EDGAR 10-K Filing

Company CIK: 1776932
Filing Year: 2022
Filename: 1776932_10-K_2022_0001829126-22-016532.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
BUSINESS
CORPORATE STRUCTURE
MedMen Enterprises Inc. was incorporated in the Province of British Columbia under the Business Corporations Act (British Columbia) in 1987 under the name T.M.T. Resources Inc., which was then changed to Ladera Ventures Corp (“Ladera”) in 2017. On May 28, 2018, Ladera completed a reverse takeover with MM Enterprises USA, LLC, pursuant to which Ladera became the parent of MM Enterprises USA, LLC and Ladera changed its name to “MedMen Enterprises Inc.” On May 29, 2018, the Company’s Class B Subordinate Voting Shares began trading on the Canadian Securities Exchange (“CSE”) under the symbol “MMEN”.
The Company operates through its 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” or the “LLC”). MM Enterprises USA has 41 wholly-owned (either directly or indirectly) material subsidiaries. Such subsidiaries are incorporated or otherwise organized under the laws of California, Nevada, Delaware, New York, Florida, Arizona, Illinois, Massachusetts and Virginia.
References herein to “MedMen Enterprises”, “MedMen” or the “Company”, “we”, “us” or “our” refer to MedMen Enterprises Inc. and its subsidiaries. The Company’s principal address is 8740 South Sepulveda Blvd, Suite 105, Los Angeles, California 90045.
The Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments thereto, are filed electronically with the Securities and Exchange Commission (“SEC”). The SEC maintains an internet site that contains these reports at: www.sec.gov. You can also access these reports through links from the website at: www.medmen.com. The Company includes the website link solely as a textual reference. The information contained on the website is not incorporated by reference into this report.
Copies of these reports are also available, without charge, by contacting MedMen Enterprises Inc., Legal Department, 8740 South Sepulveda Blvd, Suite 105, Los Angeles, California 90045.
DESCRIPTION OF BUSINESS
MedMen is a cannabis retailer based in the U.S. with locations in Los Angeles, Las Vegas, Boston, Scottsdale, New York and Chicago. MedMen offers a robust selection of high-quality products, including MedMen-owned brands, LuxLyte, and MedMen Red through its premium retail stores, proprietary delivery service, as well as curbside and in-store pick up.
Reportable Segments
The Company currently operates in one segment, the production and sale of cannabis products, which is how the Company manages 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. While the Company operates in one segment, the Company is disaggregating its revenue by geographical region. The operations in New York and Florida are included in discontinued operations. Revenue by state for the periods presented are as follows:
($ in Millions)
Year Ended
June 25,
% of
Total
Revenue
Year Ended
June 26,
% of
Total
Revenue
California
$ 91.6
%
$ 85.9
%
Nevada
15.3
%
15.4
%
Illinois
16.1
%
20.8
%
Arizona
15.9
%
10.1
%
Massachusetts
1.9
%
-
-
Revenue from Continuing Operations
140.8
132.2
Revenue from Discontinued Operations
29.0
%
26.4
%
Total Revenue
$ 169.8
$ 158.6
Liquidity
The Company’s first medical dispensary opened in West Hollywood, California in 2015. Throughout the years, as the cannabis industry has expanded and matured, the Company has experienced the “highs” and the “lows” that have impacted the industry generally. For various reasons, fiscal year 2022 has been a particularly challenging year both for the cannabis industry and for the Company. Fiscal year 2022 was characterized by significant liquidity and cash flow constraints and uncertainty. Beginning in fiscal third quarter 2019, the Company initiated an operational and financial restructuring plan. In fiscal year 2022, the Company continued this restructuring process, with a particular emphasis on restructuring its balance sheet. As a result of this emphasis, the Company entered legally binding agreements for the sale of its assets in New York and Florida. Purposes of these proposed asset sales included both paying down the Company’s obligations to its senior lender, and funding operations. In addition, as part of that restructuring effort, the Company extended payment terms, negotiated settlements with vendors and service providers, repaid debts through the issuance of shares of Class B Subordinated Voting Shares, and entered into negotiations with its landlords with the objective of achieving either more favorable lease terms or an exit from certain unsustainable lease situations. All of these initiatives were intended to allow the Company to remain solvent and operational. In addition, the Company has evaluated various means of achieving protection from creditors that would be similar to what is available to the non-cannabis industry seeking to reorganize under bankruptcy. At the same time, the Company has continued to execute aggressively in the restructuring of operations including through the closure of its distribution facility in Los Angeles, the closure of its corporate offices in Los Angeles, reductions in headcount and other cost cutting measures. After all of what fiscal year 2022 brought, the Company believes at the start of fiscal year 2023 that the Company has a path forward, albeit a narrow one that requires us to act deliberately and swiftly.
As of June 25, 2022, the Company had cash and cash equivalents of $10.8 million and a working capital deficit of $164.9 million. The Company has incurred losses from continuing operations of $165.5 million and $124.3 million in fiscal year 2022 and 2021, respectively, used cash in continued operating activities of $18.9 million and anticipates that the Company will continue to incur losses until such time as revenues exceed operating costs and the Company is able to complete its restructuring plan. As of June 25, 2022, the Company is in violation of minimum liquidity covenant of these term loans. The term loans require the Company to maintain $15.0 million minimum cash. On July 31, 2022, these term loans of $97.8 million became due and the Company was unable to meet this financial obligation and pay the lender, which constitutes an event of default. The moneys owed under the Lender and Landlord Support Agreement which allowed us to defer $22.0 million of rent payment over three years beginning in 2020, will come due in July 2023. On August 22, 2022, the Company completed the sale of its Florida-based assets for $63.0 million and the assumption of certain liabilities that the Company valued at approximately $4.0 million, a reduction of $16.0 million from the originally announced sales price of $83.0 million. The purchase price was less than first negotiated due to factors that include changes in the market values of cannabis assets in Florida and the Company’s desire to close the transaction in a timely manner with a counterparty likely to achieve state regulatory approval. The buyer made a cash payment of $40.0 million at closing and is required to make two additional installment payments of $11.5 million each after the closing. The net proceeds to the Company at closing were $14.5 million, with a $25.0 million payment going to the Company’s secured senior lender. Proceeds of the transaction to the Company will be used to fund operations and pay interest to its secured senior lender while the term loans remain outstanding and in default. 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 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 groups 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 its ongoing operations. However, the Company’s 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, the Company 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 has had and will continue to have on the broader retail environment could also have a significant impact on the Company’s financial operations.
As of June 25, 2022, the accompanying Consolidated Financial Statements 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 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 the Company’s ability to continue as a going concern.
General
As of June 25, 2022, the Company operated 30 store locations across California (13), Florida (7), New York (4) Nevada (3), Illinois (1), Massachusetts (1) and Arizona (1). The Company’s retail stores are located in strategic locations across key cities and neighborhoods in each of its markets. As of June 25, 2022, all store locations and cultivation/manufacturing facilities in Florida and New York are considered held for sale and reported as discontinued operations. The Company has leases and plans to open additional retail stores over the next 12 months, including, but not limited to the following cities which may or may not continue depending on its ability to finance the build-out of the respective stores and continue to sustain the respective lease expenses while these locations are unbuilt or unoccupied:
● San Francisco, CA
● Morton Grove, IL
● Newton, MA
● New York, NY
The Company expects to continue strengthening its retail operations and in the foreseeable future critically assess the viability of each of its store’s profitability. If in the event of not being able to achieve store-level profitability, the Company will seek all possible actions to remedy the stores’ operations including disposal by sale or otherwise. The Company will also continue to assess a pipeline of stores through acquisitions, partnerships and applications for new licenses, with a focus on recreational states such as California, Arizona, Illinois and Massachusetts.
The Company has had some success in its digital platform and plans to continue assessing growth opportunities. The Company launched statewide, same-day delivery in California in August 2019 and launched delivery in Nevada in September 2019. See “Retail Operations - In-Store Pickup and Delivery” for further information about the Company’s delivery operations.
The Company launched MedMen Buds, the Company’s loyalty program in July 2019. The program currently is offered in all of the Company’s stores in Arizona, Nevada and California and has more than 800,000 members. See “Retail Operations - Loyalty Program” for further information about the Company’s loyalty program.
MedMen operated five cultivation and production facilities across Nevada, California, New York, Florida and Arizona. During the fiscal second quarter of 2022, the Company effectuated four contractual agreements with American Family of Brands, LLC (“AFB”), an unrelated third party and no longer has a controlling financial interest in previously consolidated entities, Manlin DHS Development, LLC (“DHS”) and Project Mustang Development, LLC (“Mustang”), its cultivation facilities in California and Nevada, respectively, therefore these entities are no longer included in the Company’s financial statements. The deconsolidation did not have a material impact on the Company’s Consolidated Financial Statements. See “Description of the Business - Cultivation and Production Operations” under “Management Agreement with AFB” for further information about the Company’s cultivation and production operations.
In New York and Florida, the cultivation and production facilities have been focused primarily on the commercialization of medical cannabis and, in select locations, the research and development of new strains of cannabis and cultivation techniques. The procedures at each facility place an emphasis on customer and patient safety, with a strict quality control process. See “Description of the Business - Cultivation and Production Operations” for further information about the Company’s cultivation and production operations.
In February 2021, the Company entered into an Investment Agreement with respect to its New York operations whereby a controlling interest would be acquired by an unrelated third party, Ascend Wellness Holdings (“AWH”). On January 3, 2022, the Company announced its termination and of the Investment Agreement. On January 13, 2022, AWH and AWH New York, LLC filed a complaint in the Supreme Court of the State of New York, New York County, Commercial Division, against MedMen NY, Inc., MM Enterprises USA, LLC, Project Compassion NY, LLC and Project Compassion Capital, LLC seeking specific performance and a declaratory judgement relating to the Investment Agreement dated February 25, 2021 between the parties. On May 11, 2022, the Company announced a settlement agreement with AWH that would allow the sale of MedMen’s New York operations to close for increased consideration. The agreement resolved the litigation between MedMen and AWH concerning the transaction and added $15.0 million in additional purchase price. Under the terms of the settlement agreement, AWH was to pay MedMen $88.0 million: $73.0 million as an assumption of MedMen’s existing debt and $15.0 million in cash. Other terms of the transaction remained as originally announced in February 2021. It is unclear whether the sale of the New York assets will be completed with AWH. At this moment the Company continues to hold and market the sale of its stores and cultivation facility in New York state to all interested parties. On or about August 15, 2022, the Company learned that AWH had announced publicly that it intended to breach the settlement agreement and to terminate the transaction with MedMen. Management’s plans for the sale of the New York operations have not changed and the Company will continue to market the business to other interested parties.
In February 2022, the Company entered into an agreement 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. In connection with the sale transaction, the Company agreed to license the tradename “MedMen” to Buyer for use in Florida for a period of two years, subject to termination rights. The assets and liabilities allocable to the operations within the state of Florida have been classified as a discontinued operation. On August 22, 2022, the Company completed the sale of its Florida-based assets for $63.0 million in cash and the assumption of approximately $4.0 million in liabilities, a reduction of approximately $16.0 million from the originally announced sales price of $83.0 million. Prior to the transaction and reflected in the Consolidated Financial Statements for the year ended June 25, 2022, the Company recorded an impairment charge of $16.0 million to write-down the carrying basis of the assets held for sale. The reduction of the sales price reflects a decline in market values of cannabis assets in Florida and the Company’s desire to close the transaction in a timely manner with a counterparty likely to achieve state regulatory approval.
The Company views Nevada, California, Illinois, Arizona and Massachusetts as providing ongoing opportunities for growth due to their market depth, current favorable supply-demand dynamics and regulatory framework.
In addition to owning its own cannabis licenses and operations, the Company also provides management services to third-party cannabis license-holders. The Company currently has management services contracts at two licensed retail dispensaries in California. See “Management Services” for further information about the Company’s management services.
The Company is operated by an executive team and has a Board of Directors that has significant experience in the cannabis industry and other analogous industries such as retail, technology, consumer packaged goods, alcohol and apparel.
Market Opportunity
Management expects the legalization of cannabis throughout the United States to continue to expand both recreationally and medically. In the United States, 19 states, in addition to the District of Columbia, the Commonwealth of the Northern Mariana Islands, and Guam, have legalized cannabis for recreational purposes or “adult-use”. These states are Alaska, Arizona, California, Colorado, Connecticut, Illinois, Maine, Massachusetts, Michigan, Montana, New Jersey, New Mexico, New York, Nevada, Oregon, South Dakota, Vermont, Virginia and Washington. In these markets, recreational sales are expected to grow as cannabis retailers, as permitted by law, benefit from a shift in consumers from illegal sales to legal sales and from new cannabis consumers. The Company is well-versed in operating within a recreational market as well as markets that begin as medical-only markets and transition to recreational use. MedMen will continue to seek opportunities for profitable growth.
With respect to medical marijuana, as more research centers study the effects of cannabis-based products in treating or addressing therapeutic needs, and assuming that research findings demonstrate that such products are effective in doing so, management believes that the size of the U.S. medical cannabis market will also continue to grow as more states expand their medical marijuana programs and new states legalize medical marijuana. In the United States, 38 states, the District of Columbia, Puerto Rico, Guam, and the U.S. Virgin Islands have legalized medical cannabis. Given MedMen’s experience in New York and Florida, the Company believes that MedMen is well-versed in operating within a medical-only market and will continue to seek opportunities to expand. These markets provide the Company a national platform to execute on its medical strategy, allowing the Company to serve both medical and recreational consumers.
Retail Operations
MedMen’s mission is to provide customer’s a best in class, inclusive and informative environment where the customer can comfortably navigate its extensive selection of cannabis products with the assistance of highly trained employees.
MedMen operates its retail operations through a number of wholly-owned subsidiaries in California, Nevada, Florida, Arizona, Massachusetts, New York, and Illinois. MedMen currently operates 13 retail stores in California, one retail store in Arizona, three retail stores in Nevada, and one retail store in Illinois, all of which serve both recreational and medical marijuana patients, one retail store in Massachusetts which serves recreational customers, and four retail stores in New York. Seven retail stores in Florida that served medical marijuana patients during 2022. Of the Company’s 13 retail stores in California, the Company owns and operates 11 retail stores and manages the operations of two through long-term management services agreements.
In connection with management’s decision to market and sell the Company’s assets in New York and Florida, four and seven of its retail locations, respectively, are currently classified as held for sale in the Consolidated Financial Statements.
Expanding upon its omni-channel experience, the Company launched its delivery platform in California in August 2019 and in September 2019, MedMen’s delivery service was launched in Nevada. At this time, the Company expects to expand its delivery service in California and in other states where permissible by the regulatory framework. Delivery service is available seven days a week, 365 days a year. Both MedMen Buds and MedMen Delivery cement the Company’s commitment to continuously evolving the consumer experience. During fiscal year 2021, the Company no longer delivers in Nevada and expect to bring back this service at a later date.
In connection with the contractual agreements with AFB as further described above, the Company is contractually obligated to operate no less than 11 retail stores in California, unless 1) if disposed of, the presumed new owner assumes the agreement with AFB, 2) the new owner and AFB enter into a new agreement on terms mutually agreeable, or 3) the Company substitutes the store with a new store of equal caliber.
Branding and Marketing
MedMen utilizes consistent branding and messaging across its dispensaries under the “MedMen” name. In order to support its retail operations, MedMen has a dedicated marketing team that engages potential customers through in-store demos, social media and promotions, including the MedMen Buds loyalty program, which is described below.
MedMen continues to focus on growing market share and allocating capital to maximize shareholder value, which begins with providing a superior retail experience for its consumers. This includes building retail spaces where customers can find cannabis information about the products, while discovering the benefits of cannabis.
The Company curates unique cannabis products and resources that reflect the interests of its customers.
MedMen works diligently to identify emerging cannabis trends and influencers within beauty, wellness, fashion, sports, and entertainment lifestyle verticals. As cannabis gains popularity across these categories, MedMen aims to become a leading lifestyle destination for the next-generation cannabis consumer.
In order to continue enhancing its customer experience, the Company launched MedMen Buds, a rewards program that encompasses over 800,000 individual participants that continues to grow daily, with members across California, Florida, Arizona and Nevada. MedMen understands that in the current retail landscape, building loyalty with core customers is a key driver of continued growth. The Company’s understanding of what its customers value, and how it can meet those needs is critical in deepening its connection with its core customers.
Banking and Processing
MedMen deposits funds from its dispensary operations into its banking partners in each respective market. The banks are fully aware of the nature of MedMen’s business and continue to remain supportive of MedMen’s growth plans. MedMen’s dispensaries currently accept only cash and debit card and do not process credit card payments. The Company believes that, as regulations continue to evolve, over time most forms of payment will be accepted, however, it is unclear exactly when this may occur.
Product Selection and Offerings
Product selection decisions are currently made by MedMen’s team of buyers, which negotiates and receives bids from potential brand vendors across all product categories including flower, vape pens, oils, extracts, edibles and pre-rolls. MedMen bases its product selection decisions on product quality, margin potential, consumer feedback and the ability for the respective brands to scale.
MedMen currently sells its own branded products in California, Arizona, Nevada, and New York under MedMen Red and LuxLyte brands. MedMen manufactures its own products in Arizona, New York and Florida, and expects to leverage contract manufacturers in California, Nevada and Illinois for its own branded products.
MedMen’s retail locations make available a variety of MedMen and third party (resale) cannabis and cannabis products. Cannabis and cannabis products for sale include but are not limited to: cannabis dry flower, concentrated cannabis oil, vaporizer forms of cannabis, cannabis edible products and other cannabis products.
Product Pricing
MedMen’s prices vary based on the market conditions and product pricing of vendor partners. Generally, MedMen strives to keep pricing consistent across all store locations within a state. Cannabis product pricing is usually based on operating costs, materials costs, distribution costs, and quality and strength of ingredients.
