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Amidst staggering net losses, MedMen’s spending spree comes at a steep price for investors

MedMen Enterprises Inc. (CSE:MMEN) (OTCQB:MMNFF), announced on Friday that Canaccord Genuity would buy over 17 million units of the company on a bought deal basis to help raise up to 120 million Canadian dollars ($90 million). Canaccord has the option to purchase up to an additional 2.6 million units at the same price, exercisable any time on or before the date that is 30 days following the close of the offering. All told, it would result in MedMen raising an another CA$18 million ($13.6 million).

According to a statement, proceeds from the transaction will be used to finance the company’s immense free cash flow deficit, acquisitions, capital expenditures, and general corporate purposes.

In their fourth quarter and fiscal year 2018 financial results, MedMen reported a net loss of $79 million on $21 million of revenue. The company generated a free cash flow deficit of $60 million in the last quarter and $112 million for the fiscal year. Complicating things further, MedMen spent approximately $850 million in acquisitions over the past two months, including $682 million to acquire PharmaCann.

[Cannabis arrests fall in New York City though racial disparities persist]

“2018 is a year of many milestones, including the pending PharmaCann acquisition; closed and pending expansions to Northern California, Illinois, Arizona, and Florida; successes in accessing the capital markets; and the launch of our suite of [statemade] products and brand strategy,” said Adam Bierman, MedMen’s chief executive officer and co-founder in a recent statement. “With our strengthened Board of Directors and management team, diverse asset base and strong balance sheet, we believe we are well positioned to capture the future potential of the evolving cannabis industry.”

And while management portrayed confidence following the recent financial report, it might not surprise many investors that additional funding would be needed for such large transactions — especially given the company’s deep financial deficits.

Stockholder dilution and stock price losses

The dilution to shareholders that occurred with the Canaccord bought deal financing resulted in massive share price losses of around 10 percent on Friday and 4.69 percent this past Monday. Overall, share prices fell 18 percent over the past five trading sessions.

Further scaring investors was the fact that the current deal with Canaccord is not MedMen’s first effort to raise money to fund their deficits and acquisitions in recent months. In October, MedMen acquired a pharmacy in the San Francisco Bay area and bought out a licensed medical cannabis dispensary called Seven Point in Illinois. They also agreed with WhiteStar Solutions LLC to acquire control of Monarch, a Scottsdale, Arizona-based medical cannabis license holder with a dispensary.

[Francis Ford Coppola makes great movies, great wine, and now great cannabis?]

To pay for all of these deals MedMen took out a CA$94 million ($70.9 million) Term Loan with funds managed by Hankey Capital and with an affiliate of Stable Road Capital as the largest loan participant.

While trying to establish themselves as a dominant brand in the market, MedMen is spending themselves into a hole — a huge wager considering the uncertainties of the U.S. cannabis market.

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MedMen’s approach to the cannabis industry

Based in Los Angeles, MedMen owns and operates a number of facilities involved in the cultivation, manufacturing, and retail of legal marijuana, employing over 800 people across the U.S. Their singular focus on branded retail has made them somewhat of a household name in the cannabis industry.

"Retail is the control point of our nascent industry," Bierman said during a recent investor conference call. "It is where new consumers experience cannabis products and where brands are built. It is also where customer loyalty is built."

[Aurora Cannabis triples revenue in first quarter results for fiscal year 2019]

Despite the glamour and glitz, however, MedMen is currently significantly unprofitable. The company hopes to grab as large of a market share as early as possible through their acquisitions. While the tactic may result in significant debt and shareholder dilution in the near-term, it may result in MedMen having the ability to produce marijuana more cheaply and attain market dominance long-term.

The problem for MedMen is that the company will eventually need to transition away from the growth-focused, debt-accumulating mindset and prove to investors that its business model will be profitable. With so many unknowns in the market right now —including the still-volatile federal position on legalized cannabis in the U.S. — doing so may prove difficult.

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