With their bold red lettering and flashy designs, MedMen has emerged as a prominent household name in the cannabis industry. Founded by Adam Bierman and Andrew Modlin in 2010, the two cannabis entrepreneurs foresaw a green rush in opening dispensaries and went on to open its first store in West Hollywood. The sophisticated design of their storefronts has intrigued many to step through its doors to make a purchase. When one enters a MedMen location, he is greeted with sleek wooden tables and top-tier products under glass. Each table has assigned tablets that help a user learn everything there is to know about what they are about to purchase. As MedMen grew in popularity, so did the company’s model. In December 2018, the company participated in the largest acquisition of the cannabis industry to date with an all-stock transaction of PharmaCann valued at $682 million. The deal doubled the number of states where MedMen had licenses to 12.
Now we all know that not everything that shines is gold; so how well is this first-mover actually doing?
Let’s take a glance into the company’s fundamentals
For Q4 2018, MedMen reported a revenue of $29.93 million. This is a 28% increase from the previous quarter of $21.46 million. In the same quarter, gross profits had also increased by $6 million or 39% from its previous quarter. So far so good right?
But was their increase in gross profit enough dough to cover the company’s expenses? The company had a cash burn of $74 million for the quarter. Let’s read that again- $74 million US dollars. Is this sustainable? Let’s use a basic financial ratio — The current debt to equity ratio comes in at 0.3567. This fairly low ratio is attractive to retail investors as the company is of less risk to shareholders because of its lower leverage. With a Current Ratio of 1.642, the company can cover its current liabilities with its current assets and proves it is sustainable for now. However, it is evident the company is going to need to take on further financing to keep the ship alive.
So What is Going on Internally?
The Adam and Andrew show
MedMen is facing a lawsuit that was brought upon by the former CFO, James Parker. Mr. Parker alleged that the company violated cannabis regulations in addition to the founders paying themselves millions of dollars off the company’s books. Further, the company has been scrambling to find ways to keep up with its cash burn as well. Recently, MedMen moved to take on a senior secured convertible credit facility of up to $250 million, that will have up to 5 tranches. This note comes with a 36-month maturity per tranche as well as 50% warrant coverage. Each tranche is contingent on the company completing milestones of internal growth and expansion. The company has also been seen to be selling real-estate throughout the nation. The company noted that this was to create more liquidity, but the financials clearly paint a better picture.
MedMen also faces the challenge of the average retail consumer. In states where the storefronts exist, consumers are faced with a decision of paying crippling taxes by walking through the front doors or turning to the underground market to purchase the same flower. In order to combat this, the company is planned to roll out a loyalty program to capture recurring customers.
Moving forward, the company is still faced with a steep battle of high cash-burn and skepticism. As you can tell, the company is frantically pursuing methods to clean up its books. As Scarface had said, “Don’t get high on your own supply”, MedMen is seen to be doing just that. The future does not look bright for this cannabis giant.
Author: Dmitriy Slobodskiy