Cannabis CliffsNotes: MedMen Enterprises Inc (CNSX:MMEN), Trulieve Earnings, Juniors Merge
First up is MenMen Enterprises, which released material information regarding a previously-announced $120 million bought deal financing on November 9th. Turns out, the company and underwriters have agreed to amend the offering to reflect a more current assessment of the MedMen’s share price, in context of the cannabis complex in general.
The new deal will see the underwriters purchase 13,640,000 units at $5.50/unit, for gross proceeds of $75,020,000 (ex-allotment option). Previously, 17,648,000 units at $6.87/unit would have been purchased, for gross proceeds of $120,006,400. Perhaps more significantly is the delegation of warrants, which go from half-share per unit to full share today. Ultimately, the deal could wind up being more dilutive, despite MedMen receiving much less cash in the transaction.
All other terms of the Financing remain unchanged.
The big news here: Nov 9th deal included 1/2 warrant; this amended deal 1 FULL warrant. pic.twitter.com/DoRJfX2si3
— Benjamin A. Smith (@BenjaminA_Smith) November 17, 2018
While this action is a net negative for existing shareholders, current investors shouldn’t get too discouraged. We believe the amendment is more reflective of current sector dynamics than the company itself. Since November 9th, North American cannabis sector has eroded significantly. In turn, this has diminished the present worth of original unit pricing and attractiveness of OTM warrants. The amended deal structure simply aligns individual/sector realities with current market dynamics. It’s ultimately a testament of how fast and volatile the sector moves.
Individually, MedMen shares have been exceedingly weak also. MMEN has actually fallen about 2.5x heavier than broad cannabis sector averages recently, giving hope that the amendment effects are largely priced-in. While I certainly don’t expect MMEN to be a bastion of strength tomorrow—or this week for that matter—there’s no doomsday scenario for current shareholders. Market realities have simply shifted in favor of more ameliorative pricing. As always, the market has front-run the story before the public became privy to it.
Trulieve Cannabis Corp.
There appears to be substantial bid in Trulieve Cannabis going into earnings tomorrow. The primarily Florida-based operator has seen its stock surge ↑20.14% over the past two sessions—well above the middling bounce experienced by its U.S. peers. In the absence of material news, this is likely attributed to anticipation that Trulieve will once again deliver stellar results.
In a nutshell, few competitors can best Trulieve’s overall revenue growth and aggregate revenue generation. The company delivered ↑53.28% quarter-over-quarter growth in Q2, while total revenue of $23.3 million makes Trulieve the top grossing cannabis LP in North America, according to New Cannabis Venture’s 35 Top Revenue Generating Cannabis Stocks. With Florida medical patient enrollments showing no sign of let-up, there’s little reason to believe outsized revenue expansion will slow anytime soon.
Florida cannabis patient growth per week:
7/16-10/17= 47,000 (800/week)
10/17-4/18= 100,000 (2,200/week)
4/18-11/18= 189,000 (3,200/week)
— Cannaman (@Cannamannabis) November 18, 2018
Amazingly, Trulieve dispenses, on average, 70% of all milligrams of cannabis dispensed in Florida, as mid-summer Department data (July 27, 2018). The next closest competitor in Florida dispenses, on average, 11% of dispensed cannabis milligrams. While that’s an impossible advantage to maintain long term, the sheer lead size bodes well for Trulieve’s continual market share domination in a key medical state. Few, if any, competitors can make this type of claim within their own jurisdictions.
Below is a breakdown of current Medical Marijuana Treatment Centers (MMTC) in Florida, as per floridahealth.gov. Approved medical marijuana treatment centers are the only businesses allowed to grow, process, or sell medical marijuana in-state.
One area of side interest is Trulieve v. DOH Case No. 2018-CA-000698, which would restrict Trulieve’s ability to expand in-state. No summary judgement has been received, but the eventual verdict qualifies as a material event for investors.
Midas Letter will be sourcing whether management can provide general guidance on the timeline of such a decision.
On Friday, Invictus MD Strategies Corp. announced that it has entered into a non-binding Letter of Intent with GTEC Holdings Ltd. The all-share transaction is valued at approximately $100 million, forming Western Canada’s largest indoor vertically integrated cannabis companies.
From our perspective, this merger is about two junior LPs combining together to form an entity which can compete in an increasingly competitive marketplace. New Aphria present Jakob Ripshtein recently commented that, “There will be a group of companies at the top, the big producers, and some smaller producers at the bottom, like craft beer… I suspect there will be some in the middle who will be very challenged to stay around.” Invictus MD and GTEC Holdings are apparently proponents of this particular line of thinking, with both acting to ensure both companies don’t get squeezed out from above.
The combination allows both companies to consolidate assets such as extraction and testing labs, retail outlets and e-commerce presence. In short, it appears the combined entity is stronger than the sum of its parts. We suspect others will come to a similar conclusion, with junior-on-junior M&A activity picking up in the coming weeks.
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