This has been both a game-changing and a heartbreaking year for the marijuana industry and investors.
In one respect, the cannabis industry has gained validity like during no other year before it. After years of promises, Prime Minister Justin Trudeau and Parliament were able to make recreational marijuana's legalization a reality in Canada. Although the industry is still in the relatively early stages of a rapid capacity expansion, it's expected to begin bringing in billions of dollars in added annual sales by the early part of the next decade.
Progress was made in the U.S., too. Missouri and Utah became the 31st and 32nd states to legalize medical cannabis, while Vermont and Michigan increased the number of adult-use-legal states to 10. Even with the federal government maintaining its Schedule I classification on cannabis, the industry is thriving in the United States.
Then again, marijuana stocks had what can only be described as a miserable year. Many are down by 20%, if not more, year to date.
Summarizing MedMen's year
Though it hasn't been publicly traded for the entirety of 2018, one such pot stock that's had a challenging year, at least based on its share price, is upscale retailer and grow facility operator MedMen Enterprises (MMNFF 1.41%). If we were to look back on MedMen's 2018, it would be clearly defined by three key events (presented in chronological order).
1. A joint venture with Cronos Group
To date, MedMen has focused its attention in three U.S. states (California, Nevada, and New York) and is attempting to normalize the cannabis-buying experience. It currently has 14 open stores, with two additional ones in development in Nevada. As of its most recent quarter, its sales per square foot actually topped what you'd find in the average Apple store, so it's obviously doing something right.
However, MedMen has always had its sights set on Canada, which is set to become a $5 billion-plus market within just a few years. By creating a joint venture with Cronos Group, MedMen will bring its unique cannabis shopping experience to Canada while providing Cronos with a platform to feature its premium recreational products. Cronos will use its keen insight into the Canadian pot industry to bolster MedMen's chances of success.
2. A reverse takeover listing on the Canadian Securities Exchange
Arguably the biggest event of the year was MedMen's reverse merger that took it public on the Canadian Securities Exchange on May 29. By becoming a publicly traded company, MedMen was able to raise approximately $110 million that can be used to expand its retail and cultivation presence. As a reminder, no interstate transport of weed is allowed in the U.S., meaning that vertically integrated dispensaries like MedMen need to operate cultivation farms within the same states in which they also have retail locations.
Why not list in the U.S., you ask? The simple answer is that the New York Stock Exchange and Nasdaq won't allow marijuana stocks that operate in the U.S. to list on their exchanges since marijuana is still a Schedule I substance. This is why U.S. pot stocks have been looking to Canada to list their shares.
The biggest advantage of going public for MedMen was the ability to more easily raise capital. Aside from the money raised during its reverse takeover, MedMen can also lean on bought-deal offerings -- i.e., the sale of common stock, convertible debentures, stock options, and/or warrants -- in order to raise additional capital.
3. The biggest U.S.-based marijuana deal in history
Finally, who can forget the Oct. 11 announcement from MedMen that it was acquiring privately held PharmaCann for $682 million in what would be the largest U.S.-based cannabis deal in history?
With its eyes already set on opening around 50 retail stores in the U.S. by the end of the decade, the PharmaCann acquisition adds 18 retail licenses and eight new cultivation facilities in seven states and expands MedMen's reach to six new states. In total, MedMen will have 66 retail licenses, 13 cultivation facilities, and a presence in one dozen states, including the recently legalized state of Michigan. It'll also have more than 800,000 square feet of planned cultivation and production capacity that'll allow it to launch an in-house premium brand.
Since PharmaCann and MedMen share a similar vision for growth and have reasonably similar production platforms, MedMen also anticipates recognizing cost synergies from the combination. Though the transaction faces regulatory and state-level hurdles, it's expected to close between March and October of next year.
The big question
Of course, the big question is whether MedMen Enterprises belongs in investors' portfolios in 2019. To be perfectly blunt, I don't think so.
Now, to be clear, MedMen does have a concept I can get behind. Creating a unique buying experience as well as developing its own brand and expanding via acquisition is a smart long-term strategic move.
The problem is that MedMen's expansion is going to cost a pretty penny for probably the next couple of years. Opening new stores, developing new cultivation facilities, acquiring companies, and having to consistently raise capital are all going to take their toll on shareholders. In the fiscal first quarter, MedMen recorded $21.5 million in sales but tallied $73 million in operating expenses, including a 12-fold increase in general and administrative expenses from the prior-year quarter. In other words, MedMen is going to be losing money for years, and that's not something that fundamentally focused investors are going to care for.