MedMen released their earnings. 

What I said last 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.

This 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.

Income Statement Drivers and Breakeven: Trend

Stores 23: California 11, Illinois 1, Nevada 3, Florida 4

Sales increased 30% for the Q to $36 million from $27 million as covid closures impacted revenue in the previous Q.  They have several assets being held for sale and as such comparisons to prior period are not useful.

They do indicate $21 million in sales, 58% of overall, came from their California operations.  They indicate they are looking to add one more Illinois store.

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, with an increase in sales this metric improved +$0.12 to $0.43.  MedMen are the lowest in peer group at generating revenue from PPE and G/I.

Income Statement Drivers and Breakeven: Peer

MedMen remains at 7^th in terms of sales. Absolute GM is 7th in peer group.

Gross Margin Peer and Trend:

The GM increased to 47% from 40% likely from the reduction in reliance on their own cultivation.  GM was $17 million.  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.

As with the sales metric over PPE + G/I, the GM metric, despite reduction in GM in absolute $ terms, improved by $0.08 to $0.21, they beat only Acreage and are tied with Harvest.  Not the company you want to keep.

Gross Margin USA Peer Group:

MedMen is tied at 8^th out of 10… tied with Harvest and ahead of Acreage.  There are those names again.

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 decreased by $10 million to $30 million. They include a G&A schedule this Q.  In the future, should they have one that I am willing to spread, I will comment on changes. 

SBC has been muted with their share price declines and was 4% as percent of sales or $1.3 million.

Depreciation at store and corporate level decreased to $8.6 million in the Q, a decrease of $7.3 million as they sell assets.

OPEX rang in at $41 million a decrease from $56 million last Q.

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 -$24 million improving from -$45 million last Q. The improved GM of $6 million and increase in Opex the reason.

MMEN will require incremental sales of 141% quarterly to breakeven using current GM% and $OPEX.

Other expenses of note

• Interest expense of $11 million versus $15 million last Q
• Impairment  and assorted gains on disposals aggregated Income of $15 million versus expenses last Q of $239 million

Income tax adds another $10 million burden.

Net loss from discontinued operations adds another $2.7 million burden. Bringing Net income to negative $30 million before discounting Non-Controlling Income of -$11 million, netting a Comprehensive Income of negative $22 million versus negative $503 million last Q.

EBITDA Trend and Peer

Negative EBITDA improved from -$29 million to -$13 million QoQ.  The increase in GM and the decrease in SGA the reasons.

Negative EBITDA is not a great metric when you still have $11 million in interest and $10 million in taxes to pay.

+EBITDA Breakeven: US Peers

To evidence a breakeven EBITDA at present GM% and Cash OPEX$, MMEN will need a 68% increase in sales quarterly. 

“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 given FG decreased a $2.8 million to $9.0 million. 

They had $10 million in cash at Q end flat QoQ versus $76 million in A/P, a decrease of $3 million QoQ. Current taxes are $58 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:

• During the first quarter, the Company announced a total of $20.0 million in financing commitments. On November 2, 2020, the financing commitments were upsized to $25.7 million. On July 3, 2020, the Company also announced it received $10.0 million of proceeds through the sale of its Evanston retail store.

What I said last 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.

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.