MedMen is, without doubt, one of the top contenders to dominate the highly fragmented US market. They were one of the first US companies to list ob the Canadian Stock Exchange and at the time of writing, the share price is US$5.57 (OTC:MMNFF) and CAD$7.30 (CSE:MMEN).
MedMen is a vertically integrated US focused, multi-state producer with a strong focus on the retail market and the operation of its stores and dispensaries. Given that Cannabis is still illegal at the Federal level, and hence cannabis cannot be transported across State Lines, MedMen is vertically-integrated in every State it operates in.
It is particularly strong in its home state of California, with high profile stores in Beverly Hills and other prime locations in and around Los Angeles.
MedMen has been aggressively expanding with a combination of organic growth in its operational states and through acquisition. In October, the biggest acquisition in the US occurred when MedMen bought PharmaCann for $682 million and in doing so, became the biggest Cannabis company in the US.
A horrific IPO
MedMen IPO'd with great fanfare on the 29th of May this year. With a market valuation of $2.5 billion, they positioned themselves as one of the leading contenders to dominate the US market. However the IPO was a disaster as shareholders were appalled (massive euphemism ) with the infamous share structure and the executive compensation packages.
The co-founders, Adam Bierman and Andrew Modlin, along with the Chairman, would hold Super-Voting shares, meaning they controlled all corporate affairs. In addition, there was a $30 million compensation package for the 3, that would vest over 2 years in equal monthly installments.
Investors were so irate, that the company immediately changed the compensation packages to vest under the following conditions.
- 1/3 of the package would vest once the share price got to CAD$10
- 1/3 of the package would vest once the share price got to CAD$15
- And the final third would vest once the share price reached CAD$20
Although this went a long way to appease the investors and shareholders, this methodology for the vesting of the packages is still fundamentally flawed. In this structure, the management team is more interested in raising the share price in the short term, than they are in protecting investors in the long-term.
They have been aggressively using stock to purchase companies and assets and this is going to have a dilutionary effect on shareholders, meaning the Earnings Per Share will be impacted down the line.
With their purchase of PharmaCann, MedMen now operates across 12 states, with 66 retail stores and 13 cultivation and production facilities. A recent research report by Cowan suggested the US market could be worth over $75 billion by 2025. MedMen now operates in states that that cover more than 50% of the US population.
Their model is to create vertically-integrated businesses that operate in each State. The problem with this is that they cannot currently create economies of scale. For example in Florida, companies can only build cultivation and production facilities big enough to secure their demand. This means they have to create smaller operations which are in turn very costly.
Their model is predicated on their retail brand and associated products. MedMen dispensaries are considered to be the "Apple Stores" of the cannabis industry. With very sleek designs and a very unique ins store experience, they deliver a premium service to their customers. And the retail values speak for themselves.
In their recent investor presentation [link], MedMen reported that across its 14 stores, the average revenue per square foot was USD$6,541. Consider this against Apple at $5,546 and Tiffanys at $2,951 per square foot.
They have secured prime real estate, at a great capital expense, in Los Angeles, Las Vegas and their flagship store on 5th Avenue in New York City, right opposite WeWork's flagship offices. Smart move!
MedMen has grown aggressively in 2018, as it tries to grab land and become the dominant US player. In June, just after their listing, they operated 8 stores in California, 2 in Nevada, and 4 in New York. In July they purchased Florida-based Treadwell Nursery for $53 million, half in cash and half in stock.
Treadwell has one of 14 licenses in the State of Florida, and 1 of 2 licenses in Central Florida. They have cultivation, manufacturing and delivery capability and with their licenses have the ability to operate as many as 30 dispensaries. In addition, they acquired Treadwell's cultivation facility set on 5 acres of land in Orlando.
The Florida market is considered to be on elf the best medicinal markets, given the average population age and demographics. It is estimated to be worth over $1.2 billion by 2020 and this is without recreational legalisation. MedMen now operate against Liberty Health Sciences and Trueleave in Florida.
In early October they announced to the market their acquisition of PharmaCann for $682 million in an all-stock deal. PharmaCann, founded in 2014 has 10 operational licenses in 4 States with licenses to expand into another 4 States. These include Michigan, Ohio, Pennsylvania, and Virginia.
