U.S. Markets closed

Edited Transcript of TMT.H.V earnings conference call or presentation 28-Oct-19 9:00pm GMT

Q4 2019 Medmen Enterprises Inc Earnings Call

RICHMOND Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Medmen Enterprises Inc earnings conference call or presentation Monday, October 28, 2019 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Adam Bierman

MedMen Enterprises Inc. - Co-Founder, CEO & Director

* Stéphanie Van Hassel

MedMen Enterprises Inc. - VP of IR

* Zeeshan Hyder

MedMen Enterprises Inc. - CFO

================================================================================

Conference Call Participants

================================================================================

* Brett Michael Hundley

Seaport Global Securities LLC, Research Division - Research Analyst

* Graeme Kreindler

Eight Capital, Research Division - Principal

* Jesse Pytlak

Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research

* Matt Bottomley

Canaccord Genuity Corp., Research Division - Analyst

* Navdeep Malik

Industrial Alliance Securities Inc., Research Division - Research Analyst

* Robert Fagan

GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare

* Scott Thomas Fortune

Roth Capital Partners, LLC, Research Division - Director & Research Analyst

* Shayne Laidlaw;Hedgeye Risk Management;Analyst

* Vivien Nicole Azer

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the MedMen Fourth Quarter Fiscal 2019 Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Ms. Stéphanie Van Hassel. Thank you. Please go ahead.

--------------------------------------------------------------------------------

Stéphanie Van Hassel, MedMen Enterprises Inc. - VP of IR [2]

--------------------------------------------------------------------------------

Thank you. Good afternoon, and welcome, everyone. Today, I'm joined by MedMen's Co-Founder and CEO, Adam Bierman; and CFO, Zeeshan Hyder. 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 fourth quarter and fiscal year-end results ended on June 29, 2019. The press release, along with our financial statements and MD&A are available in the company's website and filed on SEDAR.

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. And certain material factors or assumptions were applied in drawing a conclusion or making a forecast in such statements. Forward-looking statements relate to, among other things, the business and operations of MedMen, our plans for new stores and factories, our financial and operational expectations, our expectations as to future sources of funding, the terms, conditions, structuring and timing for completion of acquisitions and the prospects of MedMen upon completion of the acquisitions.

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 risk factors can be found in MedMen's annual information form dated November 2, 2018. The management's discussion and analysis for the period ended June of 29, 2019, and the earnings press release issued earlier today, all of which are available under the company's profile on SEDAR.

During today's conference call, MedMen will refer to certain non-IFRS measures that do not have any standardized meaning prescribed by IFRS, such as EBITDA and adjusted EBITDA, which are defined in the earnings press release we issued earlier today. Reconciliations to IFRS measures are contained in the press release and our MD&A. 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 Adam. Thank you.

--------------------------------------------------------------------------------

Adam Bierman, MedMen Enterprises Inc. - Co-Founder, CEO & Director [3]

--------------------------------------------------------------------------------

Good afternoon. Thank you for joining us today. With the close of fiscal 2019, our growth as a company has been nothing shy of transformative. Throughout the year, MedMen served over 1.2 million customers from all 50 states and more than 100 countries. And now our customers can shop with us from the comfort of their home through MedMen's fully owned and operated delivery platform. At present, we are licensed for 70 retail locations and operate 32 stores across 9 states. By the end of the calendar year, we anticipate taking 8 additional locations online, and we are just in the early innings of our growth story.

The acceleration of our retail expansion strategy has led to a significant increase in our revenue, with revenue totaling $130 million in fiscal 2019, an increase of 227% year-over-year. In the fourth quarter alone, we generated $42 million in revenue, putting us on an annualized run rate of $168 million, with roughly 40% of our retail licenses being operational today.

As I reflect on the first 9 years of this company, I view our growth in terms of chapters, each building on the previous. With imperfect information, we have continued to make decisions throughout each chapter, which we believe maximized our probability of building the leading cannabis company in the world.

Given the current macro environment, we are now taking a step back and deciding how best to access capital going forward and where it makes the most sense to allocate this capital. We will continue to evolve and adapt accordingly as we become increasingly focused on our 6 core geographic markets: California, Nevada, Florida, New York, Massachusetts and Illinois.

Focusing on California, MedMen has the leverage and scale to drive increased margins in the largest cannabis market in the world. In our fourth quarter, we added the flagship retail location in Long Beach, situated strategically between our Santa Ana and LAX stores. We are also rewarded 1 of 6 retail licenses in the City of Pasadena, opened our 2nd location in San Diego and announced plans for our fourth store in Northern California. We plan to have 30 stores operational in the state by the end of 2020, with 17 licenses at present, of which 13 are currently operational, and have been actively applying for, acquiring and building out retail locations across California.

In Nevada, within a handful of months of opening our Paradise location by McCarran Airport, this store became the second-best performing store in our entire retail portfolio. Through an increased focus on marketing, we continue to see month-over-month increases across our Las Vegas footprint and are excited to continue driving revenue from our in-house brands.

