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Monday, Dec 5, 2022

Struggling MedMen Seeks Restructuring, Turnaround

Culver City-based cannabis retailer MedMen Enterprises Inc., which has struggled financially for several years, is pinning its hopes on a turnaround specialist who’s already making progress with a difficult restructuring.

Tom Lynch was made the permanent chief executive of MedMen on July 15 after more than a year as interim CEO.

The executive has a long history of righting troubled companies, including Frederick’s of Hollywood Group Inc., an iconic lingerie retailer based in Hollywood, and David’s Bridal, a Conshohocken, Pa.-based wedding dress company he led out of bankruptcy.
Now Lynch looks to bring that Midas Touch to potentially his biggest corporate challenge yet.

MedMen was one of the first cannabis companies to go public on the Canadian Securities Exchange in 2018. It was unable to list on a U.S. exchange because marijuana isn’t legal on a national scale.

MedMen grew rapidly in its early years and watched its debt load build substantially in the process.
Lynch already has refinanced debt at lower interest rates, cut expenses, sold assets and begun to inch forward with expanding MedMen’s retail footprint in places like West Hollywood, Arizona, Illinois and Florida — key markets where it needs to keep revenue flowing in.

In the coming months, the company is scheduled to open stores in Boston near Fenway Park and in San Francisco.

MedMen has dug itself a deep hole, and drastic measures may be in order.
A regulatory filing in Canada revealed that the company could be up for sale. As recently as March, MedMen’s management raised concerns in its filings that it may not have the cash to pay its bills.

The company has laid off a large chunk of its workforce. It canceled a $682 million strategic acquisition of PharmaCann in October 2019 to focus on retail operations in California and other states. And it has had a revolving door for chief financial officers.
Local billionaire Don Hankey’s Hankey Capital, a private lender that sometimes provides bridge financing for businesses in a tough spot, is charging MedMen a 15.5% interest rate on $77 million in loans. Hankey Capital has warrants on the debt that gives the lender the right to buy the company’s stock on favorable terms in the future.

‘A major restructuring’

“They are in the middle innings of a major restructuring, undercapitalized and with a severely stressed balance sheet where they are trying to right the ship,” said Paul Penney, chief investment officer with Boston-based KreditForce, a merchant bank that lends in emerging growth industries.  

“The previous management team was growth at all cost with very little adherence to the balance sheet or cash flow,” Penney said. “They’ve curbed the losses and plugged the hole on losses going south. Now they are selling noncore assets and finding cheaper and more affordable debt. They are doing the rational things that they should have been doing for a long time.”

In February, New York-based Ascend Wellness Holdings Inc. bought 86.7% of MedMen’s cannabis operation in New York for $63 million and has an option to buy the rest contingent on the launch of a marijuana market in the state.

“My assumption is that they sold part of their New York assets at a cheap rate. But they’d be foolish to sell the company now, especially if they cleaned it up and improved the valuation. Then they’d get more if it were sold,” said Jonathan Decourcey, director of research with Viridian Capital Advisors, which analyzes corporate finance solutions in the cannabis industry.

He cited as possible examples of companies with firepower to acquire MedMen as
Chicago-based Green Thumb Industries Inc.; Wakefield, Mass.-based Curaleaf Holdings Inc.; Chicago-based Cresco Labs Inc. and New York-based Ayr Wellness Inc.

Restructuring the cannabis operator is a tall order for the 52-year-old Lynch.  
For its fiscal year that ended June 27, 2020, MedMen reported a loss of $526.5 million on revenue of $157.1 million. In the nine-month period that ended March 27, MedMen reported a combined loss of $111.4 million on revenue of $96.4 million.

Looking for a rebound

Still, a turnaround may be in the making.
In the nine-month period that ended in March, cash on the company’s balance sheet rose to $21.3 million from $9.4 million in June 2020 while total assets shrank to $487.3 million in the latest quarter from $574.3 million in June 2020, and total liabilities have declined to $709.7 million from $751.2 million.

Lynch, who also is MedMen’s chairman, declined to comment for this story.
He joined MedMen as interim chief executive and chief restructuring officer in March 2020, a few months after Adam Bierman stepped down as chief executive of the company he founded a decade earlier.

Lynch had been a partner and senior managing director at SierraConstellation Partners, a downtown-based interim management and advisory firm.
“This guy knows how to build value,” Penney said. “This is a guy who is blocking and tackling. This is not his first rodeo.”

Lynch’s job at MedMen is not an easy one — though he’s getting paid well.
In a July 16 filing with Canada’s securities regulatory agency, MedMen disclosed that the company paid Lynch’s SierraConstellation firm nearly $2.2 million in fees for “interim management and restructuring support” in the nine-month period ended March 27.

Lynch also received 124,868 stock options. The stock currently trades at less than 30 cents (Canadian).

On July 12, in connection with Lynch’s appointment as permanent CEO, MedMen and SierraConstellation entered into a “transaction and retention bonus agreement.”
The filings say MedMen could pay Lynch’s SierraConstellation an award of up to $750,000 if Lynch stays in his post to navigate the sale of MedMen before June 1, 2022. 

‘Going concern’ warning

MedMen defines a transaction as “the sale of all or substantially all of the company’s assets,” or equity in the business, due to a business combination, or a restructuring of the company through a liquidity event. A liquidity event is typically a reference to a plan to reorganize under federal bankruptcy laws.

If Lynch can’t complete a transaction before June 1, 2022 — whatever shape it ultimately takes — then SierraConstellation forfeits the bonus.

Lynch would get $250,000 of the retention bonus whether or not he does a transaction before next June, the filings state.

MedMen also has issued a “going concern” warning about its business.
Such warnings are issued by a company’s management or auditors — or both — when they believe that within the upcoming year from the date of the report “it is probable” the company will not have the liquidity to pay its obligations as they come due.

Lynch, however, is positive about the company’s outlook.

Last month, he gushed over MedMen’s updated growth plans.

“With the significant progress we are making turning the MedMen story from one of turnaround to one of growth, we anticipate sharing more consistent updates on the business trajectory going forward,” Lynch said in a statement in June. “This is just the beginning of the MedMen growth story.”

MedMen’s fourth-quarter and fiscal year financial results are expected to be released in late October.


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