This company has dropped plans for a big acquisition as the market for cannabis stocks falters. Meanwhile, though, its established base of U.S. sales bodes well for future expansion in that steadily legalizing market.
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MEDMEN ENTERPRISES INC., $1.70, symbol MMEN on the Canadian Securities Exchange (Shares outstanding: 156.8 million; Market cap: $266.6 million; TSI Cannabis Quality Rating (CQR): ; www.medmen.com), is a U.S. cannabis retailer with operations across the U.S. and flagship stores in Los Angeles, Las Vegas and New York.
The Canadian Securities Exchange (CSE), formerly the Canadian National Stock Exchange (CNSX), is one of our country’s alternative stock exchanges. You can trade CSE-listed stocks through your broker. You can also get stock quotes at www.thecse.com.
MedMen has its own line of cannabis products, sold under the brand names [statemade], LuxLyte, and MedMen. Its products take several forms: vape pens, drops, flower and pre-rolls. The company also classifies its cannabis by seven mood altering effects—from “max” to “zzz.”
In October 2018, MedMen agreed to acquire PharmaCann, a cannabis company licensed in eight states, for $682.0 million. Following that purchase, the company would have been licensed for 84 retail stores (35 currently operating), 17 cultivation facilities, and 15 production facilities across 12 states.
However, on October 8, 2019, MedMen and PharmaCann announced that they had mutually agreed to terminate the transaction. The recent drop in cannabis stocks has made in difficult to make acquisitions with stock as payment, and not only that, some of PharmaCann’s assets would require significant expenditures.
As well, as part of the agreement to terminate, and in exchange for satisfaction of amounts funded by MedMen to PharmaCann under a previous $21 million line of credit, PharmaCan has agreed to pay a termination fee to MedMen through a transfer of the membership interests in entities holding the following assets: a cultivation and production facility in Hillcrest, Illinois; a retail license in Evanston, Illinois; and a license in Virginia.
Cannabis in Illinois is currently legal for medicinal use and will become legal for recreational usage on January 1, 2020. The ownership of PharmaCann’s grow facility in Hillcrest gives MedMen an edge in Illinois’ recreational market, as existing operators will be the only ones allowed to grow weed for recreational customers. The law does not allow any more large cultivators to supply the Illinois market until 2021 at the earliest, and then only if demand warrants.
MedMen already operates one retail location in Oak Park, Illinois. As part of Illinois’ recreational cannabis law, current operators may also apply to open a second storefront to serve customers when sales start January 1, 2020.
The company’s acquisition strategy has pushed up its revenue. In the quarter ended March 30, 2019, total revenue jumped 155.1%, to $36.6 million from $14.3 million, a year earlier. (All figures except share price and market cap in U.S. dollars.) Meanwhile, losses widened to $23.7 million, or $0.20 a share, in the latest quarter, from $18.4 million, or $0.15. That reflects the continuing expansion of the company retail network and its supply chain.
However, an emerging problem for cannabis stocks in general, and including MedMen, will be raising money to continue to fund their ongoing losses. MedMen holds cash of $21.9 million. However, it’s using up its cash at a rate of roughly $50 million per quarter. The company is drawing down its line of credit right now, but will likely need to soon undertake dilutive share issues at today’s lower share prices.
Meanwhile, the company is operating successfully in California where it has holds a roughly 7% share of the state’s $11 billion a year cannabis market. MedMen now aims to replicate this success in other states.
There are currently 33 U.S. states that have already legalized medical use. About 11 of those, as well as the District of Columbia, have also embraced recreational consumption. It’s likely that the movement towards legalizing cannabis nationally in the U.S. will continue—driven by public opinion, demand from patients, and the industry’s experts and advocates.
Future expansion of the U.S. market—through individual states or federally—holds significant potential for sellers like MedMen.
Shares of many marijuana stocks may rebound and move higher as momentum traders buy the widely followed stocks on the latest upswing. However, considering their current sales, many Canadian producers have very high “market caps” (the value of all shares outstanding). That means they need huge revenue growth to even justify their current stock prices. If revenues merely hold steady or rise only slowly, their stock prices will be vulnerable.
This includes MedMen—although the gap between its market cap and its sales isn’t as big as it is for many of its competitors. The company’s more-established position in the marijuana field is also a plus. That could also make the company a potential takeover candidate. While that alone is not reason enough to buy the stock, it adds to MedMen’s appeal.
MedMen Enterprises has a 3-Leaf Cannabis Quality Rating (CQR). The stock is a speculative buy for aggressive investors who want exposure to the U.S. marijuana industry.
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