MedMen (MMEN.C) goes public Tuesday, but three executives will make most of the money on the deal

The risk, when allowing US weed deals to come up north to go public, is that they’ll bring their OTC way of doing things up here and soil our pretty little pubco kingdom.

I mean, let’s be clear – the Canadian venture capital markets are a rank pit of vipers that live by sucking on the lifeblood of the foolish, recycling shit into prettier shit, and tapping grandma on the shoulder repeatedly for a financial refill.

But this MedMen (MMEN.C) deal is rank AF.

The LA Times:

MedMen, which has yet to post a profit, is not staging a traditional initial public offering. Instead, it’s acquiring and taking over an existing public shell. What’s more, the company’s shares, when they begin trading in the coming days, won’t be listed on the Nasdaq or the New York Stock Exchange.

Instead, they’ll be on the Canadian Securities Exchange, a second-tier stock market in Toronto that’s become a haven for cannabis companies. Adam Bierman, MedMen’s co-founder and chief executive, said going public this way makes sense in the cannabis industry, where companies face a tangle of conflicting regulations but see immense opportunity requiring fast money.

“And how do I get that today, with the way the world is set up?” he said. “I get it by being public on the CSE in Canada.”

There you have it, friends, Mr Bierman is here for our ‘fast money,’ and boy is he getting it.

As part of its deal to go public, MedMen is selling about $100 million worth of new shares, which will give investors a roughly 6% stake in the company. That deal values the company at around $1.6 billion. That’s 60% richer than just two months ago, when the company raised money from a Canadian investment firm at a valuation of $1 billion.

But hey, we’re not just watching Mr Bierman find cheap money for the company. He’s also getting the cheap money personally.

The CEO and the Chairman will each receive US$1.5 million per year in salary for four years, plus US$10 million in ‘redeemable units’ based on share price, that have vested, plus another $30 million in long term incentive plan units that vest over 24 months, at the end of every month.

This means Bierman is coming into this deal – stock aside – with $1.5 million in salary, another $15 million annually in ‘incentives’, and $10 million ‘just cus’, or $26.5 million off the top.

President Andrew Modlin gets the same deal, so of the $100 million raised in new shares going public, $53 million of it goes straight into the pockets of the big two.

[UPDATE: Actually, the big three. Editorial slip-up there. Also, the company, after this story was posted, changed its executive compensation policy so that $23m of that bonus structure is paid based on hitting share price targets. In addition, much of that bonus is equity-based, not cash, and we don’t know if they were paid from go public financing or what was already in the bank – just so we’re clear on all points.]

And should they need to be removed for any reason, there’s the ‘executive protection’ policy to consider.

That’ll mean Bierman and/or Modlin get three times their salary, five times their bonuses, and a $250k lump sum payment on the first of the following month – and they benefit from this policy for a further three years after they’re terminated.

But hey, if you’re looking to get rid of them, think again because they also have SUPER VOTING SHARES.

In other words, regardless of what you have invested in the company, non-executive shareholders don’t get to vote on company matters in any slice larger than 0.7% of the shares outstanding. 

The [pdf-embedder url=”https://e4njohordzs.exactdn.com/wp-content/uploads/2018/05/LederaManagementInformationCircularApril272018.pdf”]:

Holders of Super Voting Shares – the Principals and certain permitted transferees – will not be entitled to receive dividends. They will be entitled to notice of and to attend at any meeting of the shareholders of the Resulting Issuer, except a meeting of which only holders of another particular class or series of shares of the Resulting Issuer will have the right to vote. At each such meeting, holders of Super Voting Shares will be entitled to 1,000 votes in respect of each Super Voting Share held.

The Super Voting Shares are being proposed to provide the Principals a number of votes that is equal to the number of MedMen Corp Redeemable Shares and MedMen Redeemable Units held by the Principals multiplied by 20.

[…]

The Principals are currently expected to subscribe for 1,932,895 Super Voting Shares.
The Super Voting Shares are being issued in order to ensure that effective control of the Resulting Issuer will, subject to the Principals selling a minority of their holding, be given to the founders of MedMen, being the key persons responsible for the success of MedMen, for a sufficient period of time so as to not provide disincentives to capital raising by the Resulting Issuer.