They are the dominant player in Illinois with 6 licenses, 4 dispensaries, and 2 cultivation and production facilities. They are on the of the biggest players in New York with 4 dispensaries and a 128,000 square foot cultivation and production facility.
The PharmaCann acquisition
First off, it created the largest US focused company by both market reach with best in class national footprint. This allows them to leverage their strong retail brand across the country, leveraging off the hype and following created from their Beverly Hills and Manhattan's 5th Avenue stores.
Secondly, it strengthened their cultivation and production capacity to just over 800,000 square feet in States that constrain the number of licenses (and hence supply) awarded to producers.
And then, on October 18th, they expanded their reach in Arizona with a $33 million purchase of Monarch for 20% in cash and the remaining 80% in stock. Monarch, which has cultivation, processing, and dispensary capability, distribute their products to over 60 dispensaries and retail outlets across the State.
Arizona represents one of the largest US States with over 172,000 medicinal marijuana patients and rapidly-growing recreational market.
MedMen entered into a joint-venture with Cronos to form MedMen Canada. The aim is to secure prime real estate in the British Columbia and Alberta provinces and to leverage their extract brands and products (when Canada allows for extracts and edibles from October 2019) to gain market share. MedMen will get its supply from the Cronos cultivation facilities In Canada.
MedMen recently reported their Fourth Quarter and Fiscal Year 2018 financial results. Fourth quarter revenues of $20.6 million were led by the California retail stores, posting an 84% conversion rate for the quarter.
Revenue was up 44% sequentially and 1,317% up year on year, although that figure is boosted by their various acquisitions. But no matter which way you look at it, that is phenomenal growth. However, this growth came with huge operating losses. They lost over $36 million in Q4 of Financial Year 2018, and have lost a cumulative $67 million in 2018, on sales of $39.8 million.
The biggest issue MedMen faces is the raising of capital. Given that cannabis is still illegal at the federal level in Canada, US-centric companies struggle to get debt finance on market-related terms. Consider the following two loans.
Hankey Capital/Stable Road Capital
Bank of Montreal (BMO)
~CAD$44 million (~9.1m warrants)
As can clearly be seen from above, MedMen (like all US companies) is stuck having to get finance from small or mezzanine lenders at very high interest rates, whereas Aurora can simply get market-related finance from a major bank.
But it gets even more expensive when you consider the warrants. The lenders were issued 500,000 warrants as an incentive to lend the funds, and in addition, Stable Road Capital received 8.6 million warrants for consulting services to be offered to MedMen. As you can see, US forms are severely disadvantaged to their Canadian peers when it comes to raising capital.
Consider too the fact that the US legislation requires vertically-integrated businesses in all operational states. By itself, this creates a very capital intensive expansion environment, and when you take into account how expensive the finance to fund this growth is, you start to get a better picture of why the Canadian LP's are poised to dominate.
They have millions of square feet of production space and are already producing at far lower costs, given the economies of scale. MedMen's total production capacity os 800,000 square foot. Aurora has five facilities that are larger than 800,000 square foot. They will already have the supply when able to enter the market and this is going to put huge pressure on the US-based operators.
Protectionism will have to come in the form of brands and owning the retail outlets. This is why MedMen is poised to become one of the dominant players in the US market.
At the time of writing, MedMen's valuation is north of CAD$3 billion, making the company seriously overvalued. However, as you will know by now, ion the cannabis industry and pot stock world, valuations cannot be considered in isolation at this stage of the game.
With organic growth being supported by an aggressive acquisitions strategy (MedMen have been called the "Aurora of the US" given their strategy of buying companies with stock), MedMen is one of the fastest growing cannabis companies currently operating in the US.
The US market is the jewel in the crown of the global cannabis market, and MedMen is very well positioned to become on the dominant players in this market. Strong retail presence, aggressive and provocative marketing of their brand has positioned them superbly for the oncoming recreational greenish currently sweeping across the US.
We are bullish on MedMen and continue to slowly dollar average down as we add to The Green Fund's Paper Portfolio.
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