MEDMEN NY, INC.
AUDITED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2020
AND
DECEMBER 31, 2019
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| MEDMEN NY, INC. |
| Index to Financial Statements |
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| FINANCIAL STATEMENTS: | |
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| INDEPENDENT AUDITOR’S REPORT | |
To the Board of Directors and Shareholders
of MedMen NY, Inc.
We have audited the accompanying financial statements of MedMen NY, Inc., which comprise the balance sheets as of December 31, 2020 and 2019, and the related statements of operations, changes in member’s equity, and cash flows for the years ended December 31, 2020 and 2019, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MedMen NY, Inc. as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Other Matters
The financial statements of MedMen NY, Inc. as of December 31, 2018, were audited by other auditors whose report dated April 3, 2019, expressed an unqualified opinion on those statements.
As part of our audit of the 2020 and 2019 financial statements, we also audited the adjustments described in Note 13 that were applied to restate the 2018 financial statements. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2018 financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2018 financial statements as a whole.
/s/ MNP LLP
Calgary, Alberta
February 12, 2021
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MEDMEN NY. INC Balance Sheets As of December 31, 2020 and December 31, 2019 |
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| ASSETS | December 31, 2020 | | December 31 2019
(Restated
Note 13) |
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| Current Assets: | | | |
| Cash and Cash Equivalents | $ | 733,811 | | | $ | 297,150 | |
| Restricted Cash | 5,280 | | | 8,844 | |
| Income Taxes Receivable | — | | | 6,805 | |
| Prepaid Expenses | 2,245,216 | | | 2,940,495 | |
| Inventory | 4,781,229 | | | 3,359,689 | |
| Total Current Assets | 7,765,536 | | | 6,612,983 | |
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| Non-Current Assets: | | | |
| Property and Equipment, Net | 14,377,150 | | | 20,462,060 | |
| Intangible Assets, Net | 10,951,050 | | | 12,400,720 | |
| Goodwill | — | | | 10,677,692 | |
| Other Assets | 1,575,320 | | | 1,574,740 | |
| Total Non-Current Assets | 26,903,520 | | | 45,115,212 | |
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| TOTAL ASSETS | $ | 34,669,056 | | | $ | 51,728,195 | |
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| LIABILITIES AND MEMBER'S EQUITY | | | |
| Current Liabilities: | | | |
| Accounts Payable and Accrued Liabilities | $ | 7,526,369 | | | $ | 5,297,406 | |
| Income Taxes Payable | 1,326,118 | | | 1,323,646 | |
| Total Current Liabilities | 8,852,487 | | | 6,621,052 | |
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| Non-Current Liabilities: | | | |
| Deferred Tax Liabilities | 5,240,823 | | | 5,935,164 | |
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| Total Non-Current Liabilities | 5,240,823 | | | 5,935,164 | |
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| TOTAL LIABILITIES | 14,093,310 | | | 12,556,216 | |
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| SHAREHOLDERS’ EQUITY | | | |
| Common Stock | — | | | — | |
| Additional Paid-In Capital | 76,198,112 | | | 70,433,888 | |
| Accumulated Deficit | (55,622,366) | | | (31,261,909) | |
| TOTAL SHAREHOLDERS’ EQUITY | 20,575,746 | | | 39,171,979 | |
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| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 34,669,056 | | | $ | 51,728,195 | |
The accompanying notes are an integral part of these Financial Statements.