The states of California, Nevada, Florida, Illinois and Massachusetts do not regulate pricing and licensed dispensing organizations within such states may set their own prices for cannabis and cannabis products. The state of New York does regulate pricing of all approved medical marijuana products.
Notwithstanding that most of the foregoing states do not regulate pricing of cannabis and cannabis products permitted to be sold in such states, many of them impose taxes on the sale of permitted products, as follows:
● Arizona - Subject to a 16% cannabis excise tax, a local cannabis excise tax which varies by city and/or county of up to 6.3% and sales tax.
● California - Subject to a 15% cannabis excise tax, a local cannabis excise tax which varies by city and/or county, and state sales tax of 7.25% with an additional local sales tax of up to 3%.
● Massachusetts - Subject to a 10.75% cannabis excise tax, a sales tax of 6.25% and a local cannabis excise tax which may vary but cannot exceed 3%
● Nevada - Subject to a 10% cannabis excise tax and 8.375% sales tax.
● New York - Medical cannabis is subject to a 7% cannabis excise payable by the cultivation facility, which is then included in the retail price of the products by the Company.
● Florida - Not currently subject to an excise tax or a sales tax.
● Illinois - Medical cannabis is subject to state and local retailers’ occupation taxes at the same rate as other qualifying drugs, i.e., 1% State Retailers’ Occupation Tax rate and is generally exempt from locally imposed retailers’ occupation taxes (except for Regional Transportation Authority and Metro-East Transit District retailers’ occupation taxes). Recreational cannabis sales are subject to the following cannabis excise and sales tax structure:
○ 10% of taxable receipts from the sale of adult use cannabis, other than cannabis- infused products, sold with 35% THC or less;
○ 25% of taxable receipts from the sale of adult use cannabis, other than cannabis- infused products, sold with greater than 35% THC;
○ 20% of taxable receipts from the sale of adult use cannabis-infused products;
○ 6.25 % Retailer’s Occupation Tax (sales tax);
○ Up to a 3% Municipal Cannabis Retailer’s Occupation Tax (sales tax); and
○ County Cannabis Retailers Occupation Tax:
● Up to 3.75% in unincorporated areas of the county; and
● Up to 3% in a municipality located in a county.
In-Store Pickup and Delivery
MedMen offers in-store pickup in most retail locations, accessible from MedMen’s website. Measures to enhance this offering and expand its availability into certain of the Company’s other operating states, where permitted under applicable laws and regulations, are underway.
The Company launched statewide delivery in California in August 2019.
Loyalty Program
MedMen launched its loyalty program, MedMen Buds, in July 2019. In addition to providing exclusive access to sales and discounts, members of MedMen Buds earn points for every purchase that lead to rewards. MedMen Buds is currently live in all of the Company’s stores across California, Nevada, Florida and Arizona and counts over 800,000 members.
Inventory Management
MedMen has comprehensive inventory management procedures, which are compliant with applicable state and local laws, regulations, ordinances, and other requirements. These procedures ensure strict control over MedMen’s cannabis and cannabis product inventory from delivery by a licensed distributor to sale or delivery to a consumer, or disposal as cannabis waste. Such inventory management procedures also include measures to prevent contamination and maintain the safety and quality of the products dispensed at MedMen’s retail locations. MedMen understands its responsibility to the greater community and the environment and is committed to providing consumers with a consistent and high-quality supply of cannabis.
Managed Dispensaries
MedMen uses the same proprietary, best-practices policies and procedures in both owned and managed dispensaries in order to ensure systematic operations and consistent customer experience. By design, a customer or employee should notice no distinct differences between owned and managed stores. Additionally, MedMen enters into long-term management services agreements, as further described under “Management Services” below.
Cultivation and Production Operations
MedMen’s cultivation and production operations are as follows:
Nevada (Mustang)
Under the Management Agreement with AFB, MedMen’s is the sole customer and purchaser of cannabis and cannabis extracts from this cultivation and production facility in northern Nevada. Prior to the Management Agreement with AFB, MedMen operated this facility. The combined facility is comprised of a 30,000 square foot cultivation facility and a 15,000 square foot production facility and sits on a total of 4.27 acres of land. The 30,000 square foot high-tech Dutch hybrid greenhouse allows for 22,000 square feet of canopy space. The production facility includes state-of-the-art production and extraction equipment. See below under “Management Agreement with AFB” for additional details.
California (Desert Hot Springs)
Under the Management Agreement with AFB, MedMen’s is the sole customer and purchaser of cannabis and cannabis extracts from this cultivation and production facility in Desert Hot Springs, California. The combined facility is comprised of a 30,000 square foot cultivation facility and a 15,000 square foot production facility and its design is based on the Mustang facility. See below under “Management Agreement with AFB” for additional details.
Arizona (Mesa)
The Company operates a 20,000 square foot cultivation and production facility in Mesa, Arizona.
New York (Utica)
MedMen operates a 25,641 square foot cultivation and production facility in Utica, New York in order to service medical marijuana patients in the state through its master license, which allows for cultivation, production and retail sales.
Florida (Eustis)
Until its sale, MedMen operated a 48,358 square foot cultivation and production facility in Eustis, Florida, which is approximately an hour’s drive north from Orlando.
In New York and Florida, the cultivation and production facilities are focused primarily on the commercialization of cannabis (both medical and recreational, as permitted under applicable laws) and, in select locations, the research and development of new strains of cannabis and cultivation techniques. The procedures at each facility place an emphasis on customer and patient safety, with a strict quality control process. As of June 25, 2022, the Company held for sale its retail and cultivation/manufacturing operations in New York and Florida. In February 2021, the Company entered into an investment agreement with respect to its New York operations whereby a controlling interest will be acquired by a third party. Accordingly, the operations within the state of New York have been classified as discontinued operations but the Company will continue to advise on the New York operations. On February 28, 2022, the Company entered into an agreement to sell MME Florida, LLC, including license, dispensaries, inventory and cultivation operations, and thus classified all assets and liabilities and profit or loss allocable to its operations in the state of Florida as discontinued operations.
Management Agreement with AFB: MedMen operated five cultivation and production facilities across Nevada, California, New York, Florida and Arizona. During the fiscal second quarter of fiscal 2022, the Company effectuated four contractual agreements with American Family of Brands, LLC (“AFB”), an unrelated third party and no longer has a controlling financial interest in previously consolidated entities, Manlin DHS Development, LLC (“DHS”) and Project Mustang Development, LLC (“Mustang”), its cultivation facilities in California and Nevada, respectively, therefore these entities are no longer included in the Company’s financial statements. The deconsolidation did not have a material impact on the Company’s Consolidated Financial Statements.
Real Estate Strategy
MedMen is focused on entering geographic markets which it believes has significant demand potential for cannabis (assessed through industry research, such as financial analyst reports covering the cannabis industry and consumer and retail information from data providers, and management estimates, such as top-down estimates that evaluate the total addressable market (factoring in potential penetration of cannabis consumption within a specific market) as well as using the Company’s own store performance in similar markets to evaluate potential revenue and profitability), and high barriers to entry, such as limited retail licenses, zoning restrictions and licensing requirements. MedMen’s real estate strategy is focused on prime locations with significant foot traffic and proximity to popular attractions (restaurants, malls, sports arenas, hotels, etc.). MedMen targets retail spaces with a footprint of 2,000 to 5,000 square feet, depending on the market and available real estate. MedMen utilizes both its internal real estate team and a network of real estate brokers to negotiate leases on behalf of the Company. MedMen typically prefers to secure long-term leases for its store locations instead of acquiring real estate. Where leasing of the applicable property is not possible, the Company will generally seek a financing partner to assign the purchase and sale agreement to prior to closing and after the Company has secured the license, and then enter into a leaseback transaction with that purchaser.
Management Services
In addition to owning its own retail licenses, MedMen has signed long-term management services contracts with third-party license owners seeking MedMen’s management services. Management services include the use of the “MedMen” brand, retail operations support, human resources, finance and accounting, marketing, sales, legal and compliance. MedMen currently has two management services agreements in place with license owners in California. The two managed dispensaries are located in Venice Beach (Abbot Kinney) and the Los Angeles Airport area.
The management services agreements are typically 30 years in length with 10-year renewals and significant penalties if an operator sells its interest in a managed licensed entity (20% of net sale price of licensee with respect to a change of control transaction). The management services agreements currently in place comprise of the following fees: (i) 1.5% of gross revenue for marketing and soft costs, (ii) $20,000 per month shared services fee, (iii) 25% of monthly EBITDA, (iv) 1.5% of construction budget for construction design services, and (v) 5% of construction budget for construction management services.
Employees
As of June 25, 2022, MedMen had 702 employees across its operating jurisdictions, of which 428 were full-time employees and 82 of which were employed at the corporate level. The remaining employees are part-time and employed at retail, cultivation, production, quality assurance/quality control and supply chain/distribution.
MedMen is committed to:
● Providing equal employment opportunities to all employees and applicants: These policies extend to all aspects of MedMen’s employment practices, including but not limited to, recruiting, hiring, discipline, termination, promotions, transfers, compensation, benefits, training, leaves of absence, and other terms and conditions of employment.
● Providing a work environment that is free of unlawful harassment, discrimination and retaliation: In furtherance of this commitment, MedMen strictly prohibits all forms of unlawful discrimination and harassment.
● Complying with all laws protecting qualified individuals with disabilities, as well as employees’, independent contractors’ and vendors’ religious beliefs and observances.
MedMen is committed to all of the above without regards to race, ethnicity, religion, color, sex, gender, gender identity or expression, sexual orientation, national origin, ancestry, citizenship status, uniform service member and veteran status, marital status, pregnancy, age, protected medical condition, genetic information, disability, or any other protected status in accordance with all applicable federal, state, provincial and local laws.
MedMen’s employees are highly-talented individuals who have educational achievements ranging from Ph.D., Masters, and undergraduate degrees in a wide range of disciplines, as well as staff who have been trained on the job to uphold the highest standards as set by MedMen. It is a requirement that all of MedMen’s employees pass background checks and drug screening. MedMen recruits, hires and promotes individuals that are best qualified for each position, priding itself on using a selection process that recruits people who are trainable, cooperative and share its core values as a company.
In addition, the safety of MedMen’s employees is a priority and MedMen is committed to the prevention of illness and injury through the provision and maintenance of a healthy workplace. MedMen takes all reasonable steps to ensure staff is appropriately informed and trained to ensure the safety of themselves as well as others around them.
MedMen partners with the United Food and Commercial Workers (the “UFCW”). The UFCW is a national labor union that represents cannabis workers throughout the United States. The eligible staff of all current retail locations of MedMen in California is represented by the UFCW. MedMen entered into a collective bargaining agreement with UFCW Local 770 and its sister locals in Southern California in 2018 (Local Union 135) and has expanded that relationship to include UFCW Local 5 and Local Union 324 in Northern California. In New York, MedMen has entered into a collective bargaining agreement with the Retail, Wholesale and Department Store Union, a division of the UFCW (Local Union 338), which represents MedMen’s cultivation and retail staff in New York state. MedMen has also entered into Collective Bargaining Agreement negotiations with UFCW, Local Union 881 in Illinois, to include eligible employees in its Oak Park location.
Competition
The Company continues to face intense competition from other companies as well as from the illicit market, some of which may have longer operating histories and more financial resources and manufacturing and marketing experience. With the significant increase in cannabis retail licenses issued by the various States, the Company could face increased competition by larger and better financed competitors.
Growers of cannabis and retailers operating in the illicit market continue to hold significant market share in States across the U.S. and are effectively competitors to the business. Illicit market participants divert customers away through product offering, price point, anonymity and convenience.
During the fiscal year 2022, several States where the Company operates issued new cannabis retail licenses. California issued 539 new retail licenses, Arizona issued 26, Illinois issued 149 and other states such as Florida and Massachusetts continue to approve new dispensary locations. While not all licenses issued are operational, certain jurisdictions such as California, Massachusetts, and Florida do not have a limit on the number of retail locations. As demand for legal cannabis increases and the number of authorized retail distribution points increases, the Company believes new competitors are likely to enter the U.S. retail cannabis market. Nevertheless, the Company believes its brand recognition combined with the variety of cannabis products offered and its premium retail experience will allow MedMen to maintain market share.
With respect to retail operations, MedMen expects to compete with other retail license holders across the states in which it operates. Many of MedMen’s competitors in the markets in which MedMen are small local operators and large multi-state operators. In certain markets such as Los Angeles, there are also several illegally operating dispensaries, which serve as competition. In addition to physical dispensaries, MedMen also competes with third party delivery services, which provide direct-to-consumer delivery services.
Intellectual Property
MedMen has developed numerous proprietary technologies and processes. These proprietary technologies and processes include its seed-to-sale software, cultivation and extraction techniques, and cultivation equipment and irrigation systems. While actively exploring the patentability of these techniques and processes, MedMen relies on non-disclosure/confidentiality arrangements and trade secret protection.
MedMen has invested significant resources towards developing a recognizable and unique brand consistent with premium, high-end retailers in analogous industries. To date, MedMen has 13 registered federal trademarks with the United States Patent and Trademark Office, two registered trademarks in Canada, two trademark applications in Israel, six registered trademarks in Mexico, one registered trademark in California, 17 registered trademarks in Nevada, five registered trademarks in Florida and three registered trademarks in New York. All U.S. federal registered trademarks are further described below.
MedMen’s in-house and outside legal counsel monitor and swiftly respond to potential intellectual property infringement. Additionally, MedMen maintains strict standards and operating procedures regarding its intellectual property, including the regular use of non-disclosure, confidentiality, and intellectual property assignment agreements.
In connection with the contractual agreements with AFB as further described above, the Company is legally obligated to have DHS and Mustang as the exclusive manufacturers of MedMen Red products in each of the territories.
Trademarks
As of the date hereof, MedMen has registered the following 13 federal trademarks in the United States, including the “MedMen” name itself, related logos, and design marks distinctive to MedMen’s brand:
● “MEDMEN” was registered under registration number 4916626 on March 15, 2016, registration numbers 5301055, 5301056, 5301058, and 5301059 on October 3, 2017 and registration number 5612033 on November 20, 2018. This mark was registered for use in association with providing a range of services including “arranging of seminars; conducting workshops and seminars in the fields of business management, entrepreneurship, and investing”, “private equity fund investment services; management of private equity funds; providing venture capital, development capital, private equity and investment funding”, “business advice and information; business consultation; business consultation services”, “on-line journals, namely, blogs featuring social and medical benefits of cannabis” and for use in association with the following products: “hoodies; jackets; shirts; sweatshirts; long-sleeved shirts; t-shirts” and “plastic water bottles sold empty”.
● “MYMEDMEN” was registered under registration number 5301054 on October 3, 2017 for use in association with “computer software that provides real-time, integrated business management intelligence by combining information from various databases and presenting it in an easy-to-understand user interface”.
● The stylized red text logo for “MedMen”, as registered under registration number 4788802 on August 11, 2015 for use in association with “business consultancy; business consultation services”.
● The stylized red “M”, was registered under registration number 4825297 on October 5, 2015 for use in association with “business consultancy; business consultation; business consultation services”.
● The stylized geometric marijuana leaf was registered under registration numbers 5333804 and 5333805 on November 14, 2017 and registration number 5421419 on March 13, 2018. This design mark was registered for use in association with products, namely “hoodies; long- sleeved shirts; shirts; sweatshirts; t-shirts” and for use in association with services including “private equity fund investment services; management of private equity funds; providing venture capital, development capital, private equity and investment funding” and “business management consultancy services not including services related to supply chain and inventory management”.
● The stylized text logo for “EMBER”, was registered under registration number 5616303 on November 27, 2018 for use in association with “general feature magazine in the field of cannabis, general feature magazines”.
All federal registered trademarks in the United States described above are subject to renewal 10 years from the date of registration.
UNITED STATES REGULATORY ENVIRONMENT
Federal Regulatory Environment
The federal government of the United States regulates controlled substances through the CSA, which places controlled substances on one of five schedules. Currently, marijuana is classified as a Schedule I controlled substance. A Schedule I controlled substance means the Drug Enforcement Agency considers it to have a high potential for abuse, no accepted medical treatment, and a lack of accepted safety for the use of it even under medical supervision. The federal government has sought to provide guidance to enforcement agencies and banking institutions with the introduction of the United States Department of Justice Memorandum drafted by former Deputy Attorney General James Michael Cole in 2013 (the “Cole Memo”) and the Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”) guidance in 2014.
The Cole Memo offered guidance to federal enforcement agencies as to how to prioritize civil enforcement, criminal investigations and prosecutions regarding marijuana in all states. The Cole Memo acknowledged that, notwithstanding the designation of cannabis as a Schedule I controlled substance at the federal level, several states had enacted laws authorizing the use of cannabis for medical purposes. The Cole Memo noted that jurisdictions that have enacted laws legalizing cannabis in some form have also implemented strong and effective regulatory and enforcement systems to control the cultivation, processing, distribution, sale and possession of cannabis. As such, conduct in compliance with those laws and regulations is less likely to implicate the Cole Memo’s enforcement priorities. The Department of Justice did not provide (and has not provided since) specific guidelines for what regulatory and enforcement systems would be deemed sufficient under the Cole Memo. In light of limited investigative and prosecutorial resources, the Cole Memo concluded that the Department of Justice should be focused on addressing only the most significant threats related to cannabis, such as distribution of cannabis from states where cannabis is legal to those where cannabis is illegal, the diversion of cannabis revenues to illicit drug cartels and sales of cannabis to minors.
