Will MedMen dilution slow with Bierman out as CEO and super voting shares to follow?

(Editor’s note: This article has been updated to clarify the compensation Bierman will receive for his shares.)

Adam Biermen and super voting shares are no longer in charge at MedMen, which means the dilution of common shares might finally stop. But it remains to be seen if a new CEO can stop the bleeding and turn the business to create value for existing equity holders.

Though he stepped down as chief executive, Bierman will maintain his position on the board of directors.

Super voting shares should go away in December 2020, which would benefit Class B common shareholders, because economic and financial incentives will finally be equalized between them and those in control.

Those super voting shares provide holders voting rights larger than their financial interests, and the misalignment of control and economics can lead to those in control to favor their own interests ahead of common shareholders’ interests.

In the case of MedMen, Bierman’s and Andrew Modlin’s 1,000:1 super voting shares meant additional share dilution never threatened their control of the company, as the total shares outstanding have ballooned to 607 million to 620 million, by our estimates.

Paying unsecured creditors (vendors) in equity raised questions about the value of existing common equity holders (who are below creditors in the capital structure).

And Bierman’s comment on his Reddit thread last week that “there just isn’t the appetite from the public markets to fund land grab growth right now” implied that public equity issuance would resume once MedMen’s profitability improved or the market’s “appetite” returned.

Executive Chair and venture capitalist Ben Rose will control MedMen until December 2020 via the super votes carried by Modlin’s shares, and Chief Technology Officer Ryan Lissack will serve as interim CEO. Rose and the board will conduct a search for a new CEO.

The company said that by the end of 2020, only single-vote Class B shares will be outstanding, and we trust that the super voting shares will no longer exist rather than merely conferring control to whomever controls the company’s Treasury Stock.

Bierman will be compensated for surrendering his shares, but the exact amount will be determined in the 60 days following the Feb. 21 shareholder meeting.

This compensation to give up the supervoting shares will further dilute common shareholders, but we don’t know by how much. Bierman and Modlin will receive 50% of this to-be-determined amount in subordinated shares and 50% in restricted stock units that will convert to common shares at $2.05 and expire in 10 years.

At least Bierman will have incentive to quintuple the stock price by 2030.

New CEO must break dilution treadmill

Rose, Lissack and the next CEO will need to forcefully advocate for existing common shareholders if they are to get anyone to accept new MMEN shares and convince shareholders, suppliers and landlords that MedMen is a sustainable enterprise.

The key will be persuading the market and all stakeholders that the company can be brought to profitability with the current assets base (or a specific and limited amount of additional equity) – and that, moving forward, the equity will not be further diluted with no obvious return.

As we discussed at the Investor Intelligence Conference in December, the financial markets will fund losses if there is a clear path to profitability and return on the incremental capital invested.

Issuing additional shares is fine as long as the incremental capital has a specific and defined use and is ultimately accretive to profit per share.

A focus on sustainable profitability is not a recent market whim. Serious long-term investors need to see the potential of a sustainable business to invest equity.

As the cannabis industry shifts to more mainstream consumers and investors, it will have to start acting like mainstream sustainable businesses.

Otherwise, further equity issuance with no clear use and return will make shares start to look like debased currencies such as the German papiermark, Zimbabwean dollar or Venezulan bolivar.

Mike Regan can be reached at [email protected].