Medmen Entprs B Sub Vtg

Good day and thank you for standing by. Welcome to the MedMin third quarter fiscal 2021 earnings conference call. At this time, all participants are in the listen mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to Reese Holjum. Thank you. Please go ahead.

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 27th, 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 SADAR. Before we begin, I'd like to remind you that the comments on today's call will include forward-looking statements, which by their nature involve estimates, projections, goals, forecasts, and assumptions and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Forward-looking statements relate to, among other things, the business and operations of MedMed, our plans for new stores, our financial, operational, and strategic expectations, and our expectations as to future sources of funding. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. Additional information about the material factors and assumptions forming the basis of the forward-looking statements and the risk factors are provided in the company's reports filed with the United States Securities and Exchange Commission and Canadian securities regulators, including the company's earnings press release and MD&A, which was issued earlier today and is available under the company's profile on both EDGAR and SEDAR. During today's conference call, MedMin will refer to certain non-GAAP measures that do not have any standardized meaning prescribed by GAAP, such as EBITDA, adjusted EBITDA, and corporate SDNA, which are defined in the earnings press release we issued earlier today. Reconciliations to GAAP measures are contained in the press release and are MDNA. Please note, all financial information is provided in U.S. dollars unless otherwise indicated. Now with that, I'd like to turn the call over to Tom.

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 adult use initiatives. The police report that as adult use in the U.S. gains momentum, MedMed is also gaining momentum. With the gradual reopening of California, retail beginning to position our story towards 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 percent quarter-over-quarter. Nevada same-store sales were up 8.1 percent quarter-over-quarter. Florida same-store sales were up 12.8 percent 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. Illinois was down 4.8% quarter-over-quarter. Momentum is 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 a huge success, with MedMen hitting its high watermark in weekly sales in the company's history, with its now completely revamped cost structure. What does this mean for the company's turnaround? It means the foundation we have worked hard to build over the past year is solid and starting to produce significant results. Most importantly, we see those results in the four-wall economics we have asked investors to judge us on. We continue our strong progress from the second quarter, despite significant retail restrictions remaining in California through most of January, and some retail restrictions still remaining. Retail EBITDA increased from $5.5 million to $7.4 million, a gain of 33%. Including New York and Arizona, retail EBITDA increased from $6 million to $8.5 million, a gain of 41.4%. Again, this is our third quarter in a row of positive cash flow after tax across our retail footprint, which, as a reminder, had not been accomplished in the company's history until the past three quarters. This metric also resulted in a significant savings in dilution, with Gotham Green Partners canceling almost $100 million in the money warrants due to the company hitting this metric for two quarters in a row. This quarter we held corporate-related SG&A approximately flat, adjusting for litigation related to former employees, and we continue to attract and retain world-class talent. As a reminder, at its peak, the company's corporate-related SG&A was approximately $160 million annually, but this quarter we saw our corporate SG&A reduced to $11 million, excluding pre-opening costs, as has been previously disclosed. That number was 9.4 million, excluding litigation related to former employees, which is flat from Q2 and down 1 million from Q1. We're thrilled with our talent pool at MedMen, and we have continued to bring in key talent in retail, in marketing, in finance, on the supply chain, and in almost every other vertical of the company. From a balance sheet perspective, since we last spoke, we were able to announce the closing of approximately $19 million in additional equity funding, predominantly from new capital partners, as well as announce a path to a significant deleveraging of our balance sheet. Subject to approval from the New York State Department of Health and other regulatory bodies, Ascend Wellness Holdings will complete an investment totaling up to approximately $73 million in our New York subsidiary. which will go towards paying down the large majority of one of our secured lenders. One of the key pieces to our turnaround plan was not only to move to profitability, which we have a clear path towards, but to right-size our balance sheet and reposition the company for growth. We're proud to say we continue to speed towards those goals. Finally, last quarter, I hit on my excitement around acceleration of growth in existing markets, such as California and Florida. And since then, we have announced opening our Emeryville dispensary and our Miami Beach dispensary. We continue to move closer to our two openings in San Francisco, our two openings in Massachusetts, and our significant pipeline of openings in Florida on the back of our ongoing useless expansion. Florida continues to have laser focus for management, and we review our growth strategy there as being differentiated and an enormous value driver for both the company and for patients in that market. We appreciate the patience and support as we continue to make progress on our turnaround plan, which I would describe as being ahead of schedule. With that, I'll hand it over to Tim Bossedy, our Chief Operating Officer, for operational highlights.