In January 2018, then United States Attorney General, Jeff Sessions, by way of issuance of a new Department of Justice (“DOJ”) Memorandum (the “Sessions Memo”), rescinded the Cole Memo and thereby created a vacuum of guidance for enforcement agencies and the Department of Justice. The Sessions Memorandum explains the DOJ’s rationale for rescinding all past DOJ cannabis enforcement guidance, claiming that Obama-era enforcement policies are “unnecessary” due to existing general enforcement guidance adopted in the 1980s, in chapter 9.27.230 of the U.S. Attorney’s Manual (the “USAM”). The USAM enforcement priorities, like those of the Cole Memo, are based on the use of the federal government’s limited resources and include “law enforcement priorities set by the Attorney General,” the “seriousness” of the alleged crimes, the “deterrent effect of criminal prosecution,” and “the cumulative impact of particular crimes on the community.” Although the Sessions Memorandum emphasizes that cannabis is a federally illegal Schedule I controlled substance, it does not otherwise instruct U.S. Attorneys to consider the prosecution of cannabis-related offenses a DOJ priority, and in practice, most U.S. Attorneys have not changed their prosecutorial approach to date. As a result, federal prosecutors are free to utilize their prosecutorial discretion to decide whether to prosecute cannabis activities despite the existence of state-level laws that may be inconsistent with federal prohibitions. No direction was given to federal prosecutors in the Sessions Memo as to the priority they should ascribe to such cannabis activities, and as a result it is uncertain how active federal prosecutors will be in relation to such activities.
On March 11, 2021, Merrick Garland was sworn in as the U.S. Attorney General. During his campaign, President Biden stated a policy goal to decriminalize possession of cannabis at the federal level, but he has not publicly supported the full legalization of cannabis. In response to questions posed by Senator Cory Booker, Merrick Garland stated during February 2021 congressional testimony that he would reinstitute a version of the Cole Memo. He reiterated the statement that the Justice Department under his leadership would not pursue cases against Americans “complying with the laws in states that have legalized and are effectively regulating marijuana”, in written responses to the Senate Judiciary Committee provided around March 2021. It is not yet known whether the Department of Justice under President Biden and Attorney General Garland, will re-adopt the Cole Memo or announce a substantive marijuana enforcement policy. Justice Garland indicated at a confirmation hearing before the United States Senate that it did not seem to him to be a useful use of limited resources to pursue prosecutions in states that have legalized and that are regulating the use of marijuana, either medically or otherwise. It is unclear what impact, if any, the current administration will have on U.S. federal government enforcement policy on cannabis. Nonetheless, there is no guarantee that the position of the Department of Justice will or will not change.
Because the Department of Justice memorandums serve as discretionary agency guidance and do not constitute a force of law, cannabis related businesses have worked to continually renew the Rohrabacher Blumenauer Appropriations Amendment (originally the Rohrabacher-Farr Amendment) that has been included in federal annual spending bills since 2014. This amendment restricts the Department of Justice from using federals funds to prevent states with medical cannabis regulations from implementing laws that authorize the use, distribution, possession or cultivation of medical cannabis against regulated medical marijuana actors operating in compliance with state and local law. The Rohrabacher-Farr Amendment was included in the Consolidated Appropriations Act of 2019, which was signed by President Trump on February 14, 2019 and funds the departments of the federal government through the fiscal year ending September 30, 2019. In signing the Act, President Trump issued a signing statement noting that the Act “provides that the DOJ may not use any funds to prevent implementation of medical marijuana laws by various States and territories,” and further stating “I will treat this provision consistent with the President’s constitutional responsibility to faithfully execute the laws of the United States.” While the signing statement can fairly be read to mean that the executive branch intends to enforce the CSA and other federal laws prohibiting the sale and possession of medical marijuana, the president did issue a similar signing statement in 2017 and no major federal enforcement actions followed. On September 27, 2019, the Rohrabacher-Farr Amendment was temporarily renewed through a stopgap spending bill and was similarly renewed again on November 21, 2019. The Fiscal Year 2020 omnibus spending bill was ultimately passed on December 20, 2019, making the Rohrabacher-Farr Amendment effective through September 30, 2020. In signing the spending bill, President Trump again released a statement similar to the ones he made May 2017 and February 2019 regarding the Rohrabacher-Farr Amendment. On March 15, 2021 the amendment was renewed through the signing of the Fiscal Year 2022 omnibus spending bill, effective through September 30, 2022. Notably, Rohrabacher-Farr has applied only to medical marijuana programs and has not provided the same protections to enforcement against adult-use activities. If the Rohrabacher-Farr Amendment is no longer in effect, the risk of federal enforcement and override of state marijuana laws would increase.
Since 2014, Congress has made immense strides in marijuana policy. The bipartisan Congressional Cannabis Caucus launched in 2017 and is headed by Representatives Dana Rohrabacher (CA-48), Earl Blumenauer (OR-03), Don Young (AK-At Large), and Jared Polis (CO-02). The group is “dedicated to developing policy reforms that bridge the gap between federal laws banning marijuana and the laws in an ever-growing number of states that have legalized it for medical or recreational purposes” Additionally, each year more Representatives and Senators sign on and cosponsor marijuana legalization bills including the CARERS Act, REFER Act and others. While there are different perspectives on the most effective route to end federal marijuana prohibition, Congressman Blumenauer and Senator Wyden introduced the three-bill package, Path to Marijuana Reform which would fix Section 280E of the Code, eliminate civil asset forfeiture and federal criminal penalties for businesses complying with state law, reduce barriers to banking, and would de-schedule, tax and regulate marijuana in 2017. Senator Booker has also introduced the Marijuana Justice Act, which would deschedule marijuana, and in 2018 Congresswoman Barbara Lee introduced the House companion.
Additionally, on June 7, 2018, the STATES Act was introduced in the Senate by Republican Senator Cory Gardner of Colorado and Democratic Senator Elizabeth Warren of Massachusetts. A companion bill was introduced in the House by Democratic representative Jared Polis of Colorado. The bill provides in relevant part that the provisions of the CSA, as applied to marijuana, “shall not apply to any person acting in compliance with state law relating to the manufacture, production, possession, distribution, dispensation, administration, or delivery of marihuana.” Even though marijuana will remain within Schedule I under the STATES Act, it makes the CSA unenforceable to the extent it is in conflict with state law. In essence, the bill extends the limitations afforded by the Rohrabacher-Blumenauer protection within the federal budget − which prevents the Department of Justice and the Drug Enforcement Agency from using funds to enforce federal law against state-legal medical cannabis commercial activity − to both medical and recreational cannabis activity in all states where it has been legalized. By allowing continued prohibition to be a choice by the individual states, the STATES Act does not fully legalize cannabis on a national level. In that respect, the bill emphasizes states’ rights under the Tenth Amendment, which provides that “the powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”
During his confirmation hearing on February 22, 2021, U.S. Attorney General, The Honorable Merrick B. Garland, testified that the limited resources of the Department of Justice will not be expended to pursue those in compliance with state-regulated cannabis programs, although he did not commit to reinstituting the Cole Memorandum and there is no guarantee regarding the ultimate position of the Biden Administration DOJ.11 Separate and apart from these pronouncements, Congress has withheld funding to the DOJ (pursuant to the Rohrabacher-Blumenauer Amendment to federal spending bills) to prosecute state-compliant businesses in the medical marijuana space since 2014.
Notwithstanding the foregoing, there is no guarantee that the current presidential administration will treat the enforcement of marijuana regulations as low-priority enforcement of U.S. federal laws that conflict with state laws. Accordingly, there are a number of significant risks associated with the business of the Company and unless and until the United States Congress amends the CSA with respect to medical and/or adult-use cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a significant risk that federal authorities may enforce current federal law, and the business of the Company may be deemed to be producing, cultivating, extracting, or dispensing cannabis or aiding or abetting or otherwise engaging in a conspiracy to commit such acts in violation of federal law in the United States.
Anti-Money Laundering Laws and Access to Banking
Due to the CSA categorization of marijuana as a Schedule I drug, U.S. federal law makes it illegal for financial institutions that depend on the Federal Reserve’s money transfer system to take any proceeds from marijuana sales as deposits. Banks and other financial institutions could be prosecuted and possibly convicted of money laundering for providing services to cannabis businesses under the United States Currency and Foreign Transactions Reporting Act of 1970 (the “Bank Secrecy Act”). Under U.S. federal law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be found guilty of money laundering or conspiracy.
While there has been no change in U.S. federal banking laws to account for the trend towards legalizing medical and recreational marijuana by U.S. states, FinCEN has issued guidance advising prosecutors of money laundering and other financial crimes not to focus their enforcement efforts on banks and other financial institutions that serve marijuana-related businesses, so long as that business is legal in their state and none of the federal enforcement priorities are being violated (such as keeping marijuana away from children and out of the hands of organized crime). The FinCEN guidance also clarifies how financial institutions can provide services to marijuana-related businesses consistent with their Bank Secrecy Act obligations, including thorough customer due diligence, but makes it clear that they are doing so at their own risk.
Due to the fear by financial institutions of being implicated in or prosecuted for money laundering, cannabis businesses are often forced into becoming “cash-only” businesses. As banks and other financial institutions in the U.S. are generally unwilling to risk a potential violation of federal law without guaranteed immunity from prosecution, most refuse to provide any kind of services to cannabis businesses. Despite the attempt by FinCEN to legitimize cannabis banking, in practice its guidance has not made banks much more willing to provide services to cannabis businesses. This is because, as described above, the current law does not guarantee banks immunity from prosecution, and it also requires banks and other financial institutions to undertake time-consuming and costly due diligence on each cannabis business they take on as a customer. Recently, some banks that have been servicing cannabis businesses have been closing accounts operated by cannabis businesses and are now refusing to open accounts for new cannabis businesses for the reasons enumerated above.
The few credit unions who have agreed to work with cannabis businesses are limiting those accounts to no more than 5% of their total deposits to avoid creating a liquidity risk. Since the federal government could change the banking laws as it relates to cannabis businesses at any time and without notice, these credit unions must keep sufficient cash on hand to be able to return the full value of all deposits from cannabis businesses in a single day, while also servicing the need of their other customers.
State Border Regulation
Another aspect of federal law is that it provides that cannabis and cannabis products may not be transported across state lines in the United States. As a result, all cannabis consumed in a state must be grown and produced in that same state. This dynamic could make it more difficult for the Company, in the short term, to maintain a balance between supply and demand. If excess cultivation and production capacity is created in any given state and this is not matched by increased demand in that state, then this could exert downward pressure on the retail price for the products the Company sells. If too many retail licenses are offered by state authorities in any given state, then this could result in increased competition and exert downward pressure on the retail price for the products the Company sells. On the other hand, if cultivation and production in a state fails to match demand then, in the short term, there could be insufficient supply of product in a state to meet demand and while the Company may be able to raise its prices there could be inadequate product availability in the short term, causing the Company’s revenue in that state to fall or to not grow to its full potential.
United States Border Entry
The United States Customs and Border Protection, or CBP, enforces the laws of the United States as they pertain to lawful travel and trade into and out of the U.S. Crossing the border while in violation of the CSA and other related United States federal laws may result in denied admission, seizures, fines, and apprehension. CBP officers administer determine the admissibility of travelers who are non-U.S. citizens into the United States pursuant to the United States Immigration and Nationality Act. An investment in the Subordinate Voting Shares, if it became known to CBP, could have an impact on a non-U.S. citizen’s admissibility into the United States and could lead to a lifetime ban on admission.
Because marijuana remains illegal under United States federal law, those investing in Canadian companies with operations in the United States cannabis industry could face detention, denial of entry, or lifetime bans from the United States for their business associations with United States marijuana businesses. Entry happens at the sole discretion of CBP officers on duty, and these officers have wide latitude to ask questions to determine the admissibility of a non-US citizen or foreign national. The government of Canada has started warning travelers that previous use of marijuana, or any substance prohibited by United States federal laws, could mean denial of entry to the United States. Business or financial involvement in the marijuana industry in the United States could also be reason enough for CBP to deny entry. On September 21, 2018, CBP released a statement outlining its current position with respect to enforcement of the laws of the United States. It stated that Canada’s legalization of cannabis will not change CBP enforcement of United States laws regarding controlled substances and because marijuana continues to be a controlled substance under United States law, working in or facilitating the proliferation of the legal marijuana industry in U.S. states where it is deemed legal may affect admissibility to the United States. As a result, CBP has affirmed that, employees, directors, officers, managers and investors of companies involved in business activities related to marijuana in the United States who are not United States citizens, face the risk of being barred from entry into the United States.
Tax Concerns
An additional challenge to cannabis-related businesses is that the provisions of the Code, Section 280E, are being applied by the United States Internal Revenue Service to businesses operating in the medical and adult use cannabis industry. Section 280E of the Code prohibits cannabis businesses from deducting their ordinary and necessary business expenses, forcing them to pay higher effective federal tax rates than similar companies in other industries. The effective tax rate on a cannabis business depends on how large its ratio of non-deductible expenses is to its total revenues. Therefore, businesses in the legal cannabis industry may be less profitable than they would otherwise be.
Overall, the United States federal government has specifically reserved the right to enforce federal law in regard to the sale and disbursement of medical or adult-use marijuana even if such sale and disbursement is sanctioned by state law. Accordingly, there are a number of significant risks associated with the business of the Company and unless and until the United States Congress amends the CSA with respect to medical and/or adult-use cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a significant risk that federal authorities may enforce current federal law, and the business of the Company may be deemed to be producing, cultivating, extracting, or dispensing cannabis or aiding or abetting or otherwise engaging in a conspiracy to commit such acts in violation of federal law in the United States.
State and Local Licenses
The following table provides a list of the licenses granted to and disclosed as applied for by the Company.
Entity Address Jurisdiction License Type Expiry Date (if applicable) License Number(s)
Advanced Patients’ Collective 735 S. Broadway, Los Angeles, CA 90014 State Adult use and Medical Retail 7/23/2023 C10-0000499-LIC
City Adult Use Retail 12/31/2022 0002086145-0001-8: Fund/Class J020
City Medical Retail 12/31/2022 0002086145-0001-8: Fund/Class J010
2430 Porter St., Los Angeles, CA State Adult use and Medical Distribution 7/2/2023 C11-0000635-LIC
MME CYON Retail, Inc. 110 S Robertson Blvd, Los Angeles CA 90048 State Adult use and Medical Retail 7/15/2023 C10-0000426-LIC
City Adult Use Retail 12/31/2022 0002053218-0001-8: Fund/Class J020
City Medical Retail 12/31/2022 0002181643-0001-9 Fund Class J010
Desert Hot Springs Green Horizons, Inc. 13300 Little Morongo Road, Desert Hot Springs, CA 92240 State Adult Use and Medicinal Distributor 6/24/2023 C11-0000490-LIC
State Adult use and Medical Manufacturing - Type 7 5/10/2023 CDPH-10003152
State Adult use and Medical Cultivation 9/13/2022 CAL19-0004050
City Business License - Cultivator/Distributor 9/8/2022*** BUSL-20-835
City Business License - Manufacturing 9/8/2022*** BUSL-20-822
City Cannabis Regulatory Permit - Cultivation, Distribution, and Manufacturing N/A 2017-00000396
City CUP N/A CUP 14-16
Farmacy Collective 8208 Santa Monica Blvd, Santa Monica CA 90046 State Adult use/Medical Retail 7/14/2023 C10-0000421-LIC
City West Hollywood Business License - Public Eating 5/31/2023 PBL-004537
Rochambeau, Inc. 3996 San Pablo Avenue Suites A, B, C, D; Emeryville, CA 94608 State Adult use and Medical Retail 7/7/2023 C10-0000385-LIC
City Adult use and Medical Retail 8/21/2023 EPD 20-005
City CUP for Retail N/A CUP-18-001
Sure Felt, LLC 10715 Sorrento Valley Rd., San Diego, CA 92121 State Adult use and Medical Retail 7/4/2023 C10-0000379-LIC
City Medical Marijuana Consumer Cooperative Permit 12/17/2022 Form DS-191
City CUP 6/18/2023 CUP 1865509
MMOF San Diego Retail, Inc. 5125 Convoy St., #211
San Diego, CA 92111 City CUP N/A
PTS# 369478
City Medical Marijuana Consumer Cooperative Permit 12/17/2022 Form DS-191
State Adult use and Medical Retail 7/4/2023 C10-0000378-LIC
The Compassion Network 410 Lincoln Blvd., Venice, CA 90291 State Adult use and Medical Retail 6/11/2023 C10-0000177-LIC
City Adult-Use Retail 12/31/2022 0002181643-0001-9: Fund/Class J020
City Medical Retail 12/31/2022 0002181643-0001-9: Fund/Class J010
The Source Santa Ana 2141 S Wright Street, Santa Ana CA 92705 State Adult-Use and Medicinal Retailer 7/15/2023 C10-0000442-LIC
City Regulatory Safety Permit 1/13/2023 2018-16
Viktoriya’s Medical Supplies, LLC 1075 10th St N. San Jose, CA 95112 State Adult use and Medical Microbusiness 7/4/2023 C12-0000144-LIC
City City of San Jose - Notice of Completed Registration Medical and Non-Medical Cannabis - Retail, Distribution, Delivery, Manufacturing 12/14/2022 N/A
MATTNJEREMY, INC 2767 E. Broadway
Long Beach, CA 90803 City Business License - Dispensary with Delivery - Adult Use 8/30/2023 MJ21908299
City Adult use and Medical Retail 1/4/2023 MJ21908296
State Adult use and Medical Retail 7/15/2023 C10-0000438-LIC
MME Sutter Retail Inc. 532 Sutter Street, San Francisco State and City Adult use and Medical Retail N/A Pending Local and State Approval
MME Union Retail, LLC 1861 Union St, San Francisco, CA City Cannabis Business Permit 2/25/2023 P-0025SR
MME Union Retail, LLC State Adult use and Medical Retail 1/19/2023 C10-0000930-LIC
MMOF Vegas Retail Inc 4503 Paradise Rd St. 210 A-B, Las Vegas, NV 8916 County Marijuana Master License Retail Store/Medical Dispensary 12/31/2021* 2000169.MMR-301
State Retail Marijuana Store 6/30/2023 Certificate: 04045523128584413069 Code: RD078
State Medical Marijuana Dispensary 6/30/2023 Certificate: 3465297098641153293 MME Code: D078
MMOF Fremont Retail, Inc. 823 S 3rd Street, Las Vegas, NV 89101 City Medical Retail Business License 7/1/2022* License #: M66-00014
City Recreational Retail Business License 7/1/2022* License #: M66-00015
State Retail Marijuana Store 6/30/2023 Certificate: 67501179020484699802 Code: RD178
State Medical Marijuana Dispensary 6/30/2023 Certificate: 51798010886861416556 Code: D178
MMOF Vegas Retail 2, Inc. 6332 S Rainbow Blvd #105, Las Vegas, NV 89118 City Marijuana Master License Retail Store/Medical Dispensary 12/31/2021* 2000104.MMR-301
State Retail Marijuana Store 6/30/2023 Certificate: 10756476132829656560 Code: RD092
State Medical Marijuana Dispensary 6/30/2023 Certificate: 55740439531874846857 Code: D092
MMNV2 Holdings I, LLC 12000 Truckee Canyon Court, Sparks NV 89434 State Marijuana Cultivation Facility 7/31/2023 Certificate: 07912568590104527553 Code: RC025
State Medical Marijuana Cultivation Registration Certificate 6/30/2023 Certificate: 17870088520850390544 Code: C025
County Marijuana Cultivation Facility 7/1/2022* W000009ME-LIC
State Marijuana Product Manufacturing Facility 7/31/2023 Certificate: 28332017443877189253 Code: RP016
State Medical Marijuana Production Registration Certificate 6/30/2023 Certificate: 42811321585035807243 Code: P016
County Marijuana Product Manufacturing Facility 7/1/2022* W000005ME-LIC
EBA Holdings, Inc. 8729 E Manzanita Dr., Scottsdale, AZ 85258 State Adult Use License & Approval to Operate 1/21/2023 00000068ESZM96727661
State Medical Cert & Approval to Operate - Dispensary 8/7/2024 00000072DCMU00762354
City CUP N/A 8-UP-2012#2
2832 N. Omaha, Mesa, AZ 85125 State Adult Use License & Approval to Operate - Cultivation & Manufacture (offsite) 1/21/2023 00000068ESZM96727661
MedMen NY, Inc (**) 1113 Herkimer Road, Utica, NY 13501 State Manufacturing License 7/31/2023 MM0501M
2001 Marcus Avenue, Lake Success, NY 11042 State Dispensing License 7/31/2023 MM0502D
433 Fifth Avenue, New York, NY 10116 State Dispensing License 7/31/2023 MM0503D
1304 Buckley Road, Syracuse, NY 13212 State Dispensing License 7/31/2023 MM0504D
6850 Main Street, Buffalo, NY 14221 State Dispensing License 7/31/2023 MM0506D
MME Florida, LLC (**) 25540 County Road 44A, Eustis, FL 32736 State Cultivation and Manufacturing Authorization 7/13/2022 MMTC-2017-0012
5048 Bayou Blvd., Pensacola, FL 32503 State Dispensing Authorization
326 5th Avenue North, St. Petersburg, FL 33701 State Dispensing Authorization
2949 North Federal Highway, Fort Lauderdale, FL 33306 State Dispensing Authorization
1126 Thomasville Rd, Tallahassee, FL 32303 State Dispensing Authorization
11551 University Blvd., Orlando, FL 32817 State Dispensing Authorization
550 Collins Ave, Miami Beach, FL 33139 State Dispensing Authorization
537-539 Clematis Street, West Palm Beach, Florida 33401 State Dispensing Authorization
MedMen Boston, LLC 120 Brookline Avenue, Boston, Massachusetts 02215 State Adult-Use and Medicinal Retailer 9/16/2022 MR282091
MedMen Boston, LLC 120 Brookline Avenue, Boston, Massachusetts 02215 City Host Community Agreement 2/7/2024 N/A
MME Newton Retail, LLC 232 Boylston Street State Adult-Use and Medicinal Retailer 1/22/2023 Provisional License
MME Newton Retail, LLC 232 Boylston Street City Host Community Agreement N/A N/A
Future Transactions Holdings, LLC 1132 Lake Street, Oak Park, II 60301 State Medical Dispensing License 8/22/2023 DISP.000041
State Adult Use License 3/31/2024 AUDO.000033
MME Morton Grove Retail, LLC 6761 Dempster Street, Morton Grove, IL 60053 State Adult Use License 3/31/2024 AUDO.000106
* A renewal application has been submitted by the Company in respect of the noted license/permit. The license/permit remains effective during the renewal process. The Company expects to receive a renewal for such a license in the ordinary course of business.
