UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ ☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 25, 202124, 2022
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 000-56199
MEDMEN ENTERPRISES INC.
(Exact name of registrant as specified in its charter)
British Columbia A1 | 98-1431779 | |
(State or other jurisdiction of | ||
incorporation or organization) | (I.R.S. employer identification no.) | |
| , Suite 105 | , |
| ||
(Address of principal executive offices) | (Zip code) |
(424) 330-2082
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ☐ | Accelerated Filer | |
Non-Accelerated Filer | Smaller Reporting Company | ☒ | |
Emerging Growth Company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financing accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No☒
As of November 5, 2021,October 31, 2022, the registrant had Class B Subordinate Voting Shares outstanding.
MEDMEN ENTERPRISES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 25, 202124, 2022
TABLE OF CONTENTS
i
Use of Names
In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms “we,” “us,” “our,” “Company,” “Corporation” or “MedMen” refer to MedMen Enterprises Inc. together with its wholly-owned subsidiaries.
Disclosure Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements that we believe are, or may be considered to be, “forward-looking statements”. All statements other than statements of historical fact included in this document regarding the prospects of our industry or our prospects, plans, financial position or business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking words such as “may,” “will,” “expect,” “intend,” “estimate,” “foresee,” “project,” “anticipate,” “believe,” “plan,” “forecast,” “continue” or “could” or the negative of these terms or variations of them or similar terms. Furthermore, forward-looking statements may be included in various filings that we make with the Securities and Exchange Commission (the “SEC”), press releases or oral statements made by or with the approval of one of our authorized executive officers. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. These known and unknown risks include, without limitation: marijuana remains illegal under U.S. federal law, and enforcement of cannabis laws could change;, the Company may face limitations on ownership of cannabis licenses; the Company may become subject to U.S. Food and Drug Administration or the U.S. Bureau of Alcohol, Tobacco and Firearms; the Company may face difficulties acquiring additional financing; the Company operates in a highly regulated sector and may not always succeed in complying fully with applicable regulatory requirements in all jurisdictions where we carry on business; the Company is subject to general economic risks; the Company may be negatively impacted by challenging global economic condition; the Company is subject to risks arising from epidemic diseases, such as the recent outbreak of the COVID-19 illness;COVID-19; the Company may face difficulties in enforcing its contracts; the Company is subject to taxation in Canada and the United States; cannabis businesses are subject to unfavorable tax treatment; cannabis businesses may be subject to civil asset forfeiture; the Company is subject to proceeds of crime statutes; the Company faces security risks; our use of joint ventures may expose us to risks associated with jointly owned investments; competition for the acquisition and leasing of properties suitable for the cultivation, production and sale of medical and adult use cannabis may impede our ability to make acquisitions or increase the cost of these acquisitions, which could adversely affect our operating results and financial condition; the Company faces risks related to its products; the Company is dependent on the popularity of consumer acceptance of the Company’s brand portfolio; the Company faces risks related to its insurance coverage and uninsurable risks; the Company is dependent on key inputs, suppliers and skilled labor; the Company must attract and maintain key personnel or our business will fail;personnel; the Company’s business is subject to the risks inherent in agricultural operations; the Company’s sales are difficult to forecast; the Company’s products may be subject to product recalls; the Company may face unfavorable publicity or consumer perception; the Company faces intense competition; the Company’s voting control is concentrated; the Company’s capital structure and voting control may cause unpredictability; and additional issuances of Subordinate Voting Shares may result in dilution. Further information on these and other potential factors that could affect the Company’s business and financial condition and the results of operations are included in the “Risk Factors” section of the Company’s Annual Report on Form 1010-K filed with the SEC on September 24, 2021,9, 2022, and elsewhere in the Company’s filings with the SEC, which are available on the SEC’s website or on the Company’s website at https://investors.medmen.com/. Readers are cautioned not to place undue reliance on any forward-looking statements contained in this document, which reflect management’s opinions only as of the date hereof. Except as required by law, we undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements. You are advised, however, to consult any additional disclosures we make in our reports to the SEC. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this document.
ii
PART I — FINANCIAL INFORMATION
MEDMEN ENTERPRISES INC.
Index toCondensed Consolidated Financial StatementsBalance Sheets (Unaudited)
As of September 24, 2022 and June 25, 2022
(Amounts Expressed in United States Dollars, Except for Share Data)
September 24, | June 25, | |||||||
2022 | 2022 | |||||||
(unaudited) | (audited) | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and Cash Equivalents | $ | 21,097,057 | $ | 10,795,999 | ||||
Accounts Receivable and Prepaid Expenses | 5,376,069 | 7,539,767 | ||||||
Inventory | 9,117,809 | 10,010,731 | ||||||
Assets Held for Sale | 44,185,218 | 123,158,751 | ||||||
Receivable for Assets Held for Sale | 11,500,000 | - | ||||||
Other Assets | 7,403,829 | 9,990,992 | ||||||
Total Current Assets | 98,679,982 | 161,496,240 | ||||||
Operating Lease Right-of-Use Assets | 44,461,062 | 47,649,270 | ||||||
Property and Equipment, Net | 59,965,935 | 64,107,792 | ||||||
Intangible Assets, Net | 34,057,051 | 35,746,114 | ||||||
Goodwill | 9,810,049 | 9,810,049 | ||||||
Other Non-Current Assets | 4,157,513 | 4,414,219 | ||||||
TOTAL ASSETS | $ | 251,131,592 | $ | 323,223,684 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
LIABILITIES: | ||||||||
Current Liabilities: | ||||||||
Accounts Payable and Accrued Liabilities | $ | 35,355,136 | $ | 38,905,818 | ||||
Income Taxes Payable | 64,710,033 | 58,646,291 | ||||||
Other Liabilities | 17,121,093 | 16,704,283 | ||||||
Derivative Liabilities | 7,555,153 | 6,749,563 | ||||||
Current Portion of Operating Lease Liabilities | 12,199,351 | 10,925,128 | ||||||
Current Portion of Finance Lease Liabilities | 4,150,484 | 4,061,273 | ||||||
Current Portion of Notes Payable | 66,294,249 | 97,003,922 | ||||||
Liabilities Held for Sale | 26,195,800 | 86,595,102 | ||||||
Total Current Liabilities | 233,581,299 | 319,591,380 | ||||||
Operating Lease Liabilities | 47,280,217 | 50,917,244 | ||||||
Finance Lease Liabilities | 26,905,824 | 26,553,287 | ||||||
Other Non-Current Liabilities | 2,987,812 | 3,082,277 | ||||||
Deferred Tax Liability | 40,295,319 | 35,213,671 | ||||||
Senior Secured Convertible Credit Facility | 138,746,070 | 132,005,663 | ||||||
Notes Payable | 74,898,640 | 74,372,898 | ||||||
TOTAL LIABILITIES | 564,695,181 | 641,736,420 | ||||||
SHAREHOLDERS’ EQUITY: | ||||||||
Preferred Shares ( par value, unlimited shares authorized and shares issued and outstanding) | - | - | ||||||
Subordinate Voting Shares (no par value, unlimited shares authorized, and shares issued and outstanding as of September 24, 2022 and June 26, 2022, respectively) | - | - | ||||||
Additional Paid-In Capital | 1,058,145,437 | 1,057,228,873 | ||||||
Accumulated Deficit | (897,613,980 | ) | (901,758,875 | ) | ||||
Total Equity Attributable to Shareholders of MedMen Enterprises Inc. | 160,531,457 | 155,469,998 | ||||||
Non-Controlling Interest | (474,095,046 | ) | (473,982,734 | ) | ||||
TOTAL SHAREHOLDERS’ EQUITY | (313,563,589 | ) | (318,512,736 | ) | ||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 251,131,592 | $ | 323,223,684 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
1
MEDMEN ENTERPRISES INC.
Unaudited Interim Condensed Consolidated Balance SheetsStatements of Operations (Unaudited)
As ofThree Months Ended September 25, 202124, 2022 and June 26,September 25, 2021
(Amounts Expressed in United States Dollars, Unless Otherwise Stated)Except for Share Data)
Three Months Ended | ||||||||
September 24, | September 25, | |||||||
2022 | 2021 | |||||||
Revenue | $ | 30,044,048 | $ | 36,735,904 | ||||
Cost of Goods Sold | 15,187,672 | 19,349,990 | ||||||
Gross Profit | 14,856,376 | 17,385,914 | ||||||
Operating Expenses: | ||||||||
General and Administrative | 17,846,117 | 32,649,234 | ||||||
Sales and Marketing | 443,790 | 593,224 | ||||||
Depreciation and Amortization | 3,946,523 | 5,823,617 | ||||||
Realized and Unrealized Changes in Fair Value of Contingent Consideration | (863,856 | ) | - | |||||
Impairment Expense | 1,663,911 | 435,241 | ||||||
Other Operating (Income) Expense | (2,555,118 | ) | 2,199,028 | |||||
Total Operating Expenses | 20,481,367 | 41,700,344 | ||||||
Loss from Operations | (5,624,991 | ) | (24,314,430 | ) | ||||
Non-Operating (Income) Expenses: | ||||||||
Interest Expense | 10,052,691 | 8,171,764 | ||||||
Interest Income | (33 | ) | (23,008 | ) | ||||
Accretion of Debt Discount and Loan Origination Fees | 1,581,967 | 6,347,471 | ||||||
Change in Fair Value of Derivatives | 805,590 | (2,105,415 | ) | |||||
Gain on Extinguishment of Debt | - | (10,233,610 | ) | |||||
Total Non-Operating Expenses | 12,440,215 | 2,157,202 | ||||||
Loss from Continuing Operations Before Provision for Income Taxes | (18,065,206 | ) | (26,471,632 | ) | ||||
Provision for Income Tax Expense | (2,193,542 | ) | (19,691,908 | ) | ||||
Net Loss from Continuing Operations | (20,258,748 | ) | (46,163,540 | ) | ||||
Net Income (Loss) from Discontinued Operations, Net of Taxes | 24,306,649 | (14,446,491 | ) | |||||
Net Income (Loss) | 4,047,901 | (60,610,031 | ) | |||||
Net Loss Attributable to Non-Controlling Interest | (112,312 | ) | (5,280,003 | ) | ||||
Net Income (Loss) Attributable to Shareholders of MedMen Enterprises Inc. | $ | 4,160,213 | $ | (55,330,028 | ) | |||
Earnings (Loss) Per Share - Basic and Diluted: | ||||||||
From Continuing Operations Attributable to Shareholders of MedMen Enterprises Inc. | $ | (0.02 | ) | $ | (0.04 | ) | ||
From Discontinued Operations Attributable to Shareholders of MedMen Enterprises Inc. | $ | 0.02 | $ | (0.02 | ) | |||
Weighted-Average Shares Outstanding - Basic and Diluted | 1,301,659,701 | 942,696,052 |
September 25, | June 26, | |||||||
2021 | 2021 | |||||||
(unaudited) | (audited) | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and Cash Equivalents | $ | 78,223,257 | $ | 11,873,256 | ||||
Restricted Cash | - | 730 | ||||||
Accounts Receivable and Prepaid Expenses | 6,790,371 | 7,790,805 | ||||||
Inventory | 19,400,145 | 20,093,018 | ||||||
Current Assets Held for Sale | 53,504,810 | 49,050,887 | ||||||
Other Current Assets | 7,587,744 | 7,869,974 | ||||||
Total Current Assets | 165,506,327 | 96,678,670 | ||||||
Operating Lease Right-of-Use Assets | 74,916,779 | 77,422,356 | ||||||
Property and Equipment, Net | 135,027,586 | 137,830,268 | ||||||
Intangible Assets, Net | 111,405,548 | 115,379,528 | ||||||
Goodwill | 32,900,457 | 32,900,457 | ||||||
Other Assets | 12,135,823 | 12,252,411 | ||||||
TOTAL ASSETS | $ | 531,892,520 | $ | 472,463,690 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
LIABILITIES: | ||||||||
Current Liabilities: | ||||||||
Accounts Payable and Accrued Liabilities | $ | 57,960,914 | $ | 57,138,783 | ||||
Income Taxes Payable | 80,433,269 | 61,462,662 | ||||||
Other Current Liabilities | 11,163,166 | 15,678,281 | ||||||
Derivative Liabilities | 35,330,105 | 6,935,520 | ||||||
Current Portion of Operating Lease Liabilities | 9,549,972 | 9,235,822 | ||||||
Current Portion of Finance Lease Liabilities | 204,770 | 205,595 | ||||||
Current Portion of Notes Payable | 110,632,461 | 103,496,394 | ||||||
Current Liabilities Held for Sale | 38,488,170 | 32,977,602 | ||||||
Due to Related Party | 1,476,921 | 1,476,921 | ||||||
Total Current Liabilities | 345,239,748 | 288,607,580 | ||||||
Operating Lease Liabilities, Net of Current Portion | 98,009,051 | 99,975,742 | ||||||
Finance Lease Liabilities, Net of Current Portion | 29,424,850 | 29,047,099 | ||||||
Other Non-Current Liabilities | 3,507,247 | 3,648,904 | �� | |||||
Deferred Tax Liabilities | 57,675,600 | 46,377,657 | ||||||
Senior Secured Convertible Credit Facility, Net of Current Portion | 113,503,266 | 170,821,393 | ||||||
Notes Payable, Net of Current Portion | 85,573,489 | 87,618,934 | ||||||
TOTAL LIABILITIES | 732,933,251 | 726,097,309 | ||||||
SHAREHOLDERS’ EQUITY: | ||||||||
Preferred Shares (no par value, unlimited shares authorized and no shares issued and outstanding) | - | - | ||||||
Subordinate Voting Shares (no par value, unlimited shares authorized, | and shares issued and outstanding as of September 25, 2021 and June 26, 2021, respectively)- | - | ||||||
Additional Paid-In Capital | 1,023,317,046 | 908,992,686 | ||||||
Accumulated Deficit | (772,188,033 | ) | (717,232,706 | ) | ||||
Total Equity Attributable to Shareholders of MedMen Enterprises Inc. | 251,129,013 | 191,759,980 | ||||||
Non-Controlling Interest | (452,169,744 | ) | (445,393,599 | ) | ||||
TOTAL SHAREHOLDERS’ EQUITY | (201,040,731 | ) | (253,633,619 | ) | ||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 531,892,520 | $ | 472,463,690 |
The accompanying notes are an integral part of these unaudited interim Condensed Consolidated Financial Statements.Statements (Unaudited).
2
MEDMEN ENTERPRISES INC.
Unaudited Interim Condensed Consolidated Statements of OperationsChanges in Shareholders’ Equity (Unaudited)
Three Months Ended September 25, 202124, 2022 and September 26, 202025, 2021
(Amounts Expressed in United States Dollars, Unless Otherwise Stated)Except for Share Data)
Three Months Ended | ||||||||
September 25, | September 26, | |||||||
2021 | 2020 | |||||||
Revenue | $ | 39,805,810 | $ | 35,109,139 | ||||
Cost of Goods Sold | 22,335,124 | 18,650,774 | ||||||
Gross Profit | 17,470,686 | 16,458,365 | ||||||
Expenses: | ||||||||
General and Administrative | 36,490,319 | 30,239,471 | ||||||
Sales and Marketing | 691,027 | 193,371 | ||||||
Depreciation and Amortization | 7,029,149 | 8,029,429 | ||||||
Realized and Unrealized Changes in Fair Value of Contingent Consideration | - | 302,834 | ||||||
Impairment Expense | 435,241 | 789,709 | ||||||
Other Operating Expense (Income) | 1,846,607 | (29,076,284 | ) | |||||
Total Expenses | 46,492,343 | 10,478,530 | ||||||
(Loss) Income from Operations | (29,021,657 | ) | 5,979,835 | |||||
Other Expense (Income): | ||||||||
Interest Expense | 9,966,950 | 8,785,392 | ||||||
Interest Income | (23,008 | ) | (1,210 | ) | ||||
Amortization of Debt Discount and Loan Origination Fees | 7,844,299 | 1,687,055 | ||||||
Change in Fair Value of Derivatives | (2,105,415 | ) | (305,379 | ) | ||||
(Gain) Loss on Extinguishment of Debt | (10,233,610 | ) | 10,129,655 | |||||
Total Other Expense | 5,449,216 | 20,295,513 | ||||||
Loss from Continuing Operations Before Provision for Income Taxes | (34,470,873 | ) | (14,315,678 | ) | ||||
Provision for Income Tax Expense | (19,691,908 | ) | (12,282,665 | ) | ||||
Net Loss from Continuing Operations | (54,162,781 | ) | (26,598,343 | ) | ||||
Net Loss from Discontinued Operations, Net of Taxes | (6,447,250 | ) | (6,249,060 | ) | ||||
Net Loss | (60,610,031 | ) | (32,847,403 | ) | ||||
Net Loss Attributable to Non-Controlling Interest | (5,280,003 | ) | (10,927,541 | ) | ||||
Net Loss Attributable to Shareholders of MedMen Enterprises Inc. | $ | (55,330,028 | ) | $ | (21,919,862 | ) | ||
Loss Per Share - Basic and Diluted: | ||||||||
From Continuing Operations Attributable to Shareholders of MedMen Enterprises Inc. | $ | (0.05 | ) | $ | (0.05 | ) | ||
From Discontinued Operations Attributable to Shareholders of MedMen Enterprises Inc. | $ | (0.01 | ) | $ | (0.01 | ) | ||
Weighted-Average Shares Outstanding - Basic and Diluted | 942,696,052 | 423,187,218 |
Units | $ Amount | TOTAL EQUITY ATTRIBUTABLE | ||||||||||||||||||||||||||
Subordinate Voting | Subordinate Voting Shares | Additional Paid-In Capital | Accumulated Deficit | TO SHAREHOLDERS OF MEDMEN | Non- Interest | TOTAL SHAREHOLDERS’ DEFICIENCY | ||||||||||||||||||||||
BALANCE AS OF JUNE 26, 2022 | 1,301,423,950 | $ | - | $ | 1,057,228,873 | $ | (901,758,875 | ) | $ | 155,469,998 | $ | (473,982,734 | ) | $ | (318,512,736 | ) | ||||||||||||
Net Income (Loss) | - | - | - | 4,160,213 | 4,160,213 | (112,312 | ) | 4,047,901 | ||||||||||||||||||||
Controlling Interest Equity Transactions | ||||||||||||||||||||||||||||
Partner Contributions | - | - | 37,561 | - | 37,561 | - | 37,561 | |||||||||||||||||||||
Redemption of MedMen Corp Redeemable Shares | 259,814 | - | 15,318 | (15,318 | ) | - | - | - | ||||||||||||||||||||
Share-Based Compensation | - | - | 863,685 | - | 863,685 | - | 863,685 | |||||||||||||||||||||
BALANCE AS OF SEPTEMBER 24, 2022 | 1,301,683,764 | $ | - | $ | 1,058,145,437 | $ | (897,613,980 | ) | $ | 160,531,457 | $ | (474,095,046 | ) | $ | (313,563,589 | ) |
Units | $ Amount | TOTAL EQUITY ATTRIBUTABLE | ||||||||||||||||||||||||||
Subordinate Voting | Subordinate Voting Shares | Additional Paid-In Capital | Accumulated Deficit | TO SHAREHOLDERS OF MEDMEN | Non- Interest | TOTAL SHAREHOLDERS’ DEFICIENCY | ||||||||||||||||||||||
BALANCE AS OF JUNE 27, 2021 | 726,866,374 | $ | - | $ | 908,992,686 | $ | (717,232,706 | ) | $ | 191,759,980 | $ | (445,393,599 | ) | $ | (253,633,619 | ) | ||||||||||||
Net Loss | - | - | - | (55,330,028 | ) | (55,330,028 | ) | (5,280,003 | ) | (60,610,031 | ) | |||||||||||||||||
Controlling Interest Equity Transactions | ||||||||||||||||||||||||||||
Shares Issued for Cash, Net of Fees | 406,249,973 | - | 73,393,745 | - | 73,393,745 | - | 73,393,745 | |||||||||||||||||||||
Shares Issued to Settle Debt and Accrued Interest | 20,833,333 | - | 4,030,000 | - | 4,030,000 | - | 4,030,000 | |||||||||||||||||||||
Shares Issued to Settle Accounts Payable and Liabilities | 4,182,730 | - | 700,000 | - | 700,000 | - | 700,000 | |||||||||||||||||||||
Equity Component of Debt - New and Amended | - | - | 41,388,048 | - | 41,388,048 | - | 41,388,048 | |||||||||||||||||||||
Redemption of MedMen Corp Redeemable Shares | 4,054,278 | - | 1,121,441 | 374,701 | 1,496,142 | (1,496,142 | ) | - | ||||||||||||||||||||
Shares Issued for Vested Restricted Stock Units and Cashless Exercise of Options | 8,473,868 | - | - | - | - | - | - | |||||||||||||||||||||
Shares Issued for Exercise of Warrants | 8,807,605 | - | 1,273,679 | - | 1,273,679 | - | 1,273,679 | |||||||||||||||||||||
Shares Issued for Conversion of Debt | 16,014,665 | - | 2,371,100 | - | 2,371,100 | - | 2,371,100 | |||||||||||||||||||||
Stock Grants for Compensation | 1,455,415 | - | 1,421,400 | - | 1,421,400 | - | 1,421,400 | |||||||||||||||||||||
Deferred Tax Impact On Conversion Feature | - | - | (13,057,730 | ) | - | (13,057,730 | ) | - | (13,057,730 | ) | ||||||||||||||||||
Share-Based Compensation | - | - | 1,682,677 | - | 1,682,677 | - | 1,682,677 | |||||||||||||||||||||
BALANCE AS OF SEPTEMBER 25, 2021 | 1,196,938,241 | $ | - | $ | 1,023,317,046 | $ | (772,188,033 | ) | $ | 251,129,013 | $ | (452,169,744 | ) | $ | (201,040,731 | ) |
The accompanying notes are an integral part of these unaudited interim Condensed Consolidated Financial Statements.Statements (Unaudited).
3
MEDMEN ENTERPRISES INC.
Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders’ EquityCash Flows (Unaudited)
Three Months Ended September 25, 202124, 2022 and September 26, 202025, 2021
(Amounts Expressed in United States Dollars)
Three Months Ended | ||||||||
September 24, | September 25, | |||||||
2022 | 2021 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net Loss from Continuing Operations | $ | (20,258,748 | ) | $ | (46,163,540 | ) | ||
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: | ||||||||
Deferred Tax Expense | - | (4,497,141 | ) | |||||
Depreciation and Amortization | 3,971,473 | 6,256,917 | ||||||
Non-Cash Operating Lease Costs | 3,453,863 | 4,442,077 | ||||||
Accretion of Debt Discount and Loan Origination Fees | 1,581,970 | 6,347,471 | ||||||
Loss on Disposals of Assets | 205,595 | - | ||||||
Gain on Lease Terminations | (1,587,670 | ) | - | |||||
Accretion of Deferred Gain on Sale of Property | (141,657 | ) | (141,657 | ) | ||||
Impairment of Assets | 1,663,911 | 435,241 | ||||||
Realized and Unrealized Changes in Fair Value of Contingent Consideration | 863,856 | - | ||||||
Change in Fair Value of Derivative Liabilities | 805,590 | (2,105,415 | ) | |||||
Gain on Extinguishment of Debt | - | (10,233,610 | ) | |||||
Share-Based Compensation | 863,685 | 3,104,077 | ||||||
Interest Capitalized to Senior Secured Convertible Debt and Notes Payable | 6,416,426 | 7,837,693 | ||||||
Interest Capitalized to Finance Lease Liabilities | 444,232 | 377,885 | ||||||
Changes in Operating Assets and Liabilities: | ||||||||
Accounts Receivable and Prepaid Expenses | 2,163,698 | 617,325 | ||||||
Inventory | 892,922 | (1,710,735 | ) | |||||
Other Current Assets | 2,587,163 | 282,230 | ||||||
Other Assets | 256,706 | - | ||||||
Accounts Payable and Accrued Liabilities | (1,746,175 | ) | 4,827,997 | |||||
Interest Payments on Finance Leases | (1,804,507 | ) | (1,784,541 | ) | ||||
Cash Payments - Operating Lease Liabilities | (1,026,792 | ) | (3,478,891 | ) | ||||
Income Taxes Payable | 11,145,390 | 21,707,961 | ||||||
Other Current Liabilities | (447,046 | ) | (2,413,113 | ) | ||||
Other Non-Current Liabilities | 47,192 | - | ||||||
NET CASH PROVIDED BY (USED IN) CONTINUED OPERATING ACTIVITIES | 10,351,077 | (16,291,769 | ) | |||||
Net Cash Used in Discontinued Operating Activities | (19,961,041 | ) | (6,684,431 | ) | ||||
NET CASH USED IN OPERATING ACTIVITIES | (9,609,964 | ) | (22,976,200 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of Property and Equipment | - | (391,730 | ) | |||||
Additions to Intangible Assets | (24,056 | ) | (461,456 | ) | ||||
Proceeds from the Sale of Assets Held for Sale | 51,500,000 | - | ||||||
Restricted Cash | - | 730 | ||||||
NET CASH PROVIDED BY (USED IN) CONTINUED INVESTING ACTIVITIES | 51,475,944 | (852,456 | ) | |||||
Net Cash Used in Discontinued Investing Activities | - | (2,764,417 | ) | |||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | 51,475,944 | (3,616,873 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Issuance of Subordinate Voting Shares for Cash | - | 95,000,000 | ||||||
Payment of Stock Issuance Costs Relating to Private Placement | - | (5,352,505 | ) | |||||
Exercise of Warrants for Cash | - | 1,273,679 | ||||||
Payment of Debt Issuance Costs Relating to Senior Secured Convertible Credit Facility | - | (2,608,964 | ) | |||||
Proceeds from Issuance of Notes Payable | - | 5,000,000 | ||||||
Principal Repayments of Notes Payable | (31,599,999 | ) | (75,605 | ) | ||||
Principal Repayments of Finance Lease Liability | (2,484 | ) | (959 | ) | ||||
Distributions - Non-Controlling Interest | 37,561 | - | ||||||
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | (31,564,922 | ) | 93,235,646 | |||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 10,301,058 | 66,642,573 | ||||||
Cash Included in Assets Held for Sale | - | (275,178 | ) | |||||
Cash and Cash Equivalents, Beginning of Period | 10,795,999 | 11,575,138 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 21,097,057 | $ | 77,942,533 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
MEDMEN ENTERPRISES INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended September 24, 2022 and September 25, 2021
(Amounts Expressed in United States Dollars)
Three Months Ended | ||||||||
September 24, | September 25, | |||||||
2022 | 2021 | |||||||
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION | ||||||||
Cash Paid for Interest | $ | 1,260,562 | $ | 2,336,120 | ||||
Non-Cash Investing and Financing Activities: | ||||||||
Net Assets Transferred to Held for Sale | $ | - | $ | 4,476,993 | ||||
Redemption of MedMen Corp Redeemable Shares | $ | - | $ | 1,496,142 | ||||
Derivative Liability Incurred on Convertible Facility and Equity Financing | $ | - | $ | 30,500,000 | ||||
Conversion of Convertible Debentures | $ | - | $ | 2,371,100 | ||||
Shares Issued to Settle Debt and Lender Fees | $ | - | $ | 4,030,000 | ||||
Shares Issued to Settle Accounts Payable and Liabilities | $ | - | $ | 700,000 | ||||
Equity Component of Debt - New and Amended | $ | - | $ | 41,388,047 | ||||
Deferred Tax Impact on Conversion Feature | $ | - | $ | 13,057,730 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
5
MEDMEN ENTERPRISES INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months Ended September 24, 2022 and September 25, 2021
(Amounts Expressed in United States Dollars, Unless Otherwise Stated)Except for Share and Per Share Data)
Mezzanine Equity | TOTAL EQUITY | |||||||||||||||||||||||||||||||||||
Units | $ Amount | Units | $ Amount | ATTRIBUTABLE | ||||||||||||||||||||||||||||||||
Super | Super | Subordinate | Subordinate | Additional | TO | Non- | TOTAL | |||||||||||||||||||||||||||||
Voting | Voting | Voting | Voting | Paid-In | Accumulated | SHAREHOLDERS | Controlling | SHAREHOLDERS’ | ||||||||||||||||||||||||||||
Shares | Shares | Shares | Shares | Capital | Deficit | OF MEDMEN | Interest | EQUITY | ||||||||||||||||||||||||||||
BALANCE AS OF JUNE 28, 2020 | 815,295 | $ | 82,500 | 403,907,218 | $ | - | $ | 791,172,613 | $ | (631,365,865 | ) | $ | 159,889,247 | $ | (336,777,697 | ) | $ | (176,888,450 | ) | |||||||||||||||||
Net Loss | - | - | - | - | - | (21,919,862 | ) | (21,919,862 | ) | (10,927,541 | ) | (32,847,403 | ) | |||||||||||||||||||||||
Controlling Interest Equity Transactions | ||||||||||||||||||||||||||||||||||||
Shares Issued to Settle Accounts Payable and Liabilities | - | - | 3,608,690 | - | 516,618 | - | 516,618 | - | 516,618 | |||||||||||||||||||||||||||
Equity Component of Debt - New and Amended | - | - | - | - | 21,660,379 | - | 21,660,379 | - | 21,660,379 | |||||||||||||||||||||||||||
Redemption of MedMen Corp Redeemable Shares | - | - | 29,947,959 | - | 5,351,262 | 9,019,576 | 14,370,838 | (14,370,838 | ) | - | ||||||||||||||||||||||||||
Shares Issued for Vested Restricted Stock Units | - | - | 614,207 | - | 157,477 | - | 157,477 | - | 157,477 | |||||||||||||||||||||||||||
Stock Grants for Compensation | - | - | 1,318,865 | - | 181,589 | - | 181,589 | - | 181,589 | |||||||||||||||||||||||||||
Deemed Dividend - Down Round Feature of Warrants | - | - | - | - | 4,883,467 | (4,883,467 | ) | - | - | - | ||||||||||||||||||||||||||
Deferred Tax Impact On Conversion Feature | - | - | - | - | (8,610,921 | ) | - | (8,610,921 | ) | - | (8,610,921 | ) | ||||||||||||||||||||||||
Share-Based Compensation | - | - | - | - | 1,008,530 | - | 1,008,530 | - | 1,008,530 | |||||||||||||||||||||||||||
Non-Controlling Interest Equity Transactions | ||||||||||||||||||||||||||||||||||||
Equity Component on Debt and Debt Modification | - | - | - | - | - | - | - | 2,485,588 | 2,485,588 | |||||||||||||||||||||||||||
BALANCE AS OF SEPTEMBER 26, 2020 | 815,295 | $ | 82,500 | 439,396,939 | $ | - | $ | 816,321,014 | $ | (649,149,618 | ) | $ | 167,253,895 | $ | (359,590,488 | ) | $ | (192,336,593 | ) | |||||||||||||||||
BALANCE AS OF JUNE 27, 2021 | - | $ | - | 726,866,374 | $ | - | $ | 908,992,686 | $ | (717,232,706 | ) | $ | 191,759,980 | $ | (445,393,599 | ) | $ | (253,633,619 | ) | |||||||||||||||||
Net Loss | - | - | - | - | - | (55,330,028 | ) | (55,330,028 | ) | (5,280,003 | ) | (60,610,031 | ) | |||||||||||||||||||||||
Controlling Interest Equity Transactions | ||||||||||||||||||||||||||||||||||||
Shares Issued for Cash, Net of Fees | - | - | 406,249,973 | - | 73,393,745 | - | 73,393,745 | - | 73,393,745 | |||||||||||||||||||||||||||
Shares Issued to Settle Debt and Accrued Interest | - | - | 20,833,333 | - | 4,030,000 | - | 4,030,000 | - | 4,030,000 | |||||||||||||||||||||||||||
Shares Issued to Settle Accounts Payable and Liabilities | - | - | 4,182,730 | - | 700,000 | - | 700,000 | - | 700,000 | |||||||||||||||||||||||||||
Equity Component of Debt - New and Amended | - | - | - | - | 41,388,048 | - | 41,388,048 | - | 41,388,048 | |||||||||||||||||||||||||||
Redemption of MedMen Corp Redeemable Shares | - | - | 4,054,278 | - | 1,121,441 | 374,701 | 1,496,142 | (1,496,142 | ) | - | ||||||||||||||||||||||||||
Shares Issued for Vested Restricted Stock Units and Cashless Exercise of Options | - | - | 8,473,868 | - | - | - | - | - | - | |||||||||||||||||||||||||||
Shares Issued for Exercise of Warrants | - | - | 8,807,605 | - | 1,273,679 | - | 1,273,679 | - | 1,273,679 | |||||||||||||||||||||||||||
Shares Issued for Conversion of Debt | - | - | 16,014,665 | - | 2,371,100 | - | 2,371,100 | - | 2,371,100 | |||||||||||||||||||||||||||
Stock Grants for Compensation | - | - | 1,455,415 | - | 1,421,400 | - | 1,421,400 | - | 1,421,400 | |||||||||||||||||||||||||||
Deferred Tax Impact On Conversion Feature | - | - | - | - | (13,057,730 | ) | - | (13,057,730 | ) | - | (13,057,730 | ) | ||||||||||||||||||||||||
Share-Based Compensation | - | - | - | - | 1,682,677 | - | 1,682,677 | - | 1,682,677 | |||||||||||||||||||||||||||
BALANCE AS OF SEPTEMBER 25, 2021 | - | $ | - | 1,196,938,241 | $ | - | $ | 1,023,317,046 | $ | (772,188,033 | ) | $ | 251,129,013 | $ | (452,169,744 | ) | $ | (201,040,731 | ) |
The accompanying notes are an integral part of these unaudited interim Condensed Consolidated Financial Statements.