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MEDMEN NY, INC. Statements of Operations For the Years Ended December 31, 2020 and December 31, 2019 |
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| December 31, 2020 | | December 31, 2019 |
| Revenues | $ | 9,148,884 | | | $ | 9,189,298 | |
| Cost of Goods Sold | 4,364,585 | | | 4,173,970 | |
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| Gross Profit | 4,784,299 | | | 5,015,328 | |
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| Expenses: | | | |
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| General and Administrative | 10,485,162 | | | 13,186,153 | |
| Sales and Marketing | 14,000 | | | 1,617 | |
| Impairment | 18,074,243 | | | — | |
| Depreciation and Amortization | 2,846,311 | | | 2,248,452 | |
| Total Expenses | 31,419,716 | | | 15,436,222 | |
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| Loss from Operations | (26,635,417) | | | (10,420,894) | |
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| Other Expense: | | | |
| Interest Expense | 656 | | | 56,587 | |
| Other Expense, Net | — | | | 410,444 | |
| Total Other Expense | 656 | | | 467,031 | |
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| Loss Before Provision for Income Taxes | (26,636,073) | | | (10,887,925) | |
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| Provision for Income (Benefit) Tax | (2,275,616) | | | 156,571 | |
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| Net Loss | $ | (24,360,457) | | | $ | (11,044,496) | |
The accompanying notes are an integral part of these Financial Statements.
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MEDMEN NY, INC. Statements of Changes in Member’s Equity Year Ended December 31, 2020 and December 31, 2019 |
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| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit (Restated Note 13) | | Total Shareholder's Equity |
Balance as of January 1, 2019 (Restated – Note 13) | $ | — | | | $ | 52,316,410 | | | $ | (20,217,413) | | | $ | 32,098,997 | |
| Net Loss | — | | | — | | | (11,044,496) | | | (11,044,496) | |
| Additional Contributions | — | | | 18,117,478 | | | — | | | 18,117,478 | |
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| Balance as of December 31, 2019 | — | | | 70,433,888 | | | (31,261,909) | | | 39,171,979 | |
| Net Loss | — | | | — | | | (24,360,457) | | | (24,360,457) | |
| Additional Contributions | — | | | 5,764,224 | | | — | | | 5,764,224 | |
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| Balance as of December 31, 2020 | $ | — | | | $ | 76,198,112 | | | $ | 55,622,366 | | | $ | 20,575,746 | |
The accompanying notes are an integral part of these Financial Statements.
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MEDMEN NY, INC. Statements of Cash Flows Year Ended December 31, 2020 and December 31, 2019 |
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| December 31, 2020 | | December 31, 2019 |
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| CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net Loss | $ | (24,360,457) | | | $ | (11,044,496) | |
| Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities | | | |
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| Depreciation and Amortization | 3,373,372 | | | 2,600,128 | |
| Impairment | 18,074,243 | | | — | |
| Deferred Tax Benefit | (2,284,892) | | | (1,345,086) | |
| Loss on Extinguishment of Debt | — | | | 448,075 | |
| Changes in Operating Assets and Liabilities: | | | |
| Prepaid Expenses and Other Current Assets | 695,279 | | | 552,059 | |
| Inventory | (1,421,540) | | | (756,761) | |
| Other Assets | (580) | | | 725,546 | |
| Accounts Payable and Accrued Liabilities | 2,228,963 | | | 4,290,782 | |
| Income Taxes Payable & Receivable | (856,511) | | | 47,745 | |
| Other Current Liabilities | — | | | (841,003) | |
| Due to Related Party | — | | | (192,283) | |
| Other Non-Current Liabilities | — | | | (853,653) | |
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| NET CASH USED IN OPERATING ACTIVITIES | (4,552,123) | | | (6,368,947) | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
| Purchases of Property and Equipment | (779,004) | | | (9,307,586) | |
| Restricted Cash | 3,564 | | | 747,694 | |
| CASH USED IN INVESTING ACTIVITIES | (775,440) | | | (8,559,892) | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| Member Contributions | 5,764,224 | | | 14,498,851 | |
| CASH PROVIDED BY FINANCING ACTIVITIES | 5,764,224 | | | 14,498,851 | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 436,661 | | | (429,988) | |
| Cash and Cash Equivalents, Beginning of Year | 297,150 | | | 727,138 | |
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| CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 733,811 | | | $ | 297,150 | |
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| SUPPLEMENTAL DISCLOSURE FOR NON-CASH TRANSACTIONS | | | |
| Deferred Taxes Incurred Upon Property Purchases | $ | 2,456,339 | | | $ | 3,524,261 | |
| Contribution by Parent Company for the Extinguishment of Debt | $ | — | | | $ | 3,618,626 | |
The accompanying notes are an integral part of these Financial Statements.