** In connection with the planned sale of the Company’s assets in New York and Florida, the Company engaged in actions with the respective regulatory bodies to execute transfers of its licenses upon consummation of either or both deals. See “Recent Developments - Turnaround and Growth Plan - Focus on Core Markets” below.
***
The Company has not renewed the noted license. See “Description of the Business - Cultivation and Production Operations” under “Management Agreement with AFB” for further information.
Disclosure that a license has been granted to or applied for by the Company does not imply that all required regulatory steps have been satisfied to operate a cannabis facility under that license, as licensing commonly requires multiple levels of approval at the state and local level, as well as securing compliant real estate, and licenses listed as having been granted are often provisional in nature.
The Company’s operations are in compliance with applicable state laws, regulations and licensing requirements. Additionally, the Company uses the same proprietary, best-practices policies and procedures in its managed dispensaries as in its owned dispensaries in order to ensure systematic operations and, as such, to the Company’s knowledge, the dispensaries that the Company manages are in compliance with applicable state laws, regulations and licensing requirements.
While the Company’s compliance controls have been developed to mitigate the risk of any material violations of a license arising, there is no assurance that the Company’s licenses will be renewed in the future in a timely manner. Any unexpected delays or costs associated with the licensing renewal process could impede the ongoing or planned operations of the Company and have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.
Nonetheless, for the reasons described above and the risks further described under Item 1A. “Risk Factors” herein, there are significant risks associated with the business of the Company. Readers are strongly encouraged to carefully read all the risk factors contained herein.
Compliance with Applicable State Law in the United States
The following sections describe the legal and regulatory landscape in respect of the states in which the Company currently operates and as such in which it is currently contemplated that the Company will be operating upon completion of announced transactions.
In the United States, cannabis is largely regulated at the state level. Although each state in which the Company operates (and anticipates operating) authorizes, as applicable, medical and/or adult-use marijuana production and distribution by licensed or registered entities, and numerous other states have legalized marijuana in some form, under U.S. federal law, the possession, use, cultivation, and transfer of marijuana and any related drug paraphernalia remains illegal, and any such acts are criminal acts under U.S. federal law. Although the Company believes that its business activities are compliant with applicable state and local laws of the United States, strict compliance with state and local laws with respect to marijuana may neither absolve us of liability under U.S. federal law, nor provide a defense to any federal proceeding which may be brought against us. Any such proceedings brought against us may result in a material adverse effect on the business.
Arizona
Arizona Regulatory Landscape
The Arizona Medical Marijuana Program (the “AZDHS Program”) is governed by Title 9; Chapter 17 Department of Health Services Medical Marijuana Program (the “AZDHS Rules”) and A.R.S. § 36-2801 et seq., as amended from time to time (the “Arizona Act”) (the AZDHS Rules and the Arizona Act collectively referred to herein as the “AMMA”). The Arizona Act, which was approved by the Arizona voters in 2010 provides the legal requirements and restrictions in conjunction with the applicable rules, guidelines and requirements, promulgated by the Arizona Department of Health Services (“AZDHS”). The AZDHS Program provides for a limited number of Medical Marijuana Dispensary Registration Certificates (each, an “Arizona License”). The program currently allows 131 Arizona Licenses. A variety of product types are allowed in the state including medical marijuana and manufactured and derivative products which contain medical marijuana.
On November 3, 2020, Arizona voters enacted Proposition 207 which legalized adult-use cannabis for persons 21 years of age and older. The ADHS accepted applications for marijuana establishment licenses from early applicants, which are nonprofit medical marijuana licensed dispensaries or applicants in counties with less than two (2) nonprofit medical marijuana licensed dispensaries, from January 19, 2021 through March 9, 2021. Adult use sales began on January 19 2021, immediately after the ADHS approved early adult use applications for existing nonprofit medical marijuana licensed dispensaries. As of August 2021, the ADHS has approved total of 143 adult use establishment licenses. The Arizona Department of Health adopted regulations effective June 1, 2021, for the licensing of retailers, cultivators and manufacturers. In April 2022, ADHS held a lottery to select and issue 26 marijuana establishment licenses to applicants who qualify under the Social Equity Ownership Program. After issuing licenses to qualified early applicants and to the applicants who qualify under the Social Equity Ownership Program, the ADHS may not issue more than one marijuana establishment license for every ten (10) registered pharmacies in Arizona.
Licenses
Arizona state licenses are renewed biennially. There is no ultimate expiry after which no renewals are permitted. Additionally, in respect of the renewal process, provided that the requisite renewal fees are paid, the renewal application is submitted in a timely manner along with the necessary supporting documents, and regulatory requirements are met, the licensee would expect to receive the applicable renewed license in the ordinary course of business.
Regulations
In the state of Arizona, only cannabis that is grown and manufactured in the state by a licensed establishment may be sold in the state. A single license holder is provided with the ability to cultivate, harvest, process, transport, sell and dispense cannabis and cannabis products, and is not required to participate in all of the allowable activities. Delivery is allowed from dispensaries to patients only. Delivery to recreational customers is not allowed.
Reporting Requirements
The AZDHS has not selected a state mandated seed-to-sale system at this time. Licensed entities are permitted to choose their own provider or to track marijuana products from seed-to-sale using proprietary methods. The state however, tracks patient dispensing limits through a proprietary state system. Although there are no periodic reporting requirements to the state, full seed-to-sale tracking is required by all licensees and is periodically audited by the AZDHS. Additionally, all sales transactions are manually entered into the state dispensing tracking system at the time of transaction.
California
California Regulatory Landscape
In 1996, California was the first state to legalize medical marijuana through Proposition 215, the Compassionate Use Act of 1996. This legalized the use, possession and cultivation of medical marijuana by patients with a physician recommendation for treatment of cancer, anorexia, AIDS, chronic pain, spasticity, glaucoma, arthritis, migraine, or any other illness for which marijuana provides relief. In 2003, Senate Bill 420 was signed into law establishing an optional identification card system for medical marijuana patients.
In September 2015, the California legislature passed three bills collectively known as the “Medical Cannabis Regulation and Safety Act” (“MCRSA”). The MCRSA established a licensing and regulatory framework for medical marijuana businesses in California. The system created multiple license types for dispensaries, infused products manufacturers, cultivation facilities, testing laboratories, transportation companies and distributors. Edible infused product manufacturers would require either volatile solvent or non-volatile solvent manufacturing licenses depending on their specific extraction methodology. Multiple agencies would oversee different aspects of the program and businesses would require a state license and local approval to operate. However, in November 2016, voters in California overwhelmingly passed Proposition 64, the “Adult Use of Marijuana Act” (“AUMA”) creating an adult-use marijuana program for adult-use 21 years of age or older. AUMA had some conflicting provisions with MCRSA, so in June 2017, the California State Legislature passed Senate Bill No. 94, known as Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”), which amalgamates MCRSA and AUMA to provide a set of regulations to govern medical and adult-use licensing regime for cannabis businesses in the state of California. MAUCRSA went into effect on January 1, 2018. On July 12, 2021, Governor Gavin Newsom signed Assembly Bill 141 (“AB-141”) into law in an effort to centralize and simplify regulatory and licensing oversight of the California cannabis market, thus creating the Department of Cannabis Control (“DCC”). With the passage of AB-141, the DCC consolidates three (3) state cannabis programs - BCC, CDFA, and the MCSB - under a single new department now known as the DCC. The law transfers all of the powers, duties, purposes, functions, responsibilities, and jurisdiction of the BCC, CDFA and CDPH to the DCC. Apart from creating the DCC, AB-141 also institutes many technical fixes and substantive changes to MAUCRSA and thus requires additional rulemaking at the DCC level, which will affect all licensees. The California Department of Tax and Fee Administration oversees.
In order to legally operate a medical or adult-use cannabis business in California, the operator must have both a local and state license. This requires license holders to operate in cities with marijuana licensing programs. Therefore, cities in California are allowed to determine the number of licenses they will issue to marijuana operators or can choose to outright ban marijuana.
Licenses
The Company is licensed to operate as a Medical and Adult-Use Retailer, Cultivator, Manufacturer and Distributor under applicable California and local jurisdictional law. The Company’s licenses permit it to possess, cultivate, manufacture, distribute, dispense and sell medical and adult-use cannabis in the state of California pursuant to the terms of the various licenses issued by the DCC under the provision of the MAUCRSA and California Assembly Bill No. 133.
On August 27, 2020, MME Pasadena Retail, Inc. (“MME Pasadena”), a subsidiary of the Company, received a notice from the City of Pasadena that a determination was made that there had been a material change in ownership and/or management of MedMen such that the initial application was no longer valid, resulting in MME Pasadena losing the right to proceed through the cannabis permitting process in the City of Pasadena. On October 21, 2020, MME Pasadena filed a Writ of Mandate in the Superior Court of the State of California for the County of Los Angeles against the City of Pasadena, followed by a First Amended Verified Petition for Writ of Mandate on December 8, 2020, seeking, among other things, an order requiring the city to revoke its denial of MME Pasadena’s application.
The licenses are independently issued for each approved activity for use at the Company’s facilities in California. California state and local licenses are generally renewed annually. License renewal applications are submitted per guidelines published by local cannabis regulators, the DCC. While renewals are generally annual, there is no ultimate expiry after which no renewals are permitted. Additionally, in respect of the renewal process, provided that the requisite renewal fees are paid, the renewal application is submitted in a timely manner, and there are no material violations noted against the applicable license, the Company would expect to receive the applicable renewed license in the ordinary course of business.
Regulations
In the state of California, only cannabis that is grown and manufactured in the state by a licensed establishment may be sold in the state. The Company has the capabilities to cultivate, harvest, process, manufacture, distribute, and sell/dispense/deliver adult-use and medical cannabis and cannabis products. The state also allows the Company to make wholesale purchase of cannabis and cannabis products from, or a distribution of cannabis and cannabis product to, another licensed entity within the state.
Reporting Requirements
The state of California has selected Franwell Inc.’s METRC solution (“METRC”) as the state’s track-and-trace (“T&T”) system used to track commercial cannabis activity and movement across the distribution chain (“seed-to-sale”). The METRC system is mandatory for all licensed operators in the state of California. The system allows for other third-party system integration via application programming interface (“API”).
Florida
Florida Regulatory Landscape
In 2014, the Florida legislature passed a low-THC cannabis law that allowed patients with a limited number of qualifying medical conditions to have access to low-THC cannabis and cannabis products. In 2015, five (5) vertically integrated dispensing organizations (“MMTCs”) were awarded licenses. In November of 2016, voters passed Amendment 2 (the “Amendment”), which expanded the array of qualifying medical conditions and gave patients access to full-strength medical cannabis. Late in the legislative session in 2017, the Florida legislature passed Senate Bill 8-A, which implemented the Amendment but restricted the original initiative by requiring vertical integration, limiting licenses at the state level, and prohibiting the sale and smoking of whole-plant cannabis flower (the “Rule”).
In March 2019, Governor Ron DeSantis signed a bill amending the Rule to allow smoking of whole-plant cannabis flower. In August 2020, the Florida Department of Health’s Office of Medical Marijuana Use (“OMMU”) published emergency rules permitting the production, packaging, labeling, and dispensing of edible medical marijuana derivative products by MMTCs. MMTCs manufacturing edible medical marijuana derivative products must also comply with all requirements for food establishments in Chapter 500 of the Florida Statutes and any rules adopted by the Florida Department of Agriculture and Consumer Services.
Litigation related to the 2015 applicants who were not selected for licensure and the Rule have been frequent and ongoing. In July 2019, the First District Court of Appeals issued an opinion in Department of Health v. Florigrown, ruling that two critical parts of the Rule are unconstitutional: (i) the requirement of vertical integration and (ii) the cap on the number of licenses allowed. The Florida Supreme Court heard argument on May 6, 2020, October 7, 2020, and on May 27, 2021, and rendered a 6-1 ruling on the matter holding the constitutional challenge to vertical integration and licensing caps is not likely to succeed on its merits and overturned the lower court’s injunction. The result of this case allows the Florida Department of Health’s Office of Medical Marijuana Use to move forward in creating and opening an MMTC application process guided by current rules and regulations. It is unknown at this time when the OMMU will again accept new applications.
All MMTCs currently operating are required to be vertically integrated, meaning each licensee is responsible for the entire cannabis supply chain: cultivation, processing, transporting and dispensing medical marijuana and low-THC cannabis products.
Licenses
Florida state licenses are renewed biennially. Licensees are required to submit a renewal application and fees per guidelines published by OMMU. While renewals are biennial, there is no ultimate expiry after which no renewals are permitted. Additionally, in respect of the renewal process, provided that the requisite renewal fees are paid, the renewal application is submitted in a timely manner, and regulatory requirements are met, the Company would expect to receive the applicable renewed license in the ordinary course of business.
Regulations
In the state of Florida, only cannabis that is grown and manufactured in the state by a licensed establishment may be sold in the state. Florida is a “vertically-integrated” system, which gives a single license holder the ability to cultivate, harvest, process, manufacture, transport, sell and dispense cannabis and cannabis products. In Florida, license holders must participate in all aspects of the value chain in order to dispense cannabis and cannabis products to patients. Delivery to patients is permitted under the license with approval from the OMMU.
Reporting Requirements
The OMMU has not selected a state mandated seed-to-sale system at this time. The state however, tracks patient dispensing limits through a proprietary state system. Although there are no periodic reporting requirements to the State, full seed-to-sale tracking is required by all licensees and is periodically audited by the OMMU. Additionally, all sales transactions are manually entered into the state dispensing tracking system at the time of transaction.
