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One of the biggest names in cannabis is falling behind in paying vendors

San Francisco(CNN Business) Cannabis dispensary operator MedMen Enterprises (MMNFF) had aspirations to be the biggest, most premium player in the emerging industry. It opened locations in Beverly Hills and on Manhattan's Fifth Avenue and grew its name to the extent that it was even parodied on "South Park."

But MedMen has fallen on hard times, fallen behind on payments to vendors and is working with a business advisory firm to settle its debts -- including offering stock as payment.

The company's troubles are a symptom of the broader industry's issues. Many different companies and investors have been jockeying to take control of the nascent industry, or at least to grab a significant portion of the billions that could be at stake if and when cannabis is legalized nationally. But even some of the biggest operators have found themselves retrenching recently; those that moved most aggressively to expand, like MedMen, have been hit particularly hard.

MedMen, which is in the throes of a restructuring amid a rocky financial spell, has engaged FTI Consulting to manage its outstanding balances to vendors and partners, MedMen CEO Adam Bierman told CNN Business during an interview last week.

"We absolutely paused on making [accounts payable] payments as we went through the restructuring so that, with FTI's help, we could organize the manner in which we were going to pay off our ... balances as is common in any restructuring," Bierman said.

MedMen's aggressive efforts to rein in costs and attempt to get the business on solid footing have included cutting hundreds of jobs, selling off stores, reworking financing arrangements, and negotiating payment terms with the companies whose products line the shelves of MedMen stores in states such as California, Nevada and New York.

MedMen, which is based in Culver City, California, has been spending cash as quickly as it's making it. The company spent $44 million in cash on operating activities in its quarter ending in September of last year, according to financial filings made with Canadian Securities Administrators. Its revenue over the same period? $44 million.

About 10 days ago, cannabis stock bloggers and investors started publishing anonymous emails from purported MedMen suppliers and contractors who claimed they had received letters from MedMen seeking payment extensions and renegotiations or containing offers to pay in stock in place of some of the cash owed.

"As part of the restructuring, the company has been actively working with its vendor partners on modifying payment terms, which in some cases include stock consideration," MedMen Chief Financial Officer Zeeshan Hyder, said in an emailed statement to CNN Business. "Like other retailers, the company is in constant communication with its vendors and is working towards solutions that are in the best interest of both parties."

During his interview with CNN Business, Bierman said that the online postings came from a small, vocal minority.

"For the most part, the product manufacturers that we're dealing with have been very supportive," Bierman said. "The same way that we are very supportive as adult-use programs launch and evolve on a state by state basis -- where these product manufacturers, they're not perfect either."

Bierman referenced how MedMen has been patient as product manufacturers have had to adapt to new regulations. MedMen and other companies, he said, are trying to navigate industry-wide turbulence.

Bierman said he believes that MedMen is 85% to 90% through the restructuring process and could have its cost-saving efforts wrapped up as early as February.

Companies across the cannabis sector have sought creative arrangements to settle debts with other businesses as they have navigated the broader downturn in the industry, said Kyle Porter, president of CMW Media, a marketing and public relations firm that specializes in the cannabis industry.

Since July 2019, more than half of CMW's clients became delinquent on payments, Porter told CNN Business. MedMen is neither a current nor a past client of CMW.

"It's a very relationship-driven business," Porter said. "We always run that risk: If I cut off the service, will they tell me to fly a kite and never pay off my bill?"

Porter said some firms offered stock in lieu of cash payments. Citing company policy, Porter said he never accepted, adding that valuations of stock are incredibly volatile -- especially in the cannabis space.

"It'll be the most expensive and worthless piece of paper I ever had," he said.

Asking for such arrangements puts pressure on smaller brands that might not have the ability or deep resources to weather challenging times, said Morgan Paxhia, co-founder of Poseidon Asset Management, a cannabis investment firm.

"You can't do that to companies; it'll destroy them," he said, adding that taking restricted stock on the Canadian exchanges with no likely immediate liquidity won't solve vendors' near-term cash needs. "This is not like a General Electric share."

Complicating matters further is that because cannabis is still illegal on a federal level, the US bankruptcy process is off the table for most cannabis businesses.

But while MedMen is not alone in this regard, when those operational and financial struggles occur at a company that sought to become the nation's premier cannabis retailer, the ripple effects can be resounding.

CNN Business spoke with a current vendor for MedMen who said their invoices remain unpaid.

A representative from 710 Labs, which sells cannabis flower and concentrate products, told CNN Business that the company has not been paid by MedMen since September 2019 and is owed more than $150,000. The company received an email from MedMen in early January, which was reviewed by CNN Business, seeking a settlement on the amount due and indicating the company is working on "creative arrangements" with vendors who will be offered premium shelf space if they want to agree to some repayment terms.

The coming months and the next couple of quarterly earnings reports could prove critical to MedMen's fate, said Jesse Pytlak, an analyst who covers MedMen for Toronto-based Cormark Securities.

"For MedMen to continue as a going concern, the company needs to execute on its restructuring," he said. "It's a delicate situation, and insolvency is not off the table."

When asked about the potential for insolvency, MedMen spokesperson Christian Langbein referenced three recent press announcements: A Dec. 11, 2019, release highlighting financing and corporate governance moves; a Dec. 27, 2019, release announcing the sale of non-core assets; and a Jan. 14, 2020, release announcing the closing of an amendment to extend the maturity date of a $78 million secured term loan.

MedMen declined to respond to the specific claims made by 710 Labs as well as statements and critiques from analysts and industry members that were made to CNN Business in the days following the interview with Bierman.

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