In Florida, we've opened 7 stores this year and are on-track to open 5 more locations by the end of 2019. Our 7 Florida retail locations, which includes locations in South Beach, West Palm Beach, Orlando, Jacksonville and Tampa have already surpassed internal expectations. The only limiting factor in Florida has been our own supply of product, which we are addressing through an expansion of our Eustis factory. We plan to expand the factory by over 120,000 square feet by the calendar third quarter of 2020.

Beyond our near-term opportunity, we are proud to have our own Nick Hansen heading up the Make it Legal campaign in the state and have a first-hand view of the momentum towards legalization in Florida. While we have high expectations for our medical stores, we're even more excited about the potential of our footprint under a recreational market.

As we progress into the next chapter of our evolution, our go-forward strategy will be based on 3 key objectives, these include unlocking the further potential of our factories, optimizing our current retail assets and leveraging our omnichannel strategy. As we bring these objectives to fruition, we will improve Four Wall economics and steer the organization on a path towards profitability, a topic Zeeshan will address in further detail.

By getting all of our factories up and running and advancing them to full capacity, we will have the opportunity to bring MedMen branded product to every one of our retail locations, while also providing a significant boost in EBITDA through vertical integration. We will also be able to further leverage our brand partnerships, providing cannabis CPG businesses the ability to cultivate and manufacture their products at a MedMen factory, and then distributing those products through our retail locations as well as other retailers.

As we unlock our factories' potential, we will simultaneously focus on optimizing our current retail assets, which include initiatives around driving new customers into our stores through marketing, retaining our existing customers through added product offerings and driving margins through our leverage.

Along with retail, we will also develop our digital presence by leveraging the millions of data points we now have from transactions across our unmatched network of stores. We are creating an omnichannel experience to grow our market share and build the MedMen brand and ecosystem. As part of this omnichannel experience, we've recently launched our delivery program in California and Nevada. We anticipate delivery will also be live in Florida by year-end. And once fully ramped in all our core geographies, delivery will serve over 50% of the U.S. population based on our addressable market.

Furthermore, we also launched MedMen Buds, our loyalty program, this past July, the first of its kind for the cannabis industry. The program currently has over 135,000 individual participants and continues to grow daily. These 2 initiatives along with MedMen's national retail strategy, create an industry-leading omnichannel experience, which results in improved brand awareness, customer stickiness and an elevated shopping experience.

Fiscal 2019 was no doubt eventful for MedMen and the cannabis industry as a whole, but we entered the new fiscal year with great enthusiasm. In the coming year, we remain laser-focused on bringing to life our core mission and vision of a safer, healthier and happier world, where cannabis is fully legal and regulated. From an operational standpoint, I believe we enter fiscal 2020 better positioned than ever before.

Thank you for your support of MedMen. We're headed in the right direction and we'll now refocus our efforts on what matters the most, providing an unparalleled experience, which invites the world to discover the remarkable benefits of cannabis.

With that, I'll turn the call over to our CFO, Zeeshan Hyder, to review our past performance and explain how we plan to get to our next stages of growth.

--------------------------------------------------------------------------------

Zeeshan Hyder, MedMen Enterprises Inc. - CFO [4]

--------------------------------------------------------------------------------

Thank you, Adam. As many of you know, I've been a part of the MedMen team since 2017, helping drive our private equity fund strategy, our go-public process and for the last 2 years, overseeing Corporate Development and Investor Relations. Having witnessed the company grow from less than 30 employees when I first joined to now totaling over 1,300 people, it is exciting to be joining my first earnings call as MedMen's Chief Financial Officer. In my new role as CFO, I look forward to working even closer with Adam and Andrew to bring MedMen towards our goal of achieving breakeven EBITDA by the end of calendar year 2020, while continuing to enhance our retail experience and grow the MedMen brand.

Let's first discuss our financials, followed by further details on our path to EBITDA positive. A few notes before we get started. Consistent with prior quarters, all the figures I will speak to today are in U.S. dollars. I'll also refer to our top line performance in terms of system-wide revenue as we believe this is the best representation of our economic progress. You can find further information on these financial measures in our MD&A, which was filed earlier today. I'll begin with our results for the quarter and the full year, then dig in to our business unit reporting and conclude by speaking about the steps we will take to achieve adjusted EBITDA breakeven by the end of next calendar year.

Beginning with the fourth quarter. System-wide revenue was $42 million, up 104% from $20.6 million in the same period last year and up 15% sequentially. Gross profit for the quarter, before biological asset adjustment, was $16.0 million or a margin of 38% compared to $5.9 million or a margin of 29% in the prior year period. Total operating expenses for the quarter were $68.9 million. Fourth quarter sales in '19 net loss attributable to the shareholders of MedMen Enterprises Inc. were $24.2 million or $0.15 per basic and diluted share based on our weighted average shares outstanding of $166.3 million, our public float as of June 29, 2019.

