MedMen & PharmaCann Part Paths: Looking Beyond the Press Release
- sci
- Oct 11, 2019
- 5 min read
Updated: Nov 16, 2019
With Tuesday’s announcement of the merger between PharmaCann and MedMen being cancelled, which was also accompanied by news of their CFO being fired, we look beyond the press release to evaluate the material changes which will result from this: adjustments to footprint, capital structure, executive changes, and more.
Delving into the details
The Retail Assets
Illinois:
Original terms: +4 dispensaries (and 4 additional licenses for adult-use dispensaries)
New terms: +2 dispensaries (1 operational; 1 license for an adult-use dispensary)
Details: PharmaCann currently operates 4 dispensaries in Illinois (two different locations in Romeoville, along with others dispensaries in both Schaumburg and Evanston). MedMen, as part of the terms of the cancellation, will be retaining the Evanston location. Additionally, MedMen stated that they will be retaining the rights to PharmaCann's adult-use dispensary license - vis-à-vis the Evanston location - that will permit the company to open a dispensary in the "Greater Chicago" area.
This additional license was born from Illinois’ passing of adult-use legislation that subsequently enabled current medical cannabis dispensary operators to automatically receive a license for an adult-use dispensary per each dispensary currently operated. MedMen, who acquired an Oak Park dispensary back in October 2018, will now have licenses for a total of 4 Illinois dispensaries.
Maryland:
Original terms: +1 dispensary
New terms: 0.
Details: PharmaCann operates a dispensary in Rockville.
Massachusetts:
Original terms: +3 dispensaries
New terms: 0.
Details: PharmaCann currently operates a dispensary in Wareham, and has the licenses to open up an additional dispensary in both Shrewbury and Franklin. MedMen is planning to operate a dispensary in Boston, near Fenway Park, in "early calendar 2020".
Michigan:
Original terms: +1 dispensary license
New terms: 0.
Details: PharmaCann has a license to operate a Michigan dispensary.
New York:
Original terms: +4 dispensaries
New terms: 0.
Details: Although MedMen had a New York license prior to the proposed acquisition, with dispensaries in Buffalo, Long Island, New York City, and Syracuse, the company will no longer be able to assume control over PharmaCann's 4 NY retail locations (Albany, Amherst, Bronx, and Liverpool).
Ohio:
Original terms: +1 dispensary
New terms: 0.
Details: PharmaCann currently operates a dispensary in Cincinatti.
Pennsylvania:
Original terms: +9 dispensaries (1 operational; 8 dispensary licenses)
New terms: 0.
Details: PharmaCann currently operates a dispensary in Philadelphia and, in total, possess the licenses to open up an additional 8 locations throughout the state.
Virginia:
Original terms: +1 dispensary license
New terms: +1 dispensary license
Details: As part of the cancellation arrangement, MedMen will maintain PharmaCann's license, which will make the company eligible to open up a retail location in Staunton.
The Cultivation/Manufacturing Assets
Illinois:
Original terms: +2 cultivation facilities
New terms: +1 cultivation facility
Details: MedMen, as part of the cancellation terms, will assume control of PharmaCann's 35,000 ft² facility in Hillcrest, Illinois. This facility was just one of 7 that was recently awarded a license to begin growing cannabis for the state's recreational cannabis program that is set to launch on 01/01/20.
Massachusetts:
Original terms: +1 cultivation facility
New terms: 0.
Details: PharmaCann has a license to cultivate cannabis in a 58,000 ft² facility in Holliston.
New York:
Original terms: +1 cultivation facility
New terms: 0.
Details: PharmaCann currently operates a 135,000 ft² cultivation facility in Hamptonburgh. As discussed earlier in the "Retail" section, MedMen has their own NY license that allows them to cultivation cannabis in their own 45,000 sq. ft. facility in Utica.
Ohio:
Original terms: +1 cultivation facility
New terms: 0.
Details: PharmaCann has a license for a 55,000 ft² cultivation facility in Buckeye Lake that's expected to be open by the end of 2019.
Pennsylvania:
Original terms: +1 cultivation facility
New terms: 0.