In addition, the Principals would not have considered a “going-public” transaction without the control safeguards provided by the Super Voting Shares.

I mean… Come on.

So we have an ultra inflated ‘going public’ valuation (the company had $3m in revenues from last June to December, and is not profitable), a [potential] $50m+ drag on the bottom line [and/or stock dilution, depending on where the money is coming from] in keeping the CEO and President happy, a voting system that stops anyone but those two from deciding what happens to the company – or if they deserve more long term incentive plan units, of which the company documentation makes clear there’s no limit of – and if you ever want to get rid of them, you’ll be forking out tens of millions to do so, pretty much for the next three years.

“But wait, these guys won’t throw themselves more bonuses,” I hear you reason. “I mean, surely they couldn’t justify such a thing.”

Sit down and shut up, fucker.

Mr. Bierman’s salary will be reviewed annually. Mr. Bierman may be eligible under the terms of his employment contract for a discretionary annual cash bonus and he may also be eligible to receive additional equity based compensation.  

Who’ll make the decision on that, I wonder. Could it be the guys who get to do all the voting?

Some might question how MedMen achieved their inflated valuation. Funny thing, a Canadian company called Cantor Capital bought 2.3% of the company at a billion dollar valuation earlier this year, leading to many raised eyebrows.

But hey, who’s listed on the ‘about our team’ page at Captor’s website?

Cannabis consultant Andrew Modlin.

Weird.

But wait, the looting isn’t over yet:

In the event the enterprise value of MedMen exceeds US$2 billion at any time, Mr. Bierman will be granted a US$4,000,000 cash bonus

And so will Mr Modlin.

You know who else will get a bonus? The CFO.

Yes, the CFO.

Under the terms of his four-year employment contract, Mr. Parker is entitled to an annual salary of US$750,000. In accordance with the terms of Mr. Parker’s employment contact, he is entitled to receive US$5 million in MedMen Redeemable Units that have vested and that will be issued based upon the SR Offering Price, once determined, and US$15 million in LTIP Units..

The god damned CFO is going to earn $5.75 million year one, and $15m over two years.

And if the stock hits $2 billion in enterprise value (note: the ‘going public’ valuation is $1.65 billion right now, so that’s no stretch) he takes home an extra $2.5 million in cash.

Listen, I have no trouble with guys bringing their private company on to the public markets ensuring that they do well out of the deal, and clearly the interest in financing circles for retail cannabis opportunities is high, when you look at the recent Hiku Brands (HIKU.C)/Tokyo Smoke deal as a comparable.

But this deal is a fucking embarrassment. If you buy it, you’re essentially betting that the rest of the market is dumb enough to buy into this thing without really thinking it through and you’ll get out before everyone realizes what they’ve got into, and that may not be the dumbest logic around, but it’s a terrible coda for an investment decision.

I want my money to be in the best and brightest deal, not in a deal that I hope nobody looks too deeply into, and which could [potentially] cost the first US $65 million of revenues just to ‘incentivize’ the CEO, CFO and President.

If you’re betting on this as a company with potential to repay your investment with profits, you have to question exactly what needs to happen for this outfit to actually repay your stake.

Over half your dollars are [earmarked] by the founders before it even lists.

Sure, some big financiers will be happy to sell this deal to you because maybe you’re dumb enough not to read up on it, and they’ll make money on finders fees whether the thing goes to the moon or thuds back to earth.

But you. Yeah, you, I’m talking to you now.

Careful. A deal this overbloated, this rudder-free, this lopsided, can end really badly for investors. The MedMen presentation and website are very pretty, and that Manhattan store they just opened is very stylish (and insanely expensive), but you’re paying $100m+ for each dispensary they own.

Oh – one other thing? If there’s a catastrophe and a liquidation is required, the company documents state the three primary executives mentioned above get their money back before anyone else does.

So, yeah.

— Chris Parry

FULL DISCLOSURE: We don’t own any stock in MedMen and won’t be going anywhere near it, at all, ever. We like deals where the shareholders are respected, not treated as dumb money, and where value is created on the market itself, not in the hands of the few before the public gets a look in, and wherein the adults have supervision by other adults. This deal stinks. We out.