For full year performance, MedMen generated $130 million in system-wide revenue compared to $39.8 million for fiscal 2018, a 227% increase year-over-year. Gross profit for the full year before biological asset adjustment increased significantly to $56.5 million or a margin of 43% compared to gross profit of $13.1 million or a gross margin of 33% for fiscal year 2018. Total operating expenses for the year were $292.6 million. For the full year, we reported a net loss attributable to shareholders of MedMen Enterprises Inc. as $79.1 million or $0.75 per basic and diluted share based again on 105.9 million total share count. Please refer to our full year presentation for an updated overview of our capital structure.

Now let's dig into our 4 operating units, which include retail operations, manufacturing, corporate SG&A and preopening expenses, along with our individual contributions to our adjusted EBITDA for the quarter.

Starting with retail highlights. Retail revenue totaled $39.0 million for the fourth quarter, representing a 90% increase over the last year and a 13% sequential increase over the third quarter. The increase in revenue was driven by 2 key factors: first, growth in same-store sales, which totaled 35% year-over-year. In California in particular, we saw a significant year-over-year sales increases for our flagship location. The growth rates for our Beverly Hills and downtown L.A. locations were up 86% and 64% over the last year. Second, a portion of the sequential growth came from new stores coming online, including locations in West Palm Beach and Monterey Bay. We ended the fiscal fourth quarter with 23 stores versus 21 stores at the end of fiscal third quarter.

We reported retail gross margins of 50% for the fourth quarter versus 53% for the third quarter. The decline was related to new stores opened during the quarter, which typically, initially have lower gross margin. Increasing retail gross margins will be a key area of focus going forward for MedMen. We are targeting gross margins of at least 60% in the long term, with the leverage we've created with our CPG business partner. As we consolidate our supply chain and limit our CPG business partners to our core group of strategic partners, we believe our scale and purchasing sizes will further enable us to improve our supplier terms, both related to margin and payment terms.

On an EBITDA basis, we recorded retail EBITDA prior to local taxes of $6.4 million, representing a 16.3% EBITDA margin, up from a 12.4% margin in the third quarter. While gross margin declined by 3 percentage points, we saw a corresponding 7 percentage point decline in retail operating expenses, with payroll cost as a percentage of revenue improving by over 3 percentage points. If we include local taxes into our calculation of adjusted retail EBITDA, we recorded an adjusted EBITDA margin of 7.3% compared to 5.6% in the previous quarter.

Looking at California alone, which represented over 70% of our revenue for the fourth quarter, we generated retail revenue of $27.5 million, gross margin of 52% and EBITDA margin of 20.4%, prior to any adjustment for local taxes.

Going forward, we believe the growth of retail revenue will be driven by 2 key levers: one, continued sequential revenue by each of our stores, particularly those undergoing expansions, such as our LAX location; and two, opening of new flagship locations across the country as we still have 38 nonoperational licenses, several of which are in recreational markets and have the potential to generate top-quartile type revenue. These include licenses in Pasadena, Long Beach, Las Vegas and Boston.

Moving on to our cultivation and manufacturing business. For the quarter, we reported revenue from operations of $3.0 million and an adjusted EBITDA loss of $4.1 million, largely stemming from our factories in Nevada, Florida and California. Our Nevada factory is approximately at 80% utilization, and we expect to begin steady-state production of 10,000 pounds of flour by the end of the calendar year. Until we have a critical mass of stores in Nevada, the sizable proportion of the output for Mustang will be used for third-party brands, and we are currently in the process of signing licensing agreements for the factory with leading California brands.

In California, our factory is currently awaiting its first harvest. We expect 100% of the product in Desert Hot Springs to be used for our retail location, which would allow us to achieve our target of 50% private label in-store. In Florida, we are in the process of expanding our factory in order to keep up the expansion of our retail footprint, which will reach 12 stores by the end of calendar year.

Our third business unit for reporting purposes is corporate SG&A. Earlier this year, we publicly announced our goal of reducing corporate overhead from our December 2018 quarter numbers. At the end of that quarter, we were at an annualized run rate of over $154 million. Since then, we have reduced our corporate SG&A by approximately $22 million on an annualized basis. For the fourth quarter, we reported an adjusted SG&A EBITDA loss of $33 million, representing a 15% overall reduction in just 2 quarters. We plan to provide further details on our initiatives to reduce corporate SG&A on our Q1 2020 call next month.

The last business unit I will speak to is preopening expenses. We incurred $5.3 million in preopening expenses for the quarter, which included rent expenses for retail stores and factories that are not yet operational. Over time, as we open more stores and start producing at all our factories, we expect preopening expenses to significantly decline. The majority of our preopening losses currently relate to our Desert Hot Springs facility and the leases that we've secured across Florida.

