MedMen Enterprises Inc.
Q3 2021 Earnings Call Transcript

Published: 11 May 2021

[Operator:]

Good day and thank you for standing by. Welcome to the MedMen Third Quarter Fiscal 2021 Earnings Conference Call. At this time all participants are in listen-only mode. After the speaker's presentation there will be a question-and-answer session. I would now like to hand the conference over to Reece Fulgham. Thank you. Please go ahead.

[Reece Fulgham:]

Thank you. Good afternoon, and welcome everyone. Today, I am joined by our CEO, Tom Lynch; and COO, Tim Bossidy. On today's call, management will provide prepared remarks and then we will open the call to your questions. Earlier today, we issued a press release announcing third quarter fiscal 2021 results for the period ending March 27, 2021. The press release along with our financial statements and MD&A are available on the company's website and filed on both, EDGAR and SEDAR.

[Tom Lynch:]

Thank you, everyone for joining us this afternoon where we'll provide another update on the company's turnaround progress, execution on our transition to growth, and plans to drive future growth, as well as our financial performance for the quarter. Last quarter, we addressed the increased enthusiasm in the cannabis sector. And since then New Jersey, New Mexico and New York have also passed adults use initiatives. The police report that this adult use in the U.S. gains momentum, MedMen is also gaining momentum. With the gradual reopening of California, retail beginning to position our story, so it's one of accelerated growth. First, we reported our third consecutive quarter of positive retail cash flow, which is even more robust this quarter with our increase in sales. California same-store sales were up 2.3% quarter-over-quarter, Nevada same-store sales were up 8.1% quarter-over-quarter, Florida same-store sales were up 12.8% quarter-over-quarter, New York same-store sales were up 36.9% quarter-over-quarter, Arizona state revenue was up 80.2% quarter-over-quarter and Illinois was down 4.8% quarter-over-quarter. Momentum was accelerating even more in April with California further reopening. With California April same-store sales up another 11.9% over March, and overall sales up 9.1% month-over-month. Our 420 was huge success with MedMen hitting it's high watermark in weekly sales in the company's history with it's now completely revamped cost structure.

[Tim Bossidy:]

Thank you, Tom. I'm also incredibly excited and optimistic about the momentum we have started to pick up as California retail restrictions began to lift in late January. Total retail sales increased from $10.6 million in January to $13.1 million in March, and $14 3 million in April, a gain of approximately 35% from January to April. And like Tom mentioned, some California resale restrictions do remain; we are currently limited to 75% capacity, but we do expect this to lift shortly. And while we showed another consecutive quarter of progress, we expect this progress to accelerate as our key markets continue to recover from the pandemic. We continue to focus our turnaround story on retail EBITDA as a marker of progress since time and I began. To this point, we have more than doubled retail EBITDA year-over-year from $3.9 million in Q3 2020 to $8.5 million in Q3 2021 despite the headwinds we face from COVID-19. Now as revenue continues to increase, we will start to see some additional gains from operating average versus last year's focus on rationalizing costs and improving gross margin. To drive continued revenue growth we have a number of ongoing initiatives. The first is a continued focus on driving traffic back into our stores as COVID restrictions begin to lift and people begin to socialize and travel again. We have increased our communications to our database of over 0.5 million customers through email and SMS to capitalize on this time. Our average weekly touch point has increased by about 10%, and we still see minimal opt-outs. This helped drive a significant lift in average weekly traffic into our stores by close to a 10% increase from January to February, and then by more than 15% in February to March for an increase of more than 27% over January baseline.

[Reece Fulgham:]