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MEDMEN NY, INC. Notes to Financial Statements Year Ended December 31, 2020 and December 31, 2019 |
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| NOTE 1 - NATURE OF OPERATIONS |
Organization
MedMen NY, Inc. (“MMNY” or “the Company”, formerly known as Bloomfield Industries, Inc.) is a New York corporation. The Company was formed on March 12, 2015 in the State of New York and began operations when it opened its retail storefront in Buffalo (Williamsville), New York in January 2016.
On January 19, 2017, Project Compassion NY, LLC, a Deleware limited liability company (“Project Compassion”), a company controlled by MMMG, LLC, a Nevada Limited liability company (“MMMG” or “MedMen”), acquired all of the assets of the Company.
The Company is a retail seller and cultivator of medical cannabis and has received the necessary governmental approvals and permitting to operate medical cannabis dispensary facilities and a cultivation facility in the State of New York. The dispensary facilities are located in Buffalo (Williamsville; Long Island (lake Success); Syracuse (Salma); and New York City (Fifth Avenue). The cultivation facility is located in Utica.
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MEDMEN NY, INC. Notes to Financial Statements Year Ended December 31, 2020 and December 31, 2019 |
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| NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and reflect the accounts of and operations of the Company.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of total net revenue and expenses in the reporting periods. The Company regularly evaluates significant estimates and assumptions related to the estimated useful lives, depreciation of property and equipment, amortization of intangible assets, inventory valuation, goodwill impairment, long-lived asset impairment, and going concern. These estimates and assumptions are based on current facts, historical experience and various other factors that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results the Company experiences may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and cash deposits in financial institutions.
Restricted Cash
Restricted cash balances are those which meet the definition of cash and cash equivalents but are not available for use by the Company. As of December 31, 2020 and 2019, restricted cash was $5,280 and $8,844, respectively.
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MEDMEN NY, INC. Notes to Financial Statements Year Ended December 31, 2020 and December 31, 2019 |
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Inventory
The costs of growing cannabis, including but not limited to labor, utilities, nutrition and supplies, are capitalized into inventory until the time of harvest. All direct and indirect costs related to inventory are capitalized when incurred, and subsequently classified to cost of goods sold in the Statement of Operations. Retail inventory is valued at the lower of cost and net realizable value. Cost is determined using the first-in, first-out method. Net realizable value is determined as the estimated selling price in the ordinary course of business less estimated costs to sell. Packaging and supplies are initially valued at cost. The Company reviews inventory for obsolete, redundant and slow-moving goods and any such inventory is written down to net realizable value. As of December 31, 2020 and 2019, the Company determined that no reserve was necessary.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation, amortization and impairment losses, if any. Depreciation and amortization is calculated on a straight-line basis over the estimated useful life of the asset using the following terms and methods:
| | | | | |
| Furniture and Fixtures | 3 – 7 Years |
| Leasehold Improvements | Shorter of Lease Term or Economic Life |
| Equipment and Software | 3 – 7 Years |
| Construction in Progress | Not Depreciated |
Expenditures for major renewals and improvements are capitalized, while minor replacements, maintenance and repairs, which do not extend the asset lives, are charged to operations as incurred. The assets’ residual values, useful lives and methods of depreciation are reviewed at each reporting period and adjusted prospectively if appropriate. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is included in the statement of operations in the period the asset is derecognized.
