What's the Deal with MedMen?

The beleaguered cannabis industry heavyweight saw its share price collapse over the course of 2019. And things have only gotten worse in 2020, as the company faces down a vendor payment crisis and the acrimonious departure of controversial CEO Adam Bierman.

Although the vertically integrated cannabis retailer, MedMen Enterprises Inc (CSE:MMEN), once stood tall over the competition, the company looks like it may soon be on its last legs.

Its troubles began early last year, after the company was blindsided by the industry-wide downturn that plagued the cannabis market for most of 2019. Many publicly traded cannabis companies suddenly found themselves facing a serious capital crunch, as investors began to recognize that certain pot stocks were highly overvalued.

This was further compounded by the arrival of the "Vape Criris" in late 2019, along with the realization that legalization at the federal level—in the majority of jurisdictions—is likely to arrive later than originally expected.

During that timeframe, we stopped payments to certain vendors as would be commonplace in the restructuring of a retailer. We turned over our accounts payable to a restructuring consulting firm (FTI Consulting) so that we could preserve and allocate the cash as we got through and out the other end of restructuring. Former MedMen CEO, Adam Bierman

Unfortunately, MedMen was hit particularly hard by the drop-off in investor confidence, as the company's business model was built around aggressive expansion aimed at steadily amassing market share before cannabis is legalized at the national level.

Then things took a turn for the worse in October 2019, when MedMen's bid to become the largest cannabis company in America—via the acquisition of PharmaCann—fell apart after both companies elected to mutually jettison the deal.

Industry experts believe that the decision to scuttle the planned acquisition was made in response to the declining price of MedMen shares—which were trading at 1.42 compared to approximately 4.40 when the deal was first announced in October 2018—making the all-stock agreement either too expensive or too dilutive for the company to pursue.    

The fallout from the failed PharmaCann deal also came packaged with the announcement that MedMen had abruptly terminated its Chief Financial Officer (CFO), Michael Kramer, who was subsequently replaced by the company's former Chief Corporate Development Officer, Zeeshan Hyder.

Disclaimer: Past performance is not an indicator of future performance.

At the time, MedMen also walked away from the deal with several juicy assets from the PharmaCann portfolio, including cultivation and retail licenses, a cultivation and production facility in Illinois, and a retail location in a Chicago. This led MedMen co-founder and now former CEO, Adam Bierman, to announce that the company was pivoting in a new direction to execute its ongoing expansion strategy.

 "Looking at the PharmaCann portfolio today, Illinois has emerged as the most attractive opportunity for our longer-term strategic growth plan," Bierman said.

"The cannabis sector has evolved tremendously since we first announced the PharmaCann transaction and based on the current macro-environment and future opportunities that exist for our business, we believe it is now in the best interest of our shareholders to deepen, rather than widen, our Company's reach."

However, in exchange for these consolation prizes MedMen agreed to cover a $21 million line of credit that it had previously extended to PharmaCann, which many investors viewed as being far too high a price to pay.

Vendor Payment Crisis

The next big blow came in January 2020, when it was revealed that the company had fallen behind on its vendor payments and was offering compensate its manufacturing partners with MedMen stock instead. 

The story broke when anonymous emails were uncovered containing allegations that MedMen had been sending letters to its suppliers and contractors requesting payment extensions or renegotiations, along with an offer to pay in stock in lieu of cash debts still owed.

This was then further exacerbated when a spokesperson for 710 Labs—which is still owed more than $150,000 by MedMen—publicly announced that the company had not been paid for its products since September 2019.

As part of the restructuring, the company has been actively working with its vendor partners on modifying payment terms, which in some cases include stock consideration. Like other retailers, the company is in constant communication with its vendors and is working towards solutions that are in the best interest of both parties. MedMen Chief Financial Officer, Zeeshan Hyder

The company would eventually respond to 710 Labs in January 2020, when MedMen issued an email seeking to negotiate "creative arrangements" with vendors, offering premium shelf space in exchange for agreeing to certain repayment terms.  

According to an email sent by MedMen's Senior Director of Strategic partnerships, Ben Shultz, to a vendor who wished to remain unnamed, the company is "sorry for the delay".

"We received our payment schedule from our consultant's FTI and had them signed off by our CFO. I wish I had better news here, but unfortunately, we don't have payments scheduled for you in the near term."

"We are working on longer cash term infusions, but it is unlikely that we will be able to pay off these invoices before Feb/March. That's shitty news and there's no sugar-coating it, but I have to be the messenger of bad here. If and when we can allocate funds to pay off our AR, we will be in touch," Schultz said.

This was exacerbated further by the announcement that MedMen had engaged the services of a business advisory firm, FTI Consulting, to help settle its debts, rein in corporate costs and restructure its financial arrangements.

While this was long overdue—as MedMen managed to burn through a staggering $44 million in operational expenses during Q3 2020—the move only served to further inflame investor's fears, and many began to wonder if the ship's captain was asleep at the wheel. 

This fear was seemingly confirmed by Adam Bierman during an interview with Business Insider, when the now former MedMen CEO stated that investors had been "right to punish the stock".

"The investor community and [Wall] Street, they don't really get anything wrong. If our stock is trading at a tremendous discount to our peer set, there's a reason for it," Bierman said.

Adam Bierman on the Chopping Block

By this point, it was clear that drastic action needed to be taken, and on 31 January 2020 MedMen announced that the company's co-founder and CEO, Adam Bierman, would be stepping down from the role.

