Will MedMen be the First Major Marijuana Company to go Bankrupt?

Will MedMen be the First Major Marijuana Company to go Bankrupt?

medmen bankrupt

Wait, you can’t be talking about the MedMen that is publicly traded and has a market cap of over $2 billion, right?

Yes, those guys.

If you haven’t been following the recent line of credit issued to Medmen, Alex Berenson wrote a great piece covering it for CNBC here. Some of the challenges facing the company based on their burn rate, asset sales, and overall competition from legal and black-market suppliers, most notably in California, could spell trouble for the company. Berenson, reports on the “credit card like deal”, as I will call it, that Medmen made with Gotham Green partners. Some of the highlights, lowlights if you are a shareholder, include the following:

Financial statements in February showed Medmen risked running out of money in less than 100 days if they did not find a credit line or more funding.

The headline said MedMen raised $250 million, when in reality it was $100 million and it could go to $250 million if a whole bunch of milestones and goals are reached regarding the stock price, revenue, etc.

The term of the re-payment is “credit card like when carrying interest”. MedMen must repay the credit facility at 6% over LIBOR rates and issue warrants. As of writing this article the LIBOR rate was 2.79%, while the US Ten-Year Note Yield has dropped dramatically this week to 2.41%. MedMen can defer the interest in Year 1 and have it roll over into the note. Sound familiar? Credit card companies use a similar model when pitching you to “bring your balance over to us and pay off your other cards”. MedMen is looking at a very large number to pay back at some point at 8.5% interest or above? That is not even getting into the warrants and stock dilution that could be part of the deal.

Berenson points out that MedMen has already started to sell assets and real estate to cover it’s mounting cash problems, but this creates another problem. MedMen is no longer in the landlord business of owning the property and buildings, but is now paying rent on those same properties and buildings.

In its most recent financial filings from February of this year, Medmen states “At our current operating level, we will not have sufficient funds generated from operations to cover our short-term and long-term operational needs." (This was before the Gotham Partners line of credit deal.)

MedMen is also facing a contentious lawsuit brought by its former CFO, James Parker. Parker’s lawsuit could not only be potentially embarrassing but also catch the eyes of regulators as he alleges disregard for cannabis law, regulations, and legal procedures.

If you are in the cannabis industry you are well aware of the MedMed reputation among growers, suppliers, and former employees. Adam Bierman, the CEO of MedMen, has gone on record apologizing for some of his early antics and his treatment of people in the cannabis space, and claims things have changed as MedMed has gone public.

An abrasive CEO is one thing, but what where the biggest mistakes in MedMen’s early plans? MedMen created high end branding around cannabis stores, wanting to be the "Apple Store of Dispensaries” “. That was problem number one, building your brand around a physical store. Branding works for products, not for 30x30 foot buildings. In the end, the consumer wants to get high quality cannabis at a reasonable price, that holds true everywhere. The black-market prices are still 60% of legal cannabis prices in California when you factor in taxes. BDS analytics estimates that 80% of California cannabis sales are still done on the black market.

While most in the industry believe branding is the future key to success in the cannabis industry, especially as cannabis becomes a commodity around the world when laws change, getting cheaper leads and orders will also be key. Once the Federal law changes and 30 more countries legalize cannabis, the supply will be overwhelming. Most states allow you to even grow a certain amount of cannabis plants in your own house, let alone have legal dispensaries in your area. With CVS, Walgreens, and Walmart all jumping into the CBD race this week, it will only be a matter of time, and Federal law change, until they are also selling the higher THC versions of cannabis, commonly known as marijuana.

This is all bad news for stand-alone dispensary storefronts. As Prince said in 2005, “The Internet is dead” and got laughed at, you can also say today, “The stand-alone dispensary model is dead”. You will get laughed at but watch what happens within 36 months in the US.

Branding will be a key to differentiate your cannabis flower or product from another brand's product on the store shelf. The top-level cannabis celebrities will win out at first, so your Snoop brand, your Martha Stewart brand, your just announced Seth Rogen brand, your Willie Nelson brand, and your Tommy Chong brand. Celebrity endorsement will be huge to start, since they already have a strong “know, like, or trust” with fans and consumers.

Why do you think Bruce Linton, the CEO of Canopy Growth, has teamed up with Seth Rogen, Martha Stewart, and Chelsea Handler (through Canopy Rivers investment in Civilized)? Bruce is playing chess while the others are playing checkers. He has a professional relationship with Snoop as well. When cannabis goes the way of sugar, soybeans, and coffee, guess who is locking up all the iconic brands now? If branding is the key to the future (and I have debated this with Bruce saying internet traffic will be the key to the future cannabis order, not just branding), guess who has all the famous brands under his umbrella to promote and raise consumer interest and awareness.

The fatal mistake in Medmen’s plan is to brand a store as your customer experience, and not the actual product. Like most of you out there, I live within driving distance of a few supermarkets. There is the expensive one that has nicer produce, organic stuff, and hard to find items. There is the middle-range store, that is nice inside and had reasonable prices for everyday living. Then there is the cheaper store with the outdated interior and maybe not the best fresh cuts of meat, but you can load up on the boxed and sealed items there.

Apply that analogy to the dispensary model, but only the cheaper store isn’t a little bit cheaper, but 40% to 60% cheaper. The mid-range store for everyday living has a nice selection, a reasonable price for the convenience, and is on the way home or works for your daily life travels. Then there is the high-end store, the one you go into for “just a few items” or “I just buy this or that there, but I can’t do a whole shop there because it would be way to expensive”.

You can see the problem with the Apple store, branding-model MedMed went all in on. Consumers are price sensitive as it is but throw in a massive black market as well as a “normal” dispensary as your competition, and the consumer may come in for one item or something specific, but they won’t be doing their whole shop there.

Time will tell if MedMen can get their spending and cash burn under control and pull out of a debt spiral. Owning a dispensary is a dream for many people, until your neighborhood CVS, Walgreens, and Walmart start selling the male cannabis plant in different forms now, and are just waiting for a law change to also sell the higher THC female cannabis plant. The dispensary model was protected by an “irrational moat” as Warren Buffett would call it, due to the legal status of the cannabis plant. Once that legal status is changed, the dispensary moat dries up.