MedMen Enterprises (NASDAQOTH: MMNFF) probably can't get enough of being compared to Apple. The cannabis retailer's upscale stores and super-high sales per square foot in those stores have earned it a nickname -- "the Apple Store of weed."
But MedMen's latest effort ended up being much more like Apple's ill-fated personal digital assistant Newton than any of Apple's successes. MedMen hoped to raise $120 million in a recent financing round. Instead, the company had to settle for 38% less -- and it lost its CFO along the way. Is "the Apple Store of weed" a buy after its financing flop?
MedMen ended its fiscal year 2018 on June 30 with cash and cash equivalents totaling $79.2 million. With the company continuing to lose money each quarter and using cash to help fund acquisitions, it only made sense that MedMen would opt to go to the well again with another financing round.
The idea was to issue enough new shares and warrants to raise 120 million in Canadian dollars. To achieve this goal, MedMen planned to price the units, which include one class B voting share and one class B purchase warrant, at CA$6.80 and the strike price of the warrants at CA$10. Instead, the company had to slash the size of the funding round to CA$75 million, including dropping the unit price of the offering to CA$5.50 and the warrant strike price to CA$6.87.
Did MedMen mess up the financing transaction that badly? Not really. CEO Adam Bierman chalked it up to the overall market downturn. Bierman told New Cannabis Ventures, "Shortly after the announcement, the global market experienced a significant sell-off, and as we ended last week the investors that bought that deal would have been underwater."
In the middle of all of this, MedMen CFO James Parker resigned. Parker had been with the company since July 2017. Bierman stated that Parker's departure wasn't connected with the financing transaction changes. MedMen appointed Jim Miller as interim CFO. Miller joined the company in January 2018 as vice president of accounting.
The bigger picture
The interesting thing about MedMen's scaling back of its funding deal is that it didn't have to change anything. This was a bought-deal financing, which means that the underwriters of the transaction assume all of the price risk. MedMen, though, felt that repricing the deal would be fairer to new shareholders.
Individuals who buy these newly issued shares will own part of a rapidly changing business. MedMen already operates in California, Nevada, and New York. The company has been busy scooping up additional properties and businesses to expand into other states, including Arizona and Florida.
The most transformative deal for MedMen, though, is its planned acquisition of PharmaCann. Assuming there are no snags, this will be the biggest acquisition in the history of the U.S. cannabis industry. It will make MedMen the largest marijuana business in the U.S., with operations in 12 states. The company will also hold licenses to operate up to 66 retail locations and 13 cultivation/production facilities.
Investment firm Cowen projects that the U.S. marijuana market will total $75 million by 2030. With the PharmaCann acquisition, MedMen will be a leading cannabis retailer in states representing more than 50% of that addressable market.
While MedMen's primary focus is on the huge U.S. market, the company has its sights set on Canada as well. MedMen and Cronos Group are partnering to launch retail cannabis stores throughout Canada to serve the country's recreational marijuana market.
Is MedMen a buy?
MedMen's funding flop isn't a reason to stay away from this marijuana stock. The company had a good reason to change the terms of the deal. But is MedMen stock a smart pick now that it's trading at a much lower level? Not necessarily.
The latest financing transaction highlights two major downsides for buying MedMen stock. First, the deal reminds investors that MedMen isn't profitable yet. Revenue growth is great, but at the end of the day, a company has to keep some of that revenue. MedMen isn't -- at least not yet. Second, the financing points to the likelihood of even more dilution for the stock: The PharmaCann deal will be an all-stock transaction.
Over the long run, MedMen could be a huge winner as the U.S. cannabis market expands significantly. For now, though, I think it's best to give "the Apple Store of weed" a little more time before buying the stock.
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