Despite many cannabis stocks trading in the red Friday, MedMen was able to eke out a 6% gain due to cannabis-focused private equity firm Gotham Green Partners extending the marijuana retailer a line of credit valued at $250 million. The investment is composed of convertible senior secured notes divided into three tranches, with the 1st worth $100 million and 2nd and 3rd worth $75 million. Once the deal is closed, the $100 million will become available to MedMen, while the remaining two installments will be paid out every 6 months. All of the notes will mature 36 months after the close of the deal. Within 12 months of the closing date, interest may be paid-in-kind at the discretion of MedMen, and all notes are eligible to be converted into class B subordinate voting shares.
Currently, MedMen operates the second most dispensaries in the US and rakes in the most pro forma revenue in the country. While focusing on retail at the moment, MedMen plans on offering its own cultivated products in its stores eventually. At the beginning of March, there was some concern, according to Jonathan Cooper of Seeking Alpha, that MedMen’s high operating costs would catch up to the company. Although these expenses are similar to other cannabis companies such as Aurora and Canopy, the difference is that MedMen wasn’t raising enough capital to sustain its spending. Clearly Gotham, with its investment, recognized the potential of MedMen’s retail business and didn’t want the company to fizzle out like so many others. However, the choice to offer convertible credit instead of taking a stake in the company demonstrates Gotham’s awareness of MedMen’s tight cash situation. The retailer had a net cash outflow of $123 million in Q419, only leaving the company with $78 million at the end of the quarter.
Gotham hopes to support the company’s expansion into Florida, where MedMen is licensed to operate 30 stores. This expansion, however, has hit some speed bumps after Miami Beach kept MedMen from setting up its business, forcing the company to take the Miami Beach City Commission to court. The town became concerned that its reputation and atmosphere would be negatively impacted by the increased presence of dispensaries; Miami Beach imposed regulations that essentially limited the total number of dispensaries allowed to seven. MedMen hopes to argue that it is unlawful to limit the number of stores in a similar line of business. If MedMen were to lose this case, the precedent might hinder expansion and be a cause of concern to Gotham investors.
Additionally, Gotham plans on developing MedMen’s acquired assets and cultivation capabilities. The firm believes that increasing production of and rolling out house-branded products in stores would positively affect the company’s margins overall and thus ease up the worrisome cash situation.
The cannabis industry as a whole has been gaining momentum recently in the private equity sector. 29 states this decade have legalized marijuana, creating several opportunities for companies such as MedMen. According to Nick Kovacevich, CEO of Kush Bottles Inc, “There’s a lot of investment firms and investors that are dabbling in the industry, but they’re a little hesitant to make big bets,” given the emerging status of the industry. Many private equity firms, like Gotham, have dedicated themselves to this emerging industry, offering start-ups the capital necessary to grow. The hope is that the industry will reach the mainstream and attract all kinds of investors. For instance, Ben Curren, CEO of Green Bits, received funding from Sequoia Capital despite the PE firm’s lack of cannabis in its portfolio. The future is optimistic for THC.