While shares of MedMen Enterprises Inc. (CSE:MMEN), one of the U.S. marijuana stocks, look like a bargain given its recent steep pullback, potential investors should look carefully before jumping in
SmallCapPower | October 8, 2019: MedMen Enterprises Inc. (CSE:MMEN) (OTCQX:MMNFF), one of the U.S. cannabis stocks and a multi-state operator, has recovered about 29% from its recent 52-week low of $1.78 on October 1, 2019. At first glance, MedMen has some positive qualities. It has one of the most recognizable brand names in the legal cannabis market and has cultivation and sales licenses in many key states, such as: California, Nevada, and Florida. The Company’s acquisition of PharmaCann would add Illinois, Massachusetts, and New York. However, investors should remain cautious as MedMen may have some challenges that could put downward pressure on its stock in the future.
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Figure 1: MedMen Proforma Retail Footprint
Source: Investor Presentation
Share lock-up agreements expiring. As shown in the chart below, MedMen Enterprises has approximately 312.5M shares held by MMMG, LLC (MM Can USA Inc.), a cannabis management company, and two private equity funds MedMen Opportunity Fund I, LP and MedMen Opportunity Fund II. Approximately 275M of these shares were subject to a lock-up agreement and not allowed to be sold until November 25, 2019. After which, 1/12 of the shares will be permissible to be sold at the end of each month, for the next 12 months. MedMen’s float is currently ~160M shares, which would increase MMEN’s float by 1.7x. Additionally, of the 275M shares 179M of them are held by MMMG. Two early investors in the MMMG filed a lawsuit with the Los Angeles Superior Court in January 2019, alleging they were being unfairly prevented from cashing out their interest in MedMen. The lawsuit was dismissed by the court. However, it is likely that the investors plan on cashing out their position once the shares begin to unlock. This would add ~15M shares per month to the MedMen Enterprises freely-trading float.
Figure 2: MedMen Cap Table
Source: Investor Presentation
Significant losses from operations. During Q1/19, MedMen generated $36.6M in revenue, its gross margin was 53.5%, and operating expenses came in at $73M, putting the Company’s operating loss at $53M. This implies that the Company would have to generate ~$135M in revenue per quarter to have zero income from operations. Basically, at current rates MedMen Enterprises needs to increase quarterly revenue by 3.7x just to break-even. Having said that, the Company is opening new locations and is working on trimming expenses, however it may take a few quarters before MedMen begins to realize positive operating income.
Cash burn in an increasingly capital-constrained environment. For the last reported quarter (Q1/19 ending March 31, 2019), MedMen’s cash flow from operations was -$60M, and capital expenditures were $27M. Based on this trend, the Company is burning roughly $90M per quarter. As of March 31, 2019, the Company had ~$30M in cash, then entered into a $60M at-the market equity financing program last April, which was followed by a $250M convertible from Gotham Green Partners, and $30M capital injection from Wicklow Capital. This means that the Company has access to cash reserves of $370M. With a burn rate of $90M per quarter, MedMen Enterprises has enough cash to last until April 2020. At which point it may need to raise again as it is unlikely the Company will be generating free cash flow by then. The terms of the raise may be unfavorable for MedMen as seen by two recent raises. Cresco Labs (CSE:CL) had to raise at $10.00, which was a discount to the company’s share price of $10.50 at time. Additionally, iAnthus (CSE:IAN) raised a $100M convertible note at an unfavorable 13% interest rate.
Closing of the PharmaCann transaction delayed. Under the terms of the PharmaCann deal, PharmaCann has to finish construction of its cultivation facility in Buckeye Lake, Ohio and complete one harvest before MedMen can close the transaction. This is due primarily to an Ohio regulatory requirement that requires cannabis cultivation licensee holders to have certification to begin operating before it is allowed to transfer a license to another owner. In a September 2019 announcement, MedMen Enterprises mentioned that construction of the Buckeye Lake facility was expected to be completed by the end of calendar 2019. Once construction is completed, the first harvest would need 3-4 months, which could delay the closing of the deal into April 2020.
Shares of MedMen ended Monday’s trading session up 4% at $2.29. MedMen Enterprises stock trades at a market cap of $1.1B.
Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.
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