Way back in the grim, dark days of the Great Depression, cash-strapped municipalities, and many businesses had a plan for staying open despite the fact that they had no money. They turned to a program known mainly as “scrip,” which was a really limited kind of currency that could be exchanged for goods or services in the area. It was often issued with the hope that one-day things would improve and the scrip could be bought back with actual money. Pot retailer MedMen (CSX: MMEN) is looking to do something similar, except using its own stock instead.
Bring in 16 Tons (of Pot), What Do You Get? Stock.
Marijuana retailer MedMen has been on the bad end of a cash crunch for a while now, and so it's been offering its vendors an ownership stake in the company in exchange for supplies to sell in the storefronts themselves.
An email examined at MarketWatch laid out the story: one supplier was offered several options in terms of paying a bill: the supplier could accept a 50% loss, but be paid in cash immediately, could accept a payment plan for the full value, or could accept the full value of the outstanding balance in Class B non-voting shares.
A further statement from MedMen revealed that this wasn't the first, or only, time that the company had gone down this path. It had been working with suppliers for some time now in terms of outstanding balances, and in some cases had offered stock in payment of past-due bills.
The Cash Crunch for Weed Business is Increasingly Universal
As it turns out, MedMen is not the only pot operation to face some cash troubles. Investment in such businesses in both the US and Canada has been on the downward slope since March 2019, and by October of 2019, had virtually bottomed out. Reports note that capital fundraising efforts for both public and private weed operations had dropped just over 20% from 2018 to 2019.
The frantic rush to invest in marijuana business that started up in 2015 had all but dried up by 2019, and there's little sign to suggest that things will improve any time soon.
The problem isn't universal, of course; some estimates suggest that Cronos Group (NASDAQ: CRON) has sufficient cash to cover about 15 years' worth of operations. Canopy Growth (NYSE: CGC) has about four and a half years' worth on hand, thanks to hefty investments from larger firms. Cronos actually took a $1.8 billion shot in the arm from Altria (NYSE: MO), and Constellation Brands (NYSE: STZ) put better than double that, $4 billion, into Canopy Growth.
A Slow Burn that May Consolidate the Market
This prompts several new, and in some cases distressing, possibilities. Leave aside the fact that the legality of the product almost seems to vary based upon where you're holding it at the time—it's legal in several states in the US, only partially legal for medicinal reasons in others, and generally illegal in the United States at the federal level, though that's changing with things like the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act—the idea of trying to sell off such an operation is daunting. Can the company's assets even be sold without the DEA landing on the buyer with both feet?
MedMen's plan isn't exactly the greatest either, long-term; its share price has already been on a markedly downward slope anyway—it's lost about 84% of value in the last year—and by issuing more shares, that just reduces the value of those currently available.
Yet it may not be such a bad idea. MedMen is issuing this stock to suppliers to pay bills. It makes a note of sense that a supplier would want an ownership stake in a client; the supplier has a vested interest in seeing the company succeed. It's a bit of a gamble that the stock will hold its value—at least long enough to be sold off—but if it succeeds, suddenly a premium has been paid on the supplies provided. Plus, there's the distinct possibility that MedMen may ultimately sell out to a larger, better-capitalized entity like Canopy Growth or Cronos, and that would make the stock substantially more valuable.
Are we seeing the start of a consolidating market? Maybe. The only way to tell will be to watch it closely over the next year or so. Right now, though, elements of the pot market are looking like a Tennessee Ernie Ford tune, and whether that's a good or bad sign depends on your stance.