MedMen released their earnings. 

What I said last Q:

Gross Margin increased to 47% of sales, on a sales growth of +30%, to $17 million. 

Interest and taxes aggregated $21 million.

SGA was $30 million.

I am really tempted to stop right there.

Given their dire straight… I will keep this brief.

This Q:

• Sales decline with same stores as last Q.
• GM improved to 53% and $18 million
• OPEX was $43 million
• Interest expense is $10 million or 56% of GM
• Cash an anemic $8 million against A/P and accrued of $81 million and taxes of another $86 million
• They did check the couch cushions for $10 million in more debt plus another $10 million from Gotham post Q.

I am awaiting when this will be heading to CCAA (Canadian equivalent of Chapter 11 or Chapter 7 if it goes straight to liquidation).

Income Statement Drivers and Breakeven: Trend

Stores 23: California 11, Illinois 1, Nevada 3, Florida 4. No change QoQ.

Sales decreased 5% for the Q to $34 million from $36 million despite same store count.  They have several assets being held for sale and as such comparisons to prior period are not useful.

They do indicate $19.8 million sales ($21 million last Q), 59% of overall, came from their California operations.  They indicate they are looking to add one more Illinois store and expect to open 2 stores in Massachusetts.

Annualized Sales $ per (PPE + Goodwill/Intangibles)

What I have done above is annualize the last Q’s sales and divided it by the aggerate of PPE and G/I to see how much sales are being generated and what the trend is. I added PPE and G/I to try to normalize the companies that have gone an organic path (TRUL and CWEB until their new acquisition) versus the more acquisitive (Cura and GTII)

With a further decrease in PPE and G/I through impairment and slight decline in sales, this metric slid -$0.01 to $0.42.  MedMen are the lowest in peer group at generating revenue from PPE and G/I.

Income Statement Drivers and Breakeven: Peer

MedMen remains at 8^th in terms of sales. Absolute GM is 8th in peer group.

Gross Margin Peer and Trend:

The GM increased to 53% from 47% likely from the reduction in reliance on their own cultivation.  GM was $18 million +$1 million QoQ.  When looking at SGA, interest expense and taxes…this situation is not improving rapidly enough.

Annualized Gross Margin $ per (PPE + Goodwill/Intangibles)

This is our attempt to normalize the companies growing organically from the roll ups.  We have annualized the gross margin and divided that by aggregate of PPE + G&I.

GM increased in absolute $ terms whole PPE decreased $4 million and G/I decreased 5 million improved by $0.01 to $0.22, they beat only Acreage and Harvest.  Not the company you want to keep.

Gross Margin USA Peer Group:

MedMen is at 7^th out of 11. 

SGA and SBC Trend:

NOTE: I have moved various impairments to Other Income and Expenses to keep peer group comparable.

Selling expense was stable at $0.2 million as the taps are turned off. 

G&A increased by $0.5 million to $30.8 million. They include a G&A schedule which shows an increase in Other by $3.5 million offset by a $2 million decrease in License fees and Salaries.

SBC has been muted with their share price declines and was 8% as percent of sales or $2.8 million doubling QoQ.

Depreciation at store and corporate level increased to $9.8 million in the Q from $8.6 million QoQ.

OPEX rang in at $43.5 million an increase from $40.5 million last Q. SBC and depreciation were the drivers.

SGA and SBC Peer:

MedMen has the 2^nd worst SGA in the peer group and only trails the SBC pumping Acreage and CWEB in the combined SGA and SBC metric.

+ Net Operating Profit Breakeven- US Peers

NOP before IFRS voodoo is now -$25.5 million sliding from -$23.8 million last Q. The improved GM of $1 million and increase in Opex the reason.

MMEN will require incremental sales of 142% quarterly to breakeven using current GM% and $OPEX.

Other expenses of note

• Interest expense of $10 million versus $11 million last Q
• Impairment and assorted loss on disposals aggregated expenses of $10 million versus gains last last Q of $15 million

Income tax adds another $23 million burden.

Net gain from discontinued operations adds another $1.2 million improvement. Bringing Net income to negative $69 million before discounting Non-Controlling Loss of $19 million, netting a Comprehensive Income of negative $50 million versus negative $22 million last Q.

EBITDA Trend and Peer

Negative EBITDA improved from -$13.6 million to -$12.6 million QoQ.  The increase in GM is the reason.

Negative EBITDA is not a great metric when you still have $10 million in interest and $24 million in taxes to pay.

+EBITDA Breakeven: US Peers

To evidence a breakeven EBITDA at present GM% and Cash OPEX$, MMEN will need a 70% increase in sales quarterly.  DEAD LAST!

“Waterfall” Bio Assets, Inventory, WIP, FG : Trend

Inventory is less than quarterly sales, however MedMen operates in states where they do not have to simply cultivate their own. However, getting trade terms from suppliers might be putting a crimp in inventory acquisition.  They did increase FG by $4.0 million to $13 million. 

They had $8 million in cash at Q end a $2 million decrease QoQ versus $80 million in A/P, an increase of $4 million QoQ. Current taxes are $86 million. 

Three entities that don’t take well to not being paid: taxman, lenders and suppliers.  MedMen will have trouble satisfying them all.

They have some availability of debt remaining and they are trying to sell assets (see below).  But it has the feel of them trying to put out an inferno with a firehose.

From presser:

• Senior Secured Term Loan: During the second quarter, the Company closed on $7.7 million in additional gross proceeds under its senior secured term loan with funds managed by Hankey Capital and Stable Road Capital and its affiliates.
• Unsecured Convertible Facility: During the second quarter, the Company closed $3.0 million through an unsecured convertible debenture facility with certain institutional investors.
• Senior Secured Convertible Financing: Subsequent to the quarter ended December 26, 2020, the Company closed on $10.0 million in additional gross proceeds under its senior secured convertible debt facility led by funds affiliated with Gotham Green Partners.

What I said last two Q:

There is a certain inevitability with MedMen.  It seems like “when” not “if” we hear they are heading to bankruptcy filings.

This Q:

I’ll stick with that.

When Gotham elects to turn off the tap they will end up owning this along with other creditors.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author has no position in MMEN and does not plan on entering in the next five days.