From a balance sheet perspective, we ended the fourth quarter with $34 million of cash and cash equivalents. We are currently in active discussions with both of our long-term capital partners, Wicklow Capital and Gotham Green to optimize our capital structure by making additional amendments to our convertible debt facility in order to further align all parties given current market conditions. While we don't have anything specific to announce today, the potential amendment would not change the total size of the $250 million, but would require a mutual approval to draw down the remaining balance while also providing added flexibility for MedMen through an elimination of certain covenants. The amendment would also allow us to access less dilutive capital in the form of new equity or debt financing or pursue spinouts of noncore assets, which we are currently contemplating.

I would now like to discuss our plans for improvements to our bottom line, specifically EBITDA. Our goal, as stated, is to be EBITDA breakeven by the end of next calendar year. As CFO, my job is to help lead the company in achieving that goal without sacrificing our top line growth or the strength of our brand. As a management team and company, we're all on board with this mission. To reach this goal, we will focus on several levers over the next few months. I will describe each of these in detail today and provide further guidance as they relate to our revenue and EBITDA growth on our call in November.

First, as Adam mentioned, the most important need for us at this time is increased focus. We have reassessed our business and realized that the best way for us to generate long-term value is by narrowing our scope and focusing only on our core markets where we have operating leverage and economies of scale. Going deeper in markets such as California and Nevada will unlock significantly more EBITDA in the near term than entering new states, regardless of how attractive they may be from an economic perspective.

By building the biggest retail brand in our core market, we believe we will have the ability to enter second and third tier markets at a much lower cost of capital down the line.

Second, we must continue to drive gross margin at our retail stores. We will not be satisfied with 50% gross margins and are already in the process of putting together a new vendor agreement, co-marketing deals and slotting fee arrangements that allow us to achieve our long-term target of 60% gross margin. In addition to exerting our leverage with suppliers at the gross profit level, we are using technology and centralization for better optimization across other areas of our Four Wall, including payroll, security and payment processing. For example, at 10% lift in gross margins and a 5% decrease in other operating expenses will drive significant EBITDA to our Four Wall, particularly once we operationalize the balance of our footprint.

Third, while the cultivation and manufacturing side of the business has not generated positive EBITDA to date, this is where we're expecting the biggest ramp in our business over the next 4 quarters. Our Mustang, Nevada factory will be at full utilization by the end of this calendar year. Our Desert Hot Springs, California factory will be at full utilization by mid-2020. And our Eustis, Florida factory will be ready towards the end of 2020.

And last but not least, we will focus on our core states where there are significant opportunities to reduce our overall corporate SG&A. I'm currently in the process of partnering with all of our departments to narrow the scope of our activities, to identify inefficient processes and to only allocate capital through an ROI-driven approach. All corporate initiatives and budgets will be reevaluated thru the lens of our goal to drive towards profitability. We've never been afraid to make difficult decisions, and this is no different.

As I mentioned, our initiative is to do so without jeopardizing our ability to get to the ultimate prize, which is to continue being the leading cannabis retail brand in the world.

Before I turn the call over to Adam for closing remarks, I'd like to address one particular topic, which has been top of mind for analysts and investors alike. The vape [gate] and the impact, if any, it's had on our retail stores. Since the beginning of August, we've seen absolutely no decline in retail sales. We did see a slight decrease in vape sales, but it's offset by an increase in other categories, such as pre-rolled and edibles. We're happy to answer any additional questions on the topic during our Q&A. Thank you for your time today.

With that, I'd like to turn the call back over to Adam.

--------------------------------------------------------------------------------

Adam Bierman, MedMen Enterprises Inc. - Co-Founder, CEO & Director [5]

--------------------------------------------------------------------------------

Thanks, Zeeshan. Before we open up the call to your questions, I want to take the time to remind you all that our First Quarter Fiscal 2020 earnings call is just around the corner. We will be hosting the call on Tuesday, November 26. Details will be shared shortly, and we look forward to having you join us in a few weeks.

We will now open the call to your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And your first question comes from the line of Graeme Kreindler from Eight Capital.

--------------------------------------------------------------------------------

Graeme Kreindler, Eight Capital, Research Division - Principal [2]

--------------------------------------------------------------------------------

I wanted to follow up with respect to the ramp on the manufacturing side of things, with Mustang, Desert Hot Springs and Eustis. Can you provide any sort of capital budget or expected capital outlay for those facilities over the next, let's call it, 12 months?

--------------------------------------------------------------------------------

Zeeshan Hyder, MedMen Enterprises Inc. - CFO [3]

--------------------------------------------------------------------------------

Yes. Sure. So I'll go kind of factory by factory. So on both Mustang and DHS, all CapEx has already been spent on those 2 factories, so it's more about getting the harvest in and ramping up. We don't foresee any sizable spend to get those to those levels. And then with Eustis, so that's a factory that will be funded by Treehouse. So it won't really be CapEx that's coming from MedMen other than the operating expenses to get to a full ramp-up.

--------------------------------------------------------------------------------

Graeme Kreindler, Eight Capital, Research Division - Principal [4]

--------------------------------------------------------------------------------

Got it. And then I think the -- if I caught it correctly earlier on the call, the goal is to have that expanded by about 100,000 square feet. I was just wondering what the current square footage or design capacity is, and what the end design capacity is going to be there.