MEDMEN ENTERPRISES INC.
Unaudited Interim Condensed Consolidated Statements of Cash Flows
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
Three Months Ended | ||||||||
September 25, | September 26, | |||||||
2021 | 2020 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net Loss from Continuing Operations | $ | (54,162,781 | ) | $ | (26,598,343 | ) | ||
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: | ||||||||
Deferred Tax Recovery | (4,497,141 | ) | (8,749,513 | ) | ||||
Depreciation and Amortization | 7,599,774 | 8,071,192 | ||||||
Non-Cash Operating Lease Costs | 6,595,652 | 6,740,984 | ||||||
Accretion of Debt Discount and Loan Origination Fees | 7,844,299 | 1,687,055 | ||||||
Gain on Lease Terminations | - | (15,919,946 | ) | |||||
Accretion of Deferred Gain on Sale of Property | (141,657 | ) | (141,659 | ) | ||||
Impairment of Assets | 435,241 | 789,709 | ||||||
Gain on Disposal of Assets Held for Sale | - | (12,415,479 | ) | |||||
Realized and Unrealized Changes in Fair Value of Contingent Consideration | - | 302,834 | ||||||
Change in Fair Value of Derivative Liabilities | (2,105,415 | ) | - | |||||
(Gain) Loss on Extinguishment of Debt | (10,233,610 | ) | 10,129,646 | |||||
Share-Based Compensation | 3,104,077 | 1,347,604 | ||||||
Interest Capitalized to Senior Secured Convertible Debt and Notes Payable | 7,837,693 | - | ||||||
Interest Capitalized to Finance Lease Liabilities | 377,885 | - | ||||||
Changes in Operating Assets and Liabilities: | ||||||||
Accounts Receivable and Prepaid Expenses | 664,697 | (1,533,090 | ) | |||||
Inventory | (697,367 | ) | 1,568,281 | |||||
Other Current Assets | 282,230 | 1,991,837 | ||||||
Other Assets | - | 443,507 | ||||||
Accounts Payable and Accrued Liabilities | 4,390,486 | (763,459 | ) | |||||
Interest Payments on Finance Leases | (1,784,541 | ) | (1,523,821 | ) | ||||
Cash Payments - Operating Lease Liabilities | (5,742,616 | ) | (8,411,146 | ) | ||||
Income Taxes Payable | 21,707,961 | 20,935,889 | ||||||
Other Current Liabilities | (2,410,643 | ) | 8,189,938 | |||||
Due to Related Party | - | (3,100 | ) | |||||
NET CASH USED IN CONTINUED OPERATING ACTIVITIES | (20,935,776 | ) | (13,861,080 | ) | ||||
Net Cash Used in Discontinued Operating Activities | (2,057,818 | ) | (4,297,641 | ) | ||||
NET CASH USED IN OPERATING ACTIVITIES | (22,993,594 | ) | (18,158,721 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of Property and Equipment | (3,156,147 | ) | (280,586 | ) | ||||
Additions to Intangible Assets | (461,456 | ) | (55,505 | ) | ||||
Proceeds from Sale of Assets Held for Sale and Other Assets | - | 10,000,000 | ||||||
Restricted Cash | 730 | - | ||||||
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES | (3,616,873 | ) | 9,663,909 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Issuance of Subordinate Voting Shares for Cash | 95,000,000 | - | ||||||
Payment of Stock Issuance Costs Relating to Private Placement | (5,352,505 | ) | ||||||
Exercise of Warrants for Cash | 1,273,679 | - | ||||||
Payment of Loan Amendment Fee | - | - | ||||||
Payment of Debt Issuance Costs Relating to Senior Secured Convertible Credit Facility | (2,608,964 | ) | 4,825,000 | |||||
Proceeds from Issuance of Notes Payable | 5,000,000 | 4,125,000 | ||||||
Principal Repayments of Notes Payable | (75,605 | ) | (284,330 | ) | ||||
Principal Repayments of Finance Lease Liability | (959 | ) | (39,879 | ) | ||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 93,235,646 | 8,625,791 | ||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 66,625,179 | 130,979 | ||||||
Cash Included in Assets Held for Sale | (275,178 | ) | - | |||||
Cash and Cash Equivalents, Beginning of Period | 11,873,256 | 9,598,736 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 78,223,257 | $ | 9,729,715 |
The accompanying notes are an integral part of these unaudited interim Condensed Consolidated Financial Statements.
MEDMEN ENTERPRISES INC.
Unaudited Interim Condensed Consolidated Statements of Cash Flows
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
Three Months Ended | ||||||||
September 25, | September 26, | |||||||
2021 | 2020 | |||||||
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION | ||||||||
Cash Paid for Interest | $ | 2,577,039 | $ | 1,295,556 | ||||
Non-Cash Investing and Financing Activities: | ||||||||
Net Assets Transferred to Held for Sale | $ | 4,476,993 | $ | 6,614,987 | ||||
Receivable Recorded on Asset Held for Sale | $ | - | $ | 9,407,879 | ||||
Lease Terminations and Amendments | $ | - | $ | 34,250,918 | ||||
Redemption of MedMen Corp Redeemable Shares | $ | 1,496,142 | $ | 14,370,838 | ||||
Derivative Liability Incurred on Convertible Facility and Equity Financing | $ | 30,500,000 | $ | - | ||||
Conversion of Convertible Debentures | $ | 2,371,100 | $ | - | ||||
Shares Issued to Settle Debt and Lender Fees | $ | 4,030,000 | $ | - | ||||
Shares Issued to Settle Accounts Payable and Liabilities | $ | 700,000 | $ | 516,618 | ||||
Equity Component of Debt - New and Amended | $ | 41,388,047 | $ | 2,883,786 | ||||
Release of Investments for Liabilities | $ | - | $ | 750,000 | ||||
Deferred Tax Impact on Conversion Feature | $ | 13,057,730 | $ | 8,610,921 |
The accompanying notes are an integral part of these unaudited interim Condensed Consolidated Financial Statements.
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
1. NATURE OF OPERATIONS
1. | NATURE OF OPERATIONS |
MedMen Enterprises Inc. (“MedMen Enterprises” orand its subsidiaries over which the company has control (collectively, “MedMen”, the “Company”), formerly known“we” or “us”) is a premier cannabis retailer based in the U.S. with an operational footprint in California, Nevada, Illinois, Arizona, Massachusetts, and New York. MedMen offers a robust selection of high-quality products, including MedMen-owned brands – MedMen Red and LuxLyte – through its premium retail stores, proprietary delivery service, as Ladera Ventures Corp.well as curbside and in-store pick up. MedMen Buds provides exclusive access to promotions, product drops and content.
As of September 24, 2022, the Company owns 23 store locations across California (13), was incorporated under the Business Corporations Act (British Columbia) on May 21, 1987. The Company’s Class B Subordinate Voting Shares are listed on the Canadian Securities Exchange under the symbol “MMEN”Nevada (3), on the OTCQX under the symbol “MMNFF”Illinois (1), on the Frankfurt Stock Exchange under the symbol “OJS.F”Arizona (1), on the Stuttgart Stock Exchange under the symbol “OJS.SG”Massachusetts (1), on the Munich Stock Exchange under the symbol “OJS.MU”, on the Berlin Stock Exchange under the symbol “OJS.BE” and on the Dusseldorf Stock Exchange under the symbol “OJS.DU”New York (4). The head officeCompany continues to market its assets in New York and principal address of the Company is 10115 Jefferson Boulevard, Culver City, California 90232. The Company’s registered and records office address is 885 West Georgia Street, Suite 2200, Vancouver, British Columbia Canada V6C 3E8. The Company operates through its principal wholly-owned subsidiaries, MM CAN USA, Inc., a California corporation (“MM CAN” or “MedMen Corp”), and MM Enterprises USA, LLC, a Delaware limited liability company (“MM Enterprises USA”).
MM CAN was converted into a California corporation (from a Delaware corporation) on May 16, 2018 and is based in Culver City, California. The head office and principal address of MM CAN is 10115 Jefferson Boulevard, Culver City, California 90232.
MM Enterprises USA was formed on January 9, 2018 and is based in Culver City, California. The head office and principal address of MM Enterprises USA is 10115 Jefferson Boulevard, Culver City, California 90232. MM Enterprises USA was formed as a joint venture whose contributors were MMMG, LLC (“MMMG”); MedMen Opportunity Fund, LP (“Fund I”); MedMen Opportunity Fund II, LP (“Fund II”), The MedMen of Nevada 2, LLC (“MMNV2”); DHSM Investors, LLC (“DHS Owner”); and Bloomfield Partners Utica, LLC (“Utica Owner”) (collectively, the “MedMen Group of Companies”).
On January 24, 2018, pursuant to a Formation and Contribution Agreement (the “Agreement”), a roll-up transaction was consummated whereby thethus classifies all assets and liabilities and profit or loss allocable to its operations in the state of The MedMen GroupNew York as discontinued operations. In August 2022, the Company completed the sale of Companies were transferred into MM Enterprises USA. In return,its operations in the MedMen Groupstate of Companies received MM Enterprises USA Class B Units. The Agreement was entered into byFlorida of which all assets and among MM Enterprises Manager, LLC,liabilities and profit or loss allocable to Florida are classified as discontinued operations until the sole managerday of MM Enterprises USA; MMMG; Fund I; Fund II; MMNV2; DHS Owner;sale, or August 22, 2022. As of September 24, 2022, the remaining post-acquisition assets and Utica Owner.liabilities and profit or loss allocable to Florida have been reclassified as continuing operations.
6
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation
The accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared on a going concern basis in accordance with generally accepted accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). for interim financial information. The unaudited interim Condensed Consolidated Financial Statements include the accounts of MedMen Enterprises, its subsidiaries and variable interest entities (“VIEs”) where the Company is considered the primary beneficiary, if any, after elimination of intercompany accounts and transactions. Investments in entities in which the Company has significant influence, but less than a controlling financial interest, are accounted for using the equity method.
In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial position of the Company as of and for the three months ended September 25, 2021, year ended June 26, 2021 and three months ended September 26, 2020, the consolidated results of operations and cash flows for the three months ended September 25, 2021 and September 26, 2020interim periods presented have been included. The accompanying Condensed Consolidated Financial Statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to our ability to continue as a going concern.
The accompanying unaudited interim Condensed Consolidated Financial Statements do not include all of the information required for full annual financial statements. Accordingly, certain information, footnotes and disclosures normally included in the annual financial statements prepared in accordance with GAAP, have been condensed or omitted in accordance with SEC rules and regulations within the instruction to Form 10-Q and Article 10 of Regulation S-X.for interim financial information. The financial data presented herein should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended June 26, 2021, dated September 24, 2021,25, 2022, as filed with the Securities and Exchange Commission on September 9, 2022 (the “2021“2022 Form 10-K”).
Going Concern
As of September 24, 2022, the Company had cash and cash equivalents of $21.1 million and working capital deficit of $134.9 million. The Company has incurred net losses from continuing operations of $20.3 million and $46.2 million for the three months ended September 24, 2022 and September 25, 2021, respectively. The conditions described above raise substantial doubt with respect to the Company’s ability to meet its obligations for at least one year from the issuance of these Condensed Consolidated Financial Statements, and therefore, to continue as a going concern.
The Company plans to continue to fund its operations through the implementation of its cost savings plan, and various strategic actions, including the successful negotiations of lower costs of occupancy with its master lease landlord and other landlords, divesture of non-core assets including but not limited to the current asset group held for sale, New York, as well continuing its on-going revenue strategy of market expansion and retail revenue growth. The Company also needs to obtain an extension or a refinancing of its debt-in-default with the secured senior lender. The annual operating plan for fiscal year 2023 estimates the Company will be able to manage ongoing operations. However, its cash needs are significant and not achievable with the current cash flow from operations. If the above strategic actions, for any reason, are inaccessible, it will have a significantly negative effect on the Company’s financial condition. Additionally, management expects to continue to manage the Company’s operating expenses and reduce its projected cash requirements through reduction of its expenses by delaying new store development, permanently or temporarily closing stores that are deemed to be performing below expectations, and/or implementing other restructuring activities. Furthermore, COVID-19 and the impact the global pandemic on the broader retail environment could also have a significant impact on the Company’s financial position, results of operations, equity and or its access to capital and future financing.
7
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
COVID-19
TheIn response to the COVID-19 pandemic, promotedgovernmental authorities have enacted and implemented various recommendations and safety measures from governmental authoritiesin an attempt to try and limit the pandemic. The responsespread and magnitude of governmental authorities is having a significant impact on the private sector and individuals, including unprecedented business, employment and economic disruptions.pandemic. During the current reporting period, aspects of the Company’s business continue to be affected by impacts of the COVID-19 pandemic, withas the Company’s offices and retail stores operatingstrive to operate within the local rules and regulations.regulations of the states and localities in which the Company operates. While the ultimate severityCompany saw continued recovery from the impacts of the outbreakCOVID 19-pandemic during the first quarter of 2023, the Company continues to closely monitor the potential impact that a resurgence of the COVID-19 virus, including as a result of the emergence of new variants and its impactstrains, could have on the economic environment is uncertain, the Company is monitoring this closely.Company’s operations. In the event that the Company were to experience widespread transmission of the virus at one or more of the Company’s store or other facilities, the Company could suffer reputational harm or other potential liability.liabilities. Further, the Company’s business operations may be materially and adversely affected if a significant number of the Company’s employees are impacted by the virus.
Emerging Growth CompanyBasis of Consolidation
Subsidiaries are entities controlled by the Company. Control exists when the Company either has a controlling voting interest or is the primary beneficiary of a variable interest entity. The Company is an emerging growth company as definedfinancial statements of subsidiaries are included in the Jumpstart Our Business Startups Act (the “JOBS Act”) underConsolidated Financial Statements from the date that control commences until the date that control ceases. With the exception of MME Florida, LLC, which emerging growth companies can delay adopting new or revised accounting standards until such timethe Company disposed on August 22, 2022, the list of the Company’s subsidiaries included in the Company’s 2022 Form 10-K remain complete as those standards apply to private companies.of September 24, 2022.
Functional Currency
The Company and its subsidiaries’ functional currency, as determined by management, is the United States (“U.S.”) dollar. These consolidated financial statements are presented in U.S. dollars as this is the primary economic environment of the group. All references to “C$” refer to Canadian dollars.
Significant Accounting Policies
The significant accounting policies and critical estimates applied by the Company in these unaudited interim Condensed Consolidated Financial Statements are the same as those applied in the Company’s audited Consolidated Financial Statements and accompanying notes included in the Company’s 20212022 Form 10-K.
Restricted Cash10-K, unless otherwise disclosed in these accompanying notes to the Condensed Consolidated Financial Statements for the interim period ended September 24, 2022.
Earnings (Loss) per Share
Loss per Share
The Company calculates basic loss per share by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted lossearnings per share is determined by adjusting profit or loss attributable to common shareholders and the weighted-average number of common shares outstanding, for the effects of all dilutive potential common shares, which comprise convertible debentures, restricted stock units, warrants and stock options issued.
Reclassifications
Certain amounts reported in the Notes to the Condensed Consolidated Financial Statements as of June 25, 2022 have non-material corrections and reclassified in order to conform to the current reporting period presentation. These non-material corrections and reclassifications impacted leasehold improvements and furniture and fixtures in the amount of approximately $940,000 between the categories. Customer relationships and accumulated amortization of customer relationships in the amount of $1,440,000 between the categories were reclassed between the two categories. Fully amortized management agreements and its related accumulated amortization in the amount of $964,000 were also reclassed. Non-controlling interest and accumulated deficit in the amount of approximately $3,662,000 have been reclassed between the two categories. In addition, the Company reclassified short-term and long-term operating lease liabilities between the two categories in the amount of approximately $6,825,000. There was no change to total current assets, total assets, total liabilities, total shareholders’ equity or cash flows as a result of these reclassifications and non-material corrections.
8
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Adopted Accounting Standards
In December 2019,May 2021, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income TaxesStandards Update (“ASU”) 2021-04, “Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)” (“ASU 2019-12”2021-04”), which eliminates certain exceptions related to the approachamends existing guidance for intraperiod tax allocation, the methodology for calculating income taxesearnings per share (“EPS”) in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes.accordance with Topic 260. ASU 2019-122021-04 is effective prospectively for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.2021. The Company adopted ASU 2019-122021-04 on June 27, 2021.26, 2022. The adoption of the standard did not have a material impact on the Company’s unaudited interim condensed consolidated financial statements.Condensed Consolidated Financial Statements.
Recently Issued Accounting Standards
In JanuaryMarch 2020, the FASB issued ASU 2020-01, 2020-04, ““Investments — Equity SecuritiesReference Rate Reform (Topic 321)848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), “Investments—Equity Methodprovides optional expedients and Joint Ventures (Topic 323)”,exceptions for applying GAAP to debt instruments, derivatives, and “Derivativesother contracts that reference London Interbank Offered Rate (“LIBOR”) or other reference rates expected to be discontinued as a result of reference rate reform. This guidance is optional and Hedging (Topic 815)may be elected through December 31, 2022 using a prospective application on all eligible contract modifications. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to instruments affected by reference rate reform if certain criteria are met. The Company did not modify any material contracts due to reference rate reform during the nine months ended September 30, 2022. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its financial position and results of operations.
In September 2022, the FASB issued ASU 2022-04, “Liabilities – Supplier Finance Programs (Subtopic 405-50)” (“(“ASU 2020-01”2022-04”), which is intended to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815.enhance transparency with supplier finance programs. ASU 2020-012022-04 is effective for the Company for fiscal years beginning after December 15, 2020, and interim periods therein. The Company adopted ASU 2020-01 on June 27, 2021. The adoption of the standard did not have a material impact on the Company’s unaudited interim condensed consolidated financial statements.
Recently Issued Accounting Standards
In August 2020, the FASB issued ASU 2020-06, “Debt — Debt With Conversion and Other Options (Subtopic 470-20)” and “Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity,2022, including convertible instruments and contracts on an entity’s own equity. ASU 2020-06 is effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Adoption is applied on a modified or full retrospective transition approach. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its financial position and results of operations.
9
3. INVENTORIES
3. | INVENTORY |
As of September 25, 2021 and June 26, 2021, inventoryInventory consists of the following:
Schedule of inventories | ||||||||||||||||
September 25, | June 26, | |||||||||||||||
2021 | 2021 | September 24, | June 25, | |||||||||||||
2022 | 2022 | |||||||||||||||
Raw Materials | $ | 776,265 | $ | 669,861 | $ | 612,901 | $ | 521,777 | ||||||||
Work-in-Process | 2,910,664 | 5,174,359 | 1,142,397 | 671,541 | ||||||||||||
Finished Goods | 15,713,216 | 14,248,798 | 7,362,511 | 8,817,413 | ||||||||||||
Total Inventory | $ | 19,400,145 | $ | 20,093,018 | $ | 9,117,809 | $ | 10,010,731 |
During the three months ended September 24, 2022 and September 25, 2021, the Company recognized an impairment of approximatelynil and $864,314, respectively, to write down inventory to its net realizable value.
10
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
4. ASSETS HELD FOR SALE
4. | ASSETS HELD FOR SALE |
A reconciliation of the beginning and ending balances ofour assets held for sale for the three months ended September 25, 2021 is as follows:
Schedule of asset held for sale | ||||||||||||||||
PharmaCann Assets | Available for Sale Subsidiaries | Discontinued Operations | TOTAL | |||||||||||||
(1) | (2) | (3) | ||||||||||||||
Balance as of June 26, 2021 | $ | 151,789 | $ | - | $ | 48,899,098 | $ | 49,050,887 | ||||||||
Transferred In | - | 4,477,723 | - | 4,477,723 | ||||||||||||
Ongoing Activity from Discontinued Operations | - | - | 36,569 | 36,569 | ||||||||||||
Other | (60,369 | ) | - | - | (60,369 | ) | ||||||||||
Balance as of September 25, 2021 | $ | 91,420 | $ | 4,477,723 | $ | 48,935,667 | $ | 53,504,810 |
Schedule of asset held for sale | ||||||||||||
Discontinued Operations (1) | Other Assets | TOTAL | ||||||||||
Balance as of June 25, 2022 | $ | 123,128,406 | $ | 30,345 | $ | 123,158,751 | ||||||
Ongoing Activities | (47,881,618 | ) | 248,324 | (47,633,294 | ) | |||||||
Proceeds from Sale | (67,000,000 | ) | - | (67,000,000 | ) | |||||||
Gain on Sale of Assets Held for Sale | 35,659,761 | - | 35,659,761 | |||||||||
Balance as of September 24, 2022 | $ | 43,906,549 | $ | 278,669 | $ | 44,185,218 |
(1) |
See “Note |
As of September 25, 2021, the Company was in negotiations to sublease (the “Sublease”) and enter into a management agreement (the “Management Agreement”) with the proposed sublessee to operate its cultivation facilities in California and Nevada (the “Cultivation Facilities”). The Sublease and Management Agreement is subject to the approval of the Cultivation Facilities’ landlord. On September 30, 2021, the landlord approved the Sublease which effectuated the Management Agreement. Payments under the Sublease agreement are for 52% of the Company’s lease obligations for the Cultivation Facilities increasing 2% annually until March 2024 and then 3% annually until March 2027 where it will remain at 65% of the lease obligations until the end of the Sublease term in January 2039. The Management Agreement provides the sublessee rights to make substantially all management decisions, and the rights to the income and obligation to fund operations of the Cultivation Facilities. The Management Agreement also provides the sublessee and an option to acquire all the assets used in the Cultivation Facilities, including the cannabis licenses and equipment, for an insignificant amount. The fee for the services under the Management Agreement is 100% and 30% of the California and Nevada Cultivation Facilities net revenue, respectively. The Company determined that as of the effective date of the Management Agreement, the Company would no longer have a controlling financial interest in the Cultivation Facilities under ASC 810, “Consolidations” and that as of September 25, 2021, the activities of the Cultivation Facilities met the criteria of assets held for sale. As the Company has not been relieved of the primary obligations under the leases, all of the assets and liabilities related to the Cultivation Facilities, except for the right of use assets and related lease liabilities were classified as held for sale on the unaudited interim Condensed Consolidated Balance Sheet as of September 25, 2021.11
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
4. ASSETS HELD FOR SALE (Continued)
Subsidiaries classified as assets held for sale that do not qualify as discontinued operations as of September 25, 2021 consists of the following:
Schedule of discontinued operations | ||||
September 25, | ||||
2021 | ||||
Carrying Amounts of the Assets Included in Assets Held for Sale: | ||||
Cash and Cash Equivalents | $ | 275,178 | ||
Restricted Cash | 730 | |||
Accounts Receivable and Prepaid Expenses | 335,737 | |||
Inventory | 1,390,240 | |||
TOTAL CURRENT ASSETS (1) | ||||
Property and Equipment, Net | 2,228,243 | |||
Intangible Assets, Net | 131,007 | |||
Other Assets | 116,588 | |||
TOTAL NON-CURRENT ASSETS (1) | ||||
TOTAL ASSETS OF SUBSIDIARIES CLASSIFIED AS HELD FOR SALE | $ | 4,477,723 | ||
Carrying Amounts of the Liabilities Included in Assets Held for Sale: | ||||
Accounts Payable and Accrued Liabilities | $ | 1,083,814 | ||
Other Current Liabilities | 2,104,472 | |||
TOTAL CURRENT LIABILITIES (1) | ||||
TOTAL LIABILITIES OF SUBSIDIARIES CLASSIFIED AS HELD FOR SALE | $ | 3,188,286 |
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
5. PROPERTY AND EQUIPMENT
As of September 25, 202124, 2022 and June 26, 2021,25, 2022, property and equipment consists of the following:
Schedule of property and equipment | ||||||||||||||||
September 25, | June 26, | September 24, | June 25, | |||||||||||||
2021 | 2021 | 2022 | 2022 | |||||||||||||
Land and Buildings | $ | 36,189,824 | $ | 37,400,379 | $ | 29,933,999 | $ | 29,933,999 | ||||||||
Finance Lease Right-of-Use Assets | 7,553,620 | 9,154,137 | ||||||||||||||
Capital Leases | 5,318,516 | 5,315,625 | ||||||||||||||
Furniture and Fixtures | 12,456,783 | 12,525,180 | 8,325,228 | 8,776,994 | ||||||||||||
Leasehold Improvements | 66,710,520 | 68,437,877 | 33,625,893 | 33,069,524 | ||||||||||||
Equipment and Software | 24,802,362 | 26,832,414 | 16,316,334 | 16,897,649 | ||||||||||||
Construction in Progress | 30,567,131 | 27,144,696 | 4,528,762 | 6,828,923 | ||||||||||||
Total Property and Equipment | 178,280,240 | 181,494,683 | 98,048,732 | 100,822,714 | ||||||||||||
Less Accumulated Depreciation | (43,252,654 | ) | (43,664,415 | ) | (38,082,797 | ) | (36,714,922 | ) | ||||||||
Property and Equipment, Net | $ | 135,027,586 | $ | 137,830,268 | $ | 59,965,935 | $ | 64,107,792 |
Depreciation expense related to continuing operations of $3,730,5862,258,354 and $5,099,4153,031,080 was recorded for the three months ended September 25, 202124, 2022 and September 26, 2020,25, 2021, respectively, of which $570,62524,950 and $62,447433,300, respectively, is included in cost of goods sold. The amount of depreciation recognized for the right of use assets for capital leases during the three months ended September 24, 2022 and September 25, 2021 and September 26, 2020 was $283,406347,406 and $314,143283,406, respectively, see “Note 9 – Leases”for further information.