Intangible Assets
Intangible assets are recorded at cost, less accumulated amortization and impairment losses, if any. Intangible assets acquired in a business combination are measured at fair value at the acquisition date. Amortization of definite life intangibles is recorded on a straight-line basis over their estimated useful lives, which do not exceed the contractual period, if any. The estimated useful lives, residual values and amortization methods are reviewed at each reporting period, and any changes in estimates are accounted for prospectively. Intangible assets with an indefinite life or not yet available for use are not subject to amortization. Amortization is calculated on a straight-line basis over the estimated useful life of the asset using the following terms and methods:
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| Dispensary Licenses | 15 Years |
| Customer Relationships | 5 Years |
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MEDMEN NY, INC. Notes to Financial Statements Year Ended December 31, 2020 and December 31, 2019 |
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Goodwill
Goodwill is measured as the excess of consideration transferred and the net of the acquisition date fair value of assets acquired, and liabilities assumed in a business acquisition. In accordance with ASC 350, “Intangibles—Goodwill and Other”, goodwill and other intangible assets with indefinite lives are no longer subject to amortization. The Company reviews the goodwill and other intangible assets for impairment on an annual basis as of year-end or whenever events or changes in circumstances indicate carrying amount it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The carrying amount is determined based upon the assignment of the Company’s assets and liabilities, including existing goodwill, to the identified reporting units. Where an acquisition benefits only one reporting unit, the Company allocates, as of the acquisition date, all goodwill for that acquisition to the reporting unit that will benefit. In order to determine if goodwill is impaired, the Company measures the impairment of goodwill by comparing the carrying amount to the estimated fair value. If the carrying amount is in excess of its fair value, the Company recognizes an impairment charge equal to the amount in excess.
Impairment of Long-Lived Assets
Long-lived assets such as property and equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, but no less frequently than annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows (undiscounted and without interest charges) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets.
Revenue Recognition
The Company adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” and all the related amendments, which are also codified into ASC 606. Under the new standard, the Company recognizes a sale as follows:
Revenue is recognized at the fair value of consideration received or receivable. Revenue from the sale of goods is recognized when all the following conditions have been satisfied, which are generally met once the products are shipped to customers:
•The Company has transferred the significant risks and rewards of ownership of the goods to the purchaser;
•The Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
•The amount of revenue can be measured reliably;
•It is probable that the economic benefits associated with the transaction will flow to the entity; and
•The costs incurred or to be incurred in respect of the transaction can be measured reliably.
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MEDMEN NY, INC. Notes to Financial Statements Year Ended December 31, 2020 and December 31, 2019 |
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Cost of Sales
Cost of sales includes the costs directly attributable to product sales.
Income Taxes
The Company is treated as a C Corporation for federal income tax purposes and corporate income taxes in the State of New York. Tax expense recognized in profit or loss comprises the sum of current and deferred taxes not recognized in other comprehensive income or directly in equity.
Current Tax
Current tax assets and/or liabilities comprise those claims from, or obligations to, fiscal authorities relating to the current or prior reporting periods that are unpaid at the reporting date. Current tax is payable on taxable profit, which differs from profit or loss in the financial statements. Calculation of current tax is based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period.
Deferred Tax
Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax basis of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
Deferred tax assets are recognized to the extent that the Company believe that these assets are more likely than not to be realized. In making such a determination, all available positive and negative evidence are considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If it is determined that the Company would be able to realize deferred tax assets in the future in excess of their net recorded amount, an adjustment to the deferred tax asset valuation allowance is recorded, which would reduce the provision for income taxes.
Tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. ASC 740 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Leased Assets
A lease of property and equipment is classified as a capital lease if it transfers substantially all the risks and rewards incidental to ownership to the Company. A lease of property and equipment is classified as an operating lease whenever the terms of the lease do not transfer substantially all of the risks and rewards of ownership to the lessee. Lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which the economic benefits are consumed.
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MEDMEN NY, INC. Notes to Financial Statements Year Ended December 31, 2020 and December 31, 2019 |
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Concentrations of Risk
The Company’s significant concentrations of risk consists of cash and cash equivalents. The Company maintains its cash with high-credit, quality financial institutions. At times, such deposits may be in excess of amounts insured by the Federal Deposit Insurance Corporation, up to $250,000 per bank. The Company has not experienced any losses in such accounts and believes that it is not exposed to any significant credit risk.
There were no customers that comprised more than 10% of the Company’s revenue for the year ended December 31, 2020 and 2019.
Advertising Costs
The Company expenses advertising costs as incurred. There were $14,000 and $1,617 in advertising costs during the year ended December 31, 2020 and 2019, respectively.