Thank you, Tim. First, I note that we are considered a U.S. domestic issuer under the rules of the SEC. And as such, our financial statements were prepared in accordance with U.S. GAAP. Also consistent with prior quarters, all the figures on today's call are in U.S. dollars. In addition, I'll refer to certain non-GAAP measures we believe to be relevant economic indicators. You can find further information on these financial measures in our MD&A for the third quarter. Overall, we continue to make solid progress quarter-over-quarter by most financial and operational metrics. First, let me address our system-wide retail results, which includes the New York and Arizona operations, which are classified as discontinued operations and assets held for sale respectively. System-wide transactions were up 7% from the second quarter driven mainly by broad growth across all states except for Illinois, which was slightly lower than the prior quarter. System-wide retail revenue for the fiscal third quarter was $37.8 million, up 8.2% from $34.9 million in the previous quarter. California and Nevada retail sales stabilized from the COVID-19 impact on business and occupancy restrictions. California retail sales increased by 2.3% quarter-over-quarter, and Nevada improved by 8.1%. Retail revenue for the month of April compared favorably to the first month of the second quarter growing by $3.7 million or 34.7%. We expect this trend to continue as California further relaxes retail occupancy restrictions in the coming weeks. System-wide retail gross margin for the quarter was $20.7 million, or 54.8% of revenue. And system-wide retail operating expenses for the quarter totaled $11.9 million or 31.4% of revenue, a 3.2% decrease in the prior quarter $12.3 million, and a $5.8 million or 32.9% decrease from the prior year total of $17.7 million. Year-to-date operating expenses totaled $37.5 million or 34.4% of revenue. System-wide retail adjusted EBITDA for the third quarter was $9.2 million or 24.4% of revenue, which is $1.8 million or 24% higher than the prior quarter, and $6.7 million or 270.6% higher than the prior year. Retail adjusted EBITDA including distribution expenses for the third quarter was $8.5 million or 22.5% of revenue, which is $2.5 million or 41.4% higher than the prior quarter. Year-to-date retail adjusted EBITDA including distribution expenses was $21.4 million or 19.6% of revenue. As Tom mentioned earlier, this was our third quarter in a row of positive cash flow after-tax across our retail footprint. This metric also resulted in Gotham Green Partners canceling almost $100 million in the money warrants due to the company hitting this metric with two quarters in a row. Let's now take a deeper look at our continuing operations as reported in our Form 10-Q today. On a high level basis, the presentation of our third fiscal quarter financial results differs from the prior quarter as we now classify the four New York stores and cultivation facility as discontinued operations given the investment from Ascend announced earlier this year. Additionally, the operations of our Arizona store and Arizona cultivation and manufacturing facility are excluded due to their classifications being held for sale. Revenue from continuing operations for the third quarter totaled $32 million, up $1.2 million or 3.8% sequentially. Continuing operations gross margin for the third quarter totaled $13.3 million or 42% of revenue, which is a $3 million decline from the prior quarter due primarily to a one-time rationalization and retirement of unseen brands including statement where we had non-reusable packaging of close to $1 million at cost. We also saw an impairment of $750,000 in where we adjusted to market prices. Excluding the one-time impairments of $1.7 million, gross profit would have been $14.9 million or 46.5% of revenue. We expect to see overall continuing operations based margin to improve going forward as we deepen our partnerships and cultivation at DHS and Mustang where we still carry significant fixed costs. Continuing operations, general and administrative expenses totaled $28.9 million, which is $2.4 million or 7.5% lower than the preceding quarter and $14 million or 32.7% lower than the prior year. Corporate SG&A for the third quarter was $11 million, which was $6 million or 35.7% lower than the prior year and $1.8 million or 94% higher than the prior quarter. Our corporate SG&A would have been flat quarter-over-quarter again, if not for an increase in expenses associated with ongoing litigation with former offices of MedMen. MedMen third quarter loss from operations totaled $17.4 million, which was $29.4 million or 62.8% better than prior year, and $46.5 million lower than the prior quarter due primarily to updates to the forecast financial estimates impacting tax liabilities and deferred taxes and the non-recurring retirement of brands and ongoing legal expenses related to MedMen former officer litigation as previously discussed. Net loss and comprehensive loss attributable to MedMen Enterprises improved substantially from a $68.9 million loss in the prior quarter to a $9.7 million loss in the third quarter, due primarily to the adjustment of estimates impacting both tax liabilities and deferred taxes mentioned previously. Weighted average shares outstanding for the third quarter was 541,029,620, driving a per share loss of $0.04 which compares favorably to the prior quarter net per share loss of $0.14. Turning to our balance sheet; as of March 27, 2021, the company had total assets of $487.1 million, including cash and cash equivalents of $21.3 million. During the third quarter, the company improved liquidity through multiple capital market and debt raises. During the quarter, the company closed on $18.9 million in additional gross proceeds through non-brokered private placement transactions with certain institutional investors. Additionally, the company closed $1 million through an unsecured convertible debenture facility with certain institutional investors and raised an additional $10 million in gross proceeds under it's senior secured convertible debt facility led by funds affiliated with Gotham Green. Lastly, on February 25, 2021 the company announced a substantial investment and planned deleveraging of the balance sheet subject to regulatory approval of upto $73 million in MedMen New York Inc., the proceeds of which will predominantly be used to pay down the company's senior secured lender. During the third quarter, management also continued working with our strategic advisors, Moelis, as we look to potentially diversify our funding sources and deleverage our balance sheet. I want to continue to provide updates on our cap table as well. Given our multi-class structure, as of May 7, we had approximately 664,200,870 subordinate voting shares, and an additional 98,063,396 redeemable shares, which are convertible into subordinate voting shares on a one-to-one basis. I'm very pleased to conclude that our third quarter was foundational to transitioning MedMen to a growth story, store visits, transactions and revenue all improved over the prior quarter, and our operating expenses remained under control. Our store level performance metrics improved over the prior quarter in year. California and Nevada began rebounding from COVID-19 restrictions and resulting classic drops. And importantly, we continue to develop our internal structural organizational framework to facilitate our plan dynamic growth across the country. During the quarter, we stabilized liquidity by successfully accessing the equity and debt capital markets, and are properly positioned to growing the company. MedMen management and operations teams are focused on executing our aggressive store opening schedule, thereby unlocking value from all leased but unopened portfolio properties, which is truly exciting. This will not occur overnight but I expect continued methodical progress to expand our footprint in Florida, Massachusetts, Illinois, Nevada and California. MedMen's mission is to be the best-in-class cannabis retailer. While different state regulatory regimes are developing in different ways today, we believe long-term there will be distinct winners in each vertical and we believe that those winners will be the ones with the focus, experience, dedication, and passion to provide the best experience cannabis consumers. As we transition our story, from turnaround to growth, our North Star is that our brand and retail experience will be second to none. Wrapping this up, I want to express my sincere appreciation to the various stakeholders for their continued support. And for the outstanding effort that MedMen team members put forth on a day-in and day-out basis to ensure that we are in a better operational and financial position today than we were the week, month or quarter before. I'm encouraged by the ongoing maturation and development of this very young and exciting cannabis market. And I'm extremely excited about the prospects for MedMen's place in this fast growing industry. We will now open up the call to your questions. Operator?