Borrowing costs were not capitalized as there were no active construction projects in progress during the three months ended September 24, 2022. During the three months ended September 25, 2021, and September 26, 2020, borrowing costs totaling $375,241 and nil, 0 respectively, were capitalized using an average capitalization rate of 11.95% and nil, 0 respectively. In addition, during the three months ended September 25, 2021 and September 26, 2020, total labor related costs of $102,831 and $60,620, respectively, were capitalized to Construction in Progress, of which $57,472 and $8,154, respectively, was share-based compensation..
12
6. INTANGIBLE ASSETS
6. | INTANGIBLE ASSETS |
As of September 25, 202124, 2022 and June 26, 2021,25, 2022, intangible assets consist of the following:
Schedule of Intangible assets | ||||||||
September 25, | June 26, | |||||||
2021 | 2021 | |||||||
Dispensary Licenses | $ | 121,291,616 | $ | 121,291,616 | ||||
Customer Relationships | 17,747,600 | 17,747,600 | ||||||
Management Agreement | 7,594,937 | 7,594,937 | ||||||
Capitalized Software | 10,158,363 | 9,696,903 | ||||||
Intellectual Property | 5,534,360 | 6,276,959 | ||||||
Total Intangible Assets | 162,326,876 | 162,608,015 | ||||||
Dispensary Licenses | (23,525,174 | ) | (22,125,635 | ) | ||||
Customer Relationships | (17,871,635 | ) | (16,463,017 | ) | ||||
Management Agreement | (814,511 | ) | (765,136 | ) | ||||
Capitalized Software | (5,262,713 | ) | (4,667,235 | ) | ||||
Intellectual Property | (3,447,295 | ) | (3,207,464 | ) | ||||
Less Accumulated Amortization | (50,921,328 | ) | (47,228,487 | ) | ||||
Intangible Assets, Net | $ | 111,405,548 | $ | 115,379,528 |
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
6. INTANGIBLE ASSETS(Continued)
Schedule of Intangible assets | ||||||||
September 24, | June 25, | |||||||
2022 | 2022 | |||||||
Dispensary Licenses | $ | 49,253,452 | $ | 49,253,452 | ||||
Customer Relationships | 16,409,600 | 16,409,600 | ||||||
Capitalized Software | 7,413,470 | 7,413,470 | ||||||
Intellectual Property | 4,016,597 | 4,016,597 | ||||||
Total Intangible Assets | 77,093,119 | 77,093,119 | ||||||
Dispensary Licenses | (17,477,268 | ) | (16,876,912 | ) | ||||
Customer Relationships | (16,589,651 | ) | (15,870,284 | ) | ||||
Capitalized Software | (4,681,748 | ) | (4,413,974 | ) | ||||
Intellectual Property | (4,287,401 | ) | (4,185,835 | ) | ||||
Less Accumulated Amortization | (43,036,068 | ) | (41,347,005 | ) | ||||
Intangible Assets, Net | $ | 34,057,051 | $ | 35,746,114 |
The Company recorded amortization expense related to continuing operations of $3,869,1881,713,119 and $2,992,4613,225,837 for the three months ended September 25, 202124, 2022 and September 26, 2020, respectively. During the three months ended September 25, 2021, the Company recognized an impairment on an intellectual property asset in the amount of $435,240. During the three months ended September 25, 2021 and September 26, 2020, $26,375 and $24,819, respectively, of share-based compensation was capitalized to capitalized software. respectively.
13
7. ACCOUNTS PAYABLE AND ACCRUED LIABILTIES
7. | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
As of September 25, 202124, 2022 and June 26, 2021,25, 2022, accounts payable and accrued liabilities consist of the following:
Schedule of accounts payable and accrued liabilities | ||||||||||||||||
September 25, | June 26, | |||||||||||||||
2021 | 2021 | September 24, | June 25, | |||||||||||||
2022 | 2022 | |||||||||||||||
Accounts Payable | $ | 32,190,817 | $ | 35,064,380 | $ | 19,078,177 | $ | 14,627,746 | ||||||||
Accrued Liabilities | 15,268,115 | 11,470,700 | 7,784,119 | 10,031,194 | ||||||||||||
Other Accrued Liabilities | 10,501,982 | 10,603,703 | ||||||||||||||
Accrued Inventory | 3,129,868 | 5,868,831 | ||||||||||||||
Accrued Payroll | 2,081,284 | 1,682,517 | ||||||||||||||
Local & State Taxes Payable | 3,281,687 | 6,695,532 | ||||||||||||||
Total Accounts Payable and Accrued Liabilities | $ | 57,960,914 | $ | 57,138,783 | $ | 35,355,136 | $ | 38,905,818 |
14
8. DERIVATIVE LIABILITIES
8. | DERIVATIVE LIABILITIES |
A reconciliation of the beginning and ending balance of derivative liabilities and change in fair value of derivative liabilities for the three months ended September 25, 202124, 2022 is as follows:
Schedule of reconciliation of the beginning and ending balance of derivative liabilities and change in fair value of derivative liabilities | ||||||||
September 25, | ||||||||
2021 | September 24, | |||||||
2022 | ||||||||
Balance at Beginning of Period | $ | 6,935,520 | $ | 6,749,563 | ||||
Initial Recognition of Derivative Liabilities | 30,500,000 | |||||||
Change in Fair Value of Derivative Liabilities | (2,105,415 | ) | 805,590 | |||||
Balance at End of Period | $ | 35,330,105 | $ | 7,555,153 |
On August 17, 2021, in connection with the amended and restated senior secured convertible credit facility (the Sixth Amendment”), the Company provided the note holders top-up and preemptive rights which were bifurcated from the related notes and classified as a derivative due to the variability of the number and price of shares issuable under these rights. See ““Note 11 – Senior Secured Convertible Credit Facility” for further information.
On August 17, 2021, the Company completed an equity investment through a private placement of 416,666,640 units at a price of $ per unit. Each unit consisted of one Subordinate Voting Share and one-quarter of one share purchase warrant of the Company. Certain investors also received a portion of the Short-Term Warrant with an exercise price of $30,000,000 and an expiration date of December 31, 2021. At the option of the holder, the Short-Term Warrant may be exercisable into equity or convertible promissory notes under the Convertible Facility, in which net cash settlement is outside of the Company’s control. See “Note 12 – Shareholders’ Equity” for further information. Accordingly, the Short-Term Warrant was accounted for as a derivative liability and measured at fair value, in the amount of $19,400,000 on August 17, 2021, with changes in fair value recognized in the Condensed Consolidated Statements of Operations.
13
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
8. DERIVATIVE LIABILITIES (Continued)
The fair value of the top-up provision in connection with Sixth Amendment of the Convertible Facility and the Short-Term Warrant in connection with the Private Placement was determined using the Monte CarloBlack Scholes simulation model based on Level 3 inputs on the fair value hierarchy. The following assumptions were used at the date of issuance:September 24, 2022:
Schedule of assumptions to measure fair value | ||||||||||||
Top-Up Provision | Short-Term Warrant | |||||||||||
Top-Up Provision | ||||||||||||
Average Stock Price | $ | 0.27 | $ | 0.27 | $ | |||||||
Weighted-Average Probability | % | nil | % | |||||||||
Term (in Years) | ||||||||||||
Expected Stock Price Volatility | % | % | % |
The following are the warrants issued related to the equity financing transactions that were accounted for as derivative liabilities:
Schedule of | ||||||||||
Number of Warrants | Exercise Price | Expiration Date | ||||||||
March 2021 Private Placement(1) | 50,000,000 | C$0.50 | March 27, 2024 | |||||||
(1) | See “Note 12 – Shareholders’ Equity” for further information. |
The fair value of the September 2018 and December 2018 bought deal warrants was measured based on Level 1 inputs on the fair value hierarchy since there are quoted prices in active markets for these warrants. The Company used the closing price of the publicly-traded warrants at the time of grant to estimate fair value of the derivative liability. The fair value of the March 2021 private placement warrants was measured based on Level 3 inputs on the fair value hierarchy using the Black-Scholes Option pricing model using the following variables:
Schedule of assumptions to measure fair value | ||||
Expected Stock Price Volatility | % | |||
Risk-Free Annual Interest Rate | % | |||
Expected Life (in Years) | ||||
Share Price | $ | 0.30 | ||
Exercise Price | $ | 0.40 |
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
9. LEASES
Schedule of assumptions to measure fair value | ||||
Expected Stock Price Volatility | % | |||
Risk-Free Annual Interest Rate | % | |||
Expected Life (in Years) | ||||
Share Price | $ | |||
Exercise Price | $ |
In accordance with ASU 2016-02, “Leases (Topic 842)” (“ASC 842”) the Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and accrued obligations under operating lease (current and non-current) liabilities in the Condensed Consolidated Balance Sheets. Finance lease ROU assets are included in property and equipment, net and accrued obligations under finance lease (current and noncurrent) liabilities in the Condensed Consolidated Balance Sheets.
15
9. | LEASES |
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are classified as a finance lease or an operating lease. The Company classifies a lease as an operating lease when it does not meet any of the criteria of a finance lease as set forth by ASC 842.
ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Most operating leases contain renewal options that provide for rent increases based on prevailing market conditions. The Company has lease extension terms at its propertiesvarious operating and finance leases for land, buildings, equipment and other assets that have either been extended or are likelyused for corporate purposes as well as for the production and sale of cannabis products. These leases are subject to be extended. The terms usedcovenants and restrictions standard to calculate the ROU assets for these properties include the renewal options thatindustry in which the Company is reasonably certain to exercise.operates.
The below are the details of the lease cost and other disclosures regarding the Company’s leases as offor the three months ended September 24, 2022 and September 25, 2021 and September 26, 2020:2021:
Schedule of lease cost | ||||||||||||||||
September 25, | September 26, | Three Months Ended | ||||||||||||||
2021 | 2020 | September 24, | September 25, | |||||||||||||
2022 | 2021 | |||||||||||||||
Finance Lease Cost: | ||||||||||||||||
Amortization of Finance Lease Right-of-Use Assets | $ | 283,406 | $ | 314,143 | $ | 347,406 | $ | 283,406 | ||||||||
Interest on Lease Liabilities | 1,784,541 | 1,523,821 | 1,804,507 | 1,784,541 | ||||||||||||
Operating Lease Cost | 6,595,652 | 6,740,984 | 3,453,863 | 6,595,652 | ||||||||||||
Sublease Income (1) | (1,521,693 | ) | - | |||||||||||||
Total Lease Expenses | $ | 8,663,599 | $ | 8,578,948 | $ | 5,605,776 | $ | 8,663,599 | ||||||||
Cash Paid for Amounts Included in the Measurement of Lease Liabilities: | ||||||||||||||||
Financing Cash Flows from Finance Leases | $ | 2,484 | $ | 959 | ||||||||||||
Operating Cash Flows from Operating Leases | $ | 1,026,792 | $ | 3,478,891 |
(1) | See “Note 16 – Other Operating Income” for further information. |
The weighted-average remaining lease term and discount rate related to the Company’s finance and operating lease liabilities as of September 24, 2022 and June 25, 2022, is as follows:
September 24, | June 25, | |||||||
2022 | 2022 | |||||||
Weighted-Average Remaining Lease Term (Years) - Finance Leases | 47 | 46 | ||||||
Weighted-Average Remaining Lease Term (Years) - Operating Leases | 7 | 8 | ||||||
Weighted-Average Discount Rate - Finance Leases | 24.78 | % | 24.33 | % | ||||
Weighted-Average Discount Rate - Operating Leases | 15.96 | % | 18.70 | % |
2021 | 2020 | |||||||
Cash Paid for Amounts Included in the Measurement of Lease Liabilities: | ||||||||
Financing Cash Flows from Finance Leases | $ | 959 | $ | 39,879 | ||||
Operating Cash Flows from Operating Leases | $ | 5,742,616 | $ | 8,411,146 |
16
2021 | 2020 | |||||||
Weighted-Average Remaining Lease Term (Years) - Finance Leases | 47 | 38 | ||||||
Weighted-Average Remaining Lease Term (Years) - Operating Leases | 7 | 8 | ||||||
Weighted-Average Discount Rate - Finance Leases | 17.86 | % | 16.22 | % | ||||
Weighted-Average Discount Rate - Operating Leases | 13.14 | % | 13.50 | % |
Future lease payments under non-cancellable operating leases and finance leases as of September 25, 202124, 2022 are as follows:
Schedule of future leases payments | ||||||||
Fiscal Year Ending | Operating Leases | Finance Leases | ||||||
June 25, 2022 (remaining) | $ | 17,910,606 | $ | 4,002,169 | ||||
June 24, 2023 | 24,054,763 | 5,484,327 | ||||||
June 29, 2024 | 28,079,476 | 9,860,306 | ||||||
June 28, 2025 | 21,942,722 | 6,517,465 | ||||||
June 27, 2026 | 22,359,868 | 6,712,989 | ||||||
Thereafter | 97,850,346 | 1,069,366,620 | ||||||
Total Lease Payments | 212,197,781 | 1,101,943,876 | ||||||
Less Interest | (104,638,758 | ) | (1,072,314,256 | ) | ||||
Present Value of Lease Liability | $ | 107,559,023 | $ | 29,629,620 |
Schedule of future leases payments | ||||||||
Fiscal Year Ending | Operating Leases | Finance Leases | ||||||
July 1, 2023 (remaining) | $ | 9,155,365 | $ | 4,387,279 | ||||
June 29, 2024 | 16,183,010 | 10,961,495 | ||||||
June 28, 2025 | 25,224,922 | 14,020,131 | ||||||
June 27, 2026 | 12,675,441 | 7,300,368 | ||||||
June 26, 2027 | 12,716,234 | 7,519,379 | ||||||
Thereafter | 20,832,425 | 1,054,354,990 | ||||||
Total Lease Payments | 96,787,396 | 1,098,543,643 | ||||||
Less Interest | (37,307,828 | ) | (1,067,487,335 | ) | ||||
Lease Liability Recognized | $ | 59,479,568 | $ | 31,056,308 |
MEDMEN ENTERPRISES INC.
NotesThe Company entered into a management agreement (the “Management Agreement”) with a third party to Unaudited Interim Condensed Consolidated Financial Statementsoperate its cultivation facilities in California and Nevada (the “Cultivation Facilities”). On September 30, 2021, the landlord approved the third party to operate the leased facilities which effectuated the Management Agreement. The Management Agreement provides the third party an option to acquire all the assets used in the Cultivation Facilities, including the cannabis licenses and equipment, for $1 (the “Purchase Option”). The fee for the services under the Management Agreement is 100% and 30% of the California and Nevada Cultivation Facilities net revenue, respectively. The term of the Management Agreement remains in effect until the earlier of (a) the closing of any sale pursuant to the Purchase Option and (b) the expiration of the term, as applicable, of the master lease, at which time this Management Agreement shall automatically terminate without any further action of the Parties. As of September 24, 2022, the Management Agreement remains in effect as neither termination condition has occurred. During the three months ended September 24, 2022, the Company recorded sublease income under the Management Agreement. See “Note 16 – Other Operating Income” for further information.
Three Months Ended September 25, 2021 and September 26, 2020
17
10. | NOTES PAYABLE |
(Amounts ExpressedRefer to the 2022 Form 10-K for complete disclosure of current terms of notes payable included in United States Dollars Unless Otherwise Stated)
10. NOTES PAYABLEthe footnotes of the annual financial statements as of June 25, 2022. There were no amendments during the three months ended September 24, 2022.
As of September 25, 202124, 2022 and June 26, 2021,25, 2022, notes payable consist of the following:
Schedule of notes payable | ||||||||||||||||
September 25, | June 26, | |||||||||||||||
2021 | 2021 | September 24, | June 25, | |||||||||||||
2022 | 2022 | |||||||||||||||
Financing liability incurred on various dates between January 2019 through September 2019 with implied interest rates ranging from 0.7% to 17.0% per annum. | $ | 83,400,000 | $ | 83,400,000 | $ | 72,300,000 | $ | 72,300,000 | ||||||||
Non-revolving, senior secured term notes dated between October 1, 2018 and October 30, 2020, issued to accredited investors, which mature on January 31, 2022, and bear interest at a rate of 15.5% and 18.0% per annum. | 113,333,005 | 109,318,116 | ||||||||||||||
Convertible debentures dated between September 16, 2020 through January 29, 2021, issued to accredited investors and qualified institutional buyers, which mature two years from issuance, and bear interest at a rate of 7.5% per annum. | - | 2,500,000 | ||||||||||||||
Promissory notes dated between January 15, 2019 through March 29, 2019, issued for deferred payments on acquisitions, which mature on varying dates from July 31, 2021 to April 1, 2022 and bear interest at rates ranging from 8.0% to 9.0% per annum. | 2,148,226 | 2,204,476 | ||||||||||||||
Non-revolving, senior secured term notes dated between October 1, 2018 and October 30, 2020, issued to accredited investors, which mature on August 1, 2022 and July 31, 2022, and bear interest at a rate of 15.5% and 18.0% per annum. | 66,819,991 | 97,162,001 | ||||||||||||||
Promissory notes dated November 7, 2018, issued to Lessor for tenant improvements as part of sales and leaseback transactions, which mature on November 7, 2028, bear interest at a rate of 10.0% per annum and require minimum monthly payments of $15,660 and $18,471. | 2,158,072 | 2,195,896 | 2,057,207 | 2,057,207 | ||||||||||||
Other | 15,418 | 15,418 | 15,691 | 15,691 | ||||||||||||
Total Notes Payable | 201,054,721 | 199,633,906 | 141,192,889 | 171,534,899 | ||||||||||||
Less Unamortized Debt Issuance Costs and Loan Origination Fees | (4,848,771 | ) | (8,518,578 | ) | - | (158,079 | ) | |||||||||
Net Amount | $ | 196,205,950 | $ | 191,115,328 | $ | 141,192,889 | $ | 171,376,820 | ||||||||
Less Current Portion of Notes Payable | (110,632,461 | ) | (103,496,394 | ) | (66,294,249 | ) | (97,003,922 | ) | ||||||||
Notes Payable, Net of Current Portion | $ | 85,573,489 | $ | 87,618,934 | $ | 74,898,640 | $ | 74,372,898 |
18
A reconciliation of the beginning and ending balances of notes payable for the three months ended September 25, 202124, 2022 is as follows:
Schedule of Reconciliation of Notes payable | ||||
September 25, | ||||
2021 | ||||
Balance at Beginning of Year | $ | 191,115,328 | ||
Cash Additions | 5,000,000 | |||
Paid-In-Kind Interest Capitalized | 4,014,889 | |||
Cash Payments | (75,605 | ) | ||
Conversion of Convertible Debentures | (2,371,100 | ) | ||
Derivative Liability Incurred on Settlement of Debt | (3,146,251 | ) | ||
Shares Issued to Settle Debt | (4,030,000 | ) | ||
Non-Cash Loss on Extinguishment of Debt | 2,176,251 | |||
Accretion of Debt Discount | 1,478,358 | |||
Accretion of Debt Discount Included in Discontinued Operations | 2,044,080 | |||
Balance at End of Year | 196,205,950 | |||
Less Current Portion of Notes Payable | (110,632,461 | ) | ||
Notes Payable, Net of Current Portion | $ | 85,573,489 |
Unsecured Convertible Facility
On June 28, 2021, the remaining principal amount of the unsecured convertible debenture facility of $2,500,000 was automatically converted into Class B Subordinate Voting Shares in the amount of $. In addition, 8,807,605 of the outstanding warrants under the unsecured convertible facility were exercised at varying prices for a net exercise price of $.
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
10. NOTES PAYABLE (Continued)
Unsecured Promissory Note
Schedule of Reconciliation of Notes payable | ||||
September 24, | ||||
2022 | ||||
Balance at Beginning of Period | $ | 171,376,820 | ||
Paid-In-Kind Interest Capitalized | 1,257,988 | |||
Cash Payments | (31,599,999 | ) | ||
Accretion of Debt Discount Included in Discontinued Operations | 158,079 | |||
Balance at End of Period | 141,192,889 | |||
Less Current Portion of Notes Payable | (66,294,249 | ) | ||
Notes Payable, Net of Current Portion | $ | 74,898,640 |
On July 29, 2021, the Company entered into a short-term unsecured promissory note in the amount of $5,000,000 with various investors led by Serruya Private Equity Inc. (“SPE”) wherein the note bears interest at a rate of 6.0% per annum payable quarterly in arrears with a maturity date of August 18, 2021.
In connection with the equity investment on August 17, 2021, the Company settled the promissory note by the issuance of 20,833,333 units, consisting of 20,833,333 Subordinate Voting Shares and 5,208,333 warrants, based on an issue price of $0.24 and the relative portion of the Short-Term Warrant. Refer to “Note 12 – Shareholders’ Equity” for further information on the equity investment through private placement. The fair value of the equity instruments allocated to the settlement of debt was $4,030,000 and the fair value of the derivative liability allocated was $3,146,251. Accordingly, the Company recorded a loss on extinguishment of debt of $2,176,251 for the three months ended September 25, 2021.
Financing LiabilityNon-Revolving Senior Secured Term Loan Facility
In February 2022, the Company executed the Sixth Modification extending the maturity date of the senior secured term loan facility (the “Facility”) with Hankey Capital and Stable Road Capital (the “Lenders”) to July 31, 2022 with respect to the Facility, and August 1, 2022 with respect to the incremental term loans (collectively, the “Term Loans”). The Sixth Modification required that the Company make a mandatory prepayment of at least $37,500,000 in the event the sale of certain assets and imposed covenants in regards to strategic actions the Company would have to implement if unable to pay the Term Loans by the extended stated maturity date.
During the three months ended September 24, 2022, in connection with the sale of the Company’s failedFlorida-based operations, the Company made a principal repayment of $31,599,999with proceeds from the sale. An additional $8,500,000 principal repayment will be made in 2023 upon receipt of the final installment payment from the sale of the Company’s Florida-based operations. The Facility and leaseback transactions describedTerm Loans remain in “Note 9 – Leases”, a financing liability was recognized equaldefault as of September 24, 2022 as the principal balance matured on July 31, 2022 and August 1, 2022, respectively. As of September 24, 2022, the Company is in ongoing discussions with the Lenders.
19
11. | SENIOR SECURED CONVERTIBLE CREDIT FACILITY |
Refer to the cash proceeds received upon inception. The cash payments made on2022 Form 10-K for complete disclosure of current terms of the lease lesssenior secured convertible facility included in the portion considered to be interest expense, will decreasefootnotes of the financing liability.
11. SENIOR SECURED CONVERTIBLE CREDIT FACILITYannual financial statements as of June 25, 2022. There were no amendments during the three months ended September 24, 2022.
As of September 25, 202124, 2022 and June 26, 2021,25, 2022, senior secured convertible credit facility consists of the following:
Schedule of senior secured convertible credit facility | ||||||||||||||||||||
September 25, | June 26, | September 24, | June 25, | |||||||||||||||||
Tranche | 2021 | 2021 | Tranche | 2022 | 2022 | |||||||||||||||
Senior secured convertible notes dated April 23, 2019, issued to accredited investors, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | 1A | $ | 21,502,530 | $ | 21,112,530 | |||||||||||||||
Senior secured convertible notes dated August 17, 2019, issued to accredited investors, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | 1A | $ | 23,376,684 | $ | 22,880,556 | |||||||||||||||
Senior secured convertible notes dated May 22, 2019, issued to accredited investors, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | 1B | 92,410,860 | 91,185,378 | 1B | 100,679,152 | 98,542,422 | ||||||||||||||
Senior secured convertible notes dated July 12, 2019, issued to accredited investors, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | 2 | 30,114,083 | 29,580,445 | 2 | 32,738,817 | 32,043,996 | ||||||||||||||
Senior secured convertible notes dated November 27, 2019, issued to accredited investors, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | 3 | 11,660,790 | 11,454,144 | 3 | 12,677,140 | 12,408,091 | ||||||||||||||
Senior secured convertible notes dated March 27, 2020, issued to accredited investors, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | 4 | 13,715,973 | 13,496,906 | 4 | 14,911,453 | 14,594,985 | ||||||||||||||
Amendment fee converted to senior secured convertible notes dated October 29, 2019, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | - | 22,013,655 | 21,623,561 | - | 23,932,224 | 23,424,438 | ||||||||||||||
Senior secured convertible notes dated April 24, 2020, issued to accredited investors, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | IA-1 | 3,078,500 | 3,027,003 | IA-1 | 3,346,889 | 3,275,857 | ||||||||||||||
Senior secured convertible notes dated September 14, 2020, issued to accredited investors, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | IA-2 | 5,953,444 | 5,847,933 | IA-2 | 6,472,344 | 6,334,980 | ||||||||||||||
Restatement fee issued in senior secured convertible notes dated March 27, 2020, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | - | 9,293,339 | 9,104,665 | - | 10,103,343 | 9,888,919 | ||||||||||||||
Second restatement fee issued in senior secured convertible notes dated July 2, 2020, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | - | 2,058,460 | 2,021,984 | - | 2,237,875 | 2,190,380 | ||||||||||||||
Third restatement advance issued in senior secured convertible notes dated January 11, 2021, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | - | 11,578,147 | 11,372,828 | |||||||||||||||||
Third restatement fee issued in senior secured convertible notes dated January 11, 2021, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | - | 12,587,295 | 12,320,154 | |||||||||||||||||
Total Drawn on Senior Secured Convertible Credit Facility | 223,379,781 | 219,827,377 | 243,063,216 | 237,904,778 | ||||||||||||||||
Less Unamortized Debt Discount | (109,876,515 | ) | (49,005,984 | ) | (104,317,146 | ) | (105,899,115 | ) | ||||||||||||
Senior Secured Convertible Credit Facility, Net | $ | 113,503,266 | $ | 170,821,393 | $ | 138,746,070 | $ | 132,005,663 |
20
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
11. SENIOR SECURED CONVERTIBLE CREDIT FACILITY (Continued)
A reconciliation of the beginning and ending balances of senior secured convertible credit facility for the three months ended September 25, 202124, 2022 is as follows:
Schedule of reconciliation senior secured convertible credit facilty | ||||||||||||||||||||||||||||||||||||||||||||
Tranche 1 | Tranche 2 | Tranche 3 | Tranche 4 | Incremental Advance - 1 | Incremental Advance - 2 | 3rd Advance | Amendment Fee Notes | Restatement Fee Notes | 2nd Restatement Fee Notes | TOTAL | ||||||||||||||||||||||||||||||||||
Balance as of June 26, 2021 | $ | 97,900,493 | $ | 25,266,134 | $ | 9,716,459 | $ | 2,406,966 | $ | 1,392,158 | $ | 3,195,414 | $ | 4,081,198 | $ | 18,973,030 | $ | 5,866,301 | $ | 2,023,240 | $ | 170,821,393 | ||||||||||||||||||||||
Paid-In-Kind Interest Capitalized | 1,882,881 | 533,638 | 206,645 | 219,067 | 54,498 | 105,510 | 205,319 | 390,095 | 188,674 | 36,477 | 3,822,804 | |||||||||||||||||||||||||||||||||
Net Effect on Debt from Extinguishment | 730,188 | 1,036,340 | 463,655 | (6,023,142 | ) | (1,634,070 | ) | (1,528,691 | ) | (3,386,103 | ) | 175,528 | (2,243,726 | ) | 160 | (12,409,861 | ) | |||||||||||||||||||||||||||
Equity Component Debt - New and Amended | (25,909,107 | ) | (6,956,945 | ) | (2,693,872 | ) | 3,709,995 | 218,454 | (1,684,086 | ) | (805,481 | ) | (5,085,586 | ) | (2,181,419 | ) | - | (41,388,047 | ) | |||||||||||||||||||||||||
Net Effect on Debt of Derivative | (5,665,272 | ) | (1,495,087 | ) | (578,928 | ) | (680,963 | ) | (152,843 | ) | (295,573 | ) | (574,825 | ) | (1,092,922 | ) | (461,390 | ) | (102,197 | ) | (11,100,000 | ) | ||||||||||||||||||||||
Cash Paid for Debt Issuance Costs | (1,331,576 | ) | (351,408 | ) | (136,072 | ) | (160,055 | ) | (35,924 | ) | (69,472 | ) | (135,108 | ) | (256,882 | ) | (108,446 | ) | (24,021 | ) | (2,608,964 | ) | ||||||||||||||||||||||
Amortization of Debt Discounts | 2,656,531 | 563,748 | 224,657 | 684,871 | 192,678 | 343,773 | 744,785 | 493,869 | 459,646 | 1,383 | 6,365,941 | |||||||||||||||||||||||||||||||||
Balance as of September 25, 2021 | $ | 70,264,138 | $ | 18,596,420 | $ | 7,202,544 | $ | 156,739 | $ | 34,951 | $ | 66,875 | $ | 129,785 | $ | 13,597,132 | $ | 1,519,640 | $ | 1,935,042 | $ | 113,503,266 |
Schedule of reconciliation senior secured convertible credit facility | ||||||||||||||||||||||||||||||||||||||||||||
Tranche 1 | Tranche 2 | Tranche 3 | Tranche 4 | Incremental Advance - 1 | Incremental Advance - 2 | 3rd Advance | Amendment Fee Notes | Restatement Fee Notes | 2nd Restatement Fee Notes | TOTAL | ||||||||||||||||||||||||||||||||||
Balance as of June 25, 2022 | $ | 80,178,586 | $ | 21,218,356 | $ | 8,217,079 | $ | 1,051,827 | $ | 224,585 | $ | 433,598 | $ | 842,981 | $ | 15,512,409 | $ | 2,211,711 | $ | 2,114,531 | $ | 132,005,663 | ||||||||||||||||||||||
Paid-In-Kind Interest Capitalized | 2,632,858 | 694,821 | 269,049 | 316,468 | 71,032 | 137,364 | 267,141 | 507,786 | 214,424 | 47,495 | 5,158,438 | |||||||||||||||||||||||||||||||||
Accretion of Debt Discount | 988,849 | 260,580 | 100,902 | - | - | - | - | 190,486 | 37,165 | 3,987 | 1,581,969 | |||||||||||||||||||||||||||||||||
Balance as of September 24, 2022 | $ | 83,800,293 | $ | 22,173,757 | $ | 8,587,030 | $ | 1,368,295 | $ | 295,617 | $ | 570,962 | $ | 1,110,122 | $ | 16,210,681 | $ | 2,463,300 | $ | 2,166,013 | $ | 138,746,070 |
On August 17, 2021, the Company announced that Tilray, Inc. (“Tilray”) acquired a majority of the outstanding senior secured convertible notes (the “Notes”) under the senior secured convertible credit facility (the “Convertible Facility”) with Gotham Green Partners (“GGP”). Under the terms of the transaction, a newly formed limited partnership (the “SPV”) established by Tilray and other strategic investors acquired an aggregate principal amount of approximately $165,800,000 of the Notes and warrants issued in connection with the Convertible Facility, representing 75% of the outstanding Notes and 65% of the outstanding warrants under the Convertible Facility. Specifically, Tilray’s interest in the SPV represents rights to 68% of the Notes and related warrants held by the SPV, which are convertible into, and exercisable for, approximately 21% of the outstanding Subordinate Voting Shares of MedMen upon closing of the transaction. Tilray also has the right to appoint two non-voting observers of the Company’s Board of Directors.