Recently Issued Accounting Standards
FASB ASU No. 2016-02 (Topic 842), “Leases” - Issued in February 2016, ASU No. 2016-02 established ASC Topic 842, Leases, as amended by subsequent ASUs on the topic, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to apply a two-method approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. Lessees are required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. Lessees will recognize expense based on the effective interest method for finance leases or on a straight-line basis for operating leases. The accounting applied by the lessor is largely unchanged from that applied under the existing lease standard. The Company will be required to record a right-of-use asset and lease liability equal to the present value of the remaining minimum lease payments and will continue to recognize expense on a straight-line basis upon adoption of this standard. The Company expects to record a decrease in long- term prepaid rent, reduction in its deferred rents, and an increase in lease liabilities and right of use assets upon adoption. The Company does not expect any impact to retained earnings upon transition. ASU 2016-02 is effective for reporting periods beginning after December 15, 2020 for non-public entities.
FASB ASU No. 2019-12 (Topic 740), “Simplifying the Accounting for Income Taxes” - Issued in December 2019, which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes 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. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its financial position and results of operations.
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MEDMEN NY, INC. Notes to Financial Statements Year Ended December 31, 2020 and December 31, 2019 |
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| NOTE 3 - LIQUIDITY AND CAPITAL RESOURCES |
In March 2020 the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, has adversely affected workforces, customers, economies, and financial markets globally, leading to an economic downturn. It has also disrupted the normal operations of many businesses, including ours. This outbreak has decreased spending, adversely affected demand for our product and harmed our business and results of operations.
As of December 31, 2020 and 2019, the Company had a working capital (deficit) of $(1,086,951) and $(8,069), respectively, and net losses of $24,360,457 and $11,044,496 for the year ended December 31, 2020 and 2019, respectively. The Company’s parent company continues to finance its cash needs through on-demand partner contributions. If management is unsuccessful in its efforts to generate profitable operations and/or continue to receive financial support, the Company may not be able to continue as a going concern.
The ability of the Company to continue as a going concern and to meet its obligations will be dependent upon successful sales of inventory and ultimately successful operations and cash flows. The accompanying combined financial statements do not reflect any adjustment that might result from the outcome of this uncertainty.
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| NOTE 4 - PREPAID EXPENSES |
As of December 31, 2020 and 2019, prepaid expenses was comprised of the following:
| | | | | | | | | | | |
| December 31,
2020 | | December 31,
2019 |
| Prepaid Rent | $ | 2,141,921 | | | $ | 2,711,380 | |
| Prepaid Insurance | 5,828 | | | 55,547 | |
| Prepaid Expenses | 97,467 | | | 173,568 | |
| | | |
| Total Prepaid Expenses | $ | 2,245,216 | | | $ | 2,940,495 | |
As of December 31, 2020 and 2019, inventory was comprised of the following:
| | | | | | | | | | | |
| December 31,
2020 | | December 31,
2019 |
| Raw Materials | $ | 286,271 | | | $ | 281,480 | |
| Work-in-Process | 2,601,073 | | | 1,869,149 | |
| Finished Goods | 1,893,885 | | | 1,209,060 | |
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| Total Inventory | $ | 4,781,229 | | | $ | 3,359,689 | |
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MEDMEN NY, INC. Notes to Financial Statements Year Ended December 31, 2020 and December 31, 2019 |
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| NOTE 6 - PROPERTY AND EQUIPMENT |
As of December 31, 2020 and 2019, property and equipment consisted of the following:
| | | | | | | | | | | |
| December 31,
2020 | | December 31,
2019 |
| Furniture and Fixtures | $ | 1,617,686 | | | $ | 1,412,803 | |
| Leasehold Improvements | 9,245,476 | | | 4,989,100 | |
| Equipment and Software | 4,070,461 | | | 4,107,404 | |
| Construction in Progress | 4,635,218 | | | 13,194,586 | |
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| Total Property and Equipment, Gross | 19,568,841 | | | 23,703,896 | |
| Less: Accumulated Depreciation and Amortization | (5,191,691) | | | (3,241,833) | |
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| Total Property and Equipment, Net | $ | 14,377,150 | | | $ | 20,462,060 | |
For the years ended December 31, 2020 and 2019, the Company recognized $1,923,702 and $1,121,114 of depreciation expense, respectively.