Thank you, Tom. I am 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, or a gain of approximately 35% from January to April. And like Tom mentioned, some California retail 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 Tom 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 have faced 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 half a million customers through email and SMS to capitalize on this timing. Our average weekly touchpoints have 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% from February to March, or an increase of more than 27% over a January baseline. Another great example of our increased nimbleness and effectiveness in our marketing communications was when we were approved early for recreational sales in Arizona. Despite only a couple of weeks to prepare, we were quickly able to activate marketing campaigns and digital media, leverage third-party listings partnerships, as well as local PR. The result was over an 80% lift in weekly sales in the first four weeks of January to the rest of the quarter. Another focus is beginning to ramp investment in our delivery program. We have continued to sustain growth of approximately 12% in our delivery channel by continuing to effectively market it to our customers and by offering service enhancements such as the option of scheduled delivery or ASAP delivery. Our customers who use this service have a higher propensity of loyalty to our brand, and as a result, we've been actively improving our foundational processes, ensuring that we are building a scalable business model and identifying opportunities to expand our delivery options across more stores in our portfolio. We continue to drive improvement in our assortment in California and provide a true place for discovery. Last quarter, we talked a little bit about the relaunch of MedMen Red in California. which had a strong initial start we believe can be replicated in our other markets. Total sales were almost $1 million in the quarter, and initial customer feedback was extremely positive. Flower continued to be a bright spot and differentiator for us. In Q3 of this fiscal year, California flower sales were $5.1 million, driven by over 30 brands on our shelves. This quarter, we also added 12 new brands to our assortment that helped drive $2.4 million in additional revenue. We continue to see gains from revision to our pricing model as well. Pricing adjustments to four different brands this quarter resulted in an additional $600,000 plus in revenue. We note we did see gross margin fall in California this quarter, decreasing from about 60% to about 56%. We believe this is temporary. As well, we did make some smart pricing decisions on certain products to be more competitive. The biggest margin impact was choosing to be more promotional in February to clear the way for a lot of exciting product in March and April. In Florida, we continue to increase the quality of our production and prepare for our Bell Rock Brands launch of Mary's and Dixie. Flower will continue to be a significant driver of our success in Florida. This quarter, we sold approximately 20% more units of flower, and we saw total revenue go up approximately 13% quarter over quarter. Next, I'd like to spend some time providing an update of our continued progress in each market, starting with our recreational markets. I want to start with Arizona, our newest rec market. We have not spent much time discussing Arizona in recent quarters, given the accounting classification of assets held for sale that has existed since before Tom and I started. But we want to be clear, this is an accounting classification, and we have treated Arizona like owners and saw the benefits of that as a state term to adult use this quarter. We saw sales at our talking stick dispensary increase from $1.2 million to $2.1 million quarter over quarter, or about 80%. On the wholesale side, we ended the quarter with $1.6 million in wholesale sales, with $1.3 million, or about 80%, coming from third-party sales, up 90% quarter over quarter. Arizona as a state was EBITDA positive for us, and we have plans this coming quarter to continue to increase our manufacturing consistency and cultivation yields to drive additional gains in EBITDA. In California, we continue to push ahead with two new stores in San Francisco and successfully opened our store in Emeryville. For the quarter, we were retail cash flow positive in California, which is an important note for the MedMen growth story. Yes, there are strong competitive pressures from the black market. Taxes are high, and we pay higher lease rates in California. But even with retail traffic having been impacted with COVID-related restrictions, we showed we can generate retail cash flow from our California stores. And as we said, we are seeing a lot of momentum right now, with April revenue up 35% over January revenue. In Nevada, we continue to believe our focus on the local market will pay dividends but we are now seeing the benefits as well for Las Vegas starting to return to its normalcy. In part due to increased tourism, same-store sales were up 8.1% quarter over quarter. We face a tight wholesale market in Nevada, but we continue to deepen vendor relationships and are in the early stages of a cultivation partnership that will allow us to scale the relaunched MedMen Red in Nevada, as well as improve the overall depth of our shelf and increase our gross margin. In Illinois, Our Oak Park location continues to be the best performing store in the national portfolio in terms of revenue, and we are likely no more than a few weeks away from opening our expansion and street-facing entrance with that store, which should provide additional lift. We also announced during our quarter that we secured a secondary location in Morton Grove, which is a location we view as similarly attractive given its placement on a high-traffic street with a strong suburban moat. We expect to fully open this store in late fall. In Massachusetts, we continue to target a summer opening for Fenway, which again, we view as being one of the best locations in our entire portfolio, given its proximity to Fenway Park, concert venues, and a number of universities. We continue to work closely with the City of Newton to make progress on our additional opening there as well. In our medical markets, we also continue to grow. While we announced the investment in New York, we again continue to make positive gains there with our revenue increasing 36.9% quarter over quarter. While we are still awaiting regulatory approval for the investment, we'll continue to operate like owners in the interim and believe we can continue to drive gains here as we increase the depth of our wholesale partnerships to better serve the New York patient population, including the introduction of ground flour. Florida continues to see significant improvements And as we announced in February, we are attracting investment for our high ROI opportunities there. The current plan is to double our flower canopy from 20,000 square feet to 40,000 square feet of greenhouse. But with the learnings from our first 20,000 square feet, we think we can almost triple yield with our expansion from our approximately 8,000 pounds of annual production now to over 22,000 pounds. We also think there is significant opportunity in flower for Florida patients that we are uniquely well suited to address, given our knowledge of the California flower market, the most demanding and particular flower market in all of cannabis. We still plan to expand from our current five stores to 15 over the course of this calendar year and early next in our phase one plan. But given the relatively low penetration of both patients and dispensaries in Florida, we are already starting to map out what a Phase 2 expansion will look like, even without there being additional clarity with Florida Go East initiatives. And as we saw with the success of our wholesale relationships in New York, we also feel that if the Florida wholesale market does open up, this will provide an immediate boost to our dispensaries. But we are planning and positioning for an outcome right now where we are not at all dependent on any changes in the Florida market. As an update on our cultivation and manufacturing strategy in Desert Hot Springs and Mustang, we still hope to announce something shortly here, but are waiting on several necessary approvals before it would be appropriate. To point towards the progress made, though, we can say our cash spurn here has been significantly mitigated through the early stages of our partnership. With that, I hand it over to Reece. 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 will be 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 percent quarter over quarter, and Nevada improved by 8.1 percent. Retail revenue for the month of April, compared favorably to the first month of the second quarter, growing by $3.7 billion, or 34.7 percent. 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 from 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 total $37.5 million, or 34.4% of revenues. 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 for 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 Utica 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 classification as 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 antecedent brands, including Statenet, where we had non-reusable packaging at close to $1 million at cost. We also saw an impairment of $750,000 in Distillic, 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 force margin to improve going forward as we deepen our partnerships in 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 total $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 antecedent 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 4 cents, which compares favorably to the prior quarter net per share loss of 14 cents. 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 its senior secured convertible debt facility led by funds affiliated with Gotham Green. Lastly, on February 25th, 2021, The company announced a substantial investment and planned deleveraging of the balance sheet, subject to regulatory approval of up to $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, MOLUS. 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 7th, we had approximately $664,200,870 subordinate voting shares and an additional $98,063,000 396 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 and year. California and Nevada began rebounding from COVID-19 restrictions and resulting traffic drops. And importantly, we continue to develop our internal structural organizational framework to facilitate our planned dynamic growth across the country. During the quarter, we stabilize liquidity by successfully accessing the equity and debt capital markets and are properly positioned to grow 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 leader. 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 to 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 am 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?