In connection with the sale of the Notes, the Company amended and restated the securities purchase agreement with GGP (“A&R 4”, or the “Sixth Amendment”) to, among other things, extend the maturity date to August 17, 2028, eliminate any cash interest obligations and instead provide for payment-in-kind (“PIK”) interest, eliminate certain repricing/down-round provisions, and eliminate and revise certain restrictive covenants. All or a portion of the Notes and unpaid accrued interest are convertible into Subordinate Voting Shares at the option of the Note holder prior to the Notes repayment. The conversion price of the Notes and unpaid and accrued PIK interest prior to A&R 4 ranges from $0.1529 to $0.3400. Accrued payment-in-kind interest on the Notes incurred after A&R 4 will be convertible at price equal to the higher of 1) the trailing 30-day volume weighted average price of the Subordinate Voting Shares, and 2) lowest discounted price available pursuant to the pricing policies of the Canadian Securities Exchange (the “CSE”). A&R 4 PIK was classified as a liability in accordance with ASC 480, “Distinguishing Liabilities from Equity”. The Notes may not be prepaid until the federal legalization of cannabis. Under A&R 4, the Company is subject to certain financial covenants including minimum liquidity and maintenance of the annual budget, and certain negative covenants, including restrictions on incurring liens, debt and contingent obligations, sale of assets, conducting mergers, investments and affiliate transactions, making certain payments, organizational changes, and sale-leaseback transactions. The Company was in compliance with its covenants as of September 25, 2021. The Sixth Amendment was deemed to be a substantial modification under ASC Subtopic 470-50, “Modifications and Extinguishments” and the Company recorded a gain on extinguishment of debt in the amount of $12,409,861 for the three months ended September 25, 2021.
The Notes will also provide the holders with a top-up (“Top-up”) right to acquire additional Subordinate Voting Shares and a preemptive (“Preemptive”) right with respect to future financings of the Company, subject to certain exceptions, upon the issuance by MedMen of certain Subordinate Voting Shares or Subordinate Voting Share-linked securities. Top-up rights provides the Note holders warrants for the number of Subordinate Voting Shares that maintains the Note holders their as-if converted ownership percentage of Subordinate Voting Shares (the “Top-up Warrants”). The Top-up Warrants exercise price is equal to the issue or conversion price of the Subordinate Voting Shares that triggered the Top-up Warrants. The Top-up Warrants expire at the earlier of five years or the date cannabis possession is federally legal. Preemptive rights allow the Note holders a first right to acquire its pro rata portion of certain future Subordinate Voting Share issuances at the price proposed by the Company. The Top-up and Preemptive rights were bifurcated from the Notes and classified as derivatives due to the variability in the number of shares and price in accordance with ASC 815, “Derivatives and Hedging”. See “Note 8 - Derivative Liabilities” for further discussion.
In connection with A&R 4, GGP has the ability to nominate an individual to serve on the Company’s Board of Directors for so long as GGP’s diluted ownership percentage is at least 10%.
1821
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
12. | SHAREHOLDERS’ EQUITY |
12. SHAREHOLDERS’ EQUITY
Issued and Outstanding
A reconciliation of the beginning and ending issued and outstanding shares is as follows:
Schedule of Shares issued and outstanding | ||||||||||||||||
Subordinate Voting Shares | Super Voting Shares | MM CAN USA Class B Redeemable Units | MM Enterprises USA Common Units | |||||||||||||
Balance as of June 26, 2021 | 726,866,374 | - | 95,212,601 | 725,016 | ||||||||||||
Shares Issued for Cash, Net of Fees | 406,249,973 | - | - | - | ||||||||||||
Shares Issued to Settle Debt and Accrued Interest | 20,833,333 | - | - | - | ||||||||||||
Shares Issued to Settle Accounts Payable and Liabilities | 4,182,730 | - | - | - | ||||||||||||
Redemption of MedMen Corp Redeemable Shares | 4,054,278 | - | (4,054,278 | ) | - | |||||||||||
Shares Issued for Vested Restricted Stock Units and Cashless Exercise of Options | 8,473,868 | - | - | - | ||||||||||||
Shares Issued for Exercise of Warrants | 8,807,605 | - | - | - | ||||||||||||
Shares Issued for Conversion of Debt | 16,014,665 | - | - | - | ||||||||||||
Stock Grants for Compensation | 1,455,415 | - | - | - | ||||||||||||
Balance as of September 25, 2021 | 1,196,938,241 | - | 91,158,323 | 725,016 |
Equity Investment Through Private Placement
Schedule of Shares issued and outstanding | ||||||||||||
Subordinate Voting Shares | MM CAN USA Class B Redeemable Units | MM Enterprises USA Common Units | ||||||||||
Balance as of June 25, 2022 | 1,301,423,950 | 65,066,106 | 725,016 | |||||||||
Redemption of MedMen Corp Redeemable Shares | 259,814 | (259,814 | ) | - | ||||||||
Balance as of September 24, 2022 | 1,301,683,764 | 64,806,292 | 725,016 |
On August 17, 2021, the Company entered into subscription agreements with various investors led by Serruya Private Equity Inc. (“SPE”) to purchase $100,000,000 of units (each, a “Unit”) of the Company at a purchase price of $0.24 per Unit (the “Private Placement”) wherein each Unit consisted of one Class B Subordinate Voting Share and one-quarter share purchase warrant. Each warrant permits the holder to purchase one additional Subordinate Voting Share at an exercise price of $0.288 per share for a period of five years from the date of issuance. The warrants were classified within shareholders’ equity as additional paid-in capital in accordance with ASC 815-10, “Derivatives and Hedging” (“ASC 815-10”) and recorded at fair value. The Company issued a total of 416,666,640 Subordinate Voting Shares and 104,166,660 warrants for gross proceeds of $100,000,000 including the settlement of the unsecured promissory note of $5,000,000. The Company incurred stock issuance costs totaling $7,852,679, including the Backstop Commitment fee noted below, which were recorded as reductions in additional paid-in capital. Accordingly, the Company received proceeds totaling $92,147,321 net of fees. Refer to “Note 10 – Notes Payable” for further information.
Each Unit issued to certain funds associated with SPE consisted of one Class B Subordinate Voting Share and one-quarter of one share purchase warrant, plus a proportionate interest in a short-term warrant (the “Short-Term Warrant”) which expires on December 31, 2021. At the option of the holders and upon payment of $30,000,000, the Short-Term Warrant entitles the holders to acquire (i) an aggregate of 125,000,000 Units at an exercise price of $0.24 per Unit, or (ii) $30,000,000 principal amount of notes at par, convertible into 125,000,000 Subordinate Voting Shares at a conversion price of $0.24 per share under the terms of the Convertible Facility. The proceeds from the exercise of the Short-Term Warrant, less fees and expenses, must be used to repay the senior secured term loan with Hankey Capital if any indebtedness is then outstanding. The Short-Term Warrant was classified as a liability in accordance with ASC 815-10 and recorded at fair value in the amount of $19,400,000. See “Note 8 – Derivative Liabilities” for further information.
Certain investors associated with SPE agreed to backstop the Private Placement (the “Backstop Commitment”). In consideration for providing the Backstop Commitment, the Company paid a fee of $2,500,000 in the form of 10,416,666 Class B Subordinate Voting Shares at a price of $0.24 per share.
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
12. SHAREHOLDERS’ EQUITY(Continued)
Non-Controlling Interests
Non-controlling interest represents the net assets of the subsidiaries that the holders of the Subordinate Voting Shares do not directly own. The net assets of the non-controlling interest are represented by the holders of MM CAN USA Redeemable Shares and the holders of MM Enterprises USA Common Units. Non-controlling interest also represents the net assets of the entities the Company does not directly own but controls through a management agreement. As of September 25, 202124, 2022 and June 26, 2021,25, 2022, the holders of the MM CAN USA Redeemable Shares represent approximately 7.084.74% and 36.894.76%, respectively, of the Company and holders of the MM Enterprises USA Common Units represent approximately 0.060.05% and 0.11%, respectively, of the Company.
Variable Interest Entities
The below information are entities the Company has concluded to be variable interest entities (“VIEs”) as the Company possesses the power to direct activities through management services agreements (“MSAs”). Through these MSAs, the Company can significantly impact the VIEs and thus holds a controlling financial interest. The following table represents the summarized financial information about the Company’s consolidated VIEs. VIEs include the balances of Venice Caregiver Foundation, Inc., LAX Fund II Group, LLC, and Natures Cure, Inc. This information represents amounts before intercompany eliminations.
As of and for the three months ended September 24, 2022, the balances and activities attributable to the VIEs consist of the following:
Schedule of VIE | ||||||||||||||||
Venice Caregivers Foundation, Inc. | LAX Fund II Group, LLC | Natures Cure, Inc. | TOTAL | |||||||||||||
Current Assets | $ | 1,180,136 | $ | - | $ | 24,602,018 | $ | 25,782,154 | ||||||||
Non-Current Assets | 8,763,511 | 3,233,062 | 4,891,725 | 16,888,298 | ||||||||||||
Total Assets | $ | 9,943,647 | $ | 3,233,062 | $ | 29,493,743 | $ | 42,670,452 | ||||||||
Current Liabilities | $ | 10,477,448 | $ | 16,016,119 | $ | 8,510,967 | $ | 35,004,534 | ||||||||
Non-Current Liabilities | 7,004,484 | 2,004,062 | 1,342,632 | 10,351,178 | ||||||||||||
Total Liabilities | $ | 17,481,932 | $ | 18,020,181 | $ | 9,853,599 | $ | 45,355,712 | ||||||||
Non-Controlling Interest | $ | (7,538,285 | ) | $ | (14,787,119 | ) | $ | 19,640,163 | $ | (2,685,241 | ) | |||||
Revenues | $ | 1,959,080 | $ | - | $ | 3,317,299 | $ | 5,276,379 | ||||||||
Net (Loss) Income Attributable to Non-Controlling Interest | $ | (494,845 | ) | $ | (810,965 | ) | $ | 885,605 | $ | (420,205 | ) |
22
As of and for the fiscal year ended June 25, 2021,2022, the balances of the VIEs consists of the following:
Schedule of VIE | ||||||||||||||||||||||||||||||||
Venice Caregivers Foundation, Inc. | LAX Fund II Group, LLC | Natures Cure, Inc. | TOTAL | |||||||||||||||||||||||||||||
Venice Caregivers Foundation, Inc. | LAX Fund II Group, LLC | Natures Cure, Inc. | TOTAL | |||||||||||||||||||||||||||||
Current Assets | $ | 1,209,576 | $ | 419,415 | $ | 15,102,072 | $ | 16,731,063 | $ | 1,735,304 | $ | 1,067,636 | $ | 23,557,168 | $ | 26,360,108 | ||||||||||||||||
Non-Current Assets | 12,244,054 | 2,960,842 | 4,961,913 | 20,166,809 | 10,073,880 | 3,379,412 | 4,973,459 | 18,426,751 | ||||||||||||||||||||||||
Total Assets | $ | 13,453,630 | $ | 3,380,257 | $ | 20,063,985 | $ | 36,897,872 | $ | 11,809,184 | $ | 4,447,048 | $ | 28,530,627 | $ | 44,786,859 | ||||||||||||||||
Current Liabilities | $ | 8,558,602 | $ | 11,212,934 | $ | 2,924,859 | $ | 22,696,395 | $ | 9,238,460 | $ | 16,238,249 | $ | 8,433,436 | $ | 33,910,145 | ||||||||||||||||
Non-Current Liabilities | 9,416,063 | 2,378,653 | 1,146,318 | 12,941,034 | 9,614,164 | 2,184,953 | 1,342,633 | 13,141,750 | ||||||||||||||||||||||||
Total Liabilities | $ | 17,974,665 | $ | 13,591,587 | $ | 4,071,177 | $ | 35,637,429 | $ | 18,852,624 | $ | 18,423,202 | $ | 9,776,069 | $ | 47,051,895 | ||||||||||||||||
Non-Controlling Interest | $ | (4,521,035 | ) | $ | (10,211,330 | ) | $ | 15,992,808 | $ | 1,260,443 | $ | (7,043,440 | ) | $ | (13,976,154 | ) | $ | 18,754,558 | $ | (2,265,036 | ) | |||||||||||
Revenues | $ | 2,533,056 | $ | - | $ | 4,544,535 | $ | 7,077,591 | $ | 8,732,449 | $ | 1,857 | $ | 16,157,388 | $ | 24,891,694 | ||||||||||||||||
Net (Loss) Income Attributable to Non-Controlling Interest | $ | (372,527 | ) | $ | (832,208 | ) | $ | 1,699,080 | $ | 494,345 | $ | (1,384,751 | ) | $ | (4,868,632 | ) | $ | 7,190,809 | $ | 937,426 |
As of the year ended June 26, 2021, the balances of the VIEs consists of the following:
Venice Caregivers Foundation, Inc. | LAX Fund II Group, LLC | Natures Cure, Inc. | TOTAL | |||||||||||||
Current Assets | $ | 1,365,867 | $ | 500,648 | $ | 13,260,675 | $ | 15,127,190 | ||||||||
Non-Current Assets | 12,596,223 | 2,864,806 | 4,957,685 | 20,418,714 | ||||||||||||
Total Assets | $ | 13,962,090 | $ | 3,365,454 | $ | 18,218,360 | $ | 35,545,904 | ||||||||
Current Liabilities | $ | 8,760,561 | $ | 10,302,246 | $ | 2,778,312 | $ | 21,841,119 | ||||||||
Non-Current Liabilities | 9,350,037 | 2,442,330 | 1,146,320 | 12,938,687 | ||||||||||||
Total Liabilities | $ | 18,110,598 | $ | 12,744,576 | $ | 3,924,632 | $ | 34,779,806 | ||||||||
Non-Controlling Interest | $ | (4,148,508 | ) | $ | (9,379,122 | ) | $ | 14,293,728 | $ | 766,098 | ||||||
Revenues | $ | 2,245,915 | $ | - | $ | 3,438,820 | $ | 5,684,735 | ||||||||
Net (Loss) Income Attributable to Non-Controlling Interest | $ | (885,911 | ) | $ | (763,967 | ) | $ | 1,103,128 | $ | (546,750 | ) |
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
12. SHAREHOLDERS’ EQUITY(Continued)
The net change in the consolidated VIEs and other non-controlling interest are as follows for the three months ended September 25, 2021:24, 2022:
Schedule of other non-controlling interest | ||||||||||||||||||||
Venice Caregivers Foundation, Inc. | LAX Fund II Group, LLC | Natures Cure, Inc. | Other Non- Controlling Interests | TOTAL | ||||||||||||||||
Balance as of June 26, 2021 | $ | (4,148,508 | ) | $ | (9,379,122 | ) | $ | 14,293,728 | $ | (446,159,697 | ) | $ | (445,393,599 | ) | ||||||
Net Income (Loss) | (372,527 | ) | (832,208 | ) | 1,699,080 | (5,774,348 | ) | (5,280,003 | ) | |||||||||||
Redemption of MedMen Corp Redeemable Shares | - | - | - | (1,496,142 | ) | (1,496,142 | ) | |||||||||||||
Balance as of September 25, 2021 | $ | (4,521,035 | ) | $ | (10,211,330 | ) | $ | 15,992,808 | $ | (453,430,187 | ) | $ | (452,169,744 | ) |
Schedule of other non-controlling interest | ||||||||||||||||||||
Venice Caregivers Foundation, Inc. | LAX Fund II Group, LLC | Natures Cure, Inc. | Other Non- Controlling Interests | TOTAL | ||||||||||||||||
Balance as of June 25, 2022 | $ | (7,043,440 | ) | $ | (13,976,154 | ) | $ | 18,754,558 | $ | (471,717,698 | ) | $ | (473,982,734 | ) | ||||||
Net (Loss) Income | (494,845 | ) | (810,965 | ) | 885,605 | 307,893 | (112,312 | ) | ||||||||||||
Balance as of September 24, 2022 | $ | (7,538,285 | ) | $ | (14,787,119 | ) | $ | 19,640,163 | $ | (471,409,805 | ) | $ | (474,095,046 | ) |
Le Cirque Rouge, LP (the “OP”) is a Delaware limited partnership that holds substantially all of the real estate assets owned by the REIT,Treehouse Real Estate Investment Trust (the “REIT”), conducts the REIT’s operations and is financed by the REIT. Under Accounting Standards Codification (“ASC”) Topic 810, “Consolidation” (“ASC 810, “Consolidation”Topic 810”), the OP was determined to be a variable interest entity in which the Company has a variable interest. The Company was determined to have an implicit variable interest in the OP based on the leasing relationship and arrangement with the REIT. TheHowever, the Company wasis not determined to be the primary beneficiary ofunder ASC Topic 810. Accordingly, Le Cirque Rouge, LP is not consolidated as a variable interest entity within the VIE as the Company does not have the power to direct the activities of the VIE that most significantly affect its economic performance.Consolidated Financial Statements. As of and during the three months ended September 25, 2021,24, 2022, the Company continues to have a variable interest in the OP. During the three months ended September 25, 2021, the CompanyOP and did not provide any financial or other support to the REIT other than the completion of the sale and leaseback transactions and the REIT being a lessor on various leases as described in ““Note 9 – Leases”Leases”. Accordingly, Le Cirque Rouge, LP is not consolidated as a variable interest entity within the unaudited interim Condensed Consolidated Financial Statements.
13. SHARE-BASED COMPENSATION23
13. | SHARE-BASED COMPENSATION |
The Company has a stock and equity incentive plan (the “Incentive Plan”) under which the Company may issue various types of equity instruments to any employee, officer, consultant, advisor or director. The types of equity instruments issuable under the Incentive Plan encompass, among other things, stock options, stock grants, and restricted stock units (together, “Awards”). Stock based compensation expenses are recorded as a component of general and administrative to the extent that the Company has not appointed a Compensation Committee, all rights and obligations under the Incentive Plan shall be those of the full Board of Directors.expenses. The maximum number of Awards that may be issued under the Incentive Plan shall be determined by the Compensation Committee or the Board of Directors in the absence of a Compensation Committee. Any shares subject to an Award under the Incentive Plan that are forfeited, canceled,cancelled, expire unexercised, are settled in cash or are used or withheld to satisfy tax withholding obligations, shall again be available for Awards under the Incentive Plan. Vesting of Awards will be determined by the Compensation Committee or Board of Directors in absence of one.a Compensation Committee. The exercise price for Awards (if applicable) will generally not be less than the fair market value of the Award at the time of grant and will generally expire after or years.
A summary of share-based compensation expense for the three months ended September 25, 202124, 2022 and September 26, 202025, 2021 is as follows:
Schedule of share-based compensation expense | ||||||||
Three Months Ended | ||||||||
September 25, | September 26, | |||||||
2021 | 2020 | |||||||
Stock Options | $ | 1,216,447 | $ | 1,008,538 | ||||
Stock Grants for Compensation | 333,333 | 181,589 | ||||||
Restricted Stock Grants | 1,554,297 | 157,477 | ||||||
Total Share-Based Compensation | $ | 3,104,077 | $ | 1,347,604 |
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
Schedule of share-based compensation expense | ||||||||
Three Months Ended | ||||||||
September 24, | September 25, | |||||||
2022 | 2021 | |||||||
Stock Options | $ | 863,685 | $ | 1,216,447 | ||||
Stock Grants for Compensation | - | 333,333 | ||||||
Restricted Stock Grants | - | 1,554,297 | ||||||
Total Share-Based Compensation | $ | 863,685 | $ | 3,104,077 |
13. SHARE-BASED COMPENSATION (Continued)
Stock Options
A reconciliation of the beginning and ending balance of stock options outstanding is as follows:
Schedule of stock options | ||||||||
Number of Stock Options | Weighted- Average Exercise Price | |||||||
Balance as of June 26, 2021 | 14,752,960 | $ | 1.40 | |||||
Granted | 4,084,005 | $ | 0.28 | |||||
Exercised | (867,923 | ) | $ | (0.17 | ) | |||
Forfeited | (1,201,072 | ) | $ | (0.60 | ) | |||
Balance as of September 25, 2021 | 16,767,970 | $ | 1.26 | |||||
Stock Options Exercisable as of September 25, 2021 | 15,103,675 | $ | 1.14 |
For the three months ended September 25, 2021, the fair value of stock options granted with a fixed exercise price was determined using the Black-Scholes option-pricing model with the following assumptions at the time of grant:
Schedule of stock options | ||||||||
Number of Stock Options | Weighted-Average Exercise Price | |||||||
Balance as of June 25, 2022 | 8,649,673 | $ | 1.35 | |||||
Forfeited and Expired | (205,354 | ) | $ | (3.39 | ) | |||
Balance as of September 24, 2022 | 8,444,319 | $ | 1.39 | |||||
Stock Options Exercisable as of September 24, 2022 | 8,037,095 | $ | 1.27 |
24
LTIPLong-Term Incentive Plan (“LTIP”) Units and LLC Redeemable Units
A reconciliation of the beginning and ending balances of the LTIP Units and LLC Redeemable Units issued for compensation outstanding is as follows:
Schedule of LTIP Units and LLC Redeemable Units | ||||||||||||
Weighted | ||||||||||||
LTIP Units | LLC | Average | ||||||||||
Issued and | Redeemable | Grant Date | ||||||||||
Outstanding | Units | Fair Value | ||||||||||
Balance as of June 26, 2021 and September 25, 2021 | 19,323,878 | 725,016 | $ | 0.52 |
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
13. SHARE-BASED COMPENSATION (Continued)
Schedule of LTIP Units and LLC Redeemable Units | |||||||||||||
Weighted | |||||||||||||
LTIP Units | LLC | Average | |||||||||||
Issued and | Redeemable | Grant Date | |||||||||||
Outstanding | Units | Fair Value | |||||||||||
Balance as of June 25, 2022 and September 24, 2022 | 19,323,878 | 725,016 | $ | 0.52 |
Restricted Stock Units
A reconciliation of the beginning and ending balance of restricted stock units outstanding is as follows:
Schedule of Restricted Stock Grants | ||||||||||||
Issued and Outstanding | Vested (1) | Weighted- Average Fair Value | ||||||||||
Balance as of June 26, 2021 | 20,888,394 | 897,294 | $ | 0.24 | ||||||||
Granted | 19,288,397 | - | $ | 0.32 | ||||||||
Forfeiture of Restricted Stock (2) | (265,223 | ) | - | $ | (1.07 | ) | ||||||
Redemption of Vested Stock | (7,605,945 | ) | (7,605,945 | ) | $ | (0.34 | ) | |||||
Vesting of Restricted Stock | - | 8,574,615 | $ | 0.30 | ||||||||
Balance as of September 25, 2021 | 32,305,623 | 1,865,964 | $ | 0.25 |
Schedule of Restricted Stock Grants | ||||||||||||
Issued and Outstanding | Vested (1) | Weighted-Average Fair Value | ||||||||||
Balance as of June 25, 2022 | 10,998,483 | 4,030,460 | $ | 0.20 | ||||||||
Forfeiture of Restricted Stock (2) | (1,405,788 | ) | - | $ | (0.22 | ) | ||||||
Vesting of Restricted Stock | - | 1,117,081 | $ | 0.22 | ||||||||
Balance as of September 24, 2022 | 9,592,695 | 5,147,541 | $ | 0.20 |
(1) | Restricted stock units were issued on September 24, 2021 and vests 37.5% on the first |
(2) | Restricted stock units were forfeited upon resignation of certain employees prior to their vesting |
Warrants
A reconciliation of the beginning and ending balance of warrants outstanding is as follows:
Schedule of Warrants | ||||||||||||||||
Number of Warrants Outstanding | ||||||||||||||||
Subordinate Voting Shares | MedMen Corp Redeemable Shares | TOTAL | Weighted- Average Exercise Price | |||||||||||||
Balance as of June 26, 2021 | 259,462,609 | 97,430,456 | 356,893,065 | $ | 0.33 | |||||||||||
Issued | 135,716,660 | - | 135,716,660 | $ | 0.29 | |||||||||||
Exercised | (8,807,605 | ) | - | (8,807,605 | ) | $ | (0.18 | ) | ||||||||
Balance as of September 25, 2021 | 386,371,664 | 97,430,456 | 483,802,120 | $ | 0.32 |
Schedule of Warrants | |||||||||||||||||
Number of Warrants Outstanding | |||||||||||||||||
Subordinate Voting Shares | MM CAN USA Redeemable Shares | TOTAL | Weighted-Average Exercise Price | ||||||||||||||
Balance as of June 25, 2022 | 352,704,355 | 97,430,456 | 450,134,811 | $ | 0.25 | ||||||||||||
Expired | (2,677,535 | ) | - | (2,677,535 | ) | $ | (3.27 | ) | |||||||||
Balance as of September 24, 2022 | 350,026,820 | 97,430,456 | 447,457,276 | $ | 0.23 |
The fair value of warrants exercisable for MedMen Corp Redeemable Shares was determined using the Black-Scholes option-pricing model with the following assumptions on the date of issuance:25
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
13. SHARE-BASED COMPENSATION (Continued)
The fair value of warrants exercisable for the Company’s Subordinate Voting Shares was determined using the Black-Scholes option-pricing model with the following assumptions on the latest modification of August 17, 2021:
Stock price volatility was estimated by using the historical volatility of the Company’s Subordinate Voting Shares. The expected life in years represents the period of time that warrants issued are expected to be outstanding. The risk-free rate was based on U.S. Treasury bills with a remaining term equal to the expected life of the warrants.
The following is a reconciliation for the calculation of basic and diluted loss per share for the three months ended September 25, 202124, 2022 and September 26, 2020:25, 2021:
Schedule of basic and diluted loss per share | ||||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
September 25, | September 26, | September 24, | September 25, | |||||||||||||
2021 | 2020 | 2022 | 2021 | |||||||||||||
Net Loss from Continuing Operations Attributable to Shareholders of MedMen Enterprises, Inc. | $ | (20,146,436 | ) | $ | (40,883,537 | ) | ||||||||||
Net Income (Loss) from Discontinued Operations | 24,306,649 | (14,446,491 | ) | |||||||||||||
Net Loss from Continuing Operations Attributable to Shareholders of MedMen Enterprises, Inc. | $ | (48,882,778 | ) | $ | (15,670,802 | ) | ||||||||||
Less Deemed Dividend - Down Round Feature of Warrants | - | (4,883,467 | ) | |||||||||||||
Net Loss from Continuing Operations Available to Shareholders of MedMen Enterprises, Inc. | (48,882,778 | ) | (20,554,269 | ) | ||||||||||||
Net Loss from Discontinued Operations | (6,447,250 | ) | (6,249,060 | ) | ||||||||||||
Total Net Loss | $ | (55,330,028 | ) | $ | (26,803,329 | ) | ||||||||||
Total Net Income (Loss) | $ | 4,160,213 | $ | (55,330,028 | ) | |||||||||||
Weighted-Average Shares Outstanding - Basic and Diluted | 942,696,052 | 423,187,218 | 1,301,659,701 | 942,696,052 | ||||||||||||
Loss Per Share - Basic and Diluted: | ||||||||||||||||
Earnings (Loss) Per Share - Basic and Diluted: | ||||||||||||||||
From Continuing Operations Attributable to Shareholders of MedMen Enterprises Inc. | $ | (0.05 | ) | $ | (0.05 | ) | $ | (0.02 | ) | $ | (0.04 | ) | ||||
From Discontinued Operations Attributable to Shareholders of MedMen Enterprises Inc. | $ | (0.01 | ) | $ | (0.01 | ) | $ | 0.02 | $ | (0.02 | ) |
Diluted loss per share is the same as basic loss per share as the issuance of shares on the exercise of convertible debentures, LTIP share units, warrants and share options is anti-dilutive.
