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Would a MedMen Chapter Wipe Out Stockholders?

The rumor of a MedMen restructuring continues to be simply that, a rumor at this level, however over the weekend extra accounts claiming to be suppliers of MedMen got here ahead based on tweets from well-known hashish character Jason Spatafora.

Because the refrain of social media posts and feedback develop claiming MedMen is reaching out to renegotiate excellent payments, the extra doubtless it’s that one thing is really happening in non-public.

We’ve seen numerous confusion on boards and social media about what a hashish chapter would actually imply for the inventory and whether it is even authorized.

We’ve created the next Q&A to try to clear up a number of the confusion and assist traders determine if MedMen inventory is price hanging on to or if the one worth left is within the palms of debt holders.

There are Two Sorts of Federal Chapter (Chapter 11 and Chapter 7)

Q: Can MedMen File for Chapter 11 or Chapter 7 Chapter?

A: No

Hashish continues to be an unlawful substance based on the U.S. authorities and due to this, the hashish business can also be thought-about unlawful.

The chapter code is ruled by federal legislation so an unlawful enterprise can’t use it.

Bankruptcies happen in U.S. federal district courts positioned everywhere in the nation, however federal legislation, not state legislation applies.

State legislation does apply in some circumstances when making an attempt to determine the property rights of the corporate (additionally referred to as the debtor) however doesn’t apply to the remainder of the method.

Q: What are the Advantages of Chapter 11/7, Why Does it Matter?

A: Pace and Price

The principle advantage of utilizing the chapter course of as an alternative of dealing with issues out of court docket is that the principles have all been arrange forward of time rushing up the entire course of.

All events must comply with the identical guidelines and a chapter decide is appointed to maneuver issues alongside and assist facilitate negotiations between the corporate and its collectors (the blokes who personal all of the debt).

Whereas the chapter course of is occurring the corporate continues to be dropping cash, so the quicker they will convert all of the debt to new inventory and get again to turning the enterprise across the higher.

Firms can also entry what is known as a “debtor in possession mortgage” additionally referred to as a DIP mortgage.

DIP loans are new cash to assist the corporate pay its payments till the restructuring is full and are sometimes key to serving to administration pay salaries and suppliers to maintain the corporate going and keep away from a hearth sale of the property.

Q: So is MedMen Caught in Limbo if They Attempt to Restructure?

A: We Don’t Assume So, the Guys Holding the Debt Need to Get Paid No longer Later.

The conversations we see on social media are all getting hung up on the technicalities of chapter after they actually must be specializing in what is going to doubtless occur to MedMen in the actual world.

If Medmen can’t use the formal chapter course of their collectors nonetheless have the higher hand and can attempt to get their a reimbursement.

MedMen has $200 million of secured debt excellent in opposition to $512 million of tangible property. If the secured lenders aren’t being paid they will merely take their $200 million of property and promote them on the open market leaving MedMen with half the revenue-generating property they began with.

MedMen might at all times combat the asset seizure, however that might imply extra lawsuits and fewer flexibility, making it more likely the corporate finally ends up operating out of cash and is bought for pennies anyway.

Even with out a chapter course of to information a restructuring, MedMen can and can begin negotiating with collectors and suppliers in the event that they haven’t already.

Although with out the chapter course of as a information negotiations might drag on and get messy, leaving little or no worth as soon as debt holders are accomplished choosing over the property.

 

Is There Nonetheless Inventory Upside if MedMen can Renegotiate Their Money owed?

The reply is an enormous fats no.

If we take a look at the worth of MedMen’s property excluding goodwill and half of the intangibles, it appears to be like like the corporate is already bancrupt.

Bancrupt means if all of the property had been bought and used to repay the money owed, no money can be left for anybody else, together with anybody proudly owning the inventory.

We take away goodwill and haircut intangibles as a result of in chapter, no one is prepared to pay a cent for goodwill and potential consumers are solely prepared to pay a steep low cost for intangibles.

What makes the scenario even worse is that MedMen continues to be cashflow adverse.

If MedMen had been worthwhile, they could have been capable of finally pay down a portion of the money owed with cashflow however as a result of they lose cash, the debt quantity can be flat at finest, whereas money within the financial institution dwindles.

The money burn was $55 million final quarter and even after shedding half the workforce since then, the corporate will nonetheless be burning $20-$30 million for the subsequent few quarters with no income in sight till September 2020 on the earliest based on administration steering.

This implies the worth of property goes down, whereas the worth of liabilities stays the identical leaving a smaller and smaller slice of the pie for the fairness holders (those that personal the inventory).

In keeping with our calculations, the worth of MedMen inventory is already adverse.

In the event that they borrow extra debt, liabilities and property each enhance by the identical quantity and the inventory continues to be nugatory.

In the event that they elevate money by issuing shares, shareholders are closely diluted making the worth of their shares price even lower than they at the moment are.

In any state of affairs, stockholders are worn out.

MedMen Inventory is Technically Already Nugatory

$million
Complete Belongings (Sept 30) 849
(-) Goodwill 92
(-) Intangibles at a 50% low cost 90
(-) Belongings Bought Put up September 17
Professional-forma Tangible Belongings (Sept 30) 651
Complete Liabilities (Sept 30) 671
(+) Debt Since September 10
Professional-forma Liabilities (Sept 30) 681
Liabilities with Lending Facility Maxed Out 796
Inventory Worth (Sept 29) -30
Per Share ($zero.06)
Inventory Worth After Spending Lending Facility (Sept 29) -145
Per Share ($zero.28)

How Does it All Finish for MedMen?

This all appears very sophisticated, however the ending is easy. MedMen will finally concern hundreds of thousands of recent shares to pay again all the cash they owe to lenders. Lenders will convert their debt to shares and the share rely will enhance a lot that present shareholders will successfully be worn out. Your declare to the longer term income of MedMen can be so small every share could possibly be price solely fractions of a penny in brief order.

Merchants could make a couple of dollars on what is going to little question be a unstable inventory, however if you’re a retail investor, we will assure that the longer you maintain the inventory the higher your probability of dropping all of it.

Just like the Titanic, MedMen is slowly sinking, however this time there are greater than sufficient lifeboats to go round.

Don’t be the one passenger who goes down with the ship.

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