--------------------------------------------------------------------------------

Zeeshan Hyder, MedMen Enterprises Inc. - CFO [5]

--------------------------------------------------------------------------------

You're talking about Florida?

--------------------------------------------------------------------------------

Graeme Kreindler, Eight Capital, Research Division - Principal [6]

--------------------------------------------------------------------------------

Correct, yes.

--------------------------------------------------------------------------------

Zeeshan Hyder, MedMen Enterprises Inc. - CFO [7]

--------------------------------------------------------------------------------

Yes, so in Florida right now, it's roughly 30,000 square feet. So that's enough for kind a first set of stores that we'll be rolling out. And then when we do the full expansion, that will be sufficient for the remaining balance of those stores.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

And your next question comes from the line of Brett Hundley from Seaport Global.

--------------------------------------------------------------------------------

Brett Michael Hundley, Seaport Global Securities LLC, Research Division - Research Analyst [9]

--------------------------------------------------------------------------------

Maybe if we can stay on Florida. If I look at the available data provided by that state, it does look like you guys are slowly getting more derivative products in place as a percentage of sales mix relative to flour. I'm just curious if that's a conscious effort that's in place, or maybe if that's a result of being a little bit hamstrung on supply relative to your store openings. Just wanted to get a comment, and I just have one follow-up question.

--------------------------------------------------------------------------------

Adam Bierman, MedMen Enterprises Inc. - Co-Founder, CEO & Director [10]

--------------------------------------------------------------------------------

Sure. This is Adam. It's probably a little bit of both. At this point in time, we have ample supply for the stores that are open. But as everybody's aware, we opened 2 additional stores at the end of last week, and we have more stores opening between now and the end of the year. So we will reach an inflection point where we will, at times, feel hamstrung until the final factory is complete. But that being said, I think that the mix -- we're learning, and I think we're kind of learning for the first time in Florida, what mix do Florida consumers want. And when we go into a market like that, we're really giving them the full gamut of options for the first time. And so we will figure that out as our customers tell us what it is that they want through their shopping selections, and then we will produce products accordingly. So no, it's not because we feel hamstrung yet, it's really just us figuring what it is that our consumers are going to want, going forward.

--------------------------------------------------------------------------------

Brett Michael Hundley, Seaport Global Securities LLC, Research Division - Research Analyst [11]

--------------------------------------------------------------------------------

Okay. I appreciate that comment, Adam. And then Zeeshan, I was trying to copy everything down as you were writing. If you wouldn't mind revisiting your comments on the financing arrangement that you have in place with your partners, would love to just hear you revisit those comments and color them a little bit. And if I can ask you 2 direct questions related to that. Number one, can you just remind me if you have accessed the optional tranche to the $25 million yet? And then, secondly, is there any reason that you don't think you would have full access to that funding? In other words, do you feel confident that you will be able to amend that facility to have full access to the 250 level?

--------------------------------------------------------------------------------

Zeeshan Hyder, MedMen Enterprises Inc. - CFO [12]

--------------------------------------------------------------------------------

Yes, good question. So on the first question, in terms of our financing arrangement with Gotham, I think given what's going on the capital markets, we're working alongside Gotham and Wicklow to kind of put together a financing plan for the business, which includes certain amendments to the facility. We don't have anything to share today, but a public announcement is imminent in terms of that Gotham facility.

Your second question on the $25 million, we did access $25 million of the third tranche, so we have $125 million left on the facility right now.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Your next question comes from the line of Vivian Azer from Cowen.

--------------------------------------------------------------------------------

Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [14]

--------------------------------------------------------------------------------

I just want to start with one housekeeping question, please, for you, Zeeshan. As I look at your preannouncement from August 13th of this year, you guys stated that fourth quarter gross margin -- and this is a quote, "For the fourth quarter gross margins across retail operations, we're 50% compared to 51% in the prior quarter." And now you're saying that it was 53% in the prior quarter. What explains that disconnect, please?

--------------------------------------------------------------------------------

Zeeshan Hyder, MedMen Enterprises Inc. - CFO [15]

--------------------------------------------------------------------------------

Yes, 53% should be the right number for third quarter. I'm not sure where the 51% came from. But 53% is the right comparable. There may be some adjustments that we made on inventory, which led to the difference, but it should be 53%.

--------------------------------------------------------------------------------

Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [16]

--------------------------------------------------------------------------------

Okay. Well, the 51% came from your press release. Sticking with that, I noted both in your prepared remarks as well as in the press release, you guys are referencing the May 2019 targeted cost savings announcement. But in fact, on August 13, you guys took your targeted cost savings up from a 20% SG&A reduction to a 30% SG&A reduction. So can you please explain kind of what's driving that change outside of a CFA -- a CFO change?