[Operator:]

Before we go to questions, we'll take additional remarks from Reece Fulgham.

[Reece Fulgham:]

Hi. I also wanted to mention that we have issued our earnings press release earlier today, and we are making minor edits to the final 10-Q which will be filed later tonight. Back to you, operator.

[Operator:]

Thank you. Our first question is from Scott Fortune with ROTH Capital Partner.

[Scott Fortune:]

Yes, good afternoon. Thanks for the color and the opportunity here. Just kind of a follow-up on the operating landscape in California, now that shelter-in-place is going to be removed here and vaccinations are opening things up; April you saw significantly new volume coming on board. And obviously this is more than just countless checks but how far are we getting back to the normalized traffic levels? And then, how are you looking at kind of tourism as the site of pertinent percentage of sales for your California stores? I know you're averaging about 8 million of store. And then, you can double that as moments from past experience. This will be covered on the California side. And the opportunity to move that up.

[Tom Lynch:]

Sure, Scott. Thanks for the question. I'll call -- I'll answer the vendor question first. Regarding tourism, we have the return of travel and so forth built into our models, we're not expecting really too much there because of the amount of uncertainty. What I will say to that question, and it's a very good one. Is when you look at our traffic now and this has a lot to do with our assortment, and frankly, our new or different go-to-market strategy. Our traffic mix is materially different than it had been in the past; in that we have made an effort to be -- as Tim said in the earlier comments, a discovery experience. So if you look at our assortment today which again is fundamentally different and broad, we have appealed now to folks that are curious, perhaps getting into cannabis for the first time, to those who are extremely knowledgeable and everyone in between. So we've become more of a destination shop in and around the communities in which we service. And so the traffic mix is in my estimation much healthier than it's been in the past, and any return of tourism will just be additive to that but it is not -- it is no longer the sole go-to-market strategy of this business by any means. So Tim, do you want to comment on the broader California market?

[Tim Bossidy:]

Absolutely. Thanks, Tom. So as we mentioned in our press release, same-store sales are up about almost 12% in April over March. And that's with retail capacity restrictions still being at 75%, and so where we view the next few months ahead here is that some people are estimating that LA will reach -- LA County will reach heard immunity by July. And so I think the answer to that question is we're extraordinarily excited about where the California market is heading. Because you just saw one-for-one or even all of them are turbocharged as those retail capacity restrictions lifted, we were ready with our new revised revamped assortment to serve people at a much higher volume and rate.

[Scott Fortune:]

Okay, good thing. I appreciate the color. And then what are some of the top priority initiatives to allocate some new capital, it sounds like Florida, obviously, you have Massachusetts and Illinois out there too but Florida is the kind of priority moving forward to capture that market. And where are you at with the production capacity coming on board to really start to grow the store base in Florida?

[Tom Lynch:]

Go ahead, Tim.

[Tim Bossidy:]

Thanks, Tom. So we are currently underway with our expansion at Eustace . And so we're about an 8,000-pounds annual run rate with our capacity now, and our plan through the expansion is to update that to about 22,000 pounds of annual capacity, which we're targeting to come online late this calendar year. And the goal there for this phase 1 expansion is to serve 15 dispensaries but as we're all of it further .

[Tom Lynch:]

to handicap that once gathering; and Tim felt he couldn't jump in. It's a really dependent . Tim, if you can add some color if you'd like.

[Tim Bossidy:]

I'll say we're working hand-in-hand with the regulators. A lot going on at the state right now, so we're just being patient as we work -- as we work hand-in-hand with state.

[Scott Fortune:]

Okay, thanks.

[Operator:]

[Tom Lynch:]

I don't believe we have any closing remarks. I think that's it for the call.

[Tim Bossidy:]

I appreciate folks calling in.