During the year ended December 31, 2020, management noted indicators of impairment of its long-lived assets due to the impacts of COVID-19. Accordingly, the Company recorded an impairment of $7,396,531 of its property which are included as a component of impairment expense in the accompanying statement of operations. The Company used various Level 3 inputs and a discounted cash flow model to determine the fair value of these asset groups.
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| NOTE 7 - INTANGIBLE ASSETS |
As of December 31, 2020 and 2019, intangible assets consisted of the following:
| | | | | | | | | | | |
| December 31,
2020 | | December 31,
2019 |
| Dispensary Licenses | $ | 14,171,600 | | | $ | 14,171,600 | |
| Customer Relationships | 2,658,600 | | | 2,658,600 | |
| | | |
| Total Intangibles, Gross | 16,830,200 | | | 16,830,200 | |
| | | |
| Less: | | | |
| Accumulated Amortization (Dispensary) | (3,769,515) | | | (2,834,320) | |
| Accumulated Amortization (Customer Relationships) | (2,109,635) | | | (1,595,160) | |
| Total Accumulated Amortization | (5,879,150) | | | (4,429,480) | |
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| Total Intangibles, Net | $ | 10,951,050 | | | $ | 12,400,720 | |
For the years ended December 31, 2020 and 2019, the Company recognized $1,449,670 and $1,479,014 of amortization expense, respectively.
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MEDMEN NY, INC. Notes to Financial Statements Year Ended December 31, 2020 and December 31, 2019 |
As of December 31, 2020 and 2019, goodwill was $0 and $10,677,692, respectively. Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment. Management considers the Company to be one operating segment and one reporting unit. Goodwill arises from the purchase price for acquired businesses exceeding the fair value of tangible and intangible assets acquired less assumed liabilities. Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The Company adopted ASU 2017-04 which eliminates Step 2 from the quantitative assessment of the goodwill impairment test wherein the goodwill impairment loss was measured by comparing the implied fair value of a reporting unit’s goodwill with its carrying amount. As a result of the amendment, the goodwill impairment test consists of one step comparing the fair value of a reporting unit with its carrying amount. The amount by which the carrying amount exceeds the reporting unit’s fair value is recognized as a goodwill impairment loss.
The Company conducts its annual goodwill impairment assessment during the second quarter of each year. For the purpose of the goodwill impairment for the year ended December 31, 2019, the Company performed the qualitative approach and concluded based upon the qualitative factors, no impairment was required. For the purpose of the goodwill impairment test for the year ended December 31, 2020, due to various factors, the Company forwent the qualitative approach and performed a quantitative assessment wherein the fair value of each reporting unit is determined using a discounted cash flow method (income approach). The earnings forecast for the reporting unit impaired was revised based on a decrease in anticipated operating profits and cash flows for the next five years as it relates to the current economic environment related to COVID-19. The fair value of that reporting unit was estimated using the expected present value of future cash flows. As of December 31, 2020, the Company recorded a goodwill impairment loss in the amount of $10,677,692 which is included as a component of impairment expense in the accompanying statement of operations.
The Company had a convertible note dated January 18, 2017 which was issued to accredited investors. The convertible note matured on January 18, 2019. During the year ended December 31, 2019 the Company’s parent company paid the debt holders through the issuance of the parent company’s shares. The payment is reflected as a contribution in the statement changes in shareholders’ equity. As a result, the Company recognized a loss on extinguishment of debt of approximately $448,000 which is included as a component of other expense in the accompanying statement of operations for the year ended December 31, 2019.
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MEDMEN NY, INC. Notes to Financial Statements Year Ended December 31, 2020 and December 31, 2019 |
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| NOTE 10 - COMMITMENTS AND CONTINGENCIES |
Operating Leases
The Company leases property from third parties under operating lease agreements that specify minimum rentals. The lease expires 2029 and contains certain renewal provisions. The Company’s rent expense was $4,531,602 and $4,510,094 for the year ended December 31, 2020 and 2019, respectively and recorded in general and administrative expenses in the accompanying statements of operations.
