In our last structure on $META, we predicted that there could be some headwinds based upon high cost per incremental store, high corporate G&A, and that the medical business line looking like dead weight.

Indeed, all of that is now manifesting as we’ll see below. 

To the financials!

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• Cash down slightly to $7MM. Sales flat QoQ – $17MM
• G&A/expenses flat QoQ at $10MM
• 30% margin on cannabis, which is 96% of total sales ($54MM)
• $2.2MM in total accessory sales ($600k last quarter). No other retail outfit discloses this well, so no comparatives available. Seems very, very low (to me) that less than $0.05 of every dollar spent is non-cannabis. Would like to get more insight on this.
• The results of their shopping spree has landed: New Leaf, New Leaf Emporium, NAC Bio, NAC Medical….the latter one being impaired this quarter.
• Total goodwill/Intangibles impaired by some $19MM in total, NAC Medical taking the brunt of it at $13MM. Interestingly, $3.5MM of total impaired was on three specific retail outlets, 2 in ALTA and the lone store in SASK. Already. Hella.
• 30 stores up and running as of the MD&A date, another 15 or so in the hopper. I am not sure where I got the 32 number last time – they only had 24 stores open as of prior financials. 
• Which, means that quarterly sales were up by only $21k, despite 6 more stores being opened at some point. By being vague in terms of what’s actually open in the fleet ‘as of’ – this sort of nonsense pops up.
• Operations virtually break even – before $20MM/yr in corporate overhead. Eep. $3MM/yr in salaries for executive.
• SBC around $17k, my estimate last quarter missed by a mile. As an excuse, I could suggest it shows that management is aware of where the company is currently at, and froze conversions internally. But I won’t. 
• If it does blow out next quarter, the cynic might see it as a bolt for the exits by management. I would.
• Paying convertible interest in shares. Given the $1.08 conversion price, I’m pretty confidant that discussions were had with the holders about the Nov 2019 interest payment as well.
• The Second Cup ‘strategic alliance’ looks dead at the moment. Wrote off $375k that was remaining as intangible around it.
• I suspect we’ll see their ‘research division’ folded soon.

Okay. 

Good disclosure overall, excepting stores that are actually open versus planned. We’ve seen this ‘hide the weenie’ strategy in several US MSO’s, where pitch deck vagary leaks into financials. In general though, retail financials are a much easier read than LP’s.

What that disclosure provides though is some hard realities that $META is facing. The business is all about runway, and this outfit is in similar shape to others in terms of cash: they need it. Desperately. 

With current margins – it’s a business built on volume, and with the leverage they’ve undertaken to initiate – an increase in stores is the only way forward. G&A is eye watering at this level, and even with 30 stores up and in full flight, they were able to lose $20MM on the year excluding impairments.

That sales set a quarterly record isn’t impressive. To myself it’s worrying:  sales are only up $20k from last quarter as of end of May and July quarters, that $17MM in gross margin is supporting a $40MM/annum run rate. The 6 stores opened may have some revenues in here: and if they have, that means overall individual store sales actually went down.

$META recently terminated a key employee, perhaps in conjunction with their sale of the medical division. Medical business lines have been pretty much terminal themselves, as we’ve seen with other companies in the space. With little price differentiation and easy access to cultivars via recreational channels, medical existing as a separate business line doesn’t have the volume nor customer capture that it had previously. They took a pretty hard dump on it on impairment, and sold the 7 NAC Medical clinics to an insurance company for $4MM last month.

They recently hit up their lender again as well. Back in January 2018, they appointed a Chief of a Manitoba First Nation as a director, which also brought access to credit facilities. His tribe (OCN) has lent $META cash in the past, and the loan facility is now structured as a LOC. Some $9MM at 10% (plus $200k/ yr in fees for the pleasure of doing it) was already in place, that total has now expanded to $20MM, with some $475k/yr in fees. Likely under that relationship, there’s also alignment with several Manitoba First Nations that will see 5 stores opened and operate under a JV. 

So, packing around some $20MM in cash at the moment….well…sheesh. These financials don’t look good to my eyes in almost any respect.

See, for $META to even break even, I thumbnail they need about 90+ stores. Margins have been rigid, and the fact we have 2 full quarters of same store +/- sales levels –  that only increased by $20k….is serious. Given recreational sales expansion over those 6 months, a loose estimate would see sales increasing at the same rate as aggregate cannabis sales. They didn’t. 

Add in that they’ve written off $3.5MM goodwill/intangibles on three stores already, means that sales at those stores has been far (far) short of expectation. That $META’s also concentrated in Alberta gives us a glimpse into the larger recreational market – inasmuch as saturation could also be emergent – even appearing as early as July if so.  They should get a shot in the arm with late summer’s seasonality, I will definitely be looking at sales over the next statement period. If sales are largely flat again…..

We’ve seen across retailers that a store is around $3MM-$4MM to open – with fixtures and inventory and leases and signage and the like. For their cash balance of about $20MM, and given their current burn rate of some $15MM/quarter…..well. This doesn’t bode well at all. I expect their CEO is out there right now beating every possible bush for a Couch-Tard sort of thing – and without it – there is few options left to them go forward. Absent a major capital infusion or hard cost cutting measures – they’ll have a quarter or two before something has to give. 

This isn’t good at all, for either investors in $META, nor for retailers that don’t have the cash depth to see a build out through. Ontario’s slow rollout is only partially to blame. What this amount of leverage reveals is planning was for a big boom rather than organic/incremental expansion. The gold rush we saw in claims to funded capacity and massive builds in LP’s appears to have manifested itself in retail as well – except that retail capacity wasn’t funded. 

If there was assumptions that positive cashflow from retail ops could fund that expansion, we are seeing clearly in several retailers that it isn’t so. There is almost nothing good in any of this, nor these financials.  If I was to blue sky, I’d suggest they might consider doing something with Fire & Flower. Except that individual companies are limited to some 35 stores total in Alberta – and these two combined would exceed 50 – so there’d need to be divestment. Yep, I’m there already.

$FAF’s CEO Trevor Fencott might have seen this coming for his company, and did the Couche-Tard deal to head it off. If all of this is accurate, he’s going to be looking pretty good for it.

From here though, $META’s future looks to be contingent on doing a raise. A big one.

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 holds no position in $META.