--------------------------------------------------------------------------------

Zeeshan Hyder, MedMen Enterprises Inc. - CFO [17]

--------------------------------------------------------------------------------

Yes, sure. So I guess starting back in February when we first kind of announced or when Adam talked about entering this new chapter for the company and putting us on this path to profitability. Since then, we've made a ton of progress in terms of rightsizing organization for this new chapter. As we noted on our press release, we've trimmed over $22 million of annualized kind of corporate overhead. And I think going back to even how we reevaluated the PharmaCann deal and the focus in terms of our core markets, I think we understand that we're heading into an environment that may be challenging on a corporate -- on the capital market side. And because of this, I think there's ways for us to get even deeper into our cost-cutting initiatives. So that's kind of why we raised that target from 20% to 30%. We feel very confident that we'll be able to get there. And I think even beyond the 30%, given now that we're going to be trimming down the number of states that we're in, I think there's ways to optimize that even further.

--------------------------------------------------------------------------------

Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [18]

--------------------------------------------------------------------------------

Sorry, I just want to be clear then because if you guys were sticking with the 30%, I don't understand why you didn't opt to reiterate the 30% in today's press release rather than leaning back against the May 2019, 20% target.

--------------------------------------------------------------------------------

Zeeshan Hyder, MedMen Enterprises Inc. - CFO [19]

--------------------------------------------------------------------------------

Yes. So based on the work that we've done in the past few months, we still feel very confident about hitting that 30% target.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

And your next question comes from the line of Matt Bottomley from Canaccord Genuity.

--------------------------------------------------------------------------------

Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [21]

--------------------------------------------------------------------------------

I just want to go back to the investment in further CapEx, more -- maybe at a higher level than state-by-state. You had about $125 million investment in that in this fiscal 2020 year -- or 2019, rather. Can you give me any indication of what magnitude you think you'll be looking out on a 12-month forward basis and how that might reconcile to your funding needs, assuming you have the $125 million additional drawdown from Gotham?

--------------------------------------------------------------------------------

Zeeshan Hyder, MedMen Enterprises Inc. - CFO [22]

--------------------------------------------------------------------------------

Yes. So looking back 12 months in terms of what the CapEx needs were for the business, a lot of that was prior to our partnership with Treehouse, which is going to alleviate a lot of the CapEx things of the business going forward. I think as we look forward, given that we're not going to be building out or spending too many CapEx dollars on the factories, really the only CapEx is on new store buildouts. So you're going to see a decline in the CapEx kind of level for the company, we'll have a lot more details on kind of the cash needs and CapEx on our next call. But for the most part, we are going to see a reduction in cash burn as it relates to operationalizing these stores and factories.

--------------------------------------------------------------------------------

Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [23]

--------------------------------------------------------------------------------

And then last question, just on the balance sheet. What is your level of priority on the term debt that comes due next year? Is that something that is going to be considered as we get into the calendar year 2020? Or is that something you think needs to be refinanced as part of your overall capital program?

--------------------------------------------------------------------------------

Zeeshan Hyder, MedMen Enterprises Inc. - CFO [24]

--------------------------------------------------------------------------------

Yes. So we're -- I -- as I mentioned earlier, we're working with Gotham Green, Wicklow Capital and Hankey on a long-term financing plan, which includes kind of what we're going to do with that term loan that's due next October.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

And your next question comes from the line of Shayne Laidlaw from Hedgeye Risk Management.

--------------------------------------------------------------------------------

Shayne Laidlaw;Hedgeye Risk Management;Analyst, [26]

--------------------------------------------------------------------------------

Just turning to some more of the strategic things you're going to be focused on over the next year, there's been a lot of talk on this call about capital allocation and increasing your focus. So outside of California and Nevada, likely being your top 2 focused states, can you maybe round out what the next 3 are for kind of -- say, your top 5 or so for you going forward here?

--------------------------------------------------------------------------------

Zeeshan Hyder, MedMen Enterprises Inc. - CFO [27]

--------------------------------------------------------------------------------

Yes, so California and Nevada, as you mentioned, in terms of near-term opportunity, those are the strongest. And outside of those 2, I think Florida and New York, kind of round out what we're considering our core markets. I think a big focus for the company, especially over the next 6 months, will be on building out the balance of our Florida footprint. At least for the initial set of 15. And then outside of that, I mean, I don't see us doing anything transformative that's going to add too many more states to our footprint, but a big focus will be getting deeper in certain markets like California. I think we've mentioned on previous calls, but 70% plus of California still bans recreational cannabis. So we see a lot more opportunity for our brand and our footprint to go deeper in that market, particularly as you're talking about our delivery and loyalty program, which is going to add tremendous value to what we have today in California.

--------------------------------------------------------------------------------

Shayne Laidlaw;Hedgeye Risk Management;Analyst, [28]

--------------------------------------------------------------------------------

Maybe just a quick follow-up on that question, just thinking about Illinois. Obviously, one of the kind of parting messages from the PharmaCann termination was getting a couple of licenses in that state. And that was obviously kind of a big driver of that acquisition to begin with. So where does that stand in your future plans?