Future minimum lease payments under non-cancelable operating leases having an initial or remaining term of more than one year are as follows:
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| Fiscal Year Ending December: | Scheduled Payments |
| |
| 2021 | 4,838,272 | |
| 2022 | 4,687,018 | |
| 2023 | 4,542,162 | |
| 2024 | 4,680,631 | |
| 2025 | 4,817,784 | |
| Thereafter | 13,999,315 | |
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| Total Future Minimum Lease Payments | $ | 37,565,183 | |
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 December 31, 2020 and 2019, 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 December 31, 2020 and 2019, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s operations. As of December 31, 2020 and 2019, 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.
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MEDMEN NY, INC. Notes to Financial Statements Year Ended December 31, 2020 and December 31, 2019 |
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| NOTE 11 – PROVISION FOR INCOME TAXES AND DEFERRED TAXES |
The Company files a federal income tax return and files tax returns in New York State and New York City jurisdictions. The statutes of limitations for its federal income tax returns are open for fiscal years 2017 and after, and state and local income tax returns are open for fiscal years 2017 and after.
As of December 31, 2020, and December 31, 2019, the Company had unrecognized tax benefits of $1.5 million and $1.5 million, respectively, that, if recognized, would affect the Company’s effective income tax rate. The company does not expect any significant change to the unrecognized tax benefits over the next 12 months.
The Company’s policy is to recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense. As of December 31, 2020, and December 31, 2019, the Company had accrued interest and penalties of approximately $83,300 and $41,600, respectively.
The provision for income taxes consists of the following for the years ended December 31, 2020 and 2019:
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| 2020 | | 2019 |
| Current: | | | |
| Federal | $ | — | | | $ | 1,493,646 | |
| State | 9,276 | | | 8,011 | |
| Total Current | 9,276 | | | 1,501,657 | |
| | | |
| Deferred: | | | |
| Federal | (1,595,470) | | | (1,141,117) | |
| State | (689,422) | | | (203,969) | |
| Total Deferred | (2,284,892) | | | (1,345,086) | |
| Total Provision for Income Tax (Benefit) Expense | $ | (2,275,616) | | | $ | 156,571 | |
A reconciliation of the total income tax expense and the amount computed by applying the federal statutory income tax rate of 21% to the loss before provision from income taxes for the years ended December 31, 2020 and 2019, is as follows:
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| 2020 | | 2019 |
| Loss from Operations | $ | (26,636,073) | | | $ | (10,887,925) | |
| Statutory Income Tax Rate | 21 | % | | 21 | % |
| Expected tax recovery | $ | (5,593,575) | | | $ | (2,286,464) | |
| | | |
| S.280E Non-Deductible Items | 4,886,341 | | | 2,665,553 | |
| Other Items | (1,568,382) | | | (222,518) | |
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| Total Tax (Benefit) Expense | $ | (2,275,616) | | | $ | 156,571 | |
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MEDMEN NY, INC. Notes to Financial Statements Year Ended December 31, 2020 and December 31, 2019 |
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NOTE 11 – PROVISION FOR INCOME TAXES AND DEFERRED TAXES (Continued) |
As of December 31, 2020 and 2019, the components of deferred tax liabilities (assets) were as follows:
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| 2020 | | 2019 |
| Deferred Tax Liabilities (Assets): | | | |
| Depreciable asset basis differences | $ | 5,525,196 | | | $ | 6,023,950 | |
| Net Operating Loss | (284,373) | | | (88,786) | |
| Total Deferred Tax Liabilities, Net | 5,240,823 | | | 5,935,164 | |
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| Net Deferred Tax Liabilities (Net): | $ | 5,240,823 | | | $ | 5,935,164 | |
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| NOTE 12 – SUBSEQUENT EVENTS |
The Company has evaluated subsequent events through February 12, 2021 which is the date these financial statements were issued and has concluded that the following subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes to the financial statements.