26
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
15. GENERAL AND ADMINISTRATIVE EXPENSES
15. | GENERAL AND ADMINISTRATIVE EXPENSES |
During the three months ended September 25, 202124, 2022 and September 26, 2020,25, 2021, general and administrative expenses consisted of the following:
Schedule of general and administrative expenses | ||||||||||||||||
Three Months Ended | ||||||||||||||||
September 25, | September 26, | Three Months Ended | ||||||||||||||
2021 | 2020 | September 24, | September 25, | |||||||||||||
2022 | 2021 | |||||||||||||||
Salaries and Benefits | $ | 10,659,505 | $ | 10,474,547 | $ | 6,858,048 | $ | 9,911,488 | ||||||||
Professional Fees | 7,557,205 | 3,606,461 | 1,350,848 | 7,430,659 | ||||||||||||
Rent | 6,969,488 | 9,655,444 | �� | 3,627,925 | 4,754,883 | |||||||||||
Licenses, Fees and Taxes | 2,827,651 | 3,402,522 | 1,001,669 | 2,537,788 | ||||||||||||
Deal Cost | 1,657,587 | 223,818 | ||||||||||||||
Share-Based Compensation | 863,685 | 1,642,853 | ||||||||||||||
Deal Costs | 429,272 | 1,637,587 | ||||||||||||||
Other General and Administrative | 6,818,883 | 2,876,679 | 3,714,670 | 4,733,976 | ||||||||||||
Total General and Administrative Expenses | $ | 36,490,319 | $ | 30,239,471 | $ | 17,846,117 | $ | 32,649,234 |
27
16. OTHER OPERATING EXPENSE
16. | OTHER OPERATING (INCOME) EXPENSE |
During the three months ended September 24, 2022 and September 25, 2021, and September 26, 2020, other operating (income) expense consisted of the following:
Schedule of other operating expenses | ||||||||
Three Months Ended | ||||||||
September 25, | September 26, | |||||||
2021 | 2020 | |||||||
Loss (Gain) on Disposals of Assets | $ | 15,146 | $ | (143,367 | ) | |||
Restructuring and Reorganization Expense | 2,378,675 | 588,922 | ||||||
Gain on Settlement of Accounts Payable | (530,411 | ) | (160,645 | ) | ||||
Gain on Lease Terminations | - | (16,629,284 | ) | |||||
Gain on Disposal of Assets Held For Sale | - | (12,415,479 | ) | |||||
Other Income | (16,803 | ) | (316,431 | ) | ||||
Total Other Operating Expense (Income) | $ | 1,846,607 | $ | (29,076,284 | ) |
Schedule of other operating expenses | ||||||||
Three Months Ended | ||||||||
September 24, | September 25, | |||||||
2022 | 2021 | |||||||
Loss on Disposals of Assets | $ | 205,595 | $ | 15,146 | ||||
Restructuring and Reorganization Expense | 423,793 | 2,378,675 | ||||||
Gain on Settlement of Accounts Payable | (74,637 | ) | (177,990 | ) | ||||
Gain on Lease Terminations | (1,587,650 | ) | - | |||||
Other Income | (1,522,219 | ) | (16,803 | ) | ||||
Total Other Operating (Income) Expense | $ | (2,555,118 | ) | $ | 2,199,028 |
MEDMEN ENTERPRISES INC.
NotesDuring the three months ended September 24, 2022, the Company recorded $1,521,650 of sublease income related to Unaudited Interim Condensedthe cultivation facilities in California and Nevada as a component of Other Operating Income in the Consolidated Financial Statements of Operations.
Three Months Ended September 25, 2021 and September 26, 2020
28
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
17. PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES
17. | PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES |
The following table summarizes the Company’s income tax expense and effective tax rates for the three months ended September 25, 202124, 2022 and September 26, 2020:25, 2021:
Schedule of income tax expense and effective tax rates | ||||||||||||||||
Three Months Ended | ||||||||||||||||
September 25, | September 26, | Three Months Ended | ||||||||||||||
2021 | 2020 | September 24, | September 25, | |||||||||||||
2022 | 2021 | |||||||||||||||
Loss from Continuing Operations Before Provision for Income Taxes | $ | (34,470,873 | ) | $ | (14,315,678 | ) | $ | (18,065,206 | ) | $ | (26,471,632 | ) | ||||
Income Tax Expense | (19,691,908 | ) | (12,282,665 | ) | (2,193,542 | ) | (19,691,908 | ) | ||||||||
Effective Tax Rate | (57 | %) | (86 | %) | -12 | % | -74 | % |
ForWe have historically calculated the three months ended September 25, 2021, the Company calculated its provision for income taxes during its interim reporting periods by applying an estimate of the annual effective tax rate (“AETR”) for the full fiscal year to “ordinary” income or loss (pre-tax income or loss excluding unusual or infrequently occurring discrete items) for the respective reporting period. For the three months ended September 25, 2021, we determined we could no longer reliably estimate income taxes utilizing an AETR. The AETR estimate is highly sensitive to estimates of ordinary income (loss) and permanent differences such that minor fluctuations in these estimates could result in significant fluctuations of the Company’s AETR. Accordingly, we used our actual year-to-date effective tax rate to calculate income taxes for the three months ended September 25, 2022.
As the Company operates in the legal cannabis industry, the Company is subject to the limits of IRC Section 280E for U.S. federal, Illinois state, FloridaMassachusetts state and New York state income tax purposes under which the Company is only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E. However, the State of California does not conform to IRC Section 280E and, accordingly, the Company deducts all operating expenses on its California Franchise Tax Returns.
The Company has approximately gross $8,500,000$12,230,000 (tax effected $2,300,000)$3,240,000) of Canadian non-capital losses and $6,915,000$6,000,000 (tax effected $1,833,000)$1,620,000) of share issuance cost 20(1)(e) balance. The loss tax attribute has been determined to be more likely than not that the tax attribute would not yield any tax benefit. As such, the Company has recorded a full valuation allowance against the benefit. Since IRC Section 280E was not applied in the California Franchise Tax Returns, the Company has approximately $195,000,000$22,000,000 of gross California net operating losses which begin expiring in 2033 as of June 26, 2021.25, 2022. The Company has evaluated the realization of its California net operating loss tax attribute and has determined under the more likely than not standard that $192,400,000$217,300,000 will not be realized.
The effective tax rate for the three months ended September 25, 202124, 2022 is different compared withfrom the three months ended September 26, 2020,25, 2021, respectively, primarily due to the Company’s forecasted income and related 280E expenditures and reclassification of the Company’s Arizona operations from discontinued operations to continued operations.expenditures. The Company’s non-deductible expenses related to IRC Section 280E limitations have remained relatively consistent.
The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, and in Canada. The Company is generally subject to audit by taxing authorities in various U.S., state, and in foreign jurisdictions for fiscal years 20132014 through the current fiscal year. As of September 25, 2021,24, 2022, the Company had $16,500,00018,781,424 of unrecognized tax benefits, all of which would reduce income tax expense and the effective tax rate if recognized. During the three months ended September 25, 2021,24, 2022, the Company recognized a net discrete tax expense of $261,000407,993 primarily related on interest of past liabilities. During the next twelve months, the Company does not estimate any material reduction in its unrecognized tax benefits.
29
MEDMEN ENTERPRISES INC.
18. | COMMITMENTS AND CONTINGENCIES |
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
18. COMMITMENTS AND CONTINGENCIES
Contingencies
The Company’s operations are subject to a variety of local and state regulations. Failure to comply with one or more of these regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulations as of September 25, 202124, 2022 and June 26, 2021,25, 2022, marijuana regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties or restrictions in the future.
Claims and Litigation
From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of September 25, 2021,24, 2022, there were no pending or threatening lawsuits that could be reasonably assessed to have resulted in a probable loss to the Company in an amount that can be reasonably estimated. As such, no accrual has been made in the unaudited interim Condensed Consolidated Financial Statements relating to claims and litigations. As of September 25, 2021,24, 2022, there are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party to the Company or has a material interest adverse to the Company’s interest.
In July 2018, a legal claim was filed against the Company related to alleged misrepresentations in respect of a financing transaction completed in May 2018. During the year ended September 25, 2021, the claim was settled for a total of C$575,000 of which C$ shall be paid in Class B Subordinate Voting Shares. The settlement liability has been accrued in the Consolidated Balance Sheet.
In late January 2019, the Company’s former Chief Financial Officer (“CFO”) filed a complaint against MM Enterprises in the Superior Court of California, County of Los Angeles, seeking damages for claims relating to his employment. The Company is currently defending against this lawsuit, which seeks damages for wrongful termination, breach of contract, and breach of implied covenant of good faith. The former CFO’s employment agreement provided for the payment of severance in the event of termination without cause. The Company disputes the claims set forth in this lawsuit and believes that the outcome is neither probable nor estimable. As of September 25, 2021, $584,000 has been accrued in the Consolidated Balance Sheet.
In March 2020, litigation was filed against the Company in the Superior Court of Arizona, Maricopa County, related to a purchase agreement for a previous acquisition. The Superior Court of Arizona, Maricopa County granted summary judgement in favor of the Company on all counts in July 2022. The Company is currently defending against thisin process of recovering certain fees and costs associated with the lawsuit which seeks damages for fraudulent inducement and breach of contract.from the plaintiffs. The Company believes the likelihood of a loss contingency is neither probable nor estimable. As such, no amount has been accrued in these financial statements.
In April 2020, a complaint was filed against the Company in Los Angeles Superior Court related to a contemplated acquisition in which the plaintiffs are seeking damages for alleged breach of contract and breach of implied covenant of good faith and fair dealing. While no amounts have been identified in the claim, thedealing seeking declaratory relief and specific performance. The Company estimated this to be approximately $5,200,000.has filed counterclaims including for breach of contract, breach of promissory note, unjust enrichment and declaratory relief. The Company believes the likelihood of a loss contingency is neither probable nor remote. As such, no amount has been accrued in the financial statements.
In May 2020, litigation was filed against the Company related to a purchase agreement and secured promissory note for a previous acquisition. The Company is currently defending against this lawsuit, which claims for breach of contract, breach of implied covenant of good faith and fair dealing, common law fraud and securities fraud. The plaintiffs are seeking damages for such claims in which the amount is currently not reasonably estimable. Therefore, pursuant to ASC 450, “Contingencies” (“ASC 450”), a liability has not been recorded in these audited Consolidated Financial Statements. In response, the Company filed a counterclaim and is seeking entitlement to proceeds of the sale, net of amounts owed under the secured promissory note which is in dispute.note. The plaintiffs filed an appeal to the ruling on the entitlement of proceeds in excess of the secured promissory note. In accordance with ASC 450, anynote which was dismissed. The additionally claims and counterclaims are currently in dispute. Any loss recoveries related to the Company’s counterclaim have not been recorded. In addition, net proceeds resulting from the sale was not recognized as a receivable as the amount is not reasonably estimable.
In September 2020 aand May 2020, legal dispute wasdisputes were filed against the Company related to the separation of a former officerofficers in which the severance issued is currently being disputed. The Company believes the likelihood of loss is remote. As a result, no amount has been set up for potential damages in these financial statements.
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MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
18. COMMITMENTS AND CONTINGENCIES (Continued)
In FebruaryNovember 2020, a legal dispute was filed againstentities affiliated with former officers of the Company and settled in December 2020 for approximately $2,400,000. Asinitiated arbitration against a subsidiary of September 25, 2021, the remaining amount of $400,000 has been accrued in the Consolidated Balance Sheet.
In December 2020, a lawsuit was filed against the Company related to a previous acquisition alleging that the plaintiffs were owed additional compensation. In the complaint, the plaintiffs allegein Los Angeles, California asserting breach of contract, breach of the implied covenant of good faith and fair delaying,dealing, fraud, and unjust enrichment, among other causes of actions.enrichment. The plaintiffsclaimants are generally seeking the issuance of 51,716,141 shares, which has been accrued in the Consolidated Balance Sheet as of September 25, 2021,damages and compensatory damages according to proof, including lost earnings and other monetary damages.benefits, past and future, interest on lost earnings and benefits, reasonable attorney’s fees, and such other and further relief as the court deems proper. The Company asserted counterclaims, including for breach of the same management agreements. The arbitration is currently set for hearing in December 2022. The litigation is at an early stage and the likelihood of a loss contingency is remote. The amount of other monetary damages is not reasonably estimable and thus,As a result, no amount has been accruedset up for potential damages in these financial statements. During the three months ended September 25, 2021, the parties entered into a partial settlement in the amount of $1,050,000 of which $475,000 is remaining as of September 25, 2021 and has been accrued in the Consolidated Balance Sheet.
In JanuaryOctober 2021, a cross-complaintsuit for premises liability and negligence seeking unspecified damages for pain and suffering, disability, mental and emotional distress, and loss of earnings was filed against the Company relatedin Los Angeles Superior Court. The matter is in the process of being litigated. The Company believes the likelihood of loss is remote. As a lien foreclosure alleging breach of contract, quantum merit and implied indemnity. result, no amount has been set up for potential damages in these financial statements.
The Company is actively defending the legal matter whichdefendant in several complaints filed by various of its landlords seeking rents and damages under leases. In 2020 a complaint was filed in Cook County Circuit Court, Illinois against the claimantCompany by a landlord claiming the Company had failed to meet its obligations to apply effort to obtain a retail cannabis license at a property and seeking rents and damages. The litigation is currently in the discovery phase. If the litigation is not settled or resolved, trial will likely take place During the fiscal year ended 2023. In July 2022, a complaint was filed against the Company in the United States District Court for the Southern District of New York by a landlord seeking damages under a lease on real estate located in Illinois. The Company is required to file an answer to the complaint by September 2022. Prior attempts to resolve the lease dispute with this landlord have failed. In June 2022, a complaint was filed against the Company by the Company’s landlord at its cultivation center in Utica, New York, related to an agreement to purchase land next to the cultivation center, which land was also owned by the landlord. Plaintiff seeks to enforce a land purchase agreement and seeks damages. In April 2022, the landlord at the Company’s dispensary location in Tampa, Florida, filed suit seeking damages under a lease, shortly after the Company announced its plans to sell its Florida business. The Company retained this lease and litigation following the sale of approximately $11,000,000. Thethe Florida business and the litigation is at an early stage and thus the likelihood of a loss contingency is remote. As such,a result, no amount has been accruedset up for potential damages in these financial statements.
19. RELATED PARTY TRANSACTIONS31
All related party balances due to the Company as of September 25, 2021 and June 26, 2021 did not have any formal contractual agreements regarding payment terms or interest. As of September 25, 2021 and June 26, 2021, other amounts due to related parties was $1,476,921 and $1,476,921, respectively, were recorded in the unaudited interim Condensed Consolidated Balance Sheets.
Pursuant to the Side Letter executed on July 2, 2020 in conjunction with the Fourth Amendment of the Convertible Facility with GGP, Wicklow Capital and GGP had the right to approve director nominees submitted by the Company. The ability to approve the nominees to the Company’s Board of Directors met the definition of control under ASC 850 and accordingly, Wicklow Capital is a related party of the Company.
On August 17, 2021, Tilray acquired the majority of the outstanding senior secured convertible notes and warrants held by GGP and GGP no longer held significant influence over the Company and therefore as of September 25, 2021, was not considered a related party under ASC 850, “Related Party Disclosures” (“ASC 850”), however GGP was during the fiscal year ended June 26, 2021. As of August 17, 2021, the Company determined Tilray to be a related party as a result of Tilray having significant influence over the Company. See “Note 11 – Senior Secured Convertible Credit Facility” for a full disclosure of the SPV and A&R 4.
On August 17, 2021, the Company entered an equity investment through private placement led by SPE. In connection with the private placement, the Company appointed Michael Serruya, SPE’s Managing Director, as a member of its board of directors. As of August 17, 2021, the Company determined SPE to be a related party as a result of the private placement and involvement with the Board. See “Note 12 – Shareholders’ Equity” for discussion on the private placement transaction.
In March 2020, the Company entered into a restructuring plan and retained interim management and advisory firm, Sierra Constellation Partners LLC (“SCP”). As part of the engagement, Tom Lynch, a Partner and Senior Managing Director at SCP, was appointed as Interim Chief Executive Officer and Chief Restructuring Officer, and Tim Bossidy, a Director at SCP, was appointed as Interim Chief Operating Officer. In December 2020, Mr. Lynch was elected as Chairman of the Board and in July 2021, Mr. Lynch was permanently appointed as Chief Executive Officer. Also in December 2020, Reece Fulgham, a Managing Director at SCP, was appointed as Interim Chief Financial Officer. During the three months ended September 25, 2021, the Company had paid $1,255,473 in fees to SCP for interim management and restructuring support. During the three months ended September 25, 2021, Mr. Lynch and Mr. Bossidy each received 214,030 stock options. To date, as of September 25, 2021, the Company has granted restricted stock units to its executive officers who are directors at SCP.
19. | RELATED PARTY TRANSACTIONS |
The Company’s Board of Directors each receive quarterly fees of $200,000 of which one-third is paid in cash and two-thirds is paid in Class B Subordinate Voting Shares. The Class B Subordinate Voting Shares is recorded as a restricted stock unit until settled.
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
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20. SEGMENTED INFORMATION
20. | SEGMENT INFORMATION |
The Company currently operates in one segment, the production and sale of cannabis products, which is how the Company’s Chief Operating Decision Maker manages the business and makes operating decisions. The Company’s cultivation operations are not considered significant to the overall operations of the Company. Intercompany sales and transactions are eliminated in consolidation.
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21. | REVENUE |
21. While the Company operates in one segment as disclosed in “Note 20 – Segment Information”, the Company is disaggregating its revenue by geographical region in accordance with ASC 606, “Revenue from Contracts with Customers”. Revenue by state for the periods presented are as follows:
DISCONTINUED OPERATIONS
Schedule of Disaggregation of revenue | ||||||||
Three Months Ended | ||||||||
September 24, | September 25, | |||||||
2022 | 2021 | |||||||
California | $ | 19,928,985 | $ | 24,626,555 | ||||
Nevada | 2,997,469 | 4,079,151 | ||||||
Illinois | 3,542,071 | 4,328,602 | ||||||
Arizona | 2,794,648 | 3,701,596 | ||||||
Massachusetts | 780,875 | - | ||||||
Revenue from Continuing Operations | $ | 30,044,048 | $ | 36,735,904 | ||||
Revenue from Discontinued Operations | 3,629,641 | 7,340,099 | ||||||
Total Revenue | $ | 33,673,689 | $ | 44,076,003 |
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22. | DISCONTINUED OPERATIONS |
On February 28, 2022, MME Florida LLC and its parent, MM Enterprises USA, LLC, a wholly-owned subsidiary of the Company entered into an Asset Purchase Agreement (the “Agreement”) with Green Sentry Holdings, LLC, (“Buyer”) for the sale of substantially all of the Company’s Florida-based assets, including its license, dispensaries, inventory and cultivation operations, and assumption of certain liabilities.
During the fiscal year ended June 26, 2021,On August 22, 2022, the Company hadclosed the transaction at the final sales price of $67,000,000, which comprised of $63,000,000in cash and $4,000,000in liabilities to be assumed by the Buyer. The Buyer made a change in plancash payment of sale for the remaining Arizona disposal group. As$40,000,000 at closing, a result, the assets no longer meet the held for sale criteriacash payment of $11,500,000 on September 15, 2022 and areis required to be reclassified as held and used at the lowermake one additional installment payment of adjusted carrying value$11,500,000 on or the fair value at the date of the subsequent decision not to sell. before March 15, 2023.During the three months ended September 25, 2021, revenues, net loss, net depreciation and amortization, in the amounts of24, 2022, $3,992,36231,599,999 , $1,241,888 and $202,136, respectively, is included in continuing operations in the unaudited interim Condensed Consolidated Statements of Operations. During the three months ended September 26, 2020, revenues, net loss, net depreciation and amortization, in the amounts of $1,819,230, $2,398,485 and $12,700, respectively, were reclassified to continuing operations and is included in the unaudited interim Condensed Consolidated Statements of Operations.
On January 29, 2018, the Company acquired all membership interests and assets in Project Compassion NY, LLC (“Project Compassion”) as a part of the formation of MM Enterprises USA through a joint venture. Through Project Compassion, the Company has one cultivation and production facility in Utica, New York, and operates four dispensaries in the state of New York that are located in Buffalo, Lake Success, Salina and Manhattan (collectively, “MedMen NY, Inc.”). During the year ended June 26, 2021, the Company contemplated the divesture of non-core assets and management entered into a plan to sell MedMen NY, Inc. On February 25, 2021, the Company entered into a definitive investment agreement to sell a controlling interest in MedMen NY, Inc. equity of approximately 86.7% with the option to purchase the remaining equity of approximately 13.3% that the Company will retain in MedMen NY, Inc. following the sale for a total sales price of up to $73,000,000. In conjunction with the investment agreement, MedMen NY, Inc. will engage the services of the purchaser pursuant to a management agreement until regulatory approval has been obtained. The aggregate sales price consists of a cash purchase price of $35,000,000, subject to adjustments and a senior secured promissory note of $28,000,000 which shall be assigned to Hankey Capital in partial satisfaction of the outstanding debt, and within five business days after the first sale by MedMen NY, Inc. of adult-use cannabis products at one or more of its retail store locations, additional shares of MedMen NY, Inc. will be purchased for $10,000,000 in cash. The proceeds in cash will bewas used to repay a portion of the Hankey Capital notes payable due by the Company. Accordingly, the total amount of interest expense and amortization of debt discounts and loan origination fees related to the Senior Secured Term Loan Facility allocated to discontinued operations wasand the Company received net cash proceeds of $4,847,30219,558,947. As of September 24, 2022, the final cash payment of $11,500,000 remains due and payable. Accordingly, the Company recognized a gain on sale of assets of $3,855,29331,719,833 included in Net Income from Discontinued Operations for the three months ended September 25, 2021 and September 26, 2020, respectively. As of September 25, 2021, the initial closing of the investment has not occurred and is expected to close within the next twelve months.
Consequently, assets and liabilities allocable to the operations within the state of New York were classified as a discontinued operation and presented as held for sale for all periods presented. Revenue and expenses, gains24, 2022. All profit or lossesloss relating to the discontinuation of New YorkFlorida operations have beenwere eliminated from profit or loss from the Company’s continuing operations and are shown as a single line item in the unaudited interim Condensed Consolidated Statements of Operations. The assets associated with the New York component have been measured at the lower of the carrying amount or FVLCTS. The Company will continue to operate the New York operations until the ultimate sale of the disposal group.
MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
21. DISCONTINUED OPERATIONS (Continued)
The operating results of the discontinued operations are summarized as follows:
Schedule of net operating loss of discontinued operation | ||||||||||||||||
Three Months Ended | ||||||||||||||||
September 25, | September 26, | Three Months Ended | ||||||||||||||
2021 | 2020 | September 24, | September 25, | |||||||||||||
2022 | 2021 | |||||||||||||||
Revenue | $ | 4,270,193 | $ | 2,116,819 | $ | 3,629,641 | $ | 7,340,099 | ||||||||
Cost of Goods Sold | 2,242,419 | 1,419,888 | 2,103,298 | 5,227,553 | ||||||||||||
Gross Profit | 2,027,774 | 696,931 | 1,526,343 | 2,112,546 | ||||||||||||
Expenses: | ||||||||||||||||
General and Administrative | 1,776,510 | 2,420,786 | 4,983,995 | 5,617,595 | ||||||||||||
Sales and Marketing | 6,000 | 6,472 | 43,311 | 103,803 | ||||||||||||
Depreciation and Amortization | 16,227 | 645,419 | 872,895 | 1,221,759 | ||||||||||||
Other Income | (245,170 | ) | - | |||||||||||||
Impairment Expense | (78,433 | ) | - | |||||||||||||
Gain on Disposal of Assets and Other Income | (35,659,761 | ) | (597,591 | ) | ||||||||||||
Total Expenses | 1,553,567 | 3,072,677 | ||||||||||||||
Total (Income) Expenses | (29,837,993 | ) | 6,345,566 | |||||||||||||
Loss from Operations | 474,207 | (2,375,746 | ) | |||||||||||||
Income (Loss) from Discontinued Operations | 31,364,336 | (4,233,020 | ) | |||||||||||||
Other Expense: | ||||||||||||||||
Interest Expense | 2,821,643 | 2,357,475 | 3,761,758 | 4,616,829 | ||||||||||||
Amortization of Debt Discount and Loan Origination Fees | 2,044,080 | 1,515,839 | ||||||||||||||
Accretion of Debt Discount and Loan Origination Fees | 158,079 | 3,540,908 | ||||||||||||||
Total Other Expense | 4,865,723 | 3,873,314 | 3,919,837 | 8,157,737 | ||||||||||||
Loss from Discontinued Operations Before Provision for Income Taxes | (4,391,516 | ) | (6,249,060 | ) | ||||||||||||
Provision for Income Tax Expense | (2,055,734 | ) | - | |||||||||||||
Income (Loss) from Discontinued Operations Before Provision for Income Taxes | 27,444,499 | (12,390,757 | ) | |||||||||||||
Provision for Income Tax Benefit (Expense) | (3,137,850 | ) | (2,055,734 | ) | ||||||||||||
Net Loss from Discontinued Operations | $ | (6,447,250 | ) | $ | (6,249,060 | ) | ||||||||||
Net Income (Loss) from Discontinued Operations | $ | 24,306,649 | $ | (14,446,491 | ) |
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The carrying amounts of assets and liabilities in the disposal group are summarized as follows:
Schedule of assets included in discontinued operation | ||||||||||||||||
September 25, | June 26, | |||||||||||||||
2021 | 2021 | September 24, | June 25, | |||||||||||||
2022 | 2022 | |||||||||||||||
Carrying Amounts of the Assets Included in Discontinued Operations: | ||||||||||||||||
Cash and Cash Equivalents | $ | 760,923 | $ | 901,886 | $ | 355,378 | $ | 1,124,076 | ||||||||
Restricted Cash | 5,280 | 5,280 | 5,280 | 5,280 | ||||||||||||
Accounts Receivable and Prepaid Expenses | 201,035 | 233,860 | 95,048 | 334,621 | ||||||||||||
Inventory | 5,323,054 | 4,899,281 | 2,915,345 | 6,866,833 | ||||||||||||
TOTAL CURRENT ASSETS (1) | ||||||||||||||||
Property and Equipment, Net | 12,835,207 | 12,682,787 | 9,713,565 | 41,273,597 | ||||||||||||
Operating Lease Right-of-Use Assets | 18,770,664 | 19,136,500 | 19,780,991 | 31,543,058 | ||||||||||||
Intangible Assets, Net | 10,582,559 | 10,582,559 | 10,582,559 | 40,799,146 | ||||||||||||
Other Assets | 456,945 | 456,945 | 458,383 | 1,181,795 | ||||||||||||
TOTAL ASSETS OF THE DISPOSAL GROUP CLASSIFIED AS HELD FOR SALE | $ | 48,935,667 | $ | 48,899,098 | $ | 43,906,549 | $ | 123,128,406 | ||||||||
Carrying Amounts of the Liabilities Included in Discontinued Operations: | ||||||||||||||||
Accounts Payable and Accrued Liabilities | $ | 2,937,647 | $ | 3,082,031 | $ | 2,640,664 | $ | 6,295,745 | ||||||||
Income Taxes Payable | 4,154,556 | 1,535,627 | (27,904 | ) | 1,671,380 | |||||||||||
Other Current Liabilities | 92,445 | 124,663 | - | 89,069 | ||||||||||||
Current Portion of Operating Lease Liabilities | 2,606,946 | 2,326,002 | 2,605,317 | 4,209,512 | ||||||||||||
Current Portion of Finance Lease Liabilities | 827 | 825 | - | 174,000 | ||||||||||||
TOTAL CURRENT LIABILITIES (1) | ||||||||||||||||
Operating Lease Liabilities, Net of Current Portion | 19,858,873 | 20,272,057 | 19,067,840 | 56,410,071 | ||||||||||||
Finance Lease Liabilities, Net of Current Portion | 349,371 | 349,244 | ||||||||||||||
Deferred Tax Liabilities | 5,456,681 | 5,457,753 | 6,250,511 | 6,097,597 | ||||||||||||
Notes Payable | - | 11,100,000 | ||||||||||||||
TOTAL NON-CURRENT LIABILITIES (1) | ||||||||||||||||
TOTAL LIABILITIES OF THE DISPOSAL GROUP CLASSIFIED AS HELD FOR SALE | $ | 35,457,346 | $ | 33,148,202 | $ | 30,536,428 | $ | 86,047,374 |
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MEDMEN ENTERPRISES INC.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
Three Months Ended September 25, 2021 and September 26, 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
22. SUBSEQUENT EVENTS
23. | SUBSEQUENT EVENTS |
The Company has evaluated subsequent events through November 9, 2021, which is the date these unaudited interim Condensed Consolidated Financial Statements were issued and has concluded that the followingno subsequent events have occurred that would require recognition in the Condensed Consolidated Financial Statements or disclosure in the notesNotes to the Condensed Consolidated Financial Statements.
