MedMen Enterprises Inc (CSE:MMEN) released its year-end results at the end of February and while sales were good, it was still nowhere near profitable. During the second quarter, The Company recorded sales of nearly $30 million, which is almost 10 times the amount that it posted a year ago. For the past six months, revenues reached $51 million compared to $5 million in 2017.
That’s terrific sales growth and with more States looking to legalize marijuana, those numbers could get even higher. The problem for the company, however, is that its losses continue to get bigger as well. MedMen’s losses from operations totalled a whopping $62 million during just three months. Year to date, that number balloons to $125 million compared to just $16 million in the prior year.
The main line item causing all the increase: general and administrative expenses, which was $66 million for the quarter and $131 million since the start of the fiscal year, more than the size of the losses themselves. Although it’s understandable to see expenses rise given The Company’s rapid growth, a figure that high is more than a little concerning, especially given sales and marketing expenses were just $9 million for the quarter and $13 million for the past six months.
Cash flow is a concern
Another area of concern for investors is the rate at which MedMen is burning through a lot of cash. Over the past 26 weeks, The Company used more than $125 million in cash from its operating activities. That’s up from $19 million burned through a year ago. It hasn’t helped that MedMen has been busy with acquisitions and investments, which used up another $67 million in cash.
As a result, the Company had to issue $115 million in redeemable shares and $94 million in notes payable to help fund its operations. The problem for investors is that issuing that many shares is going to result in a lot of dilution for existing shareholders. It’s a big change from a year ago when MedMen didn’t issue any new shares.
While MedMen’s cash looks nearly unchanged over the past six months, that doesn’t tell investors the real story, which is one of a company that’s bleeding a lot of cash. The inevitable problem for MedMen is that as it continues to expand and use up cash, if it continues to issue shares it’s going to have downward pressure on its stock price, meaning it’ll need to issue even more and that will only make its problems worse.
Is there too much focus on growth?
During the earnings call, CEO Adam Bierman made it clear what The Company had on its mind:
There’s a once-in-a-generation opportunity to build the biggest cannabis company in the world
What this tells me, unfortunately, is that MedMen is primarily focused on growth and that we won’t likely see its costs get under any control anytime soon. And with news of its former CFO alleging that The Company was reckless in its spending, it definitely raises some concerns.
While growth is important for MedMen to help build its brand and create shareholder value, if it doesn’t get its costs under control it might be running to issues raising the cash needed to expand.