--------------------------------------------------------------------------------

Adam Bierman, MedMen Enterprises Inc. - Co-Founder, CEO & Director [29]

--------------------------------------------------------------------------------

Yes. I would say Illinois is -- represents an opportunity for us that we're now 2 weeks into having those assets as part of the -- as part of us moving on from the PharmaCann deal. And over the last couple of weeks, we've been working hard at figuring out how to take advantage of that opportunity. So Illinois and those assets will play a role over the next 12 months at the organization. It's just too early for us to start talking about in more detail than that.

--------------------------------------------------------------------------------

Shayne Laidlaw;Hedgeye Risk Management;Analyst, [30]

--------------------------------------------------------------------------------

And then if I could just as one other quick question, if you guys don't mind. Just on the MedMen Buds now at 135,000 members. Is there any data you can provide related to whether those users have materially higher spend, their different levels of spend and then -- as well as on their visit frequency [mentioned]?

--------------------------------------------------------------------------------

Zeeshan Hyder, MedMen Enterprises Inc. - CFO [31]

--------------------------------------------------------------------------------

Yes. So that's a good question. So obviously, the data is still early, but we are seeing better economics from our loyalty members than we would from just any other customer in our store. But we're still collecting a lot of that information in real time, and we'll have something specific to say on our next call.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

And your next question comes from the line of Scott Fortune from ROTH Capital Partners.

--------------------------------------------------------------------------------

Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [33]

--------------------------------------------------------------------------------

I'd like to deal -- get into the California a little bit more in kind of transaction details, KPIs there. Do you guys give out a little more? And kind of it's been slowing down a little bit. And then also your expansion in California, organic growth versus kind of acquiring. Kind of what you guys are looking at from that opportunity to get 30 stores here?

--------------------------------------------------------------------------------

Zeeshan Hyder, MedMen Enterprises Inc. - CFO [34]

--------------------------------------------------------------------------------

Yes, so I guess the first question was, which retail metrics do we focus on internally?

--------------------------------------------------------------------------------

Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [35]

--------------------------------------------------------------------------------

Yes. And how's that been changed or growing? Or what are you guys looking at? What's happening in the California market? I know it's 70% still black market, but what really changes that?

--------------------------------------------------------------------------------

Zeeshan Hyder, MedMen Enterprises Inc. - CFO [36]

--------------------------------------------------------------------------------

Yes. So I think we see California growth in terms of kind of 3 main things. So the first thing, in terms of same-store sales growth, we saw some pretty impressive numbers for our flagship locations year-over-year. So that's always going to be the #1 driver of sales within the state. I think #2, while we aren't doing kind of bigger M&A deals right now, we are going to do one-off type deals in California that we think are highly accretive to our platform. So we continue to see that. I think the third big thing is we are also applying for several licenses in California, particularly in jurisdictions that have historically not allowed for recreational cannabis. So that's kind of the third level. And the fourth level is what the -- we talked about -- earlier about delivery. I think the delivery is a very scalable model for us within California. It allows us to get even higher EBITDA margins, given that the sales are coming out of our stores and we don't need too many additional operating expenses to go fulfill those delivery orders. So that's kind of how we view California. We'll continue to see kind of quarter-over-quarter increases within the state.

--------------------------------------------------------------------------------

Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [37]

--------------------------------------------------------------------------------

Okay. And then follow-up on Nevada. Obviously, you have a lot more production cultivation there from the Mustang side. What percent is coming from your own brands in the stores? And where is that going, potentially, for that from a higher-margin standpoint?

--------------------------------------------------------------------------------

Zeeshan Hyder, MedMen Enterprises Inc. - CFO [38]

--------------------------------------------------------------------------------

Yes, so currently about 10% of our stores are carrying our in-house brands. We're in the process of increasing that percentage to 50%, that's kind of our goal for all markets. As you can probably tell, Mustang, the majority of it will be through other stores within the state, not just MedMen stores. So our plan in there is to use kind of the brand relationships that we have in California, sign up co-manufacturing or licensing deals with those brands in Nevada, and then wholesale those products to third-party retailers. And that's how we get to full utilization of Mustang.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

Your next question comes from the line of Jesse Pytlak from Cormark.

--------------------------------------------------------------------------------

Jesse Pytlak, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [40]

--------------------------------------------------------------------------------

Just for us, I'm wondering if you could provide any commentary if you're seeing any disruptions to your supply chain. In California, in particular, just kind of given the wildfire and electricity situation.

--------------------------------------------------------------------------------

Adam Bierman, MedMen Enterprises Inc. - Co-Founder, CEO & Director [41]

--------------------------------------------------------------------------------

No, we're not.

--------------------------------------------------------------------------------

Jesse Pytlak, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [42]

--------------------------------------------------------------------------------

Okay. And then maybe just switching over to Massachusetts. It sounds like everything is still moving ahead to get the Fenway location opened in 2020. Can you just kind of remind us what your plans are on the cultivation and manufacturing side there? And what type of CapEx [you think] would be involved in getting that up and running?

