Medmen Is Slowly Adjusting to The Right Path of Profitability

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Medmen (CSE: MMEN, OTC: MMNFF) reported its financial results of Q1 2020 last week on November 26, 2019. The quarter reflected the operations for the period from June 30, 2019 – September 28, 2019. Management is aware of the high costs and losses, and most of the company’s actions to move towards a positive balance sheet occurred after the quarter’s end. Medmen has drastically altered its plan. This will be outlined further in this article.

Background

Medmen Enterprises Inc. (MMEN) (MMNFF: OTC) is currently the biggest cannabis retailer in the US. Retail is essentially building the relationship with the end customer, and this is their belief of where the long-term value will be. They are focusing on strengthening their retail brand by growing out their retail footprint in the key markets as a Multi-State Operator (MSO) – which are basically large public companies with multi-state operations. They have 70 retail licenses, and 33 operational retail licenses throughout the U.S. Though they are mainly focused on retail and branding, they also have a few cultivation/production facilities. 

MSO (Multi State Operator)

MMEN entering into the MSO world is a positive move. However, they are not the only MSO in the cannabis space. MSO’s are a benefit for consumers in a complex and highly regulated industry. MSO’s assist companies by allowing them to jump start their brands and to extend their distribution across state lines. This course of action gives consumers access to their brands from the market that they otherwise wouldn’t have engaged in.

Financial ResultsQ1 2020Q4 2019Q3 2019Q2 2019Q1 2019

Revenue

$44m

$42m

$36.6m

$29.9m

$21.5m

SG&A

$30.6m

$33m

$37.5m

$40.9m

$52.1m

Total Assets

$849.4m

$634.63m

$552.07m

$466.45m

$374.37m

Total Liabilities  

$671m

$433.78m

$292.66m

$174.75m

$128.76m

Adjusted EBITDA

($22.22m)

($39.43m)

($42.56m)

($43.91m)

($47.35m)

Gross Margins

52%

50%

53%

53%

54%

 Financial Results – (Performance since Q1 2019)

Pros:

  • Managed to increase its revenue QoQ. 
  • Maintained high gross margins QoQ. 
  • Assets are increasing QoQ.
  • Reduced their SG&A (as promised but at a slow rate).
  • The Adjusted EBITDA loss is decreasing QoQ.

Cons:

  • The total liabilities are increasing.  
  • SG&A is being reduced but is still considered high.  
  • Adjusted EBITDA loss is considered high.
  • Net losses are high.

Factors to consider that were not included in this quarter:

1. The strategic plan that was announced on Nov.15, 2019 was not integrated in this quarter. Meaning the cuts, non-core assets that were sold, and the savings from the cuts that were announced in this report were not implemented or included in the financial results of Q1 2020. The key points from the strategic plan:

  • Focusing on Core Business / Divesting Non-Core Assets;
  • Reduce Corporate SG&A;
  • Drive Asset-Level EBITDA;
  • Limit Cash Outlays; and
  • Invest in Employees and Culture.

2. The Florida revenue and asset were also not fully integrated or included in Q1 2020. They only announced the opening of the stores in Florida 4 days prior to the closing of the quarter (September 24, 2019). Those stores that were opened were not significantly reflect in the revenue. Below is a Breakdown summary of the Florida operations/Assets: 

Store CountLocationDate Announced (2019)
1West palm beachJune 14
2St. PetersburgSept. 24
3Key west Sept. 24
4PensacolaSept. 24
5Jacksonville Beach Oct. 15
 Orlando  Oct. 25
7TallahasseeOct. 25
8Sarasota Nov. 11

3. Illinois will be legalizing marijuana beginning January 1, 2020. Illinois revenue and assets only included 1 store in Q1 2020 [Chicago – Oak Park (Lake St.)]. Due to regulatory changes and termination of Pharmacann transaction, the company is expected to have 4 operational recreational stores in Illinois during Calendar 2020. The following are assets in Illinois:  

Assets  (Retail Dis./License/ Facility)LocationDate Announced
Retail Dis.Chicago – Oak ParkOct.3/18 
Retail Dis.Evanston – Maple Ave.Dec. 2/19
LicenseGreater ChicagoN/A
Facility (Cultivation/Production)HillcrestN/A

 There is a total of 10 dispensaries, of which 8 are confirmed operating and open to the public.

4. The Virginia Assets were also excluded from Q1 2020, because the transfer of Virginia License closed on October 18, 2019. 

OVERALL:

The board has finally realized the cash burn rate is a major concern that needs adjustment. Their goal in 2020 is to: (A) build a financially flexibly company; and (B) to be positive EBITDA by end of the Calendar year 2020. As per the management commentary:As we right-size our organization and implement a focus on free cash flow generation, our business will become more efficient, allowing us to better serve our stakeholders. Through the execution of these goals, we expect MedMen will be EBITDA positive by the end of calendar year 2020. 

Full Disclosure: I have long positions in Medmen Enterprises Inc. I am not receiving compensation for this article. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any companies or public security companies other than being a shareholder with any company whose stock is mentioned in this article.

Disclaimer: All posts made on this website are provided for information purposes only. None of the information here is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, Company, or fund. Before making an investment decision, you should seek the advice of a qualified and registered securities professional. The author is not paid to share this information. Cannabis Investment Group is not paid to share this information and has no business relationship other than shareholder with any company whose stock is mentioned in this article.

About the Author: Andro is in the legal profession, a writer, researcher, business consultant, and an analyst in the legal and business sector with a Bachelor of Law from the University of Sunderland. His interests range from law and politics to governance, social justice, business, technical and fundamental analysis and Securities. Majority of the business consulting experience is within the pharmaceutical industry. 9 Years of Investing and trading experience. Invested and covered the marijuana space since 2016. Majority of the legal experience is in Criminal Law with the Public Prosecution Services of Canada (PPSC), Family Law and Corporate Law.

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