who first wrote about a fierce creature – the unicorn – that conveniently was impossible to capture. He’d be rolling over in his grave right now if he knew that there are now just over 400 unicorns roaming our planet eating every last venture capital dollar in sight. Pliny failed to realize that the name of the creature he imagined would be commandeered by institutional investors to refer to a startup with a valuation that exceeds one billion dollars. In February of last year, we wrote about the first marijuana unicorn – MedMen – stating that “Should shares of MedMen begin trading on the CSE, we’ll dig into their filings to give potential investors a clear look under the hood and compare their financials to their billion-dollar valuation.” That’s exactly what we’re going to do today.

Click for company websiteThe background of MedMen (MMEN:CN) is pretty straightforward. Their plan is to open “the Apple stores of cannabis” in visible locations like New York, Las Vegas, and Los Angeles. In our last article, we cited a Bloomberg article that said MedMen’s management group and two funds own or operate 11 businesses: eight dispensaries, two growing facilities and one manufacturing plant.“ They also owned a license to open a dispensary in Manhattan for which they spent $26 million to acquire. Since then, they became a publicly traded company through a reverse merger and have become the “best-known cannabis retailer in the United States” according to an article by CNBC which went on to describe the company’s financial troubles as “a warning for the marijuana industry.”

When the CNBC article was published in March this year, MedMen had a market cap of $1.6 billion which was down from $3 billion the year prior. Today, the company is valued at just around $820 million as shares continue to slide.

MedMen Stock plummets

Credit: Bloomberg

The cause of the slide in share price could be the “financial troubles” that CNBC wrote about which entailed a cash crunch that was fortunately rectified under some onerous terms along with a struggle to compete with black market cannabis in the state of California. Incredibly, illegal sellers are responsible for 80% of all cannabis sales in the State of California according to BDS Analytics. These unregulated sales take place without any tax burdens or regulation costs which means legitimate dispensaries are having a hard time competing on price. The State of California happens to be where 46% of MedMen’s stores are located and where the majority of their revenues come from (65% of Q4-2019 revenues came from California.)

MedMen in California

Credit: MedMen Investor Deck

“During the last six months of 2018, MedMen lost $131 million — more than $2 for every dollar in marijuana it sold,” the piece goes on to say. That shouldn’t come as a surprise though. As we’ve said before, most cannabis multi-state operators are focused on capturing as much market share as possible and profitability can come later. For MedMen, the revenue growth is happening organically and through acquisitions, the most notable of which is PharmaCann.

MedMen and PharmaCann

As we’ve observed before, consolidation in the cannabis industry is happening so fast we can barely keep track of it. MedMen is no exception having announced the acquisition of PharmaCann about a year ago, a $682 million all-stock takeover by MedMen which was said to be the largest marijuana-takeover in U.S. history. Below are the pro-forma revenue statements reflecting the acquisition which the company expects to close by the end of this year:

MedMen revenue growth

Credit: MedMen Investor Deck

Yesterday’s article by the Motley Fool laments the fact that “issuing a boatload of stock to acquire PharmaCann is not liable to help its share price one iota,” although the combined entity would have 92 licenses and “38 operational stores, placing the company second in the marketplace behind only Curaleaf Holdings.” MedMen has been aggressively acquiring companies with PharmaCann representing their largest acquisition to date.

MedMen M&A Transactions

Credit: MedMen Investor Deck

All of these acquisitions have resulted in a great deal of cash being burned up while the company continues to take on debt to fund their operations. Trying to understand that debt structure, however, is another story.

MedMen’s Management

Cannabis companies have a reputation for having convoluted corporate structures that are constantly evolving as the industry continues to consolidate. Having to operate in multiple states where each regulatory environment is completely different doesn’t help either. That’s why you should always go over to SEDAR and pull up a company’s latest financial filings which are very confusing to read but provide insights that you won’t find in the glossy investor deck. This is mandatory reading for any investor who is thinking about investing in a cannabis firm. You should only invest in a company whose financials you can easily understand and whose management team appears to be playing well together. MedMen is not one of those companies.

Earlier this year, MedMen’s CFO filed a lawsuit against the company which is detailed in this complete mess of a document which – regardless of the truthfulness of said document – immediately raises concerns. The CFO is a critical component of any corporation and if this document in any way reflects the relationship the CEO had with the CFO, then that’s a management team you don’t want running your firm. Couple that with the resignation of MedMen’s Chief Operating Officer Ben Cook and General Counsel Lisa Sergi Trager this past April and you have what appears to be a great deal of turmoil in a company that really needs to be focused on execution given how much cash they’re burning through.

MedMen recently changed their fiscal year which makes their latest financials a bit tough to navigate but it all comes down to this. In the past 39 weeks, the company incurred $223.7 million in expenses with 86% of that falling into the “General and Administration” bucket. That resulted in a loss of $178 million in the same period.

MedMen's Financials

Credit: SEDAR

That spending frenzy doesn’t appear to be slowing either. In the past 13 weeks, MedMen’s expenses were more than $5.6 million per week. This sort of cash burn doesn’t seem sustainable. As the share price plummets, more equity needs to be given away when it comes time to raising money by selling shares. Alternatively, money can be raised via loans or promissory notes, but don’t expect very favorable terms. You can browse through MedMen’s list of $88.7 million in payable notes and see what sort of terms they’re getting yourself, or you can just pass on this grass in favor of other cannabis multi-state operators where the ex-CFO isn’t complaining in a lawsuit that the CEO called him a “pussy-bitch” and made him share a parking space with his executive assistant.

Conclusion

The “capture market share at any cost” strategy works just as long as companies can raise the money needed to cover their losses until profitability happens. Investors have been throwing money at the cannabis sector in such large amounts that everyone just assumes the funding will always be there. If that funding dries up due to a broader market recession, or a market event that scares investors away, companies like MedMen will quickly fall into trouble. Retail investors ought to ask themselves if this is a risk worth taking.  When companies start to spread themselves thin by taking on large amounts of debt with unfavorable terms, that’s a concern. Couple that with some apparent leadership problems and those are red flags that just can’t be ignored.

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