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Before we go to questions, we'll take additional remarks from Reeve Bulgen.

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 10Q, which will be filed later tonight. Back to you, operator.

Thank you. Your first question is from Scott Fortune with Roth Capital Partners.

Yeah, good afternoon. Thanks for the color and opportunity here. Just kind of want to follow up on the operating landscape in California now that shelter in place is kind of being removed here and vaccinations are opening things up. April, you saw significantly new volume coming on board, and obviously this is more than just 10 less 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 side of percentage of sales for your California stores? I know you're averaging, what, about 8 million a store now. And, you know, you can double that. It's from past experience side things. Just a little bit of color on the California side and the opportunity to move that up.

Sure. Scott, thanks for the question. I'll answer the end of your 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 traffic of tourism will just be additive to that, but 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?

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 it seems like la in particular in california has really successfully managed covet and and over the last few months i think rates of vaccinations here are extraordinarily high um and it actually came out i think two days ago that some people are estimating that la will reach la county will reach herd 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 a little bit more 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. Okay, definitely. I appreciate your color. And then what are some of the top priority initiatives to allocate some of the capital? It sounds like Florida, you know, 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? Go ahead, Tim. Thanks, Tom. So we are currently underway with our expansion at Eustis. And so we're about an 8,000 pound 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 a little bit further underway with this Phase 1 expansion, as we mentioned a little bit earlier in our comments, the goal would be then to pivot towards Phase 2 because we do think over time that we're only scratching the surface of where we can be in Florida with 15 stores. Okay, thanks. And then one last one for me. Any kind of timing expectations on the sale in New York and getting through the regulatory process there for the cash?

Yeah, tough for us to handicap that one, Scott. I mean, Tim, feel free to jump in. It's really dependent upon the regulatory environment there. So we're doing everything it's asked of us. Tim, if you can actually tell us if you'd like.

that's perfect thanks tom now i was just going to say we're working hand in hand with the regulators there um and so like tom said doing everything that's asked of us but there's obviously a lot going on at the state right now so we're just being patient as we work uh as we work hand in hand with uh with the state okay thanks i will jump back in the queue

If you would like to ask a question at this time, please press star then the number one on your telephone keypad. At this time, there are no additional questions. Mr. Fulton, I'll turn the call back over to you for closing remarks.

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

Well, I appreciate folks calling in and taking the time to listen to our presentation. We appreciate the attentiveness and look forward to catching up with all next quarter. Thanks again.

This concludes today's conference call. Thank you for participating. You may now disconnect.