Prior to completing a go-public transaction, we were cautious with MedMen Enterprises Inc. (MMEN.CN) (MMNNF) and considered it to be an opportunity to avoid.
Many of our readers did not agree with our view of the business and argued our rationale due to the brand that the management team has been able to build. We stuck to our beliefs with MedMen and we are glad that we did.
The last two years have been a disaster for MedMen, which owns several dispensaries in high-profile US cannabis markets. The management team that was involved with the IPO clearly was operating in the best interests of themselves and were taking huge salaries while the business remained in the startup phase of growth
On Friday, our view on MedMen was justified when Canaccord Genuity (CF.TO) assigned the US cannabis retailer a $0 price target. The Canadian broker-dealer reiterated its sell rating on MedMen and lowered the previously issued $0.25 price target.
The reason for the decrease was related to MedMen reporting fourth quarter financial results that missed expectations. According to the broker-dealer, the results cast significant doubt on the company’s ability to execute its turnaround strategy to reach profitability and meet its longer-term capital obligations.
During the quarter, MedMen reported to have generated more than $27 million of revenue. When compared to the prior quarter, the revenue number represents a more than 40% decrease and the business was impacted by lower foot traffic in two of its key markets, California and Nevada.
Another important metric to highlight from the fourth quarter is the $240 million non-cash impairment charges which primarily relates to the company’s cultivation and manufacturing facilities in California, Florida, and Nevada. MedMen cannot make mistakes and has a stretched balance sheet and we expect to see further dilution in the near term. With $10 million of cash on hand (as of the end of the fourth quarter), we believe the need for MedMen to raise additional capital is significant.
The issue for MedMen as it relates to raising capital is that it will need to raise debt capital which would increase the size of the interest payments that it already needs to make. We have a cautious outlook as it relates to the US cannabis retailer and is an opportunity that we will continue to follow from the sidelines.