Partnership with Foundry Works, Inc.37
On October 1, 2021, the Company announced that LitHouse Farms, a subsidiary of Foundry Works, Inc. (“Foundry”), will manage its cultivation and manufacturing operations at its facilities in Desert Hot Springs, California (“DHS”) and Sparks, Nevada (“Sparks”). Licensed operations at the facilities will be carried on under management agreements which include purchase options for nominal consideration, subject to regulatory approval. Concurrent with the transaction, Foundry entered into a sublease agreement for DHS worth approximately $3,200,000 per year beginning in its first year, increasing to approximately $4,600,000 per year in its sixth year, subject to 3% annual escalators thereafter through March 2039. Foundry also entered into a sublease agreement for Sparks worth approximately $2,400,000 per year beginning in its first year, increasing to approximately $3,400,000 per year in its sixth year, subject to 3% annual escalators thereafter through January 2039. Refer to “Note 4 – Assets Held for Sale” for further information.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
This management’s discussion and analysis (“MD&A”&A”) of the financial condition and results of operations of MedMen Enterprises Inc. (“MedMen Enterprises”Enterprises”, “MedMen”“MedMen”, the “Company”, “we” or the “Company”“our”) is for the three months ended September 25, 2021.24, 2022. The following discussion should be read in conjunction with, and is qualified in its entirety by, the unaudited condensed consolidated financial statementsCondensed Consolidated Financial Statements and the accompanying notes presented in Item 1 of this Form 10-Q and those discussed in Item 158 of the Company’s Annual Report on Form 1010-K (the “Form 10”“Form 10-K”) filed with the SEC on September 24, 2021.9, 2022. Except for historical information, the discussion in this section contains forward-looking statements that involve risks and uncertainties. Future results could differ materially from those discussed below for many reasons, including the risks described in “Disclosure Regarding Forward-Looking Statements,” Item 1A—”Risk1A. “Risk Factors” and elsewhere in this Form 10-Q.
We are a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act. Accordingly, we have omitted certain information called for by this Item as permitted by applicable scaled disclosure rules.
Basis of Presentation
All references to “$” and “dollars” refer to U.S. dollars. References to C$ refer to Canadian dollars. Certain totals, subtotals and percentages throughout this MD&A may not reconcile due to rounding.
Fiscal Period
The Company’sOur fiscal year is a 52/53-week year ending on the last Saturday in June. In a 52-week fiscal year, each of the Company’s quarterly periods will comprise 13 weeks. The additional weekJune or first Saturday in a 53-week fiscal year is added to the fourth quarter, making such quarter consist of 14 weeks. The Company’s first 53-week fiscal year will occur in fiscal year 2024. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company’s fiscal years ended in June and the associated quarters, months and periods of those fiscal years.July. For the current interim period, the three months ended September 25, 202124, 2022 and September 26, 202025, 2021 refer to the 13 weeks ended therein.
Selected Financial Data
The following table sets forth the Company’s selected consolidated financial data for the periods, and as of the dates, indicated. The Condensed Consolidated Statements of Operations data for the three months ended September 25, 2021 and September 26, 2020 have been derived from the unaudited interim Condensed Consolidated Financial Statements of the Company and its subsidiaries, which are included in Item 1 of this Quarterly Report on Form 10-Q (“Form 10-Q”).
The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” (“MD&A”) and the unaudited interim Condensed Consolidated Financial Statements and related notes presented in Item 1 of this Form 10-Q. The Company’s unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and on a going concern basis that contemplates continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business.
Three Months Ended | ||||||||
September 25, | September 26, | |||||||
($ in Millions) | 2021 | 2020 | ||||||
(unaudited) | (unaudited) | |||||||
Revenue | $ | 39.8 | $ | 35.1 | ||||
Gross Profit | $ | 17.5 | $ | 16.4 | ||||
(Loss) Income from Operations | $ | (29.0 | ) | $ | 6.0 | |||
Total Other Expense | $ | 5.5 | $ | 20.3 | ||||
Net Loss from Continuing Operations | $ | (54.2 | ) | $ | (26.6 | ) | ||
Net Loss from Discontinued Operations | $ | (6.4 | ) | $ | (6.2 | ) | ||
Net Loss | $ | (60.6 | ) | $ | (32.8 | ) | ||
Net Loss Attributable to Non-Controlling Interest | $ | (5.3 | ) | $ | (10.9 | ) | ||
Net Loss Attributable to Shareholders of MedMen Enterprises Inc. | $ | (55.3 | ) | $ | (21.9 | ) | ||
Adjusted Net Loss from Continuing Operations (Non-GAAP) | $ | (59.8 | ) | $ | (35.5 | ) | ||
EBITDA from Continuing Operations (Non-GAAP) | $ | (9.1 | ) | $ | 4.3 | |||
Adjusted EBITDA from Continuing Operations (Non-GAAP) | $ | (14.6 | ) | $ | (12.6 | ) |
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Quarterly Highlights
Amendment and Extension of Convertible FacilityOverview
On April 23, 2019,MedMen is a cannabis retailer based in the Company securedU.S. offering a senior secured convertible credit facility (the “Convertible Facility”) to provide up to $250,000,000 in gross proceeds, arranged by Gotham Green Partners (“GGP”). The Convertible Facility has been accessed to daterobust selection of high-quality products, including MedMen-owned brands, LuxLyte, and MedMen Red through issuances to the lenders of convertible senior secured notes (“GGP Notes”, or the “Notes”) co-issued by the Companyits premium retail stores, proprietary delivery service, as well as curbside and MM Can USA, Inc. (“MM CAN” or “MedMen Corp.”).in-store pick up. As of September 25, 2021,24, 2022, the Company has drawn down on a total of $165,000,000 on the Convertible Facility. The principal amount of the Convertible Facility has beenoperates 23 store locations across California (13), New York (4) Nevada (3), Illinois (1), Massachusetts (1) and is anticipated to be used for ongoing operations, capital expenditures and other corporate purposes.Arizona (1).
On August 17, 2021,22, 2022, the Company announced that Tilray, Inc.completed the sale of its operations in the state of Florida, including its license, dispensaries, inventory and cultivation operations, to Green Sentry Holdings, LLC (“TilrayBuyer”) acquiredat the final sales price of $67,000,000 which comprised of $63,000,000 in cash and $4,000,000 in liabilities assumed by the Buyer. The Buyer made a majoritycash payment of $40,000,000 at closing, a cash payment of $11,500,000 on September 15, 2022, and is required to make one additional installment payments of $11,500,000 on or before March 15, 2023. As of September 24, 2022, net proceeds to the Company were $19,500,000 after $31,599,999 of the outstanding GGP Notes. Undercash proceeds was used to repay the termsSenior Secured Term Loans with Hankey Capital. Proceeds of the transaction to the Company will be used to fund operations and pay interest to Hankey Capital while the Senior Secured Term Loans remain outstanding and in default. In addition, the Company licensed the tradename “MedMen” to the Buyer for use in Florida for a newly formed limited partnership (the “SPV”) established by Tilrayperiod of two years, subject to termination rights, for a quarterly revenue-based fee. All purchased assets and other strategic investors acquired an aggregate principal amountassumed liabilities related to Florida are excluded from our Consolidated Balance Sheets as of approximately $165,800,000 of the NotesSeptember 24, 2022 and warrants issued in connection with the Convertible Facility, all of which were originally issued by MedMen and held by GGP, representing 75% of the outstanding Notes and 65% of the outstanding warrants under the Convertible Facility. Specifically, Tilray’s interestprofits or losses from our Florida operations subsequent to August 22, 2022 are included in the SPV represents rights to 68%Consolidated Statements of the Notes and related warrants held by the SPV, which are convertible into, and exercisable for, approximately 21% of the outstanding Class B Subordinate Voting Shares of MedMen upon closing of the transaction. Tilray’s ability to convert the Notes and exercise the warrants is dependent upon U.S. federal legalization of cannabis or Tilray’s waiver of such requirement as well as any additional regulatory approvals. Tilray also has the right to appoint two non-voting observers of the Company’s Board of Directors.
In connection with the sale of the Notes, the Company amended and restated the Convertible Facility (the “Sixth Amendment”) to, among other things, extend the maturity date to August 17, 2028, eliminate any cash interest obligations, and instead provide for payment-in-kind interest, eliminate certain repricing provisions, and eliminate and revise certain restrictive covenants. The amendments are intended to provide MedMen the flexibility to execute on its growth priorities and explore additional strategic opportunities. In connection with the Sixth Amendment, accrued payment-in-kind interest on the Notes will be convertible at price equal to the higher of: (a) trailing 30-day volume weighted average price (“VWAP”) of the Company’s Subordinate Voting Shares or (b) the lowest discounted price available pursuant to the pricing policies of the Canadian Securities Exchange (“CSE”). The Notes may not be prepaid until the federal legalization of marijuana. The Notes, as amended, provide the holders with a top-up right to acquire additional Subordinate Voting Shares and a pre-emptive right with respect to future financings of the Company, subject to certain exceptions, upon the issuance by MedMen of certain equity or equity-linked securities. No changes have been made to the conversion and exercise prices of the Notes or related Warrants. In connection with the Sixth Amendment, GGP can nominate an individual to serve on the Company’s Board of Directors so long as GGP’s diluted ownership percentage is at least 10%.Operations. Refer to “Note 1122 – Senior Secured Convertible Credit FacilityDiscontinued Operations” of the unaudited interim condensed consolidated financial statementsConsolidated Financial Statements in Item 1 for further information.
Backstopped Equity InvestmentCOVID-19 Pandemic
On August 17, 2021,We continuously address the Company entered into subscription agreements with various investors led by Serruya Private Equity Inc. (“SPE”) to purchase $100,000,000 of units (each, a “Unit”)effects of the CompanyCOVID-19 pandemic, a discussion of which is available in Item 1A “Risk Factors” of the 2022 Form 10-K. Our business and operating results for the three months ended September 24, 2022, continue to be impacted by the COVID-19 pandemic. The overall impact on our business continues to depend on the length of time that the pandemic continues, the impact on consumer purchasing behavior, inflation, and the extent to which it affects our ability to raise capital, and the effect of governmental regulations imposed in response to the pandemic, which all remain uncertain at a purchase pricethis time. We continue to implement and evaluate actions to strengthen our financial position and support the continuity of $0.24 per Unit (the “our business and operations.
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Private Placement”) wherein certain investors associated with SPE agreed to backstop the Private Placement (the “Backstop Commitment”). Each Unit consistedResults of one Class B Subordinate Voting Share and one-quarter share purchase warrant. Each warrant permits the holder to purchase one Subordinate Voting Share at an exercise price of $0.288 per share for a period of five years from the date of issuance. The Company issued a total of 416,666,640 Subordinate Voting Shares and 104,166,660 warrants for gross proceeds of $100,000,000. The proceeds from the Private Placement will allow MedMen to expand its operations in key markets such as California, Florida, Illinois and Massachusetts and identify and accelerate further growth opportunities across the United States.Operations
Each Unit issued to certain funds associated with SPE consisted of one Class B Subordinate Voting Share and one-quarter of one share purchase warrant, plus a proportionate interestOur consolidated results, in a short-term warrant (the “Short-Term Warrant”) which expires on December 31, 2021. At the option of the holders and upon payment of $30,000,000, the Short-Term Warrant entitles the holders to acquire (i) an aggregate of 125,000,000 Units at an exercise price of $0.24 per Unit, or (ii) $30,000,000 principal amount of notes at par, convertible into 125,000,000 Subordinate Voting Shares at a conversion price of $0.24millions, except for per share underand percentage data, for the terms of the Convertible Facility. The Company will use any proceeds, less fees and expenses, from exercise of the Short-Term Warrantthree months ended September 24, 2022, compared to pay down the existing senior secured term loan with Hankey Capital if any indebtedness is then outstanding.three months ended September 25, 2021, are as follows:
Three Months Ended | ||||||||||||||||
September 24, | September 25, | |||||||||||||||
($ in Millions) | 2022 | 2021 | $ Change | % Change | ||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Revenue | $ | 30.0 | $ | 36.7 | $ | (6.7 | ) | (18 | %) | |||||||
Cost of Goods Sold | 15.2 | 19.3 | (4.1 | ) | (21 | %) | ||||||||||
Gross Profit | 14.9 | 17.4 | (2.5 | ) | (14 | %) | ||||||||||
Operating Expenses: | ||||||||||||||||
General and Administrative | 17.8 | 32.6 | (14.8 | ) | (45 | %) | ||||||||||
Sales and Marketing | 0.4 | 0.6 | (0.2 | ) | (33 | %) | ||||||||||
Depreciation and Amortization | 3.9 | 5.8 | (1.9 | ) | (33 | %) | ||||||||||
Unrealized Changes in Fair Value of Contingent Consideration | (0.9 | ) | - | (0.9 | ) | - | ||||||||||
Impairment Expense | 1.7 | 0.4 | 1.3 | 325 | % | |||||||||||
Other Operating (Income) Expense | (2.6 | ) | 2.2 | (4.8 | ) | (218 | %) | |||||||||
Total Operating Expenses | 20.5 | 41.7 | (21.3 | ) | (51 | %) | ||||||||||
Loss from Operations | (5.6 | ) | (24.3 | ) | 18.7 | (77 | %) | |||||||||
Non-Operating Expense (Income): | ||||||||||||||||
Interest Expense | 10.1 | 8.2 | 1.9 | 23 | % | |||||||||||
Accretion of Debt Discount and Loan Origination Fees | 1.6 | 6.3 | (4.7 | ) | (75 | %) | ||||||||||
Change in Fair Value of Derivatives | 0.8 | (2.1 | ) | 2.9 | (138 | %) | ||||||||||
Gain on Extinguishment of Debt | - | (10.2 | ) | 10.2 | (100 | %) | ||||||||||
Total Non-Operating Expense | 12.4 | 2.2 | 10.2 | 464 | % | |||||||||||
Loss from Continuing Operations Before Provision for Income Taxes | (18.1 | ) | (26.5 | ) | 8.4 | (32 | %) | |||||||||
Provision for Income Tax Expense | (2.2 | ) | (19.7 | ) | 17.5 | (89 | %) | |||||||||
Net Loss from Continuing Operations | (20.3 | ) | (46.2 | ) | 25.9 | (56 | %) | |||||||||
Net Income (Loss) from Discontinued Operations, Net of Taxes | 24.3 | (14.4 | ) | 38.7 | (269 | %) | ||||||||||
Net Income (Loss) | 4.0 | (60.6 | ) | 64.6 | (107 | %) | ||||||||||
Net Loss Attributable to Non-Controlling Interest | (0.1 | ) | (5.3 | ) | 5.2 | (98 | %) | |||||||||
Net Income (Loss) Attributable to Shareholders of MedMen Enterprises Inc. | $ | 4.2 | $ | (55.3 | ) | $ | 59.5 | (108 | %) | |||||||
EBITDA from Continuing Operations (Non-GAAP) | $ | (2.5 | ) | $ | (5.7 | ) | $ | 3.2 | (56 | %) | ||||||
Adjusted EBITDA from Continuing Operations (Non-GAAP) | $ | (2.0 | ) | $ | (12.2 | ) | $ | 10.2 | (84 | %) |
In consideration for the Backstop Commitment, the Company paid a fee of $2,500,000 in the aggregate to such parties in the form of 10,416,666 Class B Subordinate Voting Shares at a deemed price of $0.24 per share. In connection with the equity financing, the Company granted SPE the right to designate one individual to be nominated to serve as a director of the Company.
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Unsecured Promissory NoteRevenue
On July 29, 2021,Revenue for the Company entered intothree months ended September 24, 2022 was $30.0 million, a short-term unsecured promissory note indecrease of $(6.7) million, or (18%), compared to revenue of $36.7 million for the amount of $5,000,000 with various investors led by SPE wherein the note bears interest at a rate of 6.0% per annum payable quarterly in arrears with a maturity date of August 18,three months ended September 25, 2021. On August 17, 2021, the Company settled the promissory note by the issuance of 20,833,333 Units, consisting of 20,833,333 Subordinate Voting Shares and 5,208,333 warrants based on an issue price of $0.24 and the relative portion of the Short-Term Warrant, issued as part of the Private Placement.
Unsecured Convertible Facility
On September 16, 2020, the Company entered into an unsecured convertible debenture facility (the “Unsecured Convertible Facility”) for total available proceeds of $10,000,000 callableRevenue in tranches of $1,000,000 each. The debentures provide for the automatic conversion into Subordinate Voting Sharesvarious states in the event that the VWAPwhich we operate is 50% above the conversion price on the CSE for 45 consecutive trading days.as follows:
On June 28, 2021, the remaining balance of the Unsecured Convertible Facility of $2,500,000 was automatically converted into 16,014,664 Class B Subordinate Voting Shares in the amount of $2,007,620. In addition, 8,807,605 of the outstanding warrants under the Unsecured Convertible Facility were exercised at varying prices for a net exercise price of $1,622,377. As of September 25, 2021, the outstanding balance of the Unsecured Convertible Facility was nil.
Assets Held for Sale
Three Months Ended | ||||||||||||||||
September 24, | September 25, | |||||||||||||||
($ in Millions) | 2022 | 2021 | $ Change | % Change | ||||||||||||
California | $ | 19.9 | $ | 24.6 | $ | (4.7 | ) | (19 | %) | |||||||
Nevada | 3.0 | 4.1 | (1.1 | ) | (27 | %) | ||||||||||
Illinois | 3.5 | 4.3 | (0.8 | ) | (19 | %) | ||||||||||
Arizona | 2.8 | 3.7 | (0.9 | ) | (24 | %) | ||||||||||
Massachusetts | 0.8 | - | 0.8 | - | ||||||||||||
Continuing Operations | 30.0 | 36.7 | (6.7 | ) | (18 | %) | ||||||||||
Discontinued Operations | 3.6 | 7.3 | (3.7 | ) | (51 | %) | ||||||||||
Total Revenue | $ | 33.6 | $ | 44.0 | $ | (10.4 | ) | (24 | %) |
DuringOverall, across all markets, for the fiscal first quarter of 2022, the Company wasperiods presented, we experienced declines in negotiations to sublease (the “Sublease”) its cultivation and production facilities in Desert Hot Springs, California and Sparks, Nevada (the “Facilities”) and to enter into a management agreement (the “Management Agreement”) with the proposed sublessee to operate the Facilities. The Sublease and Management Agreement was subject to the approval of the Facilities’ landlord. On September 30, 2021, the landlord approved the Sublease which effectuated the Management Agreement and the Company determined that as of the effective date of the Management Agreement, the Company would no longer have a controlling financial interest in the Facilities. Accordingly, as of September 25, 2021, the assets and liabilities related to the Facilities were classified as held for sale in the Condensed Consolidated Balance Sheet as of September 25, 2021. Refer to “Note 4 – Assets Held for sale” of the unaudited interim condensed consolidated financial statements in Item 1 for further information.
Management Changes
On July 15, 2021, the Company permanently appointed Tom Lynch as Chief Executive Officer. Mr. Lynch has served as the interim Chief Executive Officer since March 2020.revenue across all markets.
In connectionCalifornia, we experienced a decline of $(4.7) million or (19%) over the same prior year period primarily driven by lower basket size, inconsistent traffic to the stores which was slightly partially offset by flat conversion rates. We believe we were also affected by the status of the cannabis supply in this State. California is currently experiencing high levels of cannabis production which we believe has flooded the illegal market with quality cannabis flower that illicit operators are offering to cannabis consumers at lower selling prices. In addition, the Private Placement on August 17, 2021,increase in new dispensaries within key markets, especially West Hollywood, and the Company appointed Michael Serruya to its Board of Directors.
Factors Affecting Performance
Company management believes thatmore aggressive promotional cadence these dispensaries are promoting, has resulted in a saturated market wherein the nascentCalifornia cannabis industry representsconsumer has an extraordinary opportunity in which the Company’s performance and success depend on aincreased number of factors:choices for cannabis products at discounted pricing. During this first fiscal quarter, we increased our focus on product portfolio and product selection, expanding vendor relationships, engaging in allowable marketing strategies, and continued efforts to develop our private label products.
In Nevada, revenue for the three months declined $(1.1) million or (27%). We experienced a decline in basket size as well as traffic and conversion rates. Nevada noted an overall decline in legal cannabis sales primarily related to a maturing industry, lower disposable income and a revenue base heavily reliant on tourism.
In Illinois, revenue declined $(0.8) million or (19%). We continue to face market pressure from additional licenses issued by surrounding municipalities as part of Illinois’ efforts to promote equality and accessible locations for the consumer. We have made great efforts in testing new promotional messaging that, if marketed properly, can increase foot traffic and revenue.
In Arizona, revenue for the period decreased $(0.9) million or (24%). This decrease resulted from a decline in medical-use sales because of a maturing recreational cannabis industry. Arizona is also experiencing an increase in new dispensary openings, that similar to California, has resulted in a saturated market. Exacerbating the increase in dispensary openings, is the increase in aggressive promotional cadences by these dispensaries. We continue our efforts to finding the optimal product selection that can meet the demands of both medical and recreational customers as well as planning for additional private label products from our own cultivation facility in Mesa.
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Trends
MedMen is subject to various trends that could have a material impact on the Company, its financial performance and condition, and its future outlook. A deviation from expectationsIn Massachusetts, our store near Fenway Park opened December 2021 with no comparable sales for these trends could cause actual results to differ materially from those expressed or implied in forward-looking information included in this MD&A and the Company’s financial statements. These trends include, but are not limited to, the liberalization of cannabis laws, popular support for cannabis legalization, and balanced supply and demand in states. Refer to the “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” contained in Item 7 of the Company’s Form 10.reporting period.
ComponentsDuring our first fiscal quarter, we completed the sale of Results of Operations
Revenue
For the three months ended September 25, 2021, the Company derived the majority of its revenue from direct salesour Florida-based assets. We continue to customers in its retail stores. Approximately 60% of revenue was generated from operations in California, with the remaining 40% from operations in Arizona, Nevada, Illinois and Florida. Revenue through retail stores is recognized upon delivery of the goods to the customer and when collection is reasonably assured, net of an estimated allowancehold for sales returns.sale our New York-based assets which are presented as discontinued operations.
Cost of Goods Sold and Gross Profit
Gross profit is revenue less cost of goods sold. Cost of goods sold includes the costs directly attributable to product sales and includes amounts paid for finished goods, such as flower, edibles and concentrates, packaging and other supplies, fees for services and processing, and allocated overhead, such as allocations of rent, administrative salaries, utilities and related costs. Cannabis costs are affected by various state regulations that limit the sourcing and procurement of cannabis product, which may create fluctuations in gross profit over comparative periods as the regulatory environment changes. Gross margin measures gross profit as a percentage of revenue.
Expenses
General and administrative expenses represent costs incurred in MedMen’s corporate offices, primarily related to personnel costs, including salaries, incentive compensation, benefits, share-based compensation and professional service costs, including legal and accounting. Sales and marketing expenses consist of selling costs to support customer relationships and to deliver product to retail stores. It also includes an investment in marketing and brand activities and the corporate infrastructure required to support the ongoing business. Depreciation and amortization expenses represent the portion of the Company’s definite-lived property, plant and equipment and intangible assets that is being used up during the reporting period. Changes in fair value of contingent consideration expense represent the realized gain or loss upon the settlement of contingent liabilities related to the Company’s business acquisitions and the unrealized gain or loss on the changes in fair value of such outstanding liabilities upon remeasurement at each reporting period. Impairment expense represents the permanent reduction of an assets carrying value down to fair value and may include inventory, property, plant, and equipment, intangible assets, goodwill and other assets. Other operating income and expenses consist of the gain on disposal of assets from assets held for sale and discontinued operations, restructuring fees or reorganization expenses, gain or loss on settlement of accounts payable, and gain on lease terminations.
Income Taxes
MedMen is subject to income taxes in the jurisdictions in which it operates and, consequently, income tax expense is a function of the allocation of taxable income by jurisdiction and the various activities that impact the timing of taxable events. As the Company operates in the legal cannabis industry, the Company is subject to the limits of Internal Revenue Code (“IRC”) Section 280E under which the Company is only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E and a higher effective tax rate than most industries. However, the state of California does not conform to IRC Section 280E and, accordingly, the Company deducts all operating expenses on its California Franchise Tax Returns.
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Three Months Ended September 25, 2021 Compared to Three Months Ended September 26, 2020
Three Months Ended | ||||||||||||||||
September 25, | September 26, | |||||||||||||||
($ in Millions) | 2021 | 2020 | $ Change | % Change | ||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Revenue | $ | 39.8 | $ | 35.1 | $ | 4.7 | 13 | % | ||||||||
Cost of Goods Sold | 22.3 | 18.7 | 3.6 | 19 | % | |||||||||||
Gross Profit | 17.5 | 16.4 | 1.1 | 7 | % | |||||||||||
Expenses: | ||||||||||||||||
General and Administrative | 36.5 | 30.2 | 6.3 | 21 | % | |||||||||||
Sales and Marketing | 0.7 | 0.2 | 0.5 | 250 | % | |||||||||||
Depreciation and Amortization | 7.0 | 8.0 | (1.0 | ) | (13 | %) | ||||||||||
Realized and Unrealized Changes in Fair Value of Contingent Consideration | - | 0.3 | (0.3 | ) | (100 | %) | ||||||||||
Impairment Expense | 0.4 | 0.8 | (0.4 | ) | (50 | %) | ||||||||||
Other Operating Expense (Income) | 1.9 | (29.1 | ) | 31.0 | (107 | %) | ||||||||||
Total Expenses | 46.5 | 10.4 | 36.1 | 347 | % | |||||||||||
(Loss) Income from Operations | (29.0 | ) | 6.0 | (35.0 | ) | (583 | %) | |||||||||
Other Expense (Income): | ||||||||||||||||
Interest Expense | 10.0 | 8.8 | 1.2 | 14 | % | |||||||||||
Amortization of Debt Discount and Loan Origination Fees | 7.8 | 1.7 | 6.1 | 359 | % | |||||||||||
Change in Fair Value of Derivatives | (2.1 | ) | (0.3 | ) | (1.8 | ) | 600 | % | ||||||||
(Gain) Loss on Extinguishment of Debt | (10.2 | ) | 10.1 | (20.3 | ) | (201 | %) | |||||||||
Total Other Expense | 5.5 | 20.3 | (14.8 | ) | (73 | %) | ||||||||||
Loss from Continuing Operations Before Provision for Income Taxes | (34.5 | ) | (14.3 | ) | (20.2 | ) | 141 | % | ||||||||
Provision for Income Tax Expense | (19.7 | ) | (12.3 | ) | (7.4 | ) | 60 | % | ||||||||
Net Loss from Continuing Operations | (54.2 | ) | (26.6 | ) | (27.6 | ) | 104 | % | ||||||||
Net Loss from Discontinued Operations, Net of Taxes | (6.4 | ) | (6.2 | ) | (0.2 | ) | 3 | % | ||||||||
Net Loss | (60.6 | ) | (32.8 | ) | (27.8 | ) | 845 | % | ||||||||
Net Loss Attributable to Non-Controlling Interest | (5.3 | ) | (10.9 | ) | 5.6 | (51 | %) | |||||||||
Net Loss Attributable to Shareholders of MedMen Enterprises Inc. | $ | (55.3 | ) | $ | (21.9 | ) | $ | (33.4 | ) | 153 | % | |||||
Adjusted Net Loss from Continuing Operations (Non-GAAP) | $ | (59.8 | ) | $ | (35.5 | ) | $ | (24.3 | ) | 68 | % | |||||
EBITDA from Continuing Operations (Non-GAAP) | $ | (9.1 | ) | $ | 4.3 | $ | (13.4 | ) | (312 | %) | ||||||
Adjusted EBITDA from Continuing Operations (Non-GAAP) | $ | (14.6 | ) | $ | (12.6 | ) | $ | (2.0 | ) | 16 | % |
Revenue
Revenue for the three months ended September 25, 2021 was $39.8 million, an increase of $4.7 million, or 13%, compared to revenue of $35.1 million for the three months ended September 26, 2020. For the three months ended September 25, 2021, MedMen had 27 active retail locations in the states of California, New York, Nevada, Arizona, Illinois and Florida, of which four were located within the state of New York were classified as discontinued operations, compared to 26 active retail locations in the same period in the prior year. For the fiscal first quarter of 2022, five retail locations in the state of Florida have remained temporarily closed in order to redirect inventory from its Eustis cultivation facility to its highest performing stores. As of September 25, 2021, the Company had 23 active retail locations related to continuing operations. Subsequent to September 25, 2021, the Company reopened its Tallahassee, Florida location.