Illinois
Illinois Regulatory Landscape
In 2013, the Illinois General Assembly passed the Compassionate Use of Medical Cannabis Pilot Program Act (410 ILCS 130), Public Act 98-0122 (the “Illinois Act”), which was signed into law by the Governor on August 1, 2013 and went into effect on January 1, 2014. The Illinois Act allows an individual who is diagnosed with a debilitating condition to register with the state to obtain cannabis for medical use. The program currently allows 60 Dispensing Organizations (each, a “DO”) and 22 cultivation centers statewide. A large variety of medical cannabis products are allowed in the state, including the smoking of cannabis flower. Overall, the program is administered by the Illinois Department of Public Health, the Illinois Department of Financial and Professional Regulations (the “IDFPR”) is the regulatory agency overseeing the medical marijuana program for DOs and the Illinois Department of Agriculture is the regulatory agency overseeing the medical marijuana program for cultivation centers.
In June 2019, the Illinois governor signed legislation legalizing marijuana for recreational use. The Cannabis Regulation and Tax Act, legalizing and regulating marijuana for recreational use, went into effect on June 25, 2019, however recreational sales of marijuana began in the state on January 1, 2020. The adult use program allowed existing medical marijuana license holders to apply for Early Approval Adult Use Dispensing Organization (“EAAUDO”) licenses to be able to sell adult use product at existing medical marijuana dispensaries (known as “co-located” or “same site” dispensaries) on January 1, 2020, and to have the privilege of opening a secondary adult use only retail site for every medical marijuana dispensary location the DO already had in its portfolio. All EAAUDO license holders were also required to commit to the state’s groundbreaking Social Equity program either through a financial contribution, grant agreement, donation, incubation program, or sponsorship program.
IDFPR will also be issuing an additional 75 Adult Use Dispensing Organization (“AUDO”) licenses in 2020. IDFPR is also expected to issue an additional 110 AUDO licenses by December 21, 2021. On September 3, 2021, the IDFPR announced the results from the Qualifying Applicant Lottery (conducted on July 29, 2021), the Social Equity Justice Involved Lottery (conducted on August 5, 2021), and the Tied Applicant Lottery (conducted on August 19, 2021) as the Department’s final administrative decision regarding applications for Conditional Adult Use Dispensing Organization Licenses (“Conditional Licenses”) under Sections 15-25 through 15-35.10 of the Cannabis Regulation and Tax Act (“Act”). The Department also intends to issue at least 50 additional Conditional Licenses in 2022 under a new application process consistent with Section 15-35.20 of the Act. On July 22, 2022, Governor JB Pritzker and the IDFPR issued 149 Conditional Adult Use Dispensing Organization Licenses to applicants selected in three lotteries held in the summer of 2021. All businesses qualified as Social Equity Applicants under that Cannabis Regulation and Tax Act.
Licenses
Licensees are required to submit an annual renewal application and fees per guidelines published by the IDFPR and the Department of Agriculture respectively. While renewals are annual, there is no ultimate expiry after which no renewals are permitted. Additionally, in respect of the renewal process, provided that the requisite renewal fees are paid, the renewal application is submitted in a timely manner, and regulatory requirements are met, the licensee would expect to receive the applicable renewed license in the ordinary course of business.
Under the adult use program, AUDO licenses are eligible for renewal every other year.
Regulations
In the state of Illinois, only cannabis that is grown and manufactured in the state by a licensed establishment may be sold in the state. License holders are provided the ability to dispense cannabis and cultivation centers are provided with the ability to cultivate, harvest, process, manufacture, and transport cannabis products. Delivery is not allowed from dispensaries to patients or consumers. Only designated caregivers may deliver medical cannabis to qualified patients.
Reporting Requirements
The state of Illinois has selected BioTrackTHC’s solution as the state’s track and trace system used to track commercial cannabis activity and seed-to-sale Licensed entities are permitted to choose their own provider to track marijuana products from seed-to-sale, provided that it has the ability integrate with BioTrackTHC via an API. License holders are required to provide IDFPR an annual financial report.
Massachusetts
Massachusetts Regulatory Landscape
The use of cannabis for medical use was legalized in Massachusetts by a voter approval of the Massachusetts Marijuana Initiative in 2012. The law took effect on January 1, 2013, eliminating criminal and civil penalties for the possession and use of up to a 60-day or ten-ounce supply of marijuana for medical use for patients possessing a state issued registration card.
On November 8, 2016, Massachusetts voters approved Question 4 or the Massachusetts Marijuana Legalization Initiative, which allowed for recreational or “adult use” cannabis in the Commonwealth. On September 12, 2017, the Cannabis Control Commission (“CCC”) was established under Chapter 55 of the Acts of 2017 to implement and administer laws enabling access to medical and adult-use cannabis.
On November 16, 2018, the CCC issued the first notices for retail marijuana establishments to commence adult-use operations in Massachusetts.
Under the current program there are no statewide limits on the total number of licenses permitted however, no individual or entity shall be a controlling person over more than three licenses in a particular class of license. Similarly, no individual, corporation or other entity shall be in a position to control the decision making of more than three licenses in a particular class of license. In addition, all Marijuana Establishments are required to enter into host community agreements with the municipality in which they are located.
Licenses
Marijuana Establishment licenses are renewed annually. There is no ultimate expiry after which no renewals are permitted. Additionally, in respect of the renewal process, provided that the requisite renewal fees are paid, the renewal application is submitted in a timely manner, the applicable licensee provides an accounting of the financial benefits accruing to the municipality as the result of the host community agreement, and regulatory requirements are met, the licensee would expect to receive the applicable renewed license in the ordinary course of business.
Regulations
In the state of Massachusetts, only cannabis that is grown and manufactured in the state by a licensed establishment may be sold in the state. A Marijuana Retailer may purchase and transport marijuana products from Marijuana Establishments and transport, sell or otherwise transfer marijuana products to Marijuana Establishments. Delivery is permissible to medical patients only by medical marijuana license holders. A special license type was created in the under the recreational program that allows delivery to recreational customers. Licensed cultivators and product manufacturers may cultivate, harvest, process, manufacture, package and sell marijuana products to Marijuana Establishments.
Reporting Requirements
The state of Massachusetts has selected METRC solution as the state’s T&T system used to track commercial cannabis activity and seed-to-sale. Licensed entities are permitted to choose their own provider to track marijuana products from seed-to-sale provided. The system allows for other third-party system integration via API.
Nevada
Nevada Regulatory Landscape
Medical marijuana use was legalized in Nevada by a ballot initiative in 2000. In November 2016, voters in Nevada passed an adult-use marijuana measure to allow for the sale of recreational marijuana in the state. The first dispensaries to sell adult-use marijuana began sales in July 2017. The Nevada Department of Taxation is the regulatory agency overseeing the medical and adult use cannabis programs. Similar to California, cities and counties in Nevada are allowed to determine the number of local marijuana licenses they will issue.
On June 12, 2019, Nevada Governor Steve Sisolak signed a new set of laws overhauling Nevada’s medical and recreational cannabis laws. These new laws created a new entity, the Nevada Cannabis Compliance Board (“CCB”), to take over the functions of bodies like the Nevada Department of Taxation’s Marijuana Enforcement Division. The CCB is modeled off the Nevada Gaming Control Board and began exercising its full powers on July 1, 2020. The CCB quickly gained a reputation for strict enforcement of license requirements, such as the timely payment of taxes and deadlines for the submission of renewal paperwork. Non-compliant licensees now face the shutoff of their access to METRC.
Moreover, the CCB requires that in addition to obtaining a Nevada license, each marijuana establishment must obtain a license and land use approval form from the local jurisdiction in which it is situated. A provisional or conditional licensee may not engage in cannabis business operations until it has received all necessary local approvals and a final registration certificate from the CCB.
The Company only operates in Nevada cities or counties with clearly defined marijuana programs. Currently, the Company is located in the City of Las Vegas, Clark County and Washoe County jurisdictions.
Licenses
Licenses are renewed annually and there is no ultimate expiry after which no renewals are permitted. Additionally, in respect of the renewal process, provided that the requisite renewal fees are paid, the renewal application is submitted in a timely manner along with the necessary supporting documents, and regulatory requirements are met, the licensee would expect to receive the applicable renewed license in the ordinary course of business.
Regulations
In the state of Nevada, only cannabis that is grown and manufactured in the state by a licensed establishment may be sold in the state. In Nevada, the Company has the capabilities to cultivate, harvest, process, manufacture, and sell/dispense/deliver adult-use and medical cannabis and cannabis products. The state also allows the Company to make wholesale purchase of cannabis and cannabis products from another licensed entity within the state.
Reporting Requirements
The state of Nevada uses METRC as the state’s computerized T&T system used to track commercial cannabis activity and seed-to-sale. Individual licensees, whether directly or through third-party integration systems are required to provide data to the state to meet certain reporting requirements. The system allows for other third-party system integration via application programming interface.
New York
New York Regulatory Landscape
In July 2014, the New York Legislature and Governor enacted the Compassionate Care Act (A06357E, S07923) to provide a comprehensive, safe and effective medical marijuana program to meet the needs of New Yorkers. The program currently allows 10 Registered Organizations (each, an “RO”) to hold “vertically-integrated” licenses, which gives a license holder the ability to cultivate, harvest, process, manufacture, transport, sell and dispense cannabis and cannabis products. Limited product types are allowed in the state. The New York State Department of Health (the “NYSDOH”) is the regulatory agency overseeing the medical marijuana program.
On March 31, 2021, former Governor Cuomo signed legislation (S.854-A/A.1248-A) legalizing adult-use cannabis. The bill establishes the Office of Cannabis Management (the “OCM”) to implement and enforce a comprehensive regulatory framework that covers medical, adult-use and cannabinoid hemp. The OCM will be an independent office operating as part of the New York State Liquor Authority and will be governed by a five-member board, with three members appointed by the Governor and one appointment by each legislative house.
Concerning medical cannabis, the legislation will allow people with a larger list of medical conditions to access medical marijuana, increase the number of caregivers allowed per patient, and permit home cultivation of medical cannabis for patients.
Concerning adult-use cannabis, the legislation will create a two-tier licensing structure that will allow for a range of producers by separating those growers and processors from also owning retail stores. The legislation creates licenses for producers and distributors, among other entities, and the legislation will implement strict quality control, public health and consumer protections. The legislation also implements a new cannabis tax structure that will replace a weight-based tax with a tax per mg of THC at the distributor level with different rates depending on final product type. The wholesale excise tax will be moved to the retail level with a 9% state excise tax. The local excise tax rate will be 4% of the retail price. Counties will receive 25% of the local retail tax revenue, and 75% will go to the municipality. Cities, towns, and villages may opt-out of allowing adult-use cannabis retail dispensaries or on-site consumption licenses by passing a local law by December 31, 2021, or nine (9) months after the effective date of the legislation. They cannot opt-out of adult-use legalization.
On February 22, 2022, Governor Kathy Hochul signed into law S.8084-A/A.9283-A, creating a new Adult-Use Conditional Cultivator License, authorizing eligible hemp growers to apply for a license to grow cannabis containing over 0.3% THC for the adult-use cannabis market. To be eligible for licensure, the hemp grower must have been authorized to grow hemp under the Department of Agriculture and Markets Industrial Hemp Research Pilot Program and meet certain other requirements. The Conditional Cultivator program puts New York farmers first, jumpstarting the New York Cannabis Industry and the Cannabis Law’s focus on social and economic equity. On March 10, 2022, the Cannabis Control Board (Board) approved the application and opening of the application window for Conditional Cultivators beginning March 15, 2022 and remaining open until June 30, 2022.
The same law created an adult-use conditional processor license. This license will allow businesses who are already licensed to process cannabinoid hemp in the Cannabinoid Hemp Program to apply for a license to process adult-use cannabis products in the Adult-Use Program. This application opportunity is only available to active cannabinoid hemp processor license-holders who applied for their license before January 1, 2022. Pursuant to the Cannabis Law, adult-use conditional processor licensees will be permitted to process cannabis products containing over 0.3% THC for the Adult-Use Cannabis Program. The license will also be authorized for the distribution of cannabis products to duly licensed adult-use retail dispensaries until June 1, 2023. After June 1, 2023, conditional processors seeking to distribute cannabis products, will be required to apply for a separate distributor license to engage in this activity. On June 23, 2022, the Cannabis Control Board (Board) approved the application and opening of the application window for Conditional Processors beginning June 28, 2022 and remaining open until August 31, 2022.
Licenses
State licenses in New York for Registered Organizations are renewed biennially. Before the two-year period ends, licensees are required to submit a renewal application per guidelines published by the NYSDOH. While renewals are granted every two years, there is no ultimate expiry after which no renewals are permitted. Additionally, in respect of the renewal process, provided that the requisite renewal fees are paid, the renewal application is submitted in a timely manner, and there are no material violations noted against the applicable license, the licensee would expect to receive the applicable renewed license in the ordinary course of business.
Regulations
In the state of New York, only cannabis that is grown and manufactured in the state by a licensed establishment may be sold in the state. In New York, ROs are permitted to wholesale manufactured product and extracted cannabis. Delivery is allowed from dispensaries to patients with prior approval.
Reporting Requirements
The state of New York has selected BioTrackTHC’s solution as the state’s T&T system used to track commercial cannabis activity and seed-to-sale. The BioTrackTHC system is required to serve as all ROs’ patient verification system, but is optional as the RO facing tracking system. In addition to entering all dispensing transactions into the BioTrackTHC system, every month the NYSDOH requests a dispensing report in Excel format, via email, showing all products dispensed for the month.
Regulatory Affairs Program
The Company’s Senior Vice President of Capital Markets & Legal Affairs oversees, maintains, and implements the compliance program and personnel. In addition to the Company’s legal and regulatory affairs departments, the Company also has local regulatory/compliance counsel engaged in the jurisdictions (state and local) in which it operates. Such counsel provides legal advice to the Company regarding compliance with state and local laws and regulations and the Company’s legal and compliance exposures under United States federal law. The Senior Vice President of Capital Markets & Legal Affairs serve as liaisons to state and local regulators during both regular business hours and after hours. The Compliance Department, in partnership with the Retail, Human Resources, Legal, and Logistics Departments, is responsible for ensuring operations and employees strictly comply with applicable laws, regulations and licensing conditions and ensure that operations do not endanger the health, safety or welfare of the community. The Senior Vice President of Capital Markets & Legal Affairs coordinates with the Security Department to ensure that the operation and all employees are following and complying with the Company’s written security procedures.
The Compliance Department oversees training for all employees, including on the following topics:
● Compliance with State and Local Laws
● Safe Cannabis Use
● Dispensing Procedures
● Security & Safety Policies and Procedures
● Inventory Control
● Track-and-Trace Training Session
● Transportation Procedures
The Company’s compliance program emphasizes security and inventory control to ensure strict monitoring of cannabis and inventory from delivery by a licensed distributor to sale or disposal. Only authorized, properly trained employees are allowed to access the Company’s computerized seed-to-sale system.
The Company has created comprehensive standard operating procedures, operating plans, trackers and checklists that include detailed descriptions and instructions for receiving shipments of inventory, inventory tracking, recordkeeping and record retention practices related to inventory, as well as procedures for performing inventory reconciliation and ensuring the accuracy of inventory tracking and recordkeeping. The Company maintains accurate records of its inventory at all licensed facilities. Adherence to the Company’s standard operating procedures is mandatory and ensures that the Company’s operations are compliant with the rules set forth by the applicable state and local laws, regulations, ordinances, licenses and other requirements.
SERVICE PROVIDERS
As a result of any adverse change to the approach in enforcement of United States cannabis laws, adverse regulatory or political change, additional scrutiny by regulatory authorities, adverse change in public perception in respect of the consumption of marijuana or otherwise, third party service providers to the Company could suspend or withdraw their services, which may have a material adverse effect on the Company’s business, revenues, operating results, financial condition or prospects.
ABILITY TO ACCESS PUBLIC AND PRIVATE CAPITAL
In the second half of fiscal year 2022, the Company attempted to complete a bridge loan for $20.0 million with an unrelated third-party lender to address liquidity needs until such a time the Company completed the sale of assets in New York and Florida. The Company was unsuccessful and the lender ultimately did not complete the lending, at least in part due to the uncertainty of the date by which the sale of the Florida assets was anticipated to close. While the Company has previously accessed capital markets successfully, the Company believes the facts and circumstances at a macroeconomic cannabis industry level are riskier to investors, coupled with its history of losses, high management turnover and complex debt and equity structures On July 31, 2022, the senior term notes payable became due and payable. The Company depend on the ability to close the sales of its assets in New York and on the sale of its assets in Florida in order to repay the $97.7 million outstanding. Neither of these assets sales had closed by July 31, 2022. While the sale of the Company’s Florida assets closed on August 22, 2022 and the Company entered into agreements to use a total of $40.0 million of the proceeds from that transaction to pay down the balance of the amount outstanding, the Company remains in default regarding the repayment of the balance of that debt. The Company’s inability to raise financing to fund operating or capital expenditures or acquisitions could limit its ability to operate or its growth and may have a material adverse effect upon the Company’s business, financial condition, cash flows, results of operations or prospects.