Details: PharmaCann has a license to operate a 60,000 ft² cultivation facility in Northeast Pennsylvania.
Virginia:
Original terms: +1 cultivation facility
New terms: +1 cultivation facility
Details: As part of the cancellation agreement, MedMen will assume PharmaCann's vertically-integrated Virginia license. This includes the previously discussed Staunton dispensary license, and a 20,000 ft² co-located cultivation facility.
Capital Structure Changes
As a result of the merger's annulment, MedMen will no longer be issuing approximately 168.4 million shares to PharmaCann unit-holders. This now puts MedMen's share count at ~520 million and, dropping more than 30% on the heels of Tuesday's news, gives the company a fully-diluted market cap of $624 million ($USD) as of midday Friday.
Speaking more to the capital structure of MedMen, an additional point of interest is that the company will have approximately 307 million shares beginning to unlock in several monthly tranches of ~23.6 million shares starting in late November, just days before the company is due to issue their Q4 report.
More than half of the aforementioned 307M shares (approximately 179M) belong to "MMMG, LLC", which is an entity of MedMen that has shareholders such as as Omar Mangalji and Brent Cox. Mangalji and Cox filed suit against MedMen in January 2019, alleging that "... MedMen is a publicly traded company that is withholding its shares from its shareholders. Management is using conflicted corporate structuring in breach of its fiduciary duty to its shareholders."
A few months later in June, Mangalji and Cox moved to compel arbitration on behalf of the affiliated entity, MMMG-LC.
"Since our clients filed their lawsuit alleging mismanagement of MedMen, the company’s losses have continued, several executives have resigned, debt is accumulating and valuable real estate assets have been sold. Meanwhile, MedMen’s procedural filings delayed the case until November. That delay is untenable given our clients’ views that MedMen’s financial condition is rapidly deteriorating. In order to obtain prompt relief, they have decided to file an expedited arbitration."
- Mangalji and Cox's attorney, Daniel Petrocelli
MedMen, whose CEO and Co-Founder own a collective total of approximately 74 million of MMMG's 179 million shares, championed the dismissal of litigation in a June 2019 press release. The current state of the arbitration case is currently unknown.
Executive Changes
Tucked away in Tuesday's news release was also the revelation that the company's CFO, Michael Kramer, a finance executive formerly employed with names such as Apple and Forever 21, was "terminated "on October 7th. Kramer, hired in December 2018, was purported to be the harbinger of leading the company to narrowing their net losses, while serving the company as a rudder towards the path of profitability. Moving towards the aforementioned initiatives, the company's Q3 report demonstrated that they were setting right-foot-forward, albeit in baby steps, on their new path: their SG&A was reduced from $40.9 million to $37.5 million, meanwhile Bierman and Modlin both reduced their annual salaries from $1.5 million to $50,000.
Kramer, who has agreed to terms with the company on a consulting agreement that will last through the remainder of the year, will be succeeded by MedMen's Chief Development Officer since 2017, Zeeshan Hyder. This appointment of Mr. Hyder, who has no prior CFO experience, marks the company's 3rd CFO in less than 12 months.
Looking forward
MedMen gave guidance Tuesday that they plan to have 30 California dispensaries by the end of 2020. The company currently operates 13 dispensaries in the state, with licenses to open an additional 4.
Tuesday's news release also shared that the company is "targeting break even EBITDA" by the end of calendar 2020, and will be providing more color on that initiative on their upcoming Q4 call. The company reported an adjusted EBITDA loss of $42.6M in Q3, compared to $43.9M in their Q2 report.
Questions arise
While both companies, in their respective press releases, put forth the narrative that the merger cancellation was mutual, one question - of which this news bares many - stands out firmly from the rest:
What made PharmaCann so seemingly eager to part with valuable assets -- assets that MedMen's Bierman himself pegged at a 'conservative valuation of $75M' -- for the forgiveness of just $21M worth of debt?
The investment and analyst community will surely have this inquiry on their mind, among others, when MedMen host their Q4 conference call on October 28th. MedMen CEO, Adam Bierman, will also be participating in a Reddit AMA the next day.
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