--------------------------------------------------------------------------------

Adam Bierman, MedMen Enterprises Inc. - Co-Founder, CEO & Director [43]

--------------------------------------------------------------------------------

Yes. So things are progressing in Massachusetts with our Fenway store as well as our Newton store. We continue to remain very bullish about the retail opportunities in those prime locations. We don't currently have a factory plan for the state of Massachusetts. We will initially open those 2 stores on a stand-alone.

--------------------------------------------------------------------------------

Jesse Pytlak, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [44]

--------------------------------------------------------------------------------

Okay. And then just lastly, any updated timing around when you'll see the transfer of the assets from the PharmaCann termination?

--------------------------------------------------------------------------------

Adam Bierman, MedMen Enterprises Inc. - Co-Founder, CEO & Director [45]

--------------------------------------------------------------------------------

Yes. Virginia, it's been complete -- completed. That's now in our possession. And Illinois is still making progress, and it's very near term, like weeks [now].

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

Your next question comes from the line of Nav Malik from Industrial Alliance.

--------------------------------------------------------------------------------

Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [47]

--------------------------------------------------------------------------------

So I just wanted to ask -- clarify, actually, first off, on the SG&A, just following up on that question. So are you still -- been on track for that 30% reduction by the end of the September quarter? Or do you mean that you're going to be pushing that out a bit but still the target? Or maybe just kind of give us some more color on that.

--------------------------------------------------------------------------------

Zeeshan Hyder, MedMen Enterprises Inc. - CFO [48]

--------------------------------------------------------------------------------

Yes. So we are still targeting that 30%. As I mentioned, I think we're going to give a lot more guidance on our next call as it relates to kind of all of the big line item for the business. We'll have a lot more detail to share in the coming weeks.

--------------------------------------------------------------------------------

Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [49]

--------------------------------------------------------------------------------

Okay. Okay. And I just wanted to ask in terms of guidance for 2020, in terms of just store count guidance. Is there anything you can maybe comment on in terms of -- I know that by the end of this year, calendar year, you're looking at having 37 stores operational. Is there a target that you can maybe point to for 2020?

--------------------------------------------------------------------------------

Zeeshan Hyder, MedMen Enterprises Inc. - CFO [50]

--------------------------------------------------------------------------------

Yes. So we can't comment on the actual store count we're projecting for the end of next calendar year. But what we can say is we have 5 additional ones in the queue in Florida, which will be opened by the end of this calendar year. We're targeting 30 stores in California by the end of next calendar year. And then as we mentioned, there's a couple in Massachusetts, both Fenway and Newton, that will be coming online. And there's a few others in California, which we already have licenses for, which will also be operationalizing within the next 12 months.

--------------------------------------------------------------------------------

Navdeep Malik, Industrial Alliance Securities Inc., Research Division - Research Analyst [51]

--------------------------------------------------------------------------------

Okay. Fair enough. And then I just want to ask, lastly, in terms of M&A. Of course, I know California, as you highlighted, is a key market. Could you just maybe give us a sense of what kind of vendor expectations have -- are either -- well, I guess in California and then maybe in some of your other core markets just in terms of what the propensity for M&A is and what kind of valuations look like in different markets, or how they've changed over time, given what's happened in the public market?

--------------------------------------------------------------------------------

Zeeshan Hyder, MedMen Enterprises Inc. - CFO [52]

--------------------------------------------------------------------------------

Yes. So you're not really seeing a huge change in private valuations right now, despite what's going on with the public stocks in this market. A lot of sellers, they still own really valuable licenses and their business to continue to grow month-over-month, especially in a market like California. So we are going to be a lot more selective around the M&A that we're even doing in California. I think historically, we've paid 1 to 2x revenue. Our hurdle rate is still kind of around the same range. And we don't -- we're not going to expect to pay any more than that even over the next 6 months.

--------------------------------------------------------------------------------

Operator [53]

--------------------------------------------------------------------------------

Your next question comes from the line of Robert Fagan from GMP Securities.

--------------------------------------------------------------------------------

Robert Fagan, GMP Securities L.P., Research Division - Equity Research Analyst of Healthcare [54]

--------------------------------------------------------------------------------

Just wondering if you guys can comment a little bit on the acquisition price of the Illinois assets from PharmaCann. If in addition to the $21 million note forgiveness, if there was another break fee that you guys maybe forwent collecting? And what you may have planned to do in building out the -- your platform in Illinois to capitalize on what will be in a very interesting market?

--------------------------------------------------------------------------------

Adam Bierman, MedMen Enterprises Inc. - Co-Founder, CEO & Director [55]

--------------------------------------------------------------------------------

Thanks, Robert. Yes, so there was no -- there were no other break fees. It was forgiveness for the debt that you mentioned and us taking control of the assets. There was nothing else to it. As far as our plans with those assets, I think we'll be able to talk -- we'll be talk -- we'll be able to talk more about it in our call in a month. But like I said, we're in the process of figuring out how to optimize those assets for this chapter of the company. So more to come on that.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.