COVID-19
On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. While the ultimate severity of the outbreak and its impact on the economic environment is uncertain, the Company is monitoring this closely. As of June 25, 2022, the Company currently operates 30 store locations across California (13), Florida (7), New York (4), Nevada (3), Illinois (1), Massachusetts (1) and Arizona (1). The Company’s priority during the COVID-19 pandemic has been protecting the safety of its employees and customers and it is following the recommended guidelines of applicable government and health authorities. Despite being deemed as an essential retailer in its core markets, the Company has experienced a negative impact on sales in certain markets as a result of shelter-at-home orders, social distancing efforts, restrictions on the maximum allowable number of people within a retail establishment and declining tourism. Although the Company only permanently closed one store as a result of COVID-19, certain markets, such as California and Nevada, experienced a greater impact on sales due to reduced store hours and foot traffic in certain locations, as well as limits on the number of customers that may be in a store at any one time. Other markets, such as Illinois and Florida were not significantly impacted by COVID-19 and in some cases, stores in those markets have generated increased sales. Due to its strong vendor partnerships in each market, the Company has not experienced a significant impact to its supply chain in each market. In the event that the Company were to experience widespread transmission of the virus at one or more of the Company’s stores or other facilities, the Company could suffer reputational harm or other potential liability. 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.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of COVID-19, including tax relief and government loans, grants and investments. The Company did not utilize any relief provided by the CARES Act and, as a cannabis retailer, the Company is not eligible to obtain a loan under the Paycheck Protection Program under the CARES Act. The Paycheck Protection Program is governed by the rules of the Small Business Administration, which considers as ineligible for loans business concerns that are engaged in any illegal activity; the cultivation, distribution, sale and possession of cannabis violates federal law in the United States. Accordingly, the CARES Act did not have a material impact on the Company’s Consolidated Financial Statements for the year ended June 26, 2021. To date, the Company has generally implemented certain safety measures to ensure the safety of its customers and associates, which may have the effect of discouraging shopping or limiting the occupancy of its stores. Store operations in California and Nevada have been modified, with an increased focus on direct-to-consumer delivery and enabling a curbside pickup option for its customers. The Company leveraged its technology team to build the enhanced omni-channel functionality in, and expects to continue offering, a variety of purchasing options for its customers. These measures, and any additional measures that have been and may continue to be taken in response to the COVID-19 pandemic, have substantially decreased and may continue to decrease, the number of customers that visit the stores which has had, and will likely continue to have a material adverse effect on the business, financial condition and results of operations. The ultimate magnitude of COVID-19, including the extent of its overall impact on the financial and operational results cannot be reasonably estimated at this time; however, the Company has experienced significant declines in sales. The overall impact will depend on the length of time that the pandemic and the various strains of viral infections continues, the extent to which it affects the Company’s ability to raise capital, and the effect of governmental regulations imposed in response to the pandemic, as well as uncertainty regarding all of the foregoing. At this time, it is unclear how long these measures may remain in place, what additional measures may be imposed, or when and if the Company’s operations will be restored to the levels that existed prior to the COVID-19 pandemic.
In addition, the Company’s business depends on consumer discretionary spending, and as such, its results are particularly sensitive to economic conditions and consumer confidence. COVID-19 has significantly impacted economic conditions, resulting in, among other things, unprecedented increases in the number of people seeking jobless benefits and a significant decline in global financial markets. As a result, as the Company noted in fiscal year 2022, even when all its store locations are fully operational, there can be no guarantee that its revenue will return to its pre-COVID-19 levels.
TURNAROUND AND GROWTH PLAN
The Company executed on a number of initiatives to continue restructuring the business and reduce its operating expenses and cash burn:
Focus on Core Markets
Beginning in 2019, the Company began searching for opportunities to sell non-core assets to raise non-dilutive financing. The Company determined that the sale of non-core assets would allow for management to further focus on deepening its market share in its core markets. The Company previously intended to sell its assets in Arizona; however, following the passage and expeditious roll-out of adult-use sales in Arizona, the Company reclassified its Arizona operations from discontinued to continuing operations in the fourth quarter of 2021.
Evanston, Illinois
On July 1, 2020, the Company executed definitive agreements, which were amended and restated on October 30, 2020, to sell all outstanding membership interests in MME Evanston Retail, LLC, which owns the retail store located in Evanston, Illinois, for total consideration of $20.0 million. During the first quarter of fiscal 2021, the Company received $10.0 million of the total consideration. During the second quarter of fiscal 2021, the Company received $8.0 million of the total consideration, which, pursuant to the lender and landlord support agreements entered into during the first quarter of fiscal 2021, was used to paydown amounts outstanding under the Convertible Facility. The final payment of $2.0 million to be received in the form of a secured promissory note payable three months following the closing of the transaction. On August 10, 2020, all operational control and risk of loss was transferred, and the Company had no further obligation to fund operations of Evanston through a Consulting Agreement. In April 2022, the regulatory approval was finalized and the transfer of the cannabis license successfully completed.
New York - Investment Agreement
On February 25, 2021, MedMen NY, Inc. (“MMNY”), the New York subsidiary of the Company, and its parent, MM Enterprises USA, entered into an investment agreement (the “Investment Agreement”) with Ascend Wellness Holdings, LLC, a New York limited liability company (“AWH NY”), and Ascend Wellness Holdings, LLC, a Delaware limited liability company (“AWH”, and collectively, the “Investors”) whereby, subject to approval from the New York State Department of Health and other applicable regulatory bodies, AWH agreed to purchase shares of common stock of MMNY for an aggregate purchase price of up to $73.0 million. The Investment Agreement provided that all final regulatory approvals including from the State of New York shall be received by December 31, 2021 (the “Deadline”). All final regulatory approvals were not received by the Deadline and, on January 3, 2022, the Company advised the Investors that of this failure. On January 14, 2022, the Investors filed a complaint in the Commercial Division of the Supreme Court of the State of New York in New York County against MMNY and MM Enterprises USA in which AWH sought, among other things, to compel the MMNY and the Company to close the transaction on the terms set forth in the Investment Agreement. On May 11, 2022, AWH and the Company entered into a non-binding term sheet settling the legal dispute (the “Term Sheet”). Under the Term Sheet, AWH agreed to increase the transaction consideration set forth in the Investment Agreement by $15.0 million, to $88.0 million, $4.0 million of which was to be contingent on the start of adult-use sales at a MMNY dispensary. The Term Sheet required the parties to use their best efforts to execute a formal settlement agreement based on the terms of the Term Sheet within ten calendar days of their execution of the Term Sheet. The Term Sheet further required the parties to, within thirty days of executing the settlement agreement, complete the closing of the transaction on the same terms and conditions as set forth in the Investment Agreement except to the extent modified by the settlement agreement. AWH failed to comply with these provisions of the Term Sheet and, instead, announced during an AWH earnings call on August 15, 2022 that AWH did not intend to close the transaction as required by the Term Sheet.
Florida - Asset Purchase Agreement
On August 22, 2022, the Company, through its wholly-owned subsidiary MME Florida LLC and MM Enterprises USA closed the sale to Florida-based private company, Green Sentry Holdings, LLC (“Green Sentry”), of substantially all of the Company’s Florida-based assets, including its license, dispensaries, inventory and cultivation operations, and assumption of certain liabilities. The consideration received by the Company was comprised of $63.0 million in cash and the assumption of approximately $4.0 million in liabilities by Green Sentry. The Company consummated the transaction pursuant to the terms of the Asset Purchase Agreement, dated February 27, 2022, as amended by the First Amendment, dated July 31, 2022, and the Second Amendment, dated August 22, 2022, which Second Amendment amended the purchase price and provided that $40.0 million of the purchase price be applied to the repayment of the Company’s Senior Secured Term Loan Facility in several instalments. The amendments to the Asset Purchase Agreement also provide for a deferred rent escrow of approximately $550,000 from the purchase price. The deal includes the license of the Company’s trademarks in the state to Green Sentry, subject to termination rights.
Hilco Process for Rent Reductions Process - 2022
In April 2022, management engaged the restructuring firm of Hilco Real Estate to solicit a permanent reduction of rent costs with all landlords. The Company has deferred $360,000 to be due in 2023. In addition, the Company has negotiated rent reductions of approximately $650,000 annually on average and $3,340,000 through the term of the lease. Management continues in negotiations with the remaining landlords and will continue to pursue permanent reductions in lease costs.
Lender and Landlord Support Agreement - 2020
On July 3, 2020, the Company announced the execution of definitive agreements (collectively referred to as the “Lender and Landlord Support Agreement”) with certain lenders, including Gotham Green Partners, Stable Road Capital and affiliates, and the landlord for several of its retail, cultivation and manufacturing facilities, Treehouse Real Estate Investment Trust. Lender and Landlord Support Agreement resulted in approximately $32 million of cash commitments over the next twelve months through a combination of cash interest and rent deferrals. The rent deferral of $24.0 million is due on July 1, 2023. The Company is currently in negotiations with the landlord in regard to this deferral payment.
Senior Secured Convertible Note Facility
Initial Agreement
In April 2019, the Company entered into a senior secured convertible credit facility (the “Convertible Facility”) to provide up to $250.0 million in gross proceeds, arranged by Gotham Green Partners (“GGP”). The Convertible Facility is accessed through issuances by the Company to the lenders of convertible senior secured notes with an interest rate equal to LIBOR plus 6.0% per annum (“Facility Notes”). In connection with the Convertible Facility, the Company has also issued share purchase warrants (the “Facility Warrants”) to purchase Subordinate Voting Shares. Since April 2019, the Convertible Facility was amended at various times modifying certain covenants, amending the conversion and exercise prices of securities issued pursuant to the Convertible Facility, cancelling and issuing new Facility Warrants and providing additional financing with the issuance of Facility Notes.
Second Restatement
On July 2, 2020, the Company amended and restated the Convertible Facility (the “Second Restatement”) wherein the minimum liquidity covenant was waived until September 30, 2020 and resetting at $5,000,000 thereafter with incremental increases on March 31, 2021 and December 31, 2021. The payment-in-kind feature on the Convertible Facility was also extended, such that 100% of the cash interest due prior to June 2021 will be paid-in-kind and 50% of the cash interest due thereafter will be paid-in-kind. The Second Restatement released certain assets from its collateral to allow greater flexibility to generate proceeds through the sale of non-core assets. The Second Restatement allowed for immediate prepayment of amounts under the Convertible Facility with a 5% prepayment penalty until 2nd anniversary of the Second Restatement and 3% prepayment penalty thereafter. As part of the Second Restatement, holders of Facility Notes were provided down-round protection where issuances of equity interests (including securities that are convertible or exchangeable for equity interests) by the Company at less than the higher of (i) lowest conversion price under the amended and restated notes of the Convertible Facility amendment dated March 27, 2020 and (ii) the highest conversion price determined for any incremental advances, will automatically adjust the conversion/exercise price of the previous tranches and incremental tranche 4 warrants and the related replacement warrants to the price of the newly issued equity interests. Certain issuances of equity interests were exempted such as issuances to existing lenders, equity interests in contemplation at the time of Second Restatement and equity interests issued to employees, consultants, directors, advisors or other third parties, in exchange for goods and services or compensation. As consideration for the amendment, the conversion price for 52% of the tranches 1 through 3 and the first amendment fee notes outstanding under the Convertible Facility were amended to $0.34 per share. An amendment fee of $2,000,000 was also paid through the issuance of additional notes at a conversion price of $0.28 per share.
On September 14, 2020, the Company was advanced an additional $5,000,000 in gross proceeds (the “Incremental Advance”) under the Convertible Facility and the Company issued additional Facility Notes with a conversion price per share of $0.20. In connection with the Incremental Advance, the Company issued 25,000,000 Facility Warrants with an exercise price of $0.20 per share. In addition, 1,080,255 existing Facility Warrants were cancelled and replaced with 16,875,001 Facility Warrants with an exercise price of $0.20 per share. Pursuant to the terms of the Convertible Facility, the conversion price for 5.0% of the existing Facility Notes outstanding prior to Tranche 4 and Incremental Advance (including paid-in-kind interest accrued on such Notes), being 5.0% of an aggregate principal amount of $170,729,923, was amended to $0.20 per share. As consideration for the additional advance, the Company also issued convertible notes as consideration for a $468,564 fee with a conversion price of $0.20 per share.
The Convertible Facility was also amended to include, among other things, a modification to the minimum liquidity covenant, which extends the period during which it is waived from September 30, 2020 to December 31, 2020. The minimum liquidity threshold resets to $5.0 million thereafter to $7.5 million effective on March 31, 2021 and then to $15.0 million effective on December 31, 2021.
On September 16, 2020 and September 28, 2020, the down round feature on the Facility Notes and Facility Warrants issued in connection with Tranche 4, Incremental Advances and certain amendment fees was triggered wherein the exercise price was adjusted to $0.17 and $0.15 per share, respectively.
Third Restatement
On January 11, 2021, the Company amended and restated the Convertible Facility (the “Third Restatement”) pursuant to which the Company received an additional advance of $10.0 million evidenced by the issuance of Facility Notes with a conversion price of $0.1608 per Subordinate Voting Share. In connection with the Third Restatement, the Company paid a fee of $937,127, which amount is also evidenced by the issuance of Facility Notes with a conversion price of $0.1608 per Share. The Company also issued 62,174,567 Facility Warrants exercisable for five years at a purchase price of $0.1608 per Share. The Facility Notes, and Facility Warrants issued pursuant to the Third Restatement included down round adjustment provisions, with certain exceptions, if the Company issued securities at a lower price.
Pursuant to the terms of the Third Restatement, of the $168.1 million Facility Notes outstanding prior to Tranche 4 and the Incremental Advances thereunder (including paid-in-kind interest accrued on such notes), the conversion price of $47.1 million of the Facility Notes was changed to $0.17 per share ($16.8 million of which continued to be subject to down round adjustment provisions), and the Company cancelled an aggregate of 2,160,507 Facility Warrants that were issued with such notes and, in exchange, issued 41,967,832 Facility Warrants with an exercise price of $0.1608 per share.
At the time of the Third Restatement, the Convertible Facility included certain negative covenants, including restrictions on incurring liens and debt, sale of assets, conducting mergers, investments and affiliate transactions and making certain payments. The Convertible Facility was also amended to, among other things, modify the minimum liquidity covenant, which extended the period during which it was waived from December 31, 2020 to June 30, 2021, reset the minimum liquidity threshold to $7.5 million effective on July 1, 2021 through December 31, 2021, and $15.0 million thereafter, and waived of the minimum liquidity covenant if the Company is current on cash interest. Furthermore, covenants with regards to non-operating leases, capital expenditures and corporate SG&A were tied to a board of directors approved budget.
As a result of issuances of convertible debentures pursuant to the Company’s unsecured convertible debenture facility entered into on September 16, 2020, under the terms of the Convertible Facility (prior to the Third Restatement), the conversion prices of a total of approximately $63.9 million Facility Notes and the exercise prices of 130,804,447 Facility Warrants were reduced to $0.1529 per share.
On May 11, 2021, the Company entered into an agreement letter (the “Letter”) with GGP wherein the Company received reprieve from certain potential non-compliance with certain covenants under the Third Restatement dated January 11, 2021, such as potential non-compliance with certain reporting and notice requirements, pay certain liabilities when due, deliver control agreements for certain bank accounts, obtain consent from the lenders prior to hiring certain executives, obtain consent from the lenders for certain matters and related items. No amounts were paid by the Company for the Letter.
Fourth Restatement
On August 17, 2021, the Company entered into an amended and restated Convertible Facility (“Fourth Restatement”) pursuant to which certain terms were amended, including among other things, extension of the maturity date of the Facility Notes to August 17, 2028, elimination of any cash interest payable and instead providing for paid-in-kind interest, elimination of certain repricing provisions that apply to the Facility Notes and the Facility Warrants, elimination of and revision to certain restrictive covenants and amendment to the minimum liquidity covenant. Accrued paid-in-kind interest will be convertible at the higher of (i) the per Share volume-weighted average price of the Shares on the Canadian Securities Exchange (or, if not listed on the Canadian Securities Exchange, such other recognized stock exchange or quotation system on which the Shares are listed for trading) for the period from the scheduled open of trading until the scheduled close of trading of the primary trading session over the 30 consecutive trading days prior to and including the relevant interest payment date, determined without regard to after-hours trading or any other trading outside of the regular trading session trading hours, and (ii) the price per share determined using the lowest discounted price available pursuant to the pricing policies of the Canadian Securities Exchange or otherwise permitted by the Canadian Securities Exchange. Following the Fourth Restatement, (i) the Facility Notes held by the holders on the effective date of the Fourth Restatement may not be prepaid without the prior written consent of the collateral agent until legalization of the general cultivation, distribution and possession of marijuana at the federal level in the United States, or the removal of the regulation of such activities from the U.S. federal laws, following which any such prepayment shall require no less than six months’ notice from MedMen to the holders of such Facility Notes. The Convertible Facility continues to include affirmative and negative covenants, including restrictions on the following: incurring liens and debt, selling assets, conducting mergers, investments and affiliate transactions and making certain equity distributions, in each case, subject to customary exceptions. No changes were made to the conversion and exercise prices of the Facility Notes or Facility Warrants.
The Fourth Restatement also provides the holders of the Facility Notes with a top-up right upon the issuance by MedMen of certain Subordinate Voting Shares, or securities convertible, exchangeable or exercisable for Subordinate Voting Shares, in the form of warrants to acquire additional Subordinate Voting Shares, intended generally to maintain their “as converted” equity interest, and a pre-emptive right with respect to certain future equity financings of the Company, subject to certain exceptions.
An event of default may result in the accelerated maturity of all amounts outstanding under the Facility Notes and also an increase in the interest rate under the Convertible Facility by up to 3% per annum. An event of default includes but is not limited to failure to pay any amounts owed pursuant to the Convertible Facility, failure to comply with covenants, the filing of certain judgements and liens against the Company, filing of bankruptcy, prohibition by a governmental authority to conduct the Company’s material business or a material adverse change to business, loss of a cannabis license that results in a material adverse effect, default under any material agreement, a change of control, or de-listing for a securities stock exchange.
In connection with the Fourth Restatement, a newly formed limited partnership (the “Superhero LP”) established by Tilray, Inc. (“Tilray”) and other strategic investors, acquired an aggregate principal amount of approximately $165.8 million of the Facility Notes and 135,266,664 Facility Warrants, all of which were originally issued by MedMen and held by certain funds associated with GGP and certain other investors. The Company granted Tilray the right to appoint two non-voting observers to the Company’s board of directors.