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| NOTE 13 – CORRECTION OF ERROR IN PREVIOUSLY ISSUED FINANCIAL STATEMENTS |
Subsequent to the issuance of the Financial Statements as of and for the fiscal years ended December 31, 2018 on April 3, 2019, an error in deferred taxes was noted. The Company did not appropriately assess the impact of its tax positions during the year and did not record the deferred tax impact on the intangible assets acquired as part of the Bloomfield acquisition. Following the identification of this error, the Company adjusted the beginning balance of equity for the year ended December 31, 2019. The error was deemed to be an error in previously issued financial statements under ASC 250, “Accounting Changes and Error Corrections”. Management performed additional reviews and analysis of other financial statement line items on the statement of operations, reviewed our accounting policies and noted no additional corrections were required.
The following tables present the summary impacts on the relevant line items of the financial statements on our previously reported balance sheet and statements of operations as of and for the year ended December 31, 2018:
Effect on Balance Sheet
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| December 31, 2018 | | Adjusted | | As
Corrected |
| ASSETS | | | | | |
| Non-Current Assets: | | | | | |
| Property and Equipment, Net | $ | 8,751,327 | | | — | | | 8,751,327 | |
| Intangible Assets, Net | 13,879,734 | | | — | | | 13,879,734 | |
| Goodwill | 5,527,276 | | | 5,150,416 | | | 10,677,692 | |
| Other Assets | 1,698,991 | | | — | | | 1,698,991 | |
| Total Non-Current Assets | 32,307,328 | | | 5,150,416 | | | 37,457,744 | |
| TOTAL ASSETS | $ | 38,037,781 | | | $ | 5,150,416 | | | $ | 43,188,197 | |
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MEDMEN NY, INC. Notes to Financial Statements Year Ended December 31, 2020 and December 31, 2019 |
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NOTE 13 – CORRECTION OF ERROR IN PREVIOUSLY ISSUED FINANCIAL STATEMENTS (Continued) |
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| December 31, 2018 | | Adjusted | | As
Corrected |
| LIABILITIES AND MEMBER'S EQUITY | | | | | |
| Current Liabilities: | | | | | |
| Accounts Payable and Accrued Liabilities | $ | 1,006,624 | | | $ | — | | | $ | 1,006,624 | |
| Other Current Liabilities | 841,004 | | | — | | | 841,004 | |
| Income taxes Payable | — | | | 694,500 | | | 694,500 | |
| Current Portion of Notes Payable | 3,170,551 | | | — | | | 3,170,551 | |
| Due to Related Parties | 192,283 | | | — | | | 192,283 | |
| Total Current Liabilities | 5,210,462 | | | 694,500 | | | 5,904,962 | |
| | | | | |
| Non-Current Liabilities: | | | | | |
| Other Non-Current Liabilities, Net of Current Portion | 853,653 | | | — | | | 853,653 | |
| Deferred Tax Liabilities | — | | | 4,330,585 | | | 4,330,585 | |
| Total Non-Current Liabilities | 853,653 | | | 4,330,585 | | | 5,184,238 | |
| TOTAL LIABILITIES | 6,064,115 | | | 5,025,085 | | | 11,089,200 | |
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| SHAREHOLDERS’ EQUITY | | | | | |
| Common Stock | — | | | — | | | — | |
| Additional Paid-In Capital | 52,316,410 | | | — | | | 52,316,410 | |
| Accumulated Deficit | (20,342,744) | | | 125,331 | | | (20,217,413) | |
| TOTAL SHAREHOLDERS’ EQUITY | 31,973,666 | | | 125,331 | | | 32,098,997 | |
| | | | | |
| TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY | $ | 38,037,781 | | | $ | 5,150,416 | | | $ | 43,188,197 | |
Effect on Statement of Operations
| | | | | | | | | | | | | | | | | |
| December 31, 2018 | | Adjusted | | As
Corrected |
| | | | | |
| Loss Before Provision for Income Taxes | $ | (9,664,533) | | | — | | | $ | (9,664,533) | |
| Provision for Income Tax (Benefit) | — | | | 284,584 | | | 284,584 | |
| Net Loss | $ | (9,664,533) | | | $ | 284,584 | | | $ | (9,379,949) | |
