In media, there is a term called the “Friday News Dump”, where a news item is released late in the evening on a Friday, with hopes of avoiding the scrutiny of journalists. The entity that orchestrates the Friday News Dump is typically trying to bury the headline after the evening news has been delivered, banking on the idea that everyone will forget about it by the time Monday morning rolls around. It is an old tactic used by sports teams, politicians, and of course, corporations. So when MedMen Inc. dropped a press release at 11:47pm eastern this past Friday, it probably did fly under a lot of radars in the cannabis industry. But savvy investors saw the move for what it was and have begun dissecting it to determine the odds of the big gamble ever paying off for the corporate cannabis giant.
Without getting too deep into the. . . weeds, on November 9th, MedMen announced what is called a large equity capital raise. They need money. In fact, this is their second such raise since they joined the Canadian Securities Exchange back in May.
In laymen’s terms, they offer up a portion of their stock holdings at a specific set of terms and pricing, hoping to attract investors and convert chunks of ownership of the company into operating cash. In this case, the latest raise was a bought deal, meaning that some large entity came along and offered to buy up the entire offering in one lucrative purchase.
MedMen stood to rake in a much-needed $130 million with relatively favorable terms for their existing investors.
Despite the fact that the stock value is up 50% overall in the past six months, it has always been a bumpy road with MedMen. But since the November 9th announcement the company has really hit some turbulence.
For starters, the stock price was hovering at $7.32 (Canadian) at the end of trading on November 8th. Since then it has plummeted by 26% down to just $5.43 (Canadian) at the end of the day Friday with no updates so far today.
Additionally, on Friday morning, the company announced the sudden resignation of their Chief Financial Officer – not exactly a confidence booster when trying to close a multimillion dollar investment deal.
And so, in literally the 11th hour on Friday, we got the press release that MedMen was being forced to sweeten the deal on what was supposed to be dry ink.
MedMen CEO Adam Bierman downplayed the devaluation, and says it was his choice to do so. Even though the underwriters at Canaccord were on the hook for the risk that came in the form of the sudden stock value drop, Bierman says it didn’t “sit right” with him, and so he chose to balance the scales at his expense.
In the new deal, the company stands to net $75 Million (down from $130M), and will create more dilution of its existing shareholders’ units. This is a lose/lose for MedMen and its current investor base, but is more likely a reflection of the market’s reaction to the company’s illogical business model than it is a reflection of Bierman’s fair nature.
They have 19 licensed cannabis facilities operating in 13 states with imminent plans to expand that to 66 retail outlets, but here’s the catch. . . none of them are profitable.
That’s right, in an industry where 90% of legal dispensaries report profitability, and 40% of them can claim profits in excess of $500k+/yr, somehow MedMen’s mids aren’t making money. They recently reported a quarterly revenue of $21 Million, but posted a net loss of $79 Million. At that rate they only have about two months of assets on hand.
Yet, they continue to expand, mostly though stock sell-offs like we are witnessing now.
The company also claims to have 800,000 sq. ft. of planned cultivation space, but only a fraction of that is actually already built out and in operation. If they can get that size canopy up and running, and if they can then sell that product directly through their expanding list of retail outlets, there is a potential windfall of profit.
So will the gamble pay off?
Will these costly acquisitions and rapid expansion provide the path to profitability?
These uncertainties have many investors leery, and that hesitation is what probably forced MedMen to cut the value of their latest capital raise.
Their next quarterly report is due on November 29th, and will certainly answer those questions, and more.