The resignation went into effect on 1 February, with MedMen COO Ryan Lissack taking over the reins as interim CEO until a permanent replacement can be found. Additionally, Bierman also agreed to surrender all of his Class A super voting shares to the company, although he will still continue to serve on MedMen's board of directors.

The Board supports both Adam's decision to step aside for a new CEO to lead the company, and his and Andrew's decision to surrender their voting rights to give all shareholders a stronger voice. This evolution will provide Adam the space to contribute to the future of MedMen and extend his commitment to the industry that he has helped pioneer. MedMen Executive Chairman Ben Rose

When the announcement broke, Bierman stated that he continues to believe that MedMen is "positioned to thrive".

"It's time for the next iteration of leadership to capitalize on the opportunity we have created."

"This has been an incredible journey and I will continue to be inspired by those around the globe working to make our world safer, healthier and happier through access to legal, regulated cannabis," Bierman said.

Investors hoped that the dramatic shakeup would turn things around for the company, as Bierman departed amid accusations of a toxic corporate environment and gross financial mismanagement.

Under his leadership the company was hit with several highly damaging lawsuits, including one brought by MedMen's former CFO, James Parker, who made multiple disturbing allegations.

During his time as CFO, Parker claims that Bierman and MedMen President Andrew Modlin forced him to engage in a number of shocking activities, including:

  • Paying unlicensed brokers to sell the company's stock.
  • Wiring money to a consultant to artificially prop up MedMen's share value.
  • Using company money to pay for premium chauffer services and luxury cars for both founders.

Although MedMen denied the allegations made in Parker's lawsuit—dismissing it as the fabricated accusations of disgruntled former employee—many believe that Bierman was likely forced out by private equity firm Gotham Green Partners, which previously extended a hefty $280 million in financing to the company.

And at first glance the change in leadership seemed to be working, as MedMen stock began to trend upward on the day Bierman's departure was announced, climbing by 9.30% in a single day. However, his excision ultimately failed to stop the rot, and these initial gains would soon evaporate before the stock slid even lower in value, reaching just 0.51 a share by 7 February.

And to make matters worse, the company subsequently announced that it no longer has access to the remaining $115 million in funding from Gotham Green Partners that it had yet to utilise, which means that MedMen could soon be facing another cash crunch. 

Bierman's exit from the company also raised serious questions about the balance of power behind the scenes, despite MedMen's attempt at addressing the issue by having both founders return their super-voting shares.

The news of this change should have sent share prices higher—as MedMen has previously drawn considerable criticism for its ownership structure, which gave Bierman and Modlin almost total control of the company—but instead it only served to further complicate the issue.

While Bierman has already surrendered his super-voting shares, Modlin's won't be returned to the company until December 2020, with MedMen's executive chairman Ben Rose being granted proxy control over the shares until this time.

Unfortunately, Rose is also the chief investment officer of Chicago-based investment firm, Wicklow Capital, which has provided financing to MedMen in the past. This left many questioning whether the move has "effectively shifted" voting control of MedMen to Wicklow until the end of 2020.

As a result, investor confidence slid even further, as MedMen has already faced similar accusations that Gotham Green Partners asserts an outsized influence on the company's decision making process.

Industry Punchline or Potential Buy?

In the past, we've always been fairly bullish on MedMen, having previously identified them as an early market leader in the cannabis retail space—despite how overvalued the stock originally was—due to the company's superlative branding and product positioning.

In June last year we even predicted that the stock could deliver some outsized gains in 2019, based on its solid top line growth, strong public awareness and new introduced cost-cutting measures.

However, eventually it always comes down to execution, and in that department MedMen has been sorely lacking. Instead of delivering substantial growth, the stock tanked by 87% over the last 12 months, as the company was hit by a succession of lawsuits and high-profile resignations, not to mention a failed acquisition and vendor payment crisis.

Additionally, a burn rate analysis conducted by MJBiz Investor Intelligence in December 2019 concluded that the company only had enough cash on hand for another four months' worth of funding.

Despite all this, many still considered the stock to be a speculative buy, while Seaport analyst Brett Hundley claimed that investors who are willing to take a long position could see a "huge upside".

Although, this was before the company announced that Gotham Green Partners had revoked its remaining $115 million credit line, which has put MedMen in a very tough financial position.         

While it is entirely possible that the pot stock could still turn things around, at this point we would advise most investors to stay well away from MedMen until the company is able to address the cavalcade of issues that have continuously chipped away at its value for the last 12 months.

Having said all that, MedMen's current low share price may still offer an attractive opportunity for long term investors who are capable of riding out the risk and are looking to initiate a new position or average down on their existing investment.   

This could be one of the best investing opportunities of 2020

Legislative changes are blowing through the US, and with it, an ever-increasing number of states legalising cannabis for recreational use.

With the success seen in Illinois, which legalised for adult-use on January 1 and saw products moving off the shelf at an unprecedented rate, this company is primed to take advantage of the booming US recreational market.

They have secured partnerships with the biggest cannabis companies in the US, and their portfolio is second to none.

And with the sector-wide pullback of 2019, this company is now at a bargain-basement price.

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Hugo Gray
Hugo Gray

Hugo Gray is a Melbourne-based journalist with a body of work that covers a diverse range of topics, including immigration law, sex technology, and now the rapidly expanding cannabis industry.

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