Can Medmen Avoid Bankruptcy?

Over the past few weeks, there has been a flurry of activity at MedMen corporate. The beleaguered cannabis retailer, which was attempting to become profitable after ousting its founders and CEO in January of 2020, has been navigating employment lawsuits, executive exodus and boardroom in-fighting, with a dollop of weak sales and pandemic protocol on top. The interim CEO Tom Lynch, who was appointed on March 30, 2020, began beefing up the board with A-list members from Whole Foods, the Coffee Bean and Tea Leaf and Salesforce. In the 1st Quarter (fiscal) 2020 earnings report that was released on December 7, 2020, Tom Lynch assured investors, writing, “With the strength of our team and support of our capital partners, we are ahead of schedule with respect to our turnaround plan. As we get closer to achieving company-wide profitability, we remain committed to growing the MedMen brand and maintaining our position as the leading cannabis retailer in the U.S.”
 
While that statement sounds pretty exciting, there are quite a number of red flags that seem to be pointing in the opposite direction, including executive exodus, weak sales, flying pretty close to the trees (low cash) and a painfully weak share price (under 14 cents today).
 
Executive Exodus
On December 18, 2020, CFO Zeeshan Hyder was replaced by Reece Fulgham as Interim Chief Financial Officer. What does Fulgham have that Hyder doesn’t? Restructuring experience. It takes a certain type of skillset (and stomach) for a contentious battle with founders, shareholders, creditors and bondholders. It’s also possible that Hyder just wanted out – to put the whole debacle behind him. Additionally, both Lynch and Fulgham have SierraConstellation Partners as their main gig. SCP is the firm engaged by MedMen to turn the company around. Lynch offered praise to former CFO Hyder, writing, “His steady hand and deep industry knowledge were vital during our turnaround.”
 
On December 16, 2020, two days before Hyder was replaced, Tom Lynch was elected as the MedMen Chairman of the Board. Ben Rosehas resigned as the chairman and from the board effective immediately. In addition to  being the former executive chairman of MedMen, Ben Rose is the Chief Investment Officer of Wicklow Capital, a capital investor in MedMen. The abrupt departure signals discord behind the scenes. Did Hyder resign out of loyalty to Rose?
 
Andrew Modlin (a MedMen co-founder) lost his Class A super voting shares on Christmas Eve (12.24.2020).
 
Executive exodus is a red flag, particularly when the CFO and COB depart at the same time.  
 
1Q 2021 (Fiscal) Revenue
In the quarter ending September 26, 2020, MedMen revenue was up 35.1% sequentially, but down 10.13% on the year. Revenue was $35.6 million for the quarter ending September 26, 2020, compared to $39.7 million for the same period in 2019.
 
How will the last quarter of 2020 fare? The pandemic came roaring back this fall. While many stores remained open, with social distancing and mask-wearing policies in place, there just wasn’t a lot of customer traffic. I made repeated visits to the “flagship” 5th Avenue MedMen store in Manhattan in December and the Venice, California stores in October and November. In every case, the stores were bereft of customers, with no delivery bikes in sight. Weak cash-flow could present a problem for an out-of-court turnaround.  
 
Cash
MedMen had $10.3 million in cash and cash equivalents as of September 26, 2020. The net loss in the most recent quarter was -$30.2 million compared to a net loss of -$83.4 million in the same period last year. While this was an improvement, perpetual fundraising is an expensive proposition, particularly when your share price is in penny stock range ($0.139 USD).
 
The U.S. House of Representatives Decriminalized  Cannabis
Cannabis is becoming more legal in the U.S. The U.S. House of Representatives decriminalized cannabis on December 4, 2020. It’s not law yet, however, because the U.S. Senate hasn’t voted. The House approval sent shares in cannabis companies like Aphria soaring up to 3-fold off of their March lows. (Read my Dec. 5, 2020 Cannabis blog for additional information.) By contrast, MedMen shares have stayed stubbornly close to their all-time low.  

Is Restructuring Imminent?
Because cannabis is still a problem in most countries – with the exception of Canada, Uruguay and a handful of others –  whenever a cannabis company wants to borrow money, they must pay a higher interest rate. Since the terms and conditions of previous fundraising efforts have been disastrous for MedMen capital investors (including Wicklow Capital and Gotham Green Partners), Lynch and Fulgham have their work cut out for them. Skirting bankruptcy, even with these financial engineering masters at the helm, might be impossible.

Remember: you won’t get prior notice. If MedMen does indeed declare Chapter 11, the already low share price will likely gap down overnight, before you can sell. (Bad news of this nature is typically announced after the markets close.)
 


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