MedMen released their earnings. 

What I said last Q:

Every once in a while, one comparison can tell a story about a company: Gross margin $13.1 million versus Interest Expense of $13.3 million.

This is like the breadwinner of a large family where their after-tax pay is less than the interest on their mortgage.  All the other bills still have to be paid; the credit cards are maxed out. There are liens on all the assets, so even if they sell them the lenders get first crack at proceeds.  The tax collector is also knocking on the door.

The lenders are the ones that are improving their lot each Q at the expense of shareholders. This company is not for investors, although traders have made some money on it.

I must say… MedMen has some of the better MDA disclosure in their peer base.  Too bad they won’t likely be around much longer.

This Q:

There is a lot going on in these statements.  Year end, change to US GAAP, discontinued operations, impairments of $240 million… As such, I am going to have to rely on MDA versus a “true up” of Q4 to YTD Q3 as a bunch of items will not balance.

COVID laid a few more boots to MMEN when they could least afford it.    Last Q I closed with, “Two quarters left on that prediction (how long they will be around).  If I was Gotham Green, I wouldn’t want to take over during covid, nor until all the dirty work of restructuring is done.”

The creditors are making the existing management make as many hard cuts before the inevitable will happen. G&A is over 3x Gross margin, interest expense is greater than Gross Margin, A/P and Accrued are 8X cash, Income tax payable is almost 4X cash.

This is a situation of whether management can bail water faster than it is coming in and they cannot.

Let’s look at the financials and MDA and see if there is anything good happening in MMEN.

Income Statement Drivers and Breakeven: Trend

What we said the last Q’s:

65% of sales comes from California. 28 stores opened at Q end, including 3 Arizona that will be sold.

• California 12 stores saw a -9% decrease in revenue to $26.9 million and represent 59% of sales mix.
• Nevada stores saw a -20% decrease in revenue to $4.7 million and represent 10% of sales mix. Covid would be the main reason for this decline.
• Illinois, with opening of adult use, 2 stores saw a +182% increase in revenue to $6.7 million and represent 15% of sales mix.
• Fla, Mass, and NY stores saw a +11% increase in revenue to $4.9 million and represent 11% of sales mix.

Illinois was the bright spot in the Q.  They closed 5 of 8 FLA stores, likely as their cultivation capacity could not support the retail outlets.

This Q:

Sales declined 40% for the Q to $27 million from $46 million as covid and the selling of three Arizona dispensaries affected revenue.  Revenue has not been this low since the Q ended Sept 30, 2018.

56% of sales comes from California down from 65% last Q. The 3 Nevada stores were closed 8 of 12 weeks of the Q.  25 stores opened at Q end.

• During the quarter, the Company temporarily closed all three locations for eight weeks due to a state-level mandate post-COVID-19. All three locations were open as of June 27, 2020.”

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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 sales, even with a drop in sales this metric improved +$0.03.  MedMen are the lowest in peer group at generating revenue from PPE and G/I.

Income Statement Drivers and Breakeven: Peer

MedMen drops to 7^th from 4^th last Q in Revenue at $27 million. Absolute GM is 9th in peer group.

Gross Margin Peer and Trend:

This Q:

The GM increased to 40% from 28% likely from the reduction in reliance on their own cultivation.  But at $11 million, Gross Margin is lowest on record.   

As they switched to US GAAP no more Gain on Bios.

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.

As with the sales metric over PPE + G/I, the GM metric, despite reduction in GM in absolute $ terms, improved by $0.05, but again they are the lowest in the peer group.

Gross Margin USA Peer Group:

MedMen is 9^th out of 10. Cresco Labs, who derives most of their revenue from wholesale, is last.

Gross Margin North American Peer Group:

MedMen is for 9 out of 16.

SGA and SBC Trend:

Selling expense dropped to $0.2 million from $1.0 million as the taps are turned off. 

G&A increased by $4 million to $40 million. I cannot find an expense schedule.  While they indicate that corporate G&A for the period was $130 million in the presser, if I back out their stated corporate G&A for the previous 3Q’s it would lead to this Q GA being higher than what was disclosed.

If I had to guess at the increase QoQ I would guess it was professional fees.

SBC has been muted with their share price declines and decreased -1% as percent of sales.

Depreciation at store and corporate level increased to $16 million in the Q, an increase of $1 million.

OPEX rang in at $56 million an increase from $54 million last Q.

SGA and SBC Peer:

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

+ Net Operating Profit Breakeven- US Peers

NOP before IFRS voodoo is now -$45 million sliding from -$41 million (before IFRS voodoo) last Q. The reduction in GM by $2 million and increase in Opex the reason.

MMEN will require incremental sales of 409% quarterly to breakeven using current GM% and $OPEX.

Other expenses of note

• Interest expense of $15 million versus $13 million last Q, greater than GM of $11 million
• Impairment of $239 million

From MDA: The Company conducted its annual goodwill impairment assessment and recorded an impairment loss of $26.3 million. During the three months ended June 27, 2020, management also noted indicators of impairment of its long-lived assets of certain asset groups and recorded an impairment loss of $188.0 million. In addition, the Company wrote off $5.6 million related to the dispensary license in Staunton, Virginia and $4.0 million related to an acquisition in process.

Income tax adds another $67 million burden.

Net loss from discontinued operations adds another $1.4 million burden. Bringing Net income to negative $367 million before discounting Non-Controlling Income of -$135 million, netting a Comprehensive Income of negative $503 million versus negative $40 million last Q.

+ Net Operating Profit Breakeven- NA Peers

MMEN is 11 of 16 in this NA peer group.

EBITDA Trend and Peer

Negative EBITDA slid from -$24 million from -$29 million last Q.  The decrease in GM and the increase in SGA the reasons.

Negative EBITDA is not a great metric when you still have $15 million in interest and $67 million in taxes to pay.

+EBITDA Breakeven: US Peers

To evidence a breakeven EBITDA at present GM% and Cash OPEX$, MMEN will need a 266% increase in sales quarterly. 

+EBITDA Breakeven: North American Peers

“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.

Bio Assets have been removed with the switch to GAAP.

FG increased a marginal amount of $1 million to $11 million. 

MedMen has a $13 million interest expense for the Quarter.  They have $30 million in debt due in the next 12 months.  This company has to do far more than hit +EBITDA to survive. 

They had $10 million in cash at Q end decrease of $22 million QoQ versus $80 million in A/P, an increase of $12 million QoQ. Current taxes are $39 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 Convertible Financing: During the fourth quarter, the Company closed on $15.0 million in additional gross proceeds under its senior secured convertible debt facility led by funds affiliated with Gotham Green Partners. Subsequent to the quarter end, the Company closed on an additional $5.0 million under the facility.
• Sale of Non-Core Asset: On February 25, 2020 the Company entered into definitive agreements to assign its rights to acquire a licensed cultivation and manufacturing facility in Hillcrest, Illinois for total gross proceeds of $17.0 million. As part of the transaction, the Company received an initial payment of $10.0 million on February 25, 2020. The second payment of $7.0 million was received on March 23, 2020.

What I said last Q:

Two quarters left on that prediction.  If I was Gotham Green, I wouldn’t want to take over during covid, nor until all the dirty work of restructuring is done.

To put their situation into perspective: Over the last 9 months they generated $39 million in Gross Margin and paid $37 million in interest.  $2 million net is not going to cover all the cash expenses MedMen incurs.

This corpse may still be twitching but it is a corpse.  MedMen is a Zombie.

This Q:

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

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.