Denver-based Medicine Man Technologies reduced its pro forma revenue guidance but maintained its pro forma margin and EBITDA guidance via a new presentation filed with the SEC that outlines the story and the vision of the company – including a new name.
Net revenue is lower because of accounting refinements, but EBITDA looks similar to previous estimates and the margins might actually be higher.
The net pro forma revenue will be $144 million after $26 million of revenue eliminations. This means the previous revenue target of $170 million was the gross total of the individual revenue from the target acquisitions.
More importantly, the profitability seems to be basically the same at roughly $35 million of EBITDA.
While the company reiterated its “20-30% EBITDA margin” guidance, Slide 5 of the presentation uses the midpoint of 25% margin on the $144 million to display $36 million in the chart of comparable companies.
Previously, the 20% margin seemed to be more of a baseline at close with hopes to expand to 30%.
The prior 20% margin on $170 million was $34 million, as shown in the below table. The previous high-margin target of 30% margin on $170 million ($51 million of EBITDA) now implies 35.4% margin on net revenue.
This reduction in revenue is really just an accounting adjustment, and the raw-cash-generation potential of the combined businesses should not change much with an accounting elimination.
|Prior (Gross)||New (Net)|
|Pro Forma Rev.||$ 170||$ 144|
|20.0%||$ 34||$ 29|
|25.0%||$ 43||$ 36|
|30.0%||$ 51||$ 43|
This change stems from the continued due diligence and integration work Medicine Man Technologies is conducting on pending acquisitions.
As CEO Justin Dye said last week, the acquisitions are still “on track,” with a previously announced target for close in the first half of 2020.
Remember that the these pro forma revenue figures are for 2019, and the Colorado adult-use market continues to grow pretty rapidly despite being termed “mature” as new users continue to enter the state’s market.
At our Investor Intelligence Conference in December, we pointed out that companies that can clearly communicate a coherent message of value creation, strategies and targets with investors will experience a lower cost of capital. Medicine Man’s presentation generally does this.
Slide 8 of the presentation highlights the company’s longer-term goals, including a plan to change the corporate name in the first half of 2020.
Given the number of times we have had to clear up confusion between Medicine Man and dilution-prone, liquidity-challenged MedMen, we welcome this decision.
Intracompany eliminations 101: Sales down, EBITDA flat, margins up
Medicine Man’s $26 million change in its revenue forecast comes from removing the revenue from the acquisitions that will become “intracompany eliminations” once the acquisitions become divisions of a single company.
As separate companies, a hypothetical sale of raw flower by Los Sueños to Medically Correct for extraction is accounted for as revenue to Los Sueños and cost of goods sold to Medically Correct.
Medically Correct then selling an edibles product made with that flower to Starbuds is revenue to Medically Correct and COGS to Starbuds.
The final sale of that edible to the consumer at Starbuds is revenue to Starbuds (and a cost to the consumer).
Once the three are integrated under MDCL, only the retail sale at Starbuds will be revenue, and transfers from Los Sueños to Medically Correct and from Medically Correct to Starbuds will be accounted for as cost of goods sold.
In the chart below, for our hypothetical example, the bold revenue gets eliminated with consolidation. For the whole company, transactions such as this account for the $26 million eliminations, and the $170 million figure had added the three revenues in the “separate company” accounting section.
The $144 million pro forma revenue is only the final revenue to third parties (retail consumers and wholesale business buyers) at the end.
|Los Sueños||Medically Correct||Starbuds||Consumer|
|Separate Companies Accounting|
|Los Sueños to Medically Correct||Revenue||COGS|
|Medically Correct to Starbuds||Revenue||COGS|
|Starbuds to Customer||Revenue||COGS|
|Consolidated MDCL Accounting|
|Los Sueños to Medically Correct||COGS||COGS|
|Medically Correct to Starbuds||COGS||COGS|
|Starbuds to Customer||Revenue||COGS|
Below we update the numbers in our October 2019 Deep Dive to reflect the new $144 million revenue after $26 million of eliminations.
|Date||Pending Acquisitions||Total Consideration||Sales||EBITDA||EBITDA Margin||EV/S Multiple||EV/EBITDA Multiple|
|6/5/2019||Los Sueños (Los Sueños, Farmboy, Baseball)||$ 11.9|
|6/5/2019||Mesapur dba Purplebee’s||$ 11.1|
|8/15/2019||Cold Baked & Golden Works dba Dabble Extracts||$ 3.8|
|8/15/2019||Unidentified Edibles Co (implied to be Medically Correct)||$ 17.3||$ 13.8||$ 2.1||15.0%||1.25X||8.3X|
|9/3/2019||Starbuds||$ 31.0||$ 19.0||$ 5.6||29.5%||1.63X||5.5X|
|9/4/2019||Colorado Harvest||$ 12.5||$ 10.0||1.25X|
|9/5/2019||Dispensaries dba Starbuds||$ 36.9|
|9/6/2019||RootsRx||$ 15.0||$ 12.0||$ 2.1||17.5%||1.25X||7.1X|
|9/9/2019||Dispensaries at 35% margin dba Starbuds||$ 50.0||35.0%|
|9/11/2019||Strawberry Fields||$ 31.0||18.5%|
|9/12/2019||Canyon & It Brand||$ 5.1||$ 3.3||1.55X|
|Total June-September 2019 Acquisitions||$ 225.5||$ 111.0||2.03X|
|1/15/2019||Estimated Medicine Man Denver & MedPharm||$ 60.5||$ 45.0||1.34X|
|Total Pending Acquisitions||$ 286.0||$ 156.0||$ 38.9||24.9%||1.83X||7.35X|
|TTM Rev June 2019 Core MDCL||$ 14.0||$ (4.9)||-35.1%|
|Total Gross Pro Forma 2019 MDCL Revenue||$ 170.0||$ 34.0||20.0%|
|Intracompany Eliminations||$ (26.1)|
|Total Net Pro Forma 2019 MDCL Revenue||$ 143.9||$ 36.0||25.0%|
Assuming the company raises another $126 million of debt – as estimated in our comp tables – which would yield a pro forma leverage ratio of 3.5X on the $36 million of EBITDA (25% margin on $144 million) with a pro forma share count of 93.3 million, Medicine Man Technologies has an enterprise value of $332 million.
This puts the valuation at 2.3X the pro forma revenue and 9.2X the pro forma EBITDA.
Mike Regan can be reached at firstname.lastname@example.org.