Why MedMen Is Selling Its Assets

On December 31, Medmen’s (MMEN) (MMNFF) share price rose by 22.81% to 0.70 Canadian dollars on the CSE (Canadian Securities Exchange). The company’s shares also jumped by 21.39% to $0.53 on the US OTC (over-the-counter) exchange.

Currently, MedMen’s shares are 81.77% lower than its 52-week high of 3.84 Canadian dollars on the CSE. The stock is also 94.44% above its 52-week low of 0.36 Canadian dollars. The stock is also down 86.2% compared to its 52-week high of $3.84 but 47.2% higher than its 52-week low of $0.36 on the US OTC market.

As reported by MarketWatch, most of the cannabis stocks rallied on the last day of 2019. The Horizons Marijuana Life Sciences Index ETF (HMMJ), the Cannabis ETF (THCX), and the ETFMG Alternative Harvest ETF (MJ) closed up by 7.1%, 5.93%, and 5.61%, respectively. Prominent cannabis companies Aurora Cannabis (ACB), Canopy Growth (CGC) (WEED), and Cronos Group (CRON) also posted double-digit gains on December 31.

However, 2019 proved to be disastrous for MedMen Enterprises. The stock lost 81.82% of its value on the CSE in 2019. The stock was also down by 81.1% in 2019 on the US OTC. MedMen Enterprises, however, gained 18.64% on the CSE and 17.15% on the US OTC in December 2019.

Cash crunch

On December 31, Investor’s Business Daily highlighted capital crunch–related challenges ahead of the cannabis sector in 2020. At MJBizCon in December 2019, Entourage Effect Capital’s managing director, Codie Sanchez, explained that cannabis companies would need to have 12 months of cash to face the difficult economic environment.

According to MJBiz Investor Intelligence analysis, MedMen’s cash balance can sustain its operations only for four months. In April 2019, the company entered into a definitive agreement with a private equity firm, Gotham Green Partners, for a $250 million senior secured convertible credit facility. However, investors are concerned about the amount of direct control Gotham Green Partners exerts on the company’s operations.

Multiple amendments to the Gotham Green deal made it highly dilutive for MedMen’s investors

In July 2019, MedMen secured an equity commitment of $30 million from Gotham Green Partners, with participation from Wicklow Capital. The total value of committed funds reached $280 million. Until then, private equity had provided $100 million in funds to the company.

However, MedMen Enterprises reduced its conversion price pursuant to Tranche 1 of the facility, from $3.10 to $2.55. The conversion price for the $30 million commitment was set at $2.37. The changes reflected the significant deterioration in the company’s share prices since the completion of the deal.

In August 2019, MedMen announced that it closed the equity placement with Gotham Green Partners and Wicklow Capital at a conversion price of $2.05 for $30 million in proceeds. Subsequently, the available credit line is now worth $250 million.

In October 2019, MedMen again announced amendments to the senior secured convertible credit facility. While the total available funds did not change, the companies changed the size of their tranches. Tranche 3 was worth $10 million, while Tranche 4 was worth $110 million.

The companies also loosened the restrictions on additional borrowing, equity dilution, and reduced minimum cash balances for increasing MedMen’s balance sheet flexibility. On November 27, the company secured $10 million in funds from Tranche 3 of the credit facility.

MedMen is selling non-core assets to raise capital

On December 27, MedMen announced plans to raise $74 million in capital through the sale of non-core assets and execution of a previously announced equity placement. The company expects to garner $54 million in gross proceeds by divesting non-core licenses, including its Arizona license and its cultivation and manufacturing license in Illinois.

MedMen also plans to evaluate its non-core assets in other states. The company plans to focus on its core markets of Nevada, California, Florida, Illinois, New York, and Massachusetts.

On December 11, the company announced an equity placement of $27 million. However, the company announced plans to reduce the equity dilution to $20 million on December 27.

MedMen is also restructuring operations for survival

On November 15, MedMen announced a detailed restructuring plan in a bid to reduce spending and attain profitability. Then, the company announced plans to divest non-core assets for gross proceeds of $22.0 million.

The company announced the sale of a stake in Treehouse REIT, monetizing minority investments, and licenses in non-core markets to raise capital. Plus, the company also announced cost optimization, increasing asset-level EBITDA, limiting cash outlays, and investing in employees and culture as part of its restructuring plan.