The increase in revenue was primarily related to the Company’s initiatives as it recovers from the COVID-19 impact on business and occupancy restrictions. During the three months ended September 25, 2021, the Company continued to elevate its product offering, revamp its pricing and assortment strategy, and focus on driving retail traffic. Specifically in California, where retail revenue increased $3.9 million during the current period compared to the fiscal first quarter of 2021, the Company saw increased engagement through its customer relationship strategy and focused on marketing and advertising initiatives as COVID-19 restrictions began to lift. In addition, retail revenue in Arizona increased $1.4 million compared to the three months ended September 26, 2020 as a result of the Company’s focus on driving retail traffic after the state-wide transition to adult-use during the spring of calendar year 2021. Previously modified store operations based on Centers for Disease Control and Prevention guidelines and local ordinances, which limit in-store traffic for certain locations, began to operate at a less restrictive scale since the fiscal fourth quarter of 2021 as COVID-19 related restrictions began to lift, resulting in increased tourism and normalizing retail traffic levels. As the Company’s key markets continue to recover from the pandemic, MedMen expects to continue utilizing their tailored marketing initiatives and revised assortment to drive and serve retail traffic at a much higher volume and rate.
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Cost of Goods Sold and Gross Profit
Cost of goods sold for the three months ended September 25, 2021was $22.324, 2022 was $15.2 million an increasecompared to $19.3 million, a decrease of $3.6$(4.1) million, or 19%(21%), compared with $18.7 million of cost of goods sold for the three months ended September 26, 2020. Gross profit for the three months ended September 25, 20212021. Gross profit for the fiscal first quarter was $17.5$14.9 million, representing a gross margin of 44%50%, as compared with gross profit of $16.4to $17.4 million, representing a gross margin of 47%, for the three months ended September 26, 2020.same prior year period. The decreaseimprovement in gross margin is primarily dueresulted from our continuous efforts to increased promotional activity during the fiscal first quarterdevelop vendor programs that reduced our cost of 2022. In addition, during the three months ended September 25, 2021, the Company recognized an inventory write-downgoods sold, as well as our success in lowering costs of approximately $860,000production at one of itsour cultivation and production facilities.
For the three months ended September 25, 2021, the Company had 27 active retail locations in the states of California, New York, Nevada, Arizona, Illinois and Florida, of which four were located within the state of New York were classified as discontinued operations, compared to 26 active retail locations for the comparative prior period. MedMen operated five cultivation and production facilities in the states of Nevada, California, New York, Florida and Arizona during the three months ended September 25, 2021, of which one facility located in New York was classified as discontinued operations, compared to six cultivation facilities for the three months ended September 26, 2020. MedMen expects margins to improve in the coming periods as the Company continues to test its retail pricing strategy and improve operating efficiencies at its cultivation and production facilities. Subsequent to the fiscal first quarter of 2022, the Company entered into a strategic partnership for its cultivation and production facilities in California and Nevada where the Company had incurred significant fixed costs, wherein licensed operations will be carried on under management agreements while also supplying product for the Company’s private label in California and Nevada.centers.
TotalOperating Expenses
TotalOperating expenses for the three months ended September 25, 202124, 2022 were $46.5$20.5 million, an increasea decrease of $36.1$(21.3) million, or 347%(51%), compared to total expenses of $10.4$41.7 million for the three months ended September 26, 2020, which represents 117% of revenue for the three months ended September 25, 2021, compared to 30% of revenue for the three months ended September 26, 2020. The increase in total expenses was2021. These changes were attributable to the factors describeddiscussed below.
General and administrative expenses (“G&A”) for the three months ended September 25, 2021 and September 26, 202024, 2022 were $36.5$17.8 million, and $30.2compared to $32.6 million respectively, an increase of $6.3 million, or 21%. Despitefor the Company’s continued efforts to reduce company-wide selling, general and administrative expenses (“SG&A”), general and administrative expenses have increasedsame prior year period. The overall decrease in the three months period is primarily due to a $3.9 million increasethe Company’s corporate cost saving strategy. Key drivers of the decrease in G&A include reductions in professional fees ($6.1) million, payroll expenses ($3.0) million, licenses and fees ($1.5) million, deal costs ($1.2) million and rental payments ($1.1) million. Management continues to focus on reducing company-wide G&A. We expect G&A will continue to decrease in fiscal year 2023 as a result of litigation costs associated with previous officers of the Company.compared to prior year.
Sales and marketing expenses remained relatively consistent for the three months ended September 25, 202124, 2022 and September 26, 2020 were $0.7 million and $0.2 million, respectively, an increase of $0.5 million, or 250%. The increase in sales and marketing expenses is primarily attributed to an increase in marketing and advertising of $0.3 million and an increase in customer relationship tools of $0.1 million for the three months ended September 25, 2021 compared toin the same period prior as a resultamount of the Company’s increased marketing initiatives to drive retail traffic as COVID-19 restrictions began to lift, tourism increased,$0.4 million and certain states moved towards regulatory approval of recreational marijuana.$0.6 million, respectively.
Depreciation and amortization for the three months ended September 25, 2021 and September 26, 202024, 2022 was $7.0$3.9 million, and $8.0compared to $5.8 million respectively, a decrease of $1.0 million, or 13%.for the same prior year period. The overall decrease is attributable to the reductionimpairment of assets recorded in capital expenditures through aQ4 2022 and delay in capital-intensive projects as partnew capital projects. We are currently evaluating the long-term benefits of continuing to pursue the Company’s turnaround planbuild out of some of our locations not yet opened or constructed. We are in negotiations with the landlords of our unfinished locations in California, Illinois and as a result ofMassachusetts in an effort to reach the COVID-19 pandemic, resulting in a decrease in property, plantbest outcome for all parties including the communities that live and equipment and intangible assets.work near these unfinished locations possibly deterring from market values.
Realized and unrealized changes in fair value of contingent consideration remained generally consistent for the three months ended September 25, 2021 and September 26, 2020 in the amount of nil and $0.3 million, respectively.
Impairment expense for the three months ended September 25, 2021 and September 26, 202024, 2022 was $1.7 million, compared to $0.4 million and $0.8 million, respectively, a decrease of $0.4 million, or 50%. During the comparative prior period, the Company recognized impairment related to a California dispensary license upon classification as assets held for sale. During the current period, the Company recognized an impairment on an intellectual property asset in the amount of $0.4 million.
Other operating expense (income) for the three months ended September 25, 20212021. During the current period, the Company wrote off approximately $1.7 million of construction in progress.
Other operating (income) expense for the three months ended September 24, 2022 was $1.9$(2.6) million, a decrease of $31.0 million, or 107% from other operating income of $29.1compared to $2.2 million for the three months ended September 26, 2020. During the comparative prior period, the Company recognized25, 2021. The decrease of $(4.8) million in other operating (income) expense was primarily due to a decrease of $(2.0) million in restructuring expenses coupled with a gain on lease terminationstermination of $16.6$1.6 million and a gain on disposalsublease income of assets$1.5 million recognized during the fiscal first quarter of held for sale of $12.4 million, compared to nil2023, versus none in the currentcomparative period. On July 2, 2020, the Company amended its lease terms with the REIT wherein a portion of the total currently monthly base rent will be deferred for the 36-month period from July 1, 2020 and July 1, 2023. On August 10, 2020, the Company transferred operations and control of MME Evanston Retail, LLC and recorded a $12.4 million gain on disposal of assets held for sale upon deconsolidation.
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Non-Operating Expense
Total Other Expense
Total otherNon-operating expense for the three months ended September 25, 202124, 2022, was $5.5$12.4 million, a decrease of $14.8 million, or 73%, compared to total other expense of $20.3$2.2 million forin the three months ended September 26, 2020.prior year period. The decreaseincrease in total othernon-operating expense was primarily attributable to the loss on extinguishment of debt of $10.1 million in the comparative prior period, compared to the net gain on extinguishment of debt ofdue a $10.2 million in the current period as a result of the $12.4 million gain on extinguishment of debt relatedrecognized in prior fiscal first quarter versus none in the current period. This was offset by a $(4.7) million decrease in accretion of debt discount due to the Sixth Amendment, offset byprincipal repayment of $31.6 million on the $2.2Senior Secured Term Loan during the fiscal first quarter of 2023 and a $(2.9) million loss on extinguishmentdecrease in change in fair value of debt related to the settlement of the unsecured promissory note in connection with the Private Placement.
derivatives.
Provision for Income Taxes
MedMen is subject to income taxes in the jurisdictions in which it operates and, consequently, income tax expense is a function of the allocation of taxable income by jurisdiction and the various activities that impact the timing of taxable events. As we operate in the legal cannabis industry, we are subject to the limits of Internal Revenue Code (“IRC”) Section 280E under which we are only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E and a higher effective tax rate than most industries. However California does not conform to IRC Section 280E and, accordingly, we deduct all operating expenses on MedMen’s California Franchise Tax Returns.
The provision for income tax expensetaxes for the three months ended September 25, 202124, 2022 was $19.7$2.2 million, an increase of $7.4 million, or 60% compared to the provision for income tax expense of $12.3$19.7 million for the three months ended September 26, 2020,25, 2021, primarily due to the Company reporting increased expenses subject toCompany’s forecasted income and related IRC Section 280E relative to pre-tax book loss. The Company incurred a large amount of expenses that were not deductible due to IRC Section 280E limitations which resulted in income tax expense being incurred while there were pre-tax losses for the three months ended September 25, 2021.
expenditures.
Net Loss
Net loss from continuing operations for the three months ended September 25, 202124, 2022 was $54.2$20.3 million, an increasea decrease of $27.6$(25.9) million or 104%, compared to a net loss from continuing operations of $26.6$46.2 million for the three months ended September 26, 2020. The increase in25, 2021. For the fiscal first quarter of 2023, net loss from continuing operations was mainly attributablefavorably impacted by the Company’s continued efforts to the decrease of $31.0 million in other operating expense (income) as a result of gains recognized for transactions during the fiscal first quarter of 2021. In addition,optimize selling, general and administrative expenses increased by $6.3 million duringcosts and right-size the three months ended September 25, 2021 as a result of higher legal and professional fees related to ongoing litigation. This was offset by a $20.3 million decrease in (gain) loss on extinguishment of debt due to the gain of $12.4 million recognized in connection with the Sixth Amendment of the Convertible Facility offset by a loss of $2.2 million related to the settlement of the unsecured promissory note during the fiscal first quarter of 2022. Net loss attributable to non-controlling interest for the three months September 25, 2021 was $5.3 million, resulting in net loss of $55.3 million attributable to the shareholders of MedMen Enterprises Inc. compared to $21.9 million for the three months ended September 26, 2020.
Company’s corporate infrastructure.
Non-GAAP Financial Measures
In addition to providing financial measurements based on GAAP, the Company provides additional financial metrics that are not prepared in accordance with GAAP. Management uses non-GAAP financial measures, in addition to GAAP financial measures, to understandEBITDA from Continuing Operations and compare operating results across accounting periods, for financial and operational decision-making, for planning and forecasting purposes and to evaluate the Company’s financial performance. These non-GAAP financial measures (collectively, the “non-GAAP financial measures”) are defined in the “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in the Company’s Form 10.
Non-GAAP financial measuresAdjusted EBITDA from Continuing Operations are financial measures that are not defined under GAAP. Management believes that these non-GAAPWe define EBITDA as net income (loss), or “earnings”, before interest, income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA before: (i) transaction costs and restructuring costs; (ii) non-cash share-based compensation expense; (iii) fair value changes in derivative liabilities and contingent consideration; (iv) (gains) losses on disposal of assets, assets held for sale, extinguishment of debt and lease terminations; and (v) other one-time charges for non-cash operating costs. These financial measures assessare metrics that have been adjusted from the Company’s ongoing businessGAAP net income (loss) measure in an effort to provide readers with a manner that allows fornormalized metric in making comparisons more meaningful comparisons and analysis of trends inacross the business, as they facilitate comparing financial results across accounting periods and to those of peer companies. The Company uses these non-GAAP financial measures and believes they enhance an investors’ understanding of the Company’s financial and operating performance from period to period. Management also believes that these non-GAAP financial measures enable investors to evaluate the Company’s operating results and future prospects in the same manner as management.
In particular, the Company continues to make investments in its cannabis properties and management resources to better position the organization to achieve its strategic growth objectives which have resulted in outflows of economic resources. Accordingly, the Company uses these metrics to measure its core financial and operating performance for business planning purposes. In addition, the Company believes investors use both GAAP and non-GAAP measures to assess management’s past and future decisions associated with its priorities and allocation of capital,industry, as well as to analyze howremove non-recurring, irregular and one-time items that may otherwise distort the business operates in, or responds to, swings in economic cycles or to other events that impact the cannabis industry. However, these measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies in the Company’s industry. Accordingly, these non-GAAP financial measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.
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These non-GAAP financial measures exclude certain material non-cash items and certain other adjustments the Company believes are not reflective of its ongoing operations and performance. These non-GAAP financial measures are not intended to represent and should not be considered as alternatives to net income operating income or any other performance measures derived in accordance with GAAP as measures of operating performance or operating cash flows or as measures of liquidity. These non-GAAP financial measures have important limitations as analytical tools and should not be considered in isolation or as a substitute for any standardized measure under GAAP. For example, certain of these non-GAAP financial measures:
measure. Other companies in the cannabisour industry may calculate these measuresthis measure differently, than the Company does, limiting their usefulness as comparative measures.
Retail Performance
Within the cannabis industry, MedMen is uniquely focused on the retail component of the value chain. For the fiscal first quarter of 2022, the Company is providing detail with respect to earnings before interest, taxes, depreciation and amortization (“EBITDA”) attributable to the Company’s national retail operations to show how it is leveraging its retail footprint and strategically investing in the future. The table below highlights the Company’s national Retail Adjusted EBITDA Margin (Non-GAAP), which excludes corporate marketing expenses, distribution expenses, inventory adjustments, and local cannabis and excise taxes. Entity-wide Adjusted EBITDA (Non-GAAP) is presented in Item 2 “Reconciliations of Non-GAAP Financial Measures”.
Fiscal Quarter Ended | ||||||||||||||||
September 25, | June 26, | |||||||||||||||
($ in Millions) | 2021 | 2021 | $ Change | % Change | ||||||||||||
Gross Profit | $ | 17.5 | $ | 19.7 | $ | (2.2 | ) | (11 | %) | |||||||
Gross Margin Rate | 44 | % | 47 | % | (3 | )% | (6 | %) | ||||||||
Cultivation & Wholesale Revenue | (1.3 | ) | (1.3 | ) | - | - | ||||||||||
Cultivation & Wholesale Cost of Goods Sold | (4.0 | ) | (3.9 | ) | (0.1 | ) | 3 | % | ||||||||
Non-Retail Gross Margin | (2.7 | ) | (2.6 | ) | (0.1 | ) | 4 | % | ||||||||
Retail Gross Margin (Non-GAAP) | $ | 20.2 | $ | 22.3 | $ | (2.1 | ) | (9 | %) | |||||||
Retail Gross Margin Rate (Non-GAAP) | 52 | % | 55 | % | (2 | )% | (4 | %) |
Fiscal Quarter Ended | ||||||||||||||||
September 25, | June 26, | |||||||||||||||
($ in Millions) | 2021 | 2021 | $ Change | % Change | ||||||||||||
Net Loss | $ | (60.6 | ) | $ | (46.2 | ) | $ | (14.4 | ) | 31 | % | |||||
Net Loss from Discontinued Operations, Net of Taxes | 6.4 | 4.8 | 1.6 | 33 | % | |||||||||||
Provision for Income Tax Expense (Benefit) | 19.7 | (0.3 | ) | 20.0 | (6,667 | %) | ||||||||||
Other Expense | 5.5 | 20.0 | (14.5 | ) | (73 | %) | ||||||||||
Excluded Items (1) | 2.2 | 1.8 | 0.4 | 22 | % | |||||||||||
Loss from Operations Before Excluded Items | (26.7 | ) | (19.9 | ) | (6.8 | ) | 34 | % | ||||||||
Non-Retail Gross Margin | (2.7 | ) | (2.6 | ) | (0.1 | ) | 4 | % | ||||||||
Non-Retail Operating Expenses (2) | (30.7 | ) | (26.2 | ) | (4.5 | ) | 17 | % | ||||||||
Non-Retail EBITDA Margin | (33.4 | ) | (28.8 | ) | (4.6 | ) | 16 | % | ||||||||
Retail Adjusted EBITDA Margin (Non-GAAP) | $ | 6.7 | $ | 8.9 | $ | (2.2 | ) | (25 | %) | |||||||
Retail Adjusted EBITDA Margin Rate (Non-GAAP) | 17 | % | 22 | % | (4 | )% | (20 | %) |
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Fiscal Quarter Ended | ||||||||||||||||
September 25, | June 26, | |||||||||||||||
($ in Millions) | 2021 | 2021 | $ Change | % Change | ||||||||||||
Cultivation & Wholesale | $ | 0.9 | $ | 1.4 | $ | (0.5 | ) | (36 | %) | |||||||
Corporate SG&A | 18.9 | 16.8 | 2.1 | 13 | % | |||||||||||
Depreciation & Amortization | 7.0 | 6.1 | 0.9 | 15 | % | |||||||||||
Other (3) | 3.9 | 1.9 | 2.0 | 105 | % | |||||||||||
Non-Retail Operating Expenses | 30.7 | 26.2 | 4.5 | 17 | % | |||||||||||
Direct Store Operating Expenses | 13.5 | 13.4 | 0.1 | 1 | % | |||||||||||
Excluded Items (1) | 2.3 | 1.8 | 0.5 | 28 | % | |||||||||||
Total Expenses | $ | 46.5 | $ | 41.4 | $ | 5.1 | 12 | % |
The non-GAAP retail performance measures demonstrate the Company’s four-wall margins which reflect the salesReconciliations of the Company’s retail operations relativeGAAP Measures to the direct costs required to operate such dispensaries. Retail revenue is related to net sales from the Company’s stores, excluding non-retail revenue, such as cultivation and manufacturing revenue. Similarly, retail cost of goods sold and direct store operating expenses are directly related to the Company’s retail operations. Non-Retail Revenue includes revenue from third-party wholesale sales. Non-Retail Cost of Goods Sold includes costs directly related to third-party wholesale sales produced by the Company’s cultivation and production facilities, such as packaging, materials, payroll, rent, utilities, security, etc. While third-party sales were not significant for the fiscal quarter ended September 25, 2021, Non-Retail Cost of Goods Sold related to cultivation and wholesale operations was $4.0 million due to unallocated overages from increased production burn rate. Non-Retail Operating Expenses include ongoing costs related to the Company’s cultivation and wholesale operations, corporate spending, and depreciation and amortization. Non-Retail EBITDA Margin reflects the gross margins of the Company’s cultivation and wholesale operations excluding any related operating expenses. To determine the Company’s four-wall margins, certain costs that do not directly support the Company’s retail function are excluded from Retail Adjusted EBITDA Margin (Non-GAAP).Non-GAAP Financial Measures
For the fiscal first quarter of 2022, retail revenue was $38.5 million across the Company’s continuing operations in California, Nevada, Arizona, Illinois and Florida. This represents a 5% decrease, or $2.2 million, over the fiscal fourth quarter of 2021 of $40.7 million. The decrease in retail revenue from continuing operations was primarily driven by a decrease of $0.9 million in Florida, $0.7 million in Nevada, and $0.5 million in California. While there were multiple reasons for the decrease in retail revenue, we believe the primary factors were heightened restrictions due to the Delta variant of COVID-19 and increased competition in certain markets.
Retail Gross Margin Rate (Non-GAAP), which is Retail Gross Margin (Non-GAAP) divided by Retail Revenue (Non-GAAP), for the fiscal first quarter of 2022 was 52% compared to the fiscal fourth quarter of 2021 of 55%. Retail Gross Margin (Non-GAAP) is Retail Revenue (Non-GAAP) less the related Retail Cost of Goods Sold (Non-GAAP). The Company had an aggregate Retail Adjusted EBITDA Margin Rate (Non-GAAP), which is Retail Adjusted EBITDA Margin (Non-GAAP) divided by Retail Revenue (Non-GAAP), of 17% for the fiscal first quarter of 2022 which represents a decrease compared to the 22% realized in the fiscal fourth quarter of 2021 primarily due to an inventory adjustment of $0.9 million and increased promotional activity. Direct store operating expenses include, but are not limited to, rent, utilities, payroll and payroll related expenses, employee benefits, security, local taxes and distribution expenses, which increased $0.1 million, or 1%, compared to the fiscal fourth quarter of 2021.
Corporate SG&A
Corporate-level general and administrative expenses across various functions including Marketing, Legal, Retail Corporate, Technology, Accounting and Finance, Human Resources and Security (collectively referred to as “Corporate SG&A”) are combined to account for a significant proportion of the Company’s total general and administrative expenses. Corporate SG&A also includes pre-opening expenses related to general and administrative expenses incurred by the Company at non-operational retail locations, which such expenses would be classified as direct store operating expenses following its opening.
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Fiscal Quarter Ended | ||||||||||||||||
September 25, | June 26, | |||||||||||||||
($ in Millions) | 2021 | 2021 | $ Change | % Change | ||||||||||||
General and Administrative | $ | 36.5 | $ | 32.9 | $ | 3.6 | 11 | % | ||||||||
Sales and Marketing | 0.7 | 0.6 | 0.1 | 17 | % | |||||||||||
Consolidated SG&A | 37.2 | 33.5 | 3.7 | 11 | % | |||||||||||
Direct Store Operating Expenses | 13.5 | 13.4 | 0.1 | 1 | % | |||||||||||
Cultivation & Wholesale | 0.9 | 1.4 | (0.5 | ) | (36 | %) | ||||||||||
Other (1) | 3.9 | 1.9 | 2.0 | 105 | % | |||||||||||
Less: Non-Corporate SG&A | 18.3 | 16.7 | 1.6 | 10 | % | |||||||||||
Corporate SG&A as a Component of Adjusted EBITDA from Continuing Operations (Non-GAAP) | $ | 18.9 | $ | 16.8 | $ | 2.1 | 13 | % |
For the fiscal first quarter of 2022, Adjusted EBITDA from Continuing Operations (Non-GAAP) includes Corporate SG&A (Non-GAAP) of $18.9 million, representing an increase of $2.1 million, or 13%, from the $16.8 million that Corporate SG&A (Non-GAAP) contributed to Adjusted EBITDA Loss from Continuing Operations (Non-GAAP) in the fiscal fourth quarter of 2021. The increase was related to higher legal and professional fees primarily due to ongoing litigation.
Reconciliations of Non-GAAP Financial Measures
The table below reconciles Net Loss to Adjusted Net LossEBITDA from Continuing Operations (Non-GAAP)and Adjusted EBITDA from Continuing Operations for the periods indicated.
Three Months Ended | Three Months Ended | |||||||||||||||
September 25, | September 26, | September 24, | September 25, | |||||||||||||
($ in Millions) | 2021 | 2020 | 2022 | 2021 | ||||||||||||
Net Income (Loss) | $ | 4.0 | $ | (60.6 | ) | |||||||||||
Net Loss | $ | (60.6 | ) | $ | (32.8 | ) | ||||||||||
Less: Net (Income) Loss from Discontinued Operations, Net of Taxes | (24.3 | ) | 14.4 | |||||||||||||
Add (Deduct) Impact of: | ||||||||||||||||
Net Interest and Other Financing Costs (1) | 11.6 | 14.5 | ||||||||||||||
Provision for Income Taxes | 2.2 | 19.7 | ||||||||||||||
Amortization and Depreciation | 4.0 | 6.3 | ||||||||||||||
Less: Net Loss from Discontinued Operations, Net of Taxes | 6.4 | 6.2 | ||||||||||||||
Total Adjustments | 17.8 | 40.5 | ||||||||||||||
EBITDA from Continuing Operations | $ | (2.5 | ) | $ | (5.7 | ) | ||||||||||
Add (Deduct) Impact of: | ||||||||||||||||
Transaction Costs & Restructuring Costs | 5.2 | 0.8 | $ | 0.9 | $ | 4.0 | ||||||||||
Share-Based Compensation | 1.6 | 1.0 | 0.9 | 1.6 | ||||||||||||
Other Non-Cash Operating Costs (1) | (12.3 | ) | (18.7 | ) | ||||||||||||
Income Tax Effects (2) | (0.1 | ) | 8.0 | |||||||||||||
Change in Fair Value of Derivative Liabilities | 0.8 | (2.1 | ) | |||||||||||||
Change in Fair Value of Contingent Consideration | (0.9 | ) | - | |||||||||||||
(Gain) Loss on Lease Termination | (1.6 | ) | - | |||||||||||||
(Gain) Loss on Extinguishment of Debt | - | (10.2 | ) | |||||||||||||
(Gain) Loss from Disposal of Assets | 0.2 | - | ||||||||||||||
Sublease Income | (1.5 | ) | - | |||||||||||||
Impairment Expense | 1.7 | 0.4 | ||||||||||||||
Other Non-Cash Operating Costs | - | (0.2 | ) | |||||||||||||
Total Adjustments | (5.6 | ) | (8.9 | ) | $ | 0.5 | $ | (6.5 | ) | |||||||
Adjusted Net Loss from Continuing Operations (Non-GAAP) | $ | (59.8 | ) | $ | (35.5 | ) | ||||||||||
Adjusted EBITDA from Continuing Operations | $ | (2.0 | ) | $ | (12.2 | ) |
(1) | For the current period, net interest and other financing costs now include accretion of debt discount and loan origination fees of $1.6 million for the three months ended September 24, 2022. The prior year amount of $6.3 million for the three months ended September 25, 2021 have been reclassified for consistency with the current year presentation. Accretion of debt discount was previously excluded from the reconciliation of Net Loss to EBITDA from Continuing Operations and Adjusted EBITDA from Continuing Operations. |
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The table below reconciles Adjusted Net Loss to EBITDA from Continuing Operations (Non-GAAP) and Adjusted EBITDA from Continuing Operations (Non-GAAP) for the periods indicated.
Three Months Ended | ||||||||
September 25, | September 26, | |||||||
($ in Millions) | 2021 | 2020 | ||||||
Net Loss | $ | (60.6 | ) | $ | (32.8 | ) | ||
Less: Net Loss from Discontinued Operations, Net of Taxes | 6.4 | 6.2 | ||||||
Add Impact of: | ||||||||
Net Interest and Other Financing Costs | 10.0 | 8.8 | ||||||
Provision for Income Taxes | 19.7 | 12.3 | ||||||
Amortization and Depreciation | 15.4 | 9.8 | ||||||
Total Adjustments | 45.1 | 30.9 | ||||||
EBITDA from Continuing Operations (Non-GAAP) | $ | (9.1 | ) | $ | 4.3 | |||
Add (Deduct) Impact of: | ||||||||
Transaction Costs & Restructuring Costs | 5.2 | 0.8 | ||||||
Share-Based Compensation | 1.6 | 1.0 | ||||||
Other Non-Cash Operating Costs (1) | (12.3 | ) | (18.7 | ) | ||||
Total Adjustments | (5.5 | ) | (16.9 | ) | ||||
Adjusted EBITDA from Continuing Operations (Non-GAAP) | $ | (14.6 | ) | $ | (12.6 | ) |
Three Months Ended | ||||||||
September 25, | September 26, | |||||||
2021 | 2020 | |||||||
Change in Fair Value of Derivative Liabilities | $ | (2.1 | ) | $ | (0.3 | ) | ||
Gain on Disposal of Assets Held For Sale | - | (12.4 | ) | |||||
Change in Fair Value of Contingent Consideration | - | 0.3 | ||||||
Gain on Lease Termination | - | (16.6 | ) | |||||
Gain/Loss on Extinguishment of Debt | (10.2 | ) | 10.1 | |||||
Gain from Disposal of Assets | - | (0.1 | ) | |||||
Impairment Expense | 0.4 | 0.8 | ||||||
Other Non-Cash Operating Costs | (0.4 | ) | (0.5 | ) | ||||
Total Other Non-Cash Operating Costs | $ | (12.3 | ) | $ | (18.7 | ) |
Adjusted Net Loss from Continuing Operations (Non-GAAP) represents the profitability of the Company excluding unusual and infrequent expenditures and non-cash operating costs. The change in Adjusted Net Loss from Continuing Operations (Non-GAAP) was primarily due to the increase in general and administrative expense of $6.3 million as described above. In addition, amortization of debt discount increased $6.1 million in the fiscal first quarter of 2022 compared to the prior period due to increases in the Company’s effective interest rate as a result of debt modifications and extinguishments.
EBITDA from Continuing Operations (Non-GAAP) represents the Company’s current operating profitability and ability to generate cash flow and includes significant non-cash operating costs. Net Loss is adjusted for interest and financing costs as a direct result of debt financings, income taxes, and amortization and depreciation expense to arrive at EBITDA from Continuing Operations (Non-GAAP). Considering these adjustments, the Company had EBITDA from Continuing Operations (Non-GAAP) of $(9.1)$(2.5) million for the three months ended September 25, 202124, 2022 compared to $4.3$(5.7) million for the comparative prior period. The change in EBITDA from Continuing Operations (Non-GAAP) was primarily due to other non-cashthe Company’s continued cost-saving strategies and lower operating costs for disposalat the cultivation facilities of assets held for sale, lease modifications,California and extinguishmentsNevada as a result of debt as described above. the licensing and management agreement which includes lower rents.