On August 17, 2021, the Company also entered into Board Nomination Rights Agreements with each of S5 Holdings LLC (“S5 Holdings”) and GGP. With respect to S5 Holdings, so long as its diluted ownership percentage of MedMen (including the proportionate equity ownership of securities held by the Superhero LP) is at least 9%, S5 Holdings will be entitled to designate one individual to be nominated to serve as a director of the Company, which S5 Holdings has initially designated as Michael Serruya. With respect to GGP, so long as GGP and certain associated investors’ diluted ownership percentage of MedMen is at least 9%, GGP will be entitled to designate one individual to be nominated to serve as a director of the Company.
2018 Secured Term Loan
In October 2018, MedMen Corp. completed a $77.7 million senior secured term loan (the “2018 Term Loan”) with funds managed by Hankey Capital, LLC and with an affiliate of Stable Road Capital (the “Term Loan Lenders”). The ownership interests of certain of the Company’s subsidiaries have been pledged as security for the obligations under the 2018 Term Loan. Additionally, the Company guaranteed the obligations of MedMen Corp. under the 2018 Term Loan.
On January 13, 2020, the 2018 Term Loan was amended wherein the maturity date was extended to January 31, 2022 and the interest rate was increased to a fixed rate of 15.5% per annum, of which 12.0% will be payable monthly in cash based on the outstanding principal and 3.5% will accrue monthly to the principal amount of the debt as a payment-in-kind. The Company may prepay without penalty, in whole or in part, at any time and from time to time, the amounts outstanding under the 2018 Term Loan (on a non-revolving basis) upon 15 days’ notice. Certain ownership interests of the Company’s subsidiaries have been pledged as security for the obligations under the 2018 Term Loan. Additionally, the Company guaranteed the obligations of MedMen Corp. under the 2018 Term Loan.
MedMen Corp., a subsidiary of the Company, cancelled the existing warrants issued to the Term Loan Lenders, being 16,211,284 warrants exercisable for Class B Common Shares of MedMen Corp. (also called MedMen Corp. Redeemable Shares) at $4.97 per share and 1,023,256 warrants exercisable at $4.73 per share, and issued to the Term Loan Lenders a total of 40,455,729 warrants exercisable for MedMen Corp. Redeemable Shares with an exercise price of $0.60 per share that are exercisable until December 31, 2022. The new warrants issued to the Term Loan Lenders may be exercised at the election of their holders on a cashless basis.
On July 3, 2020, as part of the Lender and Landlord Support Agreement, the Company and the Term Loan Lenders further amended the commercial loan agreement that governs the 2018 Term Loan. Pursuant to the further amendment, 100% of the total interest payable prior to June 2021 will be paid-in-kind and 50% of the cash interest due thereafter for the remainder of the term of the 2018 Term Loan will be paid-in-kind. The PIK feature will expire if Section 280E tax reform occurs and the Company begins to be taxed similar to other U.S. corporations.
The threshold for the minimum liquidity covenant, which was previously $15.0 million, was waived until September 30, 2020, resetting to $5.0 million thereafter, to $7.5 million effective on March 31, 2021 and then to $15.0 million effective on December 31, 2021. In connection with the amendments to the 2018 Term Loan, the Company is now subject to certain additional covenants thereunder, which are consistent with those included as a part of the amendments to the Convertible Facility.
As consideration for the amendment of the 2018 Term Loan, MedMen Corp. issued to the lenders a total of 20.2 million warrants, each exercisable for MedMen Corp. Redeemable Shares at $0.34 per share for a period of five years. As additional consideration, a fee of $834,000 was paid-in-kind. The Company also cancelled 20.2 million warrants of the total 40.4 million warrants already held by the Term Loan Lenders, which were each exercisable at $0.60 per share.
On September 16, 2020, the Company entered into a further amendment to the 2018 Term Loan. The amendments include, among other things, an increase in the potential size of the facility by $12,000,000, of which $5,700,000 (“Incremental Notes”) is fully committed by the Term Loan Lenders.
The principal amount of the Incremental Notes carries an interest rate of 18.0% per annum, to be paid as follows: (a) 12.0% shall be paid in cash monthly in arrears; and (b) 6.0% shall accrue monthly to the outstanding principal as payment-in-kind. The 2018 Term Loan was also amended to include, among other things, a modification to the minimum liquidity covenant, which extends the period during which it is waived from September 30, 2020 to December 31, 2020. The minimum liquidity threshold resets to $5.0 million thereafter to $7.5 million effective on March 31, 2021 and then to $15.0 million effective on December 31, 2021.
As consideration for the increase in the size of the facility under the 2018 Term Loan and the amendment to the covenant, MedMen Corp. issued warrants as follows: on the closing of the initial $3,000,000, MedMen Corp. issued to the Term Loan Lenders a total of 30,000,000 warrants, exercisable for MedMen Corp. Redeemable Shares at $0.20 per share for a period of five years and 20,227,865 warrants for MedMen Corp. Redeemable Shares exercisable at $0.34 per share for a period of five years; and on closing of the remaining $2,700,000 tranche, MedMen Corp. issued to the Term Loan Lenders an additional 27,000,000 warrants exercisable for MedMen Corp. Redeemable Shares at the greater of (a) $0.20 per share and (b) 115% multiplied by the volume-weighted average trading price of the shares for the five consecutive trading days ending on the trading day immediately prior to the applicable funding date of the second tranche.
On September 16, 2020, the Company closed on an incremental term loan of $3,000,000 at an interest rate of 18.0% per annum of which 12.0% shall be paid in cash monthly in arrears; and 6.0% shall accrue monthly to the outstanding principal as payment-in-kind. In connection with the funding, MedMen Corp. issued 30,000,000 warrants each exercisable at $0.20 per share for a period of five years.
On September 16, 2020 and September 28, 2020, the down round feature on the warrants issued in connection with the incremental term loan of $3,000,000 on September 16, 2020 was triggered wherein the exercise price was adjusted to $0.17 and $0.15 per share, respectively.
On October 30, 2020, the Company closed on an incremental term loan totaling $7,705,279 under the 2018 Term Loan at an interest rate of 18.0% per annum of which 12.0% shall be paid in cash monthly in arrears; and 6.0% shall accrue monthly to the outstanding principal as payment-in-kind. In connection with the funding, MedMen Corp. issued 77,052,790 warrants each exercisable at $0.20 per share for a period of five years.
On February 25, 2021, MM CAN entered into a side letter (the “Side Letter”) with Hankey pursuant to which any circumstance that would have triggered an obligation by MM CAN to reset the exercise price of certain warrants in accordance with existing down round provisions in the 2018 Term Loan, MM CAN will issue additional warrants or Subordinate Voting Shares. In accordance therewith, on March 1, 2021, MM CAN issued warrants exercisable for 1,671,278 shares of MM CAN. The warrants have a term ending on September 14, 2025 and an exercise price of $0.481 per share.
The parties also amended certain covenants in the 2018 Term Loan to include a required minimum liquidity, board approval of the annual budget, restrictions on corporate expenditures, and the delivery of certain financial information. The Side Letter also amended the 2018 Term Loan by providing MM CAN the ability to cure within 10 days after written notice any failure to satisfy certain covenants.
Furthermore, with respect to the Investment Agreement with AWH (as described above under “Investment Agreement”), if the Milestone is not achieved by January 31, 2022, MM CAN will issue a note to Hankey (the “Note”), which will accrue interest and compound at 12% per annum and mature the earlier of (a) upon the payment of the $10.0 million based on achievement of the Milestone pursuant to the Investment Agreement, or (b) 12 months from the date of issuance of the Note. In addition, the Note will include an origination fee in an amount equal to 12% per annum interest rate on the principal amount of the Note deemed to have accrued between the period commencing on the date of the initial closing of the Investment Agreement and ending on the date of the Note.
On May 11, 2021, the Company entered into a Fifth Modification to the Senior Commercial Loan Agreement (the “Fifth Modification”) with Hankey which amends, among other things, certain covenants, including the those related to minimum liquidity, annual budget, cash forecasts and corporate expenditures, and waive certain non-compliance with covenants, such as reporting delivery requirements, delivery of insurance certificates, minimum collateral value, unencumbered liquid assets, failure to pay certain liabilities when due and related items. The parties also amended and restated the forms of warrants to conform to previously agreed upon terms, such as down round provisions. The Company agreed to pay an amendment fee of $1.0 million, that is payable upon the earliest of receipt of proceeds from the Level Up disposition or the MedMen NY disposition or when the indebtedness has become due.
On February 2, 2022, the Company executed the Sixth Modification extending the stated maturity date of January 31, 2022 of the Facility for a period of six months; specifically, July 31, 2022 with respect to 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. The Company also agreed to prepay $20,000,000 on the Term Loans and pay a fee of $1,000,000 to the Term Loan lenders in consideration of the Sixth Modification, which fee will be paid in Class B Subordinate Voting Shares (“Shares”) with a deemed price of $0.1247 (C$0.1582) for a total of 8,021,593 Class B Subordinate Voting Shares (the “Fee Shares”), with any difference in realized net proceeds that is less than $1,000 from the sale of the Fee Shares during a 30-day period, to the extent such Fee Shares are sold, reimbursed in cash.
As of June 25, 2022, the Company is in violation of minimum liquidity covenant of the 2018 Term Loan. The 2018 Term Loan requires the Company to maintain $15.0 million minimum cash. On July 31, 2022, the 2018 Term Loan of $97.8 million became due and the Company was unable to meet this financial obligation and pay the lender, which constitutes an event of default.
September 2020 Unsecured Convertible Facility
On September 16, 2020, the Company entered into an unsecured convertible debenture facility (the “2020 Convertible Facility”) for total available proceeds of $10,000,000 with certain institutional investors wherein the convertible debentures (“Debentures”) had a conversion price equal to the closing price on the trading day immediately prior to the closing date, a maturity date of 24 months from the date of issuance and bear interest from the date of issuance at 7.5% per annum, payable semi-annually in cash.
The Debentures provided for the automatic conversion into Shares in the event that the Shares trade at a volume weighted average trading price that is 50% above the Conversion Price on the CSE for 45 consecutive trading days. Upon an event of default, including failure to pay amounts then due under the Debenture, to perform or comply (without remedying such noncompliance) with the Debenture terms, or to pay debts, or commencement of bankruptcy proceedings or appointment of a trustee, all outstanding amounts under the debentures would become immediately due and payable.
Subject to certain conditions, the Company has the right to call additional tranches, totaling $1,000,000 each, no later than 20 trading days following the issuance of each tranche, including the initial tranche, up to a maximum of $10,000,000 under all tranches. The timing of additional tranches can be accelerated based on certain conditions. The investors have the right to at least four additional tranches, with any such subsequent tranche to be at least $1,000,000.
At the closing of each additional tranche, the Company agreed to issue share purchase warrants equal to 55% of the number of shares a debenture is convertible into for a particular tranche. Each warrant will be exercisable to purchase one share for a period of 24 months from the date of issuance at an exercise price equal to 120% of the volume weighted average price of the Shares on the CSE for ending on the trading day immediately prior to the applicable closing of each tranche.
On September 16, 2020, the Company closed on an initial tranche of $1,000,000 with a conversion price of $0.1670 per Subordinate Voting Share and issued 3,293,413 warrants, exercisable at $0.21 per share for a period of 24 months from the date of issuance.
On September 30, 2020, the Company closed on a second tranche of $1,000,000. The debentures issued for the second tranche have a conversion price of $0.1456 per Class B Subordinate Voting Share. As part of the second tranche, the Company issued to the Investors a total of 3,777,472 warrants, each exercisable at $0.17 per share for a period of 24 months from the date of issuance.
On November 20, 2020, the Company closed on a third tranche of $1,000,000 issuing debentures with a conversion price of $0.15 per share and warrants to purchase 3,592,326 Class B Subordinate Voting Share at an exercise price of $0.17 per share.
On December 17, 2020, the Company closed on a fourth tranche of $1,000,000 under the facility with a conversion price of $0.15 per Subordinate Voting Share. In connection with the fourth tranche, the Company issued 3,597,100 warrants for an equal number of Shares with an exercise price of $0.18 per share.
On January 29, 2021, the Company closed on a fifth tranche of $1,000,000 with a conversion price of $0.16 per Subordinate Voting Share. In connection with the fifth tranche, the Company issued 3,355,000 warrants with an exercise price of $0.19 per share.
On June 14, 2021, a portion of the 2020 Convertible Facility was automatically converted into 16,014,663 Class B Subordinate Voting Shares in the amount of $2,371,782. In addition, 8,807,605 of the outstanding warrants issued in connection with the facility were exercised at varying prices for gross proceeds of $1,622,377.
On June 28, 2021, the remaining principal amount 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 2020 Convertible facility were exercised at varying prices for gross proceeds of $1,622,377.
As of June 25, 2022, the 2020 Convertible Facility has been paid off and there are no outstanding balances.
2021 Equity Private Placements
On February 16, 2021, the Company entered into subscription agreements with institutional investors for the sale of up to 7,800,000 Units at a purchase price of $0.3713 per Unit for an aggregate purchase price of approximately $2.9 million. Each Unit consists of one Subordinate Voting Share of the Company and one warrant. Each warrant is exercisable for a period of five years to purchase one Share at an exercise price of $0.4642 per Share, subject to the terms and conditions set forth in the warrant.
For a period of one year, the purchasers have the right, within 24 hours from first notice, if an overnight raise or a commercially reasonable time in all other circumstances, to commit to participate in up to 25% on any broadly syndicated equity raises, convertible note offerings or unit deals via a bank or brokerage firm. The purchasers, however, cannot exercise this right in the following events: any capital found through a strategic capital raise conducted by Moelis & Company, any straight debt instruments, capital transactions involving a change of control, any funding by Gotham Green Partners, or capital transactions with a strategic or non-strategic counterparty that takes place in conjunction with any restriction or conversion of debt to equity. The total amount of any such individual participation cannot exceed $20.0 million.
On March 18, 2021, the Company sold C$20.0 million units at a purchase price of C$0.40 per unit. Each unit consists of one Class B Subordinate Voting Share and one share purchase warrant. Each warrant permits the holder to purchase one Share for a period of three years from the date of issuance at an exercise price of C$0.50 per Share. The exercise of the warrants is subject to a beneficial ownership limitation of 9.99%, preventing such exercise by the holder, if such exercise would result in such holder and their affiliates, exceeding ownership of 9.99% of Subordinate Voting Shares.
On May 17, 2021, the Company issued 31,250,000 units to Parallax Master Fund, L.P. at a purchase price of $0.32 per Unit for an aggregate of $10.0 million. Each Unit consisted of one Class B Subordinate Voting Share and one share purchase warrant. Each warrant permits the holder to purchase one Share for a period of three years from the date of issuance at an exercise price of $0.352 per Share, subject to the terms and conditions set forth in the warrant. The exercise of the warrants is subject to a beneficial ownership limitation of 19.99%, preventing such exercise by the holder, if such exercise would result in such holder and their affiliates, exceeding ownership of 19.99% of Subordinate Voting Shares.
Fiscal 2022 Equity Private Placements
On August 17, 2021, the Company entered into subscription agreements with various investors, including a backstop letter agreement (the “Backstop Commitment”) with investors associated Serruya Private Equity Inc. (“SPE”), to purchase $100.0 million of units (“Units”) of MedMen at a purchase price of US$0.24 (C$0.32) per Unit (the “August 2021 Private Placement”). Each Unit consisted of one Subordinate Voting Share and one quarter share purchase warrant (each, a “August 2021 Warrant”). Each whole August 2021 Warrant permits the holder to purchase one Subordinate Voting Share for a period of five years from the date of issuance at an exercise price of $0.288 per Share. In consideration for providing the Backstop Commitment, the applicable SPE investors received a fee of $2.5 million paid in the form of 10,416,666 Subordinate Voting Shares at a deemed price of $0.24 per Share. Pursuant to the August 2021 Private Placement, the Company issued an aggregate of 416,666,640 Subordinate Voting Shares and August 2021 Warrants to purchase 104,166,660 Subordinate Voting Shares.
Each Unit issued to certain funds associated with SPE also included a proportionate interest in a short-term subscription right (the “Short-Term Subscription Right”). The Short-Term Subscription Right entitled the holders to acquire, on payment of $30.0 million, at the option of the holders, an aggregate of 125,000,000 Units at an exercise price of $0.24 per Unit, or $30 million principal amount of notes at par, convertible into 125,000,000 Subordinate Voting Shares at a conversion price of $0.24 per Share. The Short-Term Warrants expired unexercised on December 31, 2021.
TREEHOUSE REAL ESTATE INVESTMENT TRUST
The Company has lease arrangements with affiliates of Treehouse Real Estate Investment Trust (“Treehouse”), which include 14 retail and cultivation properties across the U.S. As part of the Lender and Landlord Support Agreement, Treehouse agreed to defer a portion of total current monthly base rent for the 36-month period between July 1, 2020 and July 1, 2023. The total amount of all deferred rent accrues interest at 8.6% per annum during the deferral period. As consideration for the rent deferral, the Company issued to Treehouse 3,500,000 warrants, each exercisable at $0.34 per share for a period of five years. The total amount of all deferred rents is expected to be $24.6 million, of which $17.0 million was currently due and payable on July 1, 2022.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
RISK FACTORS
Summary of Risks Associated with the Business
The Company’s business is subject to a number of risks and uncertainties of which you should be aware before making a decision to invest in the Subordinate Voting Shares. This summary does not address all of the risks that the Company faces. Additional discussion of the risks summarized in this risk factor summary; and other risks the Company faces, can be found below under the heading “Risk Factors” and should be carefully considered, together with other information in this Form 10-K and other filings with the SEC, before making a decision to invest in the Subordinate Voting Shares. These risks include, among others, the following:
Regulatory Risks Associated with the Business
● Cannabis continues to be a Controlled Substance under the United States Federal Controlled Substances Act (the “CSA”) and the operations of the Company may be deemed to be criminal in nature and/or subject the Company to substantial civil penalties.
● The Rohrabacher-Farr Amendment may not be Renewed Potentially Resulting in Enforcement Activities by the U.S. Department of Justice (the “DOJ”) Against Entities in the Cannabis Industry.
