As recently as six months ago, obtaining financing in the marijuana industry wasn't easy. Prior to the legalization of recreational marijuana in Canada, and the official launch of adult-use weed sales in mid-October, the only consistent means of raising capital for pot stocks was to turn to the secondary markets. In other words, this meant issuing common stock, convertible debentures, stock options, and/or warrants.
However, over the past six months, we've witnessed new forms of financing come to life. Banks in Canada have been more willing to offer nondilutive financing options to some of the largest marijuana stocks, while partnerships have, in rarer instances, led to serious cash infusions.
Upscale dispensary chain MedMen lands a major investment partner
Roughly 10 days ago, on March 22, U.S.-based upscale vertically integrated cannabis dispensary MedMen Enterprises (OTCBB:MMNF.F) got a large capital infusion of its own.
As announced by the company, private equity investment firm Gotham Green Partners (GGP), which has made about a half-dozen investment deals to date, is supplying MedMen with up to $250 million (that's U.S., not Canadian, dollars) in a secured convertible credit facility that'll be divvied out to the company in three separate tranches ($100 million first, and then two $75 million tranches) over the course of perhaps a little over a year. The notes will bear an interest rate of LIBOR plus 6%.
MedMen plans to use the capital it's receiving to:
- Open stores where it currently possesses licenses, with a strong focus on the Florida market.
- Integrate assets from acquisitions, including its $682 million PharmaCann deal, which should close in 2019.
- Support the introduction of higher-margin in-house products.
- Make acquisitions that would support its geographic expansion in core markets.
- Consolidate its supply chain in order to improve operating efficiency.
Wall Street cheered the news, with MedMen's stock rising an aggregate of 8% in the two days immediately following the announcement. But there's more to this investment than meets the eye. Here are four things about MedMen's deal with GGP that you may not have considered.
1. There was a connection between GGP and MedMen before this deal
What you might not realize about Gotham Green Partners is that co-founder and managing member Jason Adler is also on the board of directors for Cronos Group (NASDAQ:CRON) as a member of the audit committee and compensation committee.
Why does this matter, you ask? Back in March 2018, MedMen and Cronos Group formed a joint venture. This first-of-its-kind cross-border joint venture was designed to allow MedMen to continue to develop branded products, with Cronos aiding in the introduction of the MedMen brand into the Canadian marketplace, as well as gaining access to MedMen's upscale business model in Canada. Although we haven't heard much about this partnership since it was forged a year ago, Adler, having a front-row seat on the board at Cronos, may have encouraged his team at GGP to take the plunge with a $250 million investment into MedMen.
2. Ultimately, it could still be dilutive to investors
Secondly, although it looks as if MedMen just solidified its near-term cash position, it's important for investors to understand that this could be just a glorified means of diluting its shareholders. As noted in MedMen's press release:
All or a portion of the Notes (including all accrued interest thereon) will be convertible, at the option of the holder, into Class B subordinate voting shares of the Company at any time prior to the close of business on the last business day immediately preceding the Maturity Date.
The conversion price listed for first tranche is equal to 115% of the lesser of $3.10 per share, or the closing price of the subordinate voting shares on the trading day immediately preceding the closing date. As for tranches two and three, the conversion price is the "equal or lesser of a) 115% of the 20 trading day volume weighted average trading price of the Subordinate Voting Shares as of the trading day immediately preceding the data of issue of such tranche, and b) $7.00."
In other words, MedMen has the right to issue additional debt or shares to pay the interest on these convertible securities, but more importantly, GGP retains the right to convert its debt into common stock, thereby ballooning MedMen's outstanding share count.
3. This capital will go quickly
Don't think for a moment that $250 million in capital is going to last MedMen for all that long. Even though it's an eye-popping investment figure in the cannabis industry, opening new retail locations and making acquisitions have been eating up MedMen's capital at an extraordinary pace.
Despite reporting $51.4 million in revenue through the first six months of fiscal 2019, which is more than tenfold higher than the same six-month period in 2017, operating expenses tied to opening new retail locations, maintaining existing locations, and managing its cannabis supply chain exploded higher from $16.6 million through Q2 2018 to $150.7 million through Q2 2019. All told, MedMen has lost more than $125 million from operations in just a six-month period. Extrapolate that out over a full year, especially with its desire to push into Florida's medical marijuana market, and you could see the entirety of this $250 million burned through in no time.
In short, this may not be the last time we see MedMen turn to raising capital for its near-term cost-intensive expansion plans.
4. MedMen still has a long way to go to differentiate itself in the dispensary space
Fourth and finally, don't think for a moment that a $250 million investment from GGP automatically vaults MedMen into the pole position among vertically integrated dispensaries.
On one hand, MedMen's sales per square foot, which have been higher than Apple stores on more than occasion, look great. Clearly, MedMen's focus on normalizing the cannabis-buying process, as well as targeting a more affluent clientele who isn't necessary tied to traditional cannabis culture, is working.
But MedMen isn't the only vertically integrated dispensary chain that's expanding at a breakneck pace. Just 10 days prior to MedMen landing its $250 million investment, Harvest Health & Recreation (OTC:HRVS.F) announced that it was acquiring privately held Verano in an all-stock transaction worth $850 million. Assuming the deal closes, the duo of Harvest Health and Verano will have about 70 dispensaries open by the end of 2019, along with 13 cultivation and 13 processing facilities. In total, the combination will give Harvest Health 123 retail licenses, which is nearly four dozen more than MedMen will have once its PharmaCann deal closes.
The vertically integrated dispensary space in the U.S. is probably going to take years to sort out, and there are no guarantees at this point that MedMen is necessarily a winner for investors.