For the three months ended September 25, 2021,24, 2022, Adjusted EBITDA from Continuing Operations (Non-GAAP) of $(14.6)was $(2.0) million increased compared to $(12.6)$(12.2) million for the three months ended September 26, 2020, respectively.25, 2021. The increaseimprovement is primarily due to an increasethe decrease in general and administrative expenses affecting Net Loss.expenses. The financial performance of the Company is expected to further improve as the Company has a clear pathworks towards profitability and coupled with significant deleveraging of its stabilized liquidity, is properly repositionedbalance sheet, will reposition the Company for growth.
Refer to Item 2 ““Liquidity and Capital Resources” for further discussion of management’s future outlook.
Refer to Item 2 “Retail Performance” above for reconciliations of Retail Adjusted EBITDA.
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Cash Flows
The following table summarizes the Company’s consolidated cash flows for the three months ended September 25, 202124, 2022 and September 26, 2020:25, 2021:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||
September 25, | September 26, | September 24, | September 25, | |||||||||||||||||||||||||||||
($ in Millions) | 2021 | 2020 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | ||||||||||||||||||||||||
Net Cash Used in Operating Activities | $ | (23.0 | ) | $ | (18.2 | ) | $ | (4.8 | ) | 26 | % | $ | (9.6 | ) | $ | (23.0 | ) | $ | 13.4 | (58 | %) | |||||||||||
Net Cash (Used in) Provided by Investing Activities | (3.6 | ) | 9.7 | (13.3 | ) | (137 | %) | |||||||||||||||||||||||||
Net Cash Provided by Financing Activities | 93.2 | 8.6 | 84.6 | 984 | % | |||||||||||||||||||||||||||
Net Cash Provided by (Used in) Investing Activities | 51.5 | (3.6 | ) | 55.1 | (1,531 | %) | ||||||||||||||||||||||||||
Net Cash (Used in) Provided by Financing Activities | (31.6 | ) | 93.2 | (124.8 | ) | (134 | %) | |||||||||||||||||||||||||
Net Increase in Cash and Cash Equivalents | 66.6 | 0.1 | 66.5 | 66,500 | % | 10.3 | 66.6 | (56.3 | ) | (85 | %) | |||||||||||||||||||||
Cash Included in Assets Held for Sale (1) | (0.3 | ) | - | (0.3 | ) | 100 | % | |||||||||||||||||||||||||
Cash Included in Assets Held for Sale | - | (0.3 | ) | 0.3 | 100 | % | ||||||||||||||||||||||||||
Cash and Cash Equivalents, Beginning of Period | 11.9 | 9.6 | 2.3 | 24 | % | 10.8 | 11.6 | (0.8 | ) | (7 | %) | |||||||||||||||||||||
Cash and Cash Equivalents, End of Period | $ | 78.2 | $ | 9.7 | $ | 68.5 | 706 | % | $ | 21.1 | $ | 77.9 | $ | (56.8 | ) | (73 | %) |
Cash Flow from Operating Activities
Net cash used in operating activities was $9.6 million for the three months ended September 24, 2022, a decrease of $13.4 million, compared to $23.0 million for the three months ended September 25, 2021, an increase of $4.8 million, or 26%, compared to $18.2 million for the three months ended September 26, 2020.2021. The decrease in cash used was primarily due changes in other non-cash operating costs that offsetdriven by the increase in net loss as a result of the increasedecrease in general and administrative expenses as described in “Results of $6.3 million and the increase in accretion of debt discount of $6.1 million. Specifically, the Company did not recognize any gain on lease modifications or gain on disposal of assets held for sale in the current period compared to an aggregate gain of $28.3 million in the prior period. This was positively impacted by the gain on extinguishment of debt of $10.2 million and the gain on changes in fair value of derivative liabilities of $2.1 million for the three months ended September 25, 2021.
Operations” above.
Cash Flow from Investing Activities
Net cash used inprovided by investing activities was $3.6$51.5 million for the three months ended September 25, 2021, a decrease of $13.3 million, or 137%,24, 2022 compared to $9.7the $3.6 million provided for the three months ended September 26, 2020. The decrease inof net cash providedused in investing activities in the prior year. This was primarily due to the Company’s strategic plan to divest non-core assets during the comparative prior period, resulting$51.5 million in $10.0 million received fromcash proceeds from the sale of assets held for sale. Net cash was also impacted by an increasethe Company’s operations in purchasesthe state of property and equipment of $2.9 million as the Company reopened construction-in-progressFlorida during the fiscal first quarter of 2022.current period.
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Cash Flow from Financing Activities
Net cash provided byused in financing activities was $93.2$31.6 million for the three months ended September 25, 2021, an increase of $84.6 million, or 984%,24, 2022 compared to $8.6$93.2 million net cash provided by financing activities for the three months ended September 25, 2021. During the current period, the Company used $31.6 million of the cash proceeds from the sale of its Florida-based operations to make principal repayments on the Senior Secured Term Loan. Whereas during the comparative prior period, the Company completed a private placement with Serruya Private Equity Inc. (“SPE”) resulting in an equity investment of $100.0 million.
Financial Condition and Going Concern
As of September 24, 2022, the Company had cash and cash equivalents of $21.1 million and working capital deficit of $134.9 million. The Company has incurred net losses from continuing operations of $20.3 million and $46.2 million for the three months ended September 26, 2020.24, 2022 and September 25, 2021, respectively. The increase in change of net cash provided by financing activities was primarily dueconditions described above raise substantial doubt with respect to the $95.0 millionCompany’s ability to meet its obligations for at least one year from the issuance of equity instrumentsthese Condensed Consolidated Financial Statements, and therefore, to continue as a going concern.
The Company plans to continue to fund its operations through the implementation of its cost savings plan, and various strategic actions, including the successful negotiations of lower costs of occupancy with our master lease landlord and other landlords, divesture of non-core assets including but not limited to the current asset group held for sale, New York, as well continuing its on-going revenue strategy of market expansion and retail revenue growth. We also need to obtain an extension or a refinancing of our debt-in-default with the secured senior lender. Our annual operating plan for fiscal year 2023 estimates we will be able to manage our ongoing operations. However, our cash needs are significant and not achievable with the current cash flow from operations. If the above strategic actions, for any reason, are inaccessible, it will have a significantly negative effect on the Company’s financial condition. Additionally, we expect to continue to manage the Company’s operating expenses and reduce its projected cash requirements through reduction of its expenses by delaying new store development, permanently or temporarily closing stores that are deemed to be performing below expectations, and/or implementing other restructuring activities. Furthermore, COVID-19 and the $5.0 million fromimpact the unsecured promissory note. The increase in debtglobal pandemic on the broader retail environment could also have a significant impact on the Company’s financial position, results of operations, equity and equity financings was offset by payments of stock issuance costs of $5.4 million in connection with suchor its access to capital transactions.
and future financing.
As of September 24, 2022, the accompanying Consolidated Financial ConditionStatements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying Condensed Consolidated Financial Statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to our ability to continue as a going concern.
The following table summarizes certain aspects of the Company’s financial condition as of September 25, 202124, 2022 and June 26, 2021:25, 2022:
September 25, | June 26, | September 24, | June 25, | |||||||||||||||||||||||||||||
($ in Millions) | 2021 | 2021 | $ Change | % Change | 2022 | 2022 | $ Change | % Change | ||||||||||||||||||||||||
(unaudited) | (audited) | |||||||||||||||||||||||||||||||
Cash and Cash Equivalents | $ | 78.2 | $ | 11.9 | $ | 66.3 | 557 | % | $ | 21.1 | $ | 10.8 | $ | 10.3 | 95 | % | ||||||||||||||||
Total Current Assets | $ | 165.5 | $ | 96.7 | $ | 68.8 | 71 | % | $ | 98.7 | $ | 161.5 | $ | (62.8 | ) | (39 | %) | |||||||||||||||
Total Assets | $ | 531.9 | $ | 472.5 | $ | 59.4 | 13 | % | $ | 251.1 | $ | 323.2 | $ | (72.1 | ) | (22 | %) | |||||||||||||||
Total Current Liabilities | $ | 345.2 | $ | 288.6 | $ | 56.6 | 20 | % | $ | 233.6 | $ | 319.6 | $ | (86.0 | ) | (27 | %) | |||||||||||||||
Notes Payable, Net of Current Portion | $ | 199.1 | $ | 258.4 | $ | (59.3 | ) | (23 | %) | $ | 74.9 | $ | 206.4 | $ | (131.5 | ) | (64 | %) | ||||||||||||||
Total Liabilities | $ | 732.9 | $ | 726.1 | $ | 6.8 | 1 | % | $ | 564.7 | $ | 641.7 | $ | (77.0 | ) | (12 | %) | |||||||||||||||
Total Shareholders’ Equity | $ | (201.0 | ) | $ | (253.6 | ) | $ | 52.6 | (21 | %) | $ | (313.6 | ) | $ | (318.5 | ) | $ | 4.9 | (2 | %) | ||||||||||||
Working Capital Deficit | $ | (179.7 | ) | $ | (191.9 | ) | $ | 12.2 | (6 | %) | $ | (134.9 | ) | $ | (158.1 | ) | $ | 23.2 | (15 | %) |
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As of September 25, 2021,In August 2022, the Company had $78.2 millioncompleted the sale of cash and cash equivalents and $179.7 millionits operations in the state of working capital deficit, compared to $11.9 millionFlorida at the final sales price of cash and cash equivalents and $191.9 million$67,000,000 which comprised of working capital deficit as of June 26, 2021. The increase$63,000,000 in cash and $4,000,000 in liabilities to be assumed by the Buyer. The Buyer made a cash equivalents was primarily due the $100.0 million Private Placement duringpayment of $40,000,000 at closing, $11,500,000 on September 15, 2023, and is required to make an additional installment payment of $11,500,000 on or before March 15, 2023. During the fiscal firstthird quarter of 2022, which helped stabilize liquidity and will allownet proceeds to the Company to prioritize new market opportunitieswere $19,558,947 after a principal repayment of $31,599,999 on the Senior Secured Term Loans with Hankey Capital. The final cash payment of $11,500,000 remains due and existing operations over near-term balance sheet management. In addition, on August 17, 2021, the Company amended the Convertible Facility wherein the maturity date was extended to August 17, 2028receivable as of September 24, 2022. The Senior Secured Term Loans remains outstanding and any cash interest obligation was eliminated, instead providing for paid-in-kind interest.in default as of September 24, 2022.
The $12.2$23.2 million decreaseimprovement in working capital deficit was primarily related to an increase of $66.3the $31.6 million in cash as described aboveprincipal repayment on the Senior Secured Term Loans that matured on July 31, 2022 and an increase of $4.5 million in assets held for sale related to the classification of the cultivation and production facilities in California and Nevada to held for sale during the three months ended September 25, 2021. The increase in current liabilities was due to an increase of $28.4 million in derivative liabilities related to the top-up provision of the Convertible Facility and the Short-Term Warrant under the Private Placement recognized during the fiscal first quarter of 2022, an increase of $7.1 million in current notes payable primarily related to the existing senior secured term loan, an increase of $5.5 million in liabilities held for sale related to the cultivation and production facilities noted above and an increase of $19.0 million in income taxes payable, offset by a $4.5 million decrease in other current liabilities related to a decrease in acquisition payable as a result of settlements during the current period and a decrease in accrued interest payable as a result of the Sixth Amendment of the Convertible Facility.
August 1, 2022. The Company’s working capital will be significantly impacted by continued operations and growth in retail operations the operationalization of existing licenses, and the continued stewardship of the Company’s financial resources. The ability to fund working capital needs will also be dependent on the Company’s ability to raise additional debt and equity financing.financing and execute cost savings plans.
Liquidity and Capital Resources
The primary need for liquidity is to fund working capital requirements of the business, including operationalizing existing licenses, capital expenditures, debt service and acquisitions. The primary source of liquidity has primarily been private and/or public financing and to a lesser extent by cash generated from sales. The ability to fund operations, to make planned capital expenditures, to execute on the growth/acquisition strategy, to make scheduled debt and rent payments and to repay or refinance indebtedness depends on the Company’s future operating performance and cash flows, which are subject to prevailing economic conditions and financial, business and other factors, some of which are beyond its control. Liquidity risk is the risk that the Company will not be able to meet its financial obligations associated with financial liabilities. The Company manages liquidity risk through the management of its capital structure. The Company’s approach to managing liquidity is to ensure that it will have sufficient liquidity to settle obligations and liabilities when due.
As of September 25, 2021, the Company had $78.2 million of cash and cash equivalents and $179.7 million of working capital deficit, compared to $11.9 million of cash and cash equivalents and $191.9 million of working capital deficit as of June 26, 2021. For the three months ended September 25, 2021, the Company’s monthly burn rate, which was calculated as cash spent per month in operating activities, was approximately $7.7 million compared to a monthly burn rate of approximately $6.1 million for the three months ended September 26, 2020. During the fiscal first quarter of 2022, the Company shifted its focus from a turnaround plan that took place during fiscal year 2021, which resulted in the divestiture of non-core assets and lease modifications, and turned to a growth plan with new capital to capitalize on further opportunities. As of September 25, 2021, cash generated from ongoing operations may not be sufficient to fund operations and, in particular, to fund the Company’s growth strategy in the short-term or long-term.
The restructuring of the Convertible Facility and the successful closing of the Private Placement with investors led by SPE during the fiscal first quarter of 2022 stabilized the Company’s liquidity and properly positions the Company for growth to profitability. Management evaluated its financial condition as of September 25, 2021 in conjunction with recent transactions which free up capital subsequent to the current reporting period as discussed below.
Partnership with Foundry Works, Inc.
On October 1, 2021, the Company announced that LitHouse Farms, a subsidiary of Foundry Works, Inc. (“Foundry”), will manage its cultivation and manufacturing operations at its facilities in Desert Hot Springs, California (“DHS”) and Sparks, Nevada (“Sparks”). Licensed operations at the facilities will be carried on under management agreements which include purchase options for nominal consideration, subject to regulatory approval. Concurrent with the transaction, Foundry entered into a sublease agreement for DHS worth approximately $3,200,000 per year beginning in its first year, increasing to approximately $4,600,000 per year in its sixth year, subject to 3% annual escalators thereafter through March 2039. Foundry also entered into a sublease agreement for Sparks worth approximately $2,400,000 per year beginning in its first year, increasing to approximately $3,400,000 per year in its sixth year, subject to 3% annual escalators thereafter through January 2039. The cash flow accretive partnership will help reduce the significant fixed costs associated with the facilities. Refer to “Note 4 – Assets Held for Sale” of the unaudited interim condensed consolidated financial statements in Item 1 for further information.
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Off-Balance Sheet Arrangements
The Company has no material undisclosed off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on its results of operations, financial condition, revenues or expenses, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Policies, Significant Judgments and Estimates and Recent Accounting Pronouncements
There have been no changes in critical accounting policies, estimates and assumptions from the information provided in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in the Form 10 for the fiscal year ended June 26, 202125, 2022 that have a significant effect on the amounts recognized in the interim consolidated financial statementsCondensed Consolidated Financial Statements as of and for the fiscal quarter ended September 25, 2021.24, 2022. See “Note 2 – Summary of Significant Accounting Policies” in the unaudited interim condensed consolidated financial statementsCondensed Consolidated Financial Statements in Item 1 for recently adopted accounting standards. For more information on the Company’s critical accounting estimates, refer to the annual MD&A“Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Annual Report on Form 10-K for the fiscal year ended June 26, 2021. A25, 2022. In addition, a detailed description of our critical accounting policies and recent accounting pronouncements are detailed in Part I, “Item 88. Financial Statements and Supplementary Data” of the 2021Annual Report on Form 10.10-K for the fiscal year ended June 25, 2022.
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Transactions with Related Parties
All related party balancesAs of September 24, 2022 and June 25, 2022, there were no amounts due from or due to the Company as of September 25, 2021 and June 26, 2021 did not have any formal contractual agreements regarding payment terms or interest. For amounts due from and to related parties referthat were recorded in the Consolidated Balance Sheets. Refer to ““Note 19 – Related Party Transactions”of the Consolidated Financial Statements for the three months ended September 25, 202124, 2022 in Item 1.
Gotham Green Partners
As discussed in Item 2 “Liquidity and Capital Resources” and Item 2 “Quarterly Highlights”, the Company has engaged in a strategic partnership with Gotham Green Partners, a related party. The arrangement is to provide financing to the Company in the form of a credit facility up to $250,000,000 accessed through issuances of convertible senior secured notes (the “Notes”) co-issued by the Company and MM CAN USA, Inc. The Notes are convertible, at the option of the holder, into Subordinate Voting Shares at any time prior to the close of business on the last business day immediately preceding the maturity date of April 23, 2022. In addition, upon issuance of any Notes, the lenders are issued share purchase warrants (the “Warrants”) of the Company, each of which are exercisable to purchase one Subordinate Voting Share for 36 months from the date of issue. The Notes and the Warrants, and any Subordinate Voting Shares issuable as a result of a conversion of the Notes or exercise of the Warrants, will be subject to a four-month hold period from the date of issuance of such Notes or such Warrants, as applicable, in accordance with applicable Canadian securities laws. While the Notes are outstanding, the lenders will be entitled to the collective rights to appoint a representative to attend all meetings of theCompany’s Board of Directors each receive quarterly fees of $200,000 of which one-third is paid in a non-voting observer capacity. Wicklow Capitalcash and GGP have the right to approve director nominees submitted by the Company. GGP can nominate one member to the Board of Directors so long as GGP has at least 10% of thetwo-thirds is paid in Class B Subordinate Shares on fully-diluted basis. Upon the appointment to the Board, GGP ceases its right to have a non-voting observer seat. The convertible facility bears interest at a rate of LIBOR plus 6.0% per annum. All convertible notes will have a maturity date of 36 months from the maturity date, with a twelve-month extension feature available to the Company on certain conditions. Voting Shares.
Senior Secured Convertible Credit Facility
As of November 5, 2021,September 24, 2022, the Company has drawn down a total of $165.0 million on approximately $165,000,000 of the Convertible Facility. Refer to “Note 11 – Senior Secured Convertible Credit Facility”Facility, has accrued paid-in-kind interest of the Consolidated Financial Statements for the three months ended September 25, 2021 in Item 1.
$45.2 million with an aggregate weighted average conversion price of approximately $0.24 per share, and an aggregate of 196,327,593 warrants with a weighted average exercise price of $0.17 per share.
Tilray, Inc.
In August 2021, Tilray, Inc. acquired the majority of the outstanding Notes and Warrants held by GGP in which a newly formed limited partnership established by Tilray and other strategic investors acquired 75% of the outstanding Notes and 65% of the outstanding warrants under the Convertible Facility. Specifically, Tilray’s interest in the SPV represents rights to 68% of the Notes and related Warrants held by the SPV, which are convertible into, and exercisable for, approximately 21% of the outstanding Class B Subordinate Voting Shares of MedMen. While the Notes are outstanding, Tilray will have the right to appoint two representatives to attend all meetings of the Board of Directors in a non-voting observer capacity.
Serruya Private Equity, Inc.
In August 2021, the Company executed an equity offering with various investors led by Serruya Private Equity, Inc. in which the Company issued 416,666,640 Subordinate Voting Shares and 104,166,660 warrants for gross proceeds of $100,000,000. SPE can nominate one member to the Board of Directors so long as SPE has at least 9% of the Class B Subordinate Voting Shares on fully-diluted basis. In connection with the Private Placement, the Company appointed Michael Serruya, SPE’s Managing Director, as a member of its board of directors.
SierraConstellation Partners
In March 2020, the Company entered into restructuring plan and retained interim management and advisory firm, SierraConstellation Partners (“SCP”), to support the Company in the development and execution of its turnaround and restructuring plan. As part of the engagement, Tom Lynch, a Partner and Senior Managing Director at SCP, was appointed as Interim Chief Executive Officer, and Tim Bossidy, a Director at SCP, was appointed as Interim Chief Operating Officer. In December 2020, Mr. Lynch was elected as Chairman of the Board and in July 2021, Mr. Lynch was permanently appointed as Chief Executive Officer. Also in December 2020, Reece Fulgham, a Managing Director at SCP, was appointed as Interim Chief Financial Officer. As of September 25, 2021, the Company had paid $1,255,473 in fees to SCP for interim management and restructuring support during the current fiscal year. In addition, during the three months ended September 25, 2021, Mr. Lynch and Mr. Bossidy each received 214,030 stock options. To date, as of September 25, 2021, the Company has granted 4,696,435 restricted stock units to its executive officers who are directors at SCP.
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Emerging Growth Company Status
The Company is an “emerging growth company” as defined in the Section 2(a) of the Exchange Act, as modified by the Jumpstart Our Business Start-ups Act of 2012, or the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Exchange Act for complying with new or revised accounting standards applicable to public companies. The Company has elected to take advantage of this extended transition period and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.
ITEM 3. QUANTITAVEQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information not required to be filed by smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Pursuant to Rules 13a-15(b) and 15-d-15(b) under the Securities Exchange Act of 1934, as amended (“Exchange Act”Act”), as of September 25, 2021,24, 2022, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report.
The term “disclosure controls and procedures”, as defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Based upon that evaluation and the identification of the material weakness described herein, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective, at the reasonable assurance level, as of the end of our last fiscal year end, June 25, 2022, and continues as such as of the end of the period covered by this report.
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Changes in Internal Control Over Financial Reporting
ThereFor fiscal year 2022, management identified a material weakness determining that the Company’s financial recordkeeping process was deficient and that it does not have effective controls over the period-end reconciliation process. The reconciliation process was not being performed in a manner that will detect and correct errors on a timely basis, including:
● | general ledgers are not being reviewed regularly for assets that may not be recoverable or viable, | |
● | review procedures for balance sheet account reconciliations and manual journal entries were not performed, and | |
● | some accounts and balances are not being reconciled regularly, and/or account reconciliations that are being completed do not properly address or adjust reconciling items. |
Management plans to implement measures designed to improve its internal control over financial reporting to remediate material weaknesses described above by standardizing the monthly reconciliation process for material accounts and balances with formalized procedures. Material non-standard journal entries recorded in the accounting system will be reviewed for the various applicable accounting assertions including recoverability and validity. While the Company is actively engaged in the implementation of its remediation efforts to address this internal control weakness, the actions we have taken are subject to continued review, supported by confirmation and testing by management. Accordingly, the material weakness will not be considered fully remediated until the new control procedures are implemented for a sufficient period of time and management has concluded that these controls are operating effectively which we anticipate will occur in the ensuing months.
Except as noted above, there were no changes in our internal control over financial reporting during the three months ended September 25, 202124, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements attributable to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Assessments of any evaluation of controls’ effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements as a result of error or fraud may occur and not be detected.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than noted below, there have been no material developments during the fiscal quarter covered by this Report for our legal proceedings that were disclosed in our Annual Report on Form 10-K filed on September 24, 2021.9, 2022.
As previously reported, on December 10, 2020, a lawsuit was filed againstOn October 6, 2022 the Company in the Superior Court of California for Los Angeles by Matthew Abrams, Jeremy Abrams, Judith Abrams, Scott Angoneentered into a Settlement and Mark Malan, former owners of MattnJeremy, Inc., d/b/a One Love Beach Club (“One Love”), alleging that the Company owes the plaintiffs additional cashMutual Release Agreement with Charles Coburn, Daryll DeSantis, Unisys Technical Solutions, LLC and shares as a true-up paymentDelsantro Investments LLC in connection with the acquisitiona complaint filed by these parties on May 26, 2020 and counterclaim by the Company (the “Unisys Litigation”). The agreement resolved the Unisys Litigation and preserved the Company’s right to a pro rata distribution from plaintiff and cross defendant Charles Coburn’s bankruptcy estate as may be ordered by the bankruptcy court.
On July 11, 2022 Thor 952 Fulton Street, LLC, an affiliate of OneLoveThor Equities Group, filed a complaint in the United States District Court for the Southern District of New York against Future Transactions Holdings, LLC, an affiliate of the Company, MM Enterprises USA, LLC, and the Company seeking approximately $950,960 in damages relating to a lease of commercial property located in Illinois, which lease specified use as a cannabis dispensary, claiming diversity jurisdiction. On September 2019. In16, 2022 the Company moved to dismiss the case on the basis that the subject matter of the contract was illegal under federal law, and plaintiffs thereafter moved for a voluntary dismissal. On October 17, 2022 the United States District court granted plaintiff’s motion for voluntary dismissal of the complaint the plaintiffs allege breach of contract, breach of implied covenant of good faithwithout prejudice. On October 19, 2022 Future Transactions Holdings, LLC, MM Enterprises USA, LLC, and fair delaying, fraud and unjust enrichment, among other causes of actions. The plaintiffs are seeking the issuance of 51,716,141 shares, damages resulting from the failure to issue shares, compensatory and punitive damages, costs and attorneys’ fees and other relief granted by the court. While it is too early to predict the outcome of the case or whether an adverse result would have a material adverse impact on our operations or financial position, we believe we have meritorious defenses and intend to defend this legal matter vigorously. In August 2021, the parties signed a partial settlement agreement whereby the Company agreed to pay $1,050,000, $360,000 of which has been paid andfiled a complaint under the remainder to be paid in six payments of $115,000 per month. The dispute related to the issuance of shares remains outstanding.federal Declaratory Judgment Act against Thor 942 Fulton Street, LLC.
ITEM 1A. RISK FACTORS.
Smaller reporting companies are not required to provide the information required by this item.Item.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
During the fiscal quarter ended September 25, 2021, in addition to issuances previously reported on Form 8-K, the Company issued the securities listed below:None.
Such securities were issued and sold in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. Each of the investors has represented to the Company, among other things, that it is an “accredited investor” (as such term is defined in Rule 501(a) of Regulation D under the Securities Act). The offer and sale of such securities and the Shares issuable upon exercise thereof, as applicable, if any, have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.See discussion of Senior Secured Term Loan in “Note 10 – Notes Payable” under Part I, “Item 1. Notes to Condensed Consolidated Financial Statements”, which is incorporated in this item by reference.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
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ITEM 5. OTHER INFORMATION
By resolution dated as of September 21, 2022, as consideration for Mr. Record’s service to the Company since April 24, 2022, when he was appointed as Chief Executive Officer, including successfully guiding the Company through the sale of its Florida assets, the Board effectively approved a cash bonus of $171,429. This payment represents the amount already due to Mr. Record pursuant to the terms of his employment entered at the time of his appointment; except that he shall now receive cash in lieu of RSUs for the period beginning on the date of his appointment through and until the date of the Board resolution. The Board also approved the grant to Mr. Record under the Company’s 2018 Stock and Incentive Plan of $3,000,000 worth of options with a term of five years to purchase Subordinate Voting Shares at an exercise price per share of $0.051968 and with one-third vesting on the date of grant and one-third vesting on each of April 24, 2023 and April 24, 2024. The resolution directs the Company to determine the number of options to be issued through the application of the Black Scholes option pricing model. The options will vest automatically upon a change of control or Mr. Record’s termination as CEO, unless the Board determines that Mr. Record is terminated based on his conduct or performance. A change of control generally includes the acquisition of 50% of the voting securities of the Company, a merger, or sale of all or substantially all of the Company’s assets. Pursuant to his employment terms, Mr. Record will continue to receive an annual salary of $416,000 and is eligible to receive up to an additional $8,000 per week during his service as CEO (the “Bonus”), one half of which will be paid in cash and one half will be paid in RSUs. The Bonus will be paid quarterly at the approval of the Board and not contingent on any specific requirements unless the Board determines reasonably that Mr. Record’s performance did not meet minimal acceptable standards or Mr. Record is terminated based on conduct or performance. The number of RSUs granted will be based on the trailing 10-day volume weighted average price of the Subordinate Voting Shares trading on the Canadian Securities Exchange or any National Securities Exchange prior to the date of grant.
None.
On October 18, 2022, the Company’s Board of Directors approved a change to director compensation with regards to calculating the number of Subordinate Voting Shares issued to non-employee directors. The Company’s non-employee directors will continue to receive an annual fee of $250,000, of which one-third is paid in cash on a quarterly basis and two-thirds is paid in Subordinate Voting Shares. Each director will now receive on an annual basis 3,453,802 Subordinate Voting Shares, of which 864,200 Subordinate Voting Shares will vest quarterly, with retroactive effect to April 21, 2022.
In February 2022, the Company executed the Sixth Modification extending the maturity date of senior secured term loan facility (the “Facility”) with Hankey Capital and Stable Road Capital (the “Lenders”) to July 31, 2022 with respect to the Facility, and August 1, 2022 with respect to the incremental term loans (collectively, the “Term Loans”). The Sixth Modification makes no modification to the current interest rate. The Sixth Modification provides that the definitive documentation with respect to the conditional purchase of the Term Loans by Superhero Acquisition, L.P., an existing lender under the Company’s Senior Secured Convertible Purchase Agreement dated August 7, 2021, must be entered within 45 days or the stated maturity date of the Term Loans become due. The Sixth Modification requires that the Company make a mandatory prepayment of at least $37,500,000 in the event the sale of certain assets and imposes covenants in regards strategic actions the Company must implement if it is unable to pay the Term Loans by the extended stated maturity date. During the three months ended September 24, 2022, in connection with the sale of the Company’s Florida-based operations, the Company made a principal repayment of $31,599,999 with proceeds from the sale. The Facility remains in default as of September 24, 2022 and the Company is in ongoing discussions with the Lenders.
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ITEM 6. EXHIBITS
* | This exhibit shall not be deemed “filed” for purposes of |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Dated: November | MEDMEN ENTERPRISES INC | |
/s/ | ||
By: | ||
Its: | Chief Financial Officer |
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