Stock prices are plunging, lofty valuations are deflating, regulatory landscapes remain in flux, and now deals are coming off the table.
MedMen Enterprises' bid to become the largest US cannabis company bit the dust this week when its planned acquisition of PharmaCann -- once valued at $682 million -- was mutually scrapped.
The blockbuster transaction's collapse is a sign that more upheaval is likely on the way for the larger, public players in cannabis.
"There is no doubt that the day of reckoning has come for the multistate operators," said Matt Hawkins, managing partner of Entourage Effect Capital, a cannabis-focused private equity firm formerly known as Cresco Capital Partners. "The days of being valued at projections three years down the road are long gone."
Public cannabis companies are facing a capital crunch as investors are recognizing that some firms were vastly overvalued and sweeping regulatory changes may come later than previously hoped.
"You're going to see a lot of public companies that are cash-strapped that need a round of financing that likely can't get that done in this current climate," Hawkins said.
The cannabis industry is nearing a moment where the "cream is going to rise to the top" and cash-strong companies will be able to buy up assets at a discount, he said.
"Like any emerging industry, it'll take time to play out," said Scott Fortune, a Roth Capital Partners analyst who covers MedMen. "The perceived winners today might not be the winners down the road."
The pressure is on for CEOs of public cannabis firms. Analysts and investors alike are keying on the health of balance sheets, cash on hand and paths to profitability, said Andy Berman, CEO of Harborside, an Oakland-based cannabis dispensary operator that listed on a Canadian exchange this summer.
To ensure the financials stay in order sometimes requires a decision to cut bait on planned expansion moves that once looked attractive, he said. In recent months, Harborside pulled the plug on two planned acquisitions: Airfield Supply in San Jose and Agris Farms of Walnut Oaks.
Both were analogous to MedMen's PharmaCann deal in a sense that they became too expensive or too dilutive, Berman said. Since Harborside listed shares on the Canadian exchange in June, its stock fell from $4 to just above $1.
"Whether it's large deals falling apart or smaller deals falling apart, I think there's going to be more of this," Berman said.
The precipitous drop of MedMen's stock -- shares are $1.42 now versus $4.46 last year when the deal was announced -- sunk the value of the all-stock PharmaCann acquisition.
The broader market conditions made the decision easier.
"It became clear to both sides that we would be better off without the other," Jeremy Unruh, director of regulatory and public affairs for the Chicago-based PharmaCann, told CNN Business.
PharmaCann is comfortable with its positions in the Northeast and Midwest, notably its home state of Illinois, which is set to begin recreational cannabis sales on January 1, 2020, he said. PharmaCann has more than two dozen licenses in six states and 13 operational dispensaries thus far. It is currently rebranding its locations as Verilife.
The privately-held PharmaCann will need to raise cash as it expands, and based on an "overwhelmingly positive" response received Tuesday from current and potential partners, Unruh believes that investment pipeline is solid.
California-based MedMen received four parting gifts in exchange for forgiving a $21 million line of credit to PharmaCann: a license for a facility in Virginia; a license for a store in the Greater Chicago area; a cultivation and production facility in Illinois; and an operating store in a Chicago suburb.
"Looking at the PharmaCann portfolio today, Illinois has emerged as the most attractive opportunity for our longer-term strategic growth plan," Adam Bierman, MedMen co-founder and chief executive officer, said in a statement.
For the near-term, MedMen will focus on its existing markets, including California, where it has 17 licenses and a desire to operate 30 stores by the end of 2020.
In recent months, MedMen's executives have sought to slash costs and shore up liquidity issues with a $280 million convertible debt agreement led by Gotham Green Partners.
"To me, the structure of that transaction would be to ensure that Gotham Green has a significant seat at the table should there be a need for a distress restructuring," said Hershel Gerson, CEO of cannabis investment banking firm ELLO Capital. "I'm not convinced that [MedMen is] in the clear."
The announcement of the scuttled deal also included word that MedMen fired its chief financial officer -- continuing C-suite turmoil that has included executive departures and a lawsuit filed by a former CFO.
"The level of senior level turnover, in our view, has been more of a pattern rather than culling for future success and should continue to be monitored going forward," Cowen analyst Vivien Azer wrote in a research note Tuesday.
A MedMen spokesperson could not be reached for comment.
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