● The Company’s business is highly regulated and dependent in large part on the ability to obtain or renew government permits and licenses for the current and contemplated operations, of which there can be no assurance.
● Public opinion and perception may significantly influence government policy and regulation of the cannabis industry, which could have a material adverse effect on the business, results of operations and prospects.
● Adverse legal, regulatory or political changes could have a material adverse effect on the current and planned operations.
● The Company is subject to risk of civil asset forfeiture.
● In the event that any of the Company’s operations in the United States were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime.
● There remains doubt and uncertainty that the Company will be able to legally enforce contracts it enters into.
● Failure to comply with applicable environmental laws, regulations and permitting requirements may result in enforcement actions against us, and civil or criminal fines or penalties.
● Since Section 280E of the Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking in controlled substances, the Company will be precluded from claiming certain deductions otherwise available to non-marijuana businesses and, as a result, an otherwise profitable business may in fact operate at a loss after taking into account its income tax expenses.
● If the Company were to experience a bankruptcy, there is no guarantee that U.S. federal bankruptcy protections would be available to its United States operations, which would materially adversely affect the prospects and on the rights of its lenders and securityholders.
● The emerging growth company status allows the Company certain exemptions from various reporting requirements.
Risks Related to Macro-Economic Conditions
● The global COVID-19 pandemic has and will continue to have an adverse effect on the results of operations.
● The operations and financial condition could be adversely impacted by a material downturn in global financial conditions and by a rise in interest rates in the event the Company is required to seek additional debt financing.
Risks Related to Financial and Business Matters
● The historical audited financial statements were prepared on a going concern basis.
● The Company will require additional financing to achieve its business objectives.
● The Company’s existing credit facilities impose significant restrictive provisions on its current and planned operations.
● The Company has incurred substantial indebtedness and may not be able to refinance, extend or repay this indebtedness on a timely basis or at all.
● The Company has identified a material weakness in its internal control over financial reporting and may identify additional material weaknesses in the future that may cause them to fail to meet its reporting obligations or result in material misstatements of its financial statements. If the Company fails to remediate any material weaknesses or to establish and maintain effective control over financial reporting, the Company’s ability to accurately and timely report its financial results could be adversely affected.
● MedMen is a holding company and essentially all of its assets are the capital stock of its material subsidiaries.
● Adverse publicity reports or other media attention regarding the safety, efficacy and quality of marijuana in general, or associating the consumption of adult-use and medical marijuana with illness or other negative effects or events, could have such a material adverse effect on the Company’s results of operations.
● The Company may be subject to various product liability claims, including, among others, that the marijuana product caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances.
● If one of the Company’s brands were subject to product recalls, the image of that brand and MedMen could be harmed.
● The Company is subject to those risks inherent in an agricultural business.
● The Company’s business is dependent on suppliers and skilled labor.
● The Company faces intense competition from other companies and increasing legalization of cannabis and rapid growth and consolidation in the cannabis industry may further intensify competition.
● The Company is exposed to the risk that its employees, independent contractors and consultants may engage in fraudulent or other illegal activity.
● Certain remedies may be limited.
● Future material acquisitions or dispositions or strategic transactions.
● Risks associated with pending transactions.
● Risks associated with failure to manage growth effectively.
Risks Related to Intellectual Property and Information Technology
● The Company may have limited intellectual property protection.
● Any failure of its information systems or the effect of any cyber-attacks may adversely impact the Company’s reputation and results of operations.
Additional Risks Related to Legal and Regulatory Matters
● The Company has been and may in the future be subject to investigations, civil claims, lawsuits and other proceedings.
● United States Tax Classification of the Company.
Risks Associated with the Securities of the Company
● Heightened scrutiny by securities regulatory authorities in the United States and Canada may impact investors’ ability to transact in the Company’s securities.
● Potential voting control by certain shareholders may limit your ability to influence the outcome of director elections and other matters requiring shareholder approval.
● The Company’s capital structure may cause unpredictability.
● Future sales of Subordinate Voting Shares in the public market, or the perception that such sales may occur, could adversely affect the prevailing market price of the Subordinate Voting Shares.
● The market price of the Subordinate Voting Shares is volatile and subject to wide fluctuations.
Risk Factors
The risks and uncertainties described below could materially and adversely affect the business, financial condition and results of operations and could cause actual results to differ materially from the Company’ expectations. The risk factors described below include the considerable risks associated with the current economic environment and the related potential adverse effects on the financial condition and results of operations. You should read these risk factors in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes for the fiscal year ended June 25, 2022. There also may be other factors that the Company cannot anticipate or that are not described in this report generally because management does not currently perceive them to be material. Those factors could cause results to differ materially from management’s expectations.
REGULATORY RISKS ASSOCIATED WITH THE BUSINESS
Cannabis continues to be a Controlled Substance under the United States Federal Controlled Substances Act and the operations of the Company may be deemed to be criminal in nature and/or subject the Company to substantial civil penalties.
MedMen both directly and indirectly engages in the medical and adult-use marijuana industry in the United States where local state law permits such activities. Investors are cautioned that in the United States, cannabis is largely regulated at the state level. Currently, in the United States, 37 states, the District of Columbia, Puerto Rico, Guam, the Northern Mariana Islands and the U.S. Virgin Islands have legalized medical cannabis, and 19 states, in addition to the District of Columbia, the Commonwealth of the Northern Mariana Islands, and Guam, have legalized cannabis for recreational purposes or “adult-use”. Notwithstanding the permissive regulatory environment of cannabis at the state level, cannabis continues to be categorized as a controlled substance under the CSA and as such, cultivation, distribution, sale and possession of cannabis violates federal law in the United States. The inconsistency between federal and state laws and regulations is a major risk factor.
At this time it is uncertain what policies the current President or Attorney General will take regarding the enforcement of federal cannabis laws. Although, the Attorney General has indicated he would deprioritize enforcement of low-level cannabis crimes such as possession, it is not yet known whether the Department of Justice under President Biden and Attorney General Garland will re-adopt the United States Department of Justice Memorandum drafted by former Deputy Attorney General James Michael Cole in 2013 (the “Cole Memo”), which offered guidance to federal enforcement agencies as to how to prioritize civil enforcement, criminal investigations and prosecutions regarding marijuana in all states. Due to the fact the leadership of the DOJ has changed and has not therefore introduced policies regarding the enforcement of the federal cannabis laws, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.
Federal law pre-empts state law in these circumstances, so that the federal government can assert criminal violations of federal law despite state law. The level of prosecutions of state-legal cannabis operations is entirely unknown, and neither the current administration nor the DOJ has articulated a policy regarding state legal cannabis. If the Department of Justice policy were to be to aggressively pursue financiers or equity owners of cannabis-related business, and United States Attorneys followed such Department of Justice policies through pursuing prosecutions, then the Company could face (i) seizure of its cash and other assets used to support or derived from its cannabis subsidiaries; and (ii) the arrest of its employees, directors, officers, managers and investors, who could face charges of ancillary criminal violations of the CSA for aiding and abetting and conspiring to violate the CSA by virtue of providing financial support to state-licensed or permitted cultivators, processors, distributors, and/or retailers of cannabis. Additionally, as has recently been affirmed by U.S. Customs and Border Protection, employees, directors, officers, managers and investors of MedMen who are not U.S. citizens face the risk of being barred from entry into the United States for life.
If the administration and Attorney General do not adopt a policy incorporating some or all of the policies articulated in the Cole Memo, then the Department of Justice or an aggressive federal prosecutor could allege that the Company and its Board and, potentially its shareholders, “aided and abetted” violations of federal law by providing finances and services to its operating subsidiaries. Under these circumstances, it is possible that a federal prosecutor could seek to seize its assets, and to recover the “illicit profits” previously distributed to shareholders resulting from any of the foregoing financing or services. In these circumstances, the Company’s operations would cease, MedMen shareholders may lose their entire investment and directors, officers and/or MedMen shareholders may be left to defend any criminal charges against them at their own expense and, if convicted, be sent to federal prison.
Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on MedMen, including its reputation and ability to conduct business, its holding (directly or indirectly) of medical and adult-use cannabis licenses in the United States, the listing of its securities on the CSE or other applicable exchanges, the capital, financial position, operating results, profitability or liquidity or the market price of the listed securities.
Overall, an investor’s contribution to and involvement in MedMen’s activities may result in federal civil and/or criminal prosecution, including forfeiture of his, her or its entire investment.
The Rohrabacher-Farr Amendment may not be Renewed Potentially Resulting in DOJ Enforcement Activities Against Entities in the Cannabis Industry.
The Rohrabacher-Farr Amendment prohibits the DOJ from spending funds appropriated by Congress to enforce the tenets of the CSA against the medical cannabis industry in states which have legalized such activity. On March 15, 2021, the amendment was renewed through the signing of the fiscal year 2022 omnibus spending bill and is effective through September 30, 2022. There can be no assurance that the federal government will not seek to prosecute cases involving medical cannabis businesses that are otherwise compliant with state law. Such potential proceedings could involve significant restrictions being imposed upon the Company or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Company, even if such proceedings were concluded successfully in favor of the Company.
The Company’s business is highly regulated and dependent in large part on the ability to obtain or renew government permits and licenses for our current and contemplated operations, of which there can be no assurance.
The Company’s business is subject to a variety of laws, regulations and guidelines relating to the cultivation, manufacture, management, transportation, storage, sale and disposal of marijuana, including laws and regulations relating to health and safety, the conduct of operations and the protection of the environment. Achievement of the business objectives are contingent, in part, upon compliance with applicable regulatory requirements and obtaining all requisite regulatory approvals. Changes to such laws, regulations and guidelines due to matters beyond control may cause material adverse effects to the business operations.
The Company is required to obtain or renew government permits and licenses for the current and contemplated operations. Obtaining, amending or renewing the necessary governmental permits and licenses can be a time-consuming process potentially involving numerous regulatory agencies, involving public hearings and costly undertakings on the Company’s part. The duration and success of the efforts to obtain, amend and renew permits and licenses are contingent upon many variables not within the Company’s control, including the interpretation of applicable requirements implemented by the relevant permitting or licensing authority and planning and zoning requirements with respect to its locations. The Company may not be able to obtain, amend or renew permits or licenses that are necessary to its operations. In August 2020, the Company received a notice from the City of Pasadena that a determination was made that there had been a material change in ownership and/or management of MedMen such that the initial application was no longer valid, resulting in losing the right to proceed through the cannabis permitting process in Pasadena. In response, the Company filed a lawsuit challenging the city’s determination. Any unexpected delays or costs associated with the permitting and licensing process could impede the ongoing or proposed operations. To the extent necessary permits or licenses are not obtained, amended or renewed, or are subsequently suspended or revoked, the Company may be curtailed or prohibited from proceeding with its ongoing operations or planned development and commercialization activities. Such curtailment or prohibition may result in a material adverse effect on the business, financial condition, results of operations or prospects.
While compliance controls have been developed to mitigate the risk of any material violations of any license or certificate the Company holds, there is no assurance that the licenses or certificates will be renewed by each applicable regulatory authority in the future in a timely manner. Any unexpected delays or costs associated with the licensing renewal process for any of the licenses or certificates held by MedMen could impede the ongoing or planned operations and have a material adverse effect on the business, financial condition, results of operations or prospects.
The Company may become involved in a number of government or agency proceedings, investigations and audits. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm the reputation, require the Company to take, or refrain from taking, actions that could harm its operations or require it to pay substantial amounts of funds, harming its financial condition. There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources or have a material adverse impact on the business, financial condition, results of operations or prospects.
Public opinion and perception may significantly influence government policy and regulation of the cannabis industry, which could have a material adverse effect on the business, results of operations and prospects.
Government policy changes or public opinion may also result in a significant influence over the regulation of the cannabis industry in the United States, Canada or elsewhere. Public opinion and support for medical and adult-use marijuana has traditionally been inconsistent and varies from jurisdiction to jurisdiction. While public opinion and support appears to be rising for legalizing medical and adult-use marijuana, it remains a controversial issue subject to differing opinions surrounding the level of legalization (for example, medical marijuana as opposed to legalization in general). Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of marijuana in general, or associating the consumption of adult-use and medical marijuana with illness or other negative effects or events, could have a material adverse effect on the business, results of operations or prospects. There is no assurance that such adverse publicity reports or other media attention will not arise. A negative shift in the public’s perception of cannabis, including vaping or other forms of cannabis administration, in the United States, Canada or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize medical and/or adult-use cannabis, thereby limiting the number of new state jurisdictions into which the Company could expand and perception of negative health effects from the use of vaporizers to consume cannabis could result in state and local prohibitions on the sale of vaping products for an indefinite period of time. Any inability to fully implement the Company’s expansion strategy may have a material adverse effect on its business, results of operations or prospects. Among other things, such a shift could also cause states that have already legalized medical and/or adult-use cannabis to reevaluate the extent of, and introduce new restrictions on, the permitted activities and permitted cannabis products within their jurisdictions, which may have a material adverse effect on the Company’s business, results of operations or prospects. Recent medical alerts by the Centers for Disease Control and Prevention (the “CDC”) and state health agencies on vaping related illness and other issues directly related to cannabis consumption could potentially create an inability to fully implement the expansion strategy or could restrict the products which the Company sells at our existing operations, which may have a material adverse effect on the business, results of operations or prospects.
Adverse legal, regulatory or political changes could have a material adverse effect on the current and planned operations.
The success of the Company’s business strategy depends on the legality of the cannabis industry. The political environment surrounding the cannabis industry in general can be volatile and the regulatory framework remains in flux. Currently, in the United States, 37 states, the District of Columbia, Puerto Rico, Guam, the Northern Mariana Islands and the U.S. Virgin Islands have legalized medical cannabis, and 19 states, in addition to the District of Columbia, the Commonwealth of the Northern Mariana Islands, and Guam, have legalized cannabis for recreational purposes or “adult-use”, including the states in which MedMen operates; however, the risk remains that a shift in the regulatory or political realm could occur and have a drastic impact on the industry as a whole, adversely impacting the business, results of operations, financial condition or prospects.
Delays in enactment of new state or federal regulations could restrict the ability to reach strategic growth targets and lower return on investor capital. The Company’s strategic growth strategy is reliant upon certain federal and state regulations being enacted to facilitate the legalization of medical and adult-use cannabis. If such regulations are not enacted, or enacted but subsequently repealed or amended, or enacted with prolonged phase-in periods, its growth targets, and thus, the effect on the return of investor capital, could be detrimental. The Company is unable to predict with certainty when and how the outcome of these complex regulatory and legislative proceedings will affect its business and growth.
Further, there is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. If the federal government begins to enforce federal laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing applicable state laws are repealed or curtailed, the business, results of operations, financial condition and prospects would be materially adversely affected. It is also important to note that local and city ordinances may strictly limit and/or restrict the sale of cannabis in a manner that will make it extremely difficult or impossible to transact business that is necessary for the continued operation of the cannabis industry. Federal actions against individuals or entities engaged in the cannabis industry or a repeal of applicable cannabis related legislation could adversely affect us and the business, results of operations, financial condition and prospects.
The Company is aware that multiple states are considering special taxes or fees on businesses in the cannabis industry. It is a potential yet unknown risk at this time that other states are in the process of reviewing such additional fees and taxation. This could have a material adverse effect upon the business, results of operations, financial condition or prospects. Currently, the Company has a large outstanding tax liability. For further information see, see “Note 22 - Provision For Income Taxes and Deferred Income Taxes” to the Consolidated Financial Statements located in Item 8 of this Report.
The commercial medical and adult-use cannabis industry is in its infancy and the Company anticipates that such regulations will be subject to change as the jurisdictions in which it conducts business matures. The Company has in place a detailed compliance program headed by the SVP of Legal who oversees, maintains, and implements the compliance program and personnel. In addition to its robust legal and compliance departments, the Company also has local regulatory/compliance counsel engaged in every jurisdiction (state and local) in which it operates. Such counsel regularly provides legal advice regarding compliance with state and local laws and regulation and the legal and compliance exposures under United States federal law. The Company’s compliance program emphasizes security and inventory control to ensure strict monitoring of cannabis and inventory from delivery by a licensed distributor to sale or disposal. Additionally, the Company has created comprehensive standard operating procedures that include detailed descriptions and instructions for receiving shipments of inventory, inventory tracking, recordkeeping and record retention practices related to inventory, as well as procedures for performing inventory reconciliation and ensuring the accuracy of inventory tracking and recordkeeping. The Company will continue to monitor compliance on an ongoing basis in accordance with its compliance program, standard operating procedures, and any changes to regulation in the cannabis industry.
Overall, the medical and adult-use cannabis industry is subject to significant regulatory change at the local, state and federal levels. The inability to respond to the changing regulatory landscape may cause the Company to not be successful in capturing significant market share and could otherwise harm the business, results of operations, financial condition or prospects.
The Company is subject to risk of civil asset forfeiture.
Because the cannabis industry remains illegal under U.S. federal law, any property owned by participants in the cannabis industry which are either used in the course of conducting such business, or are the proceeds of such business, could be subject to seizure by law enforcement and subsequent civil asset forfeiture. Even if the owner of the property were never charged with a crime, the property in question could still be seized and subject to an administrative proceeding by which, with minimal due process, it could be subject to forfeiture.
In the event that any of the Company’s operations in the United States were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime.
The Company is subject to a variety of laws and regulations domestically and in the United States that involve money laundering, financial recordkeeping and proceeds of crime, including the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), Sections 1956 and 1957 of U.S.C. Title 18 (the Money Laundering Control Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended and the rules and regulations thereunder, the Criminal Code (Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada.
Banks often refuse to provide banking services to businesses involved in the cannabis industry due to the present state of the laws and regulations governing financial institutions in the United States. The lack of banking and financial services presents unique and significant challenges to businesses in the marijuana industry. The potential lack of a secure place in which to deposit and store cash, the inability to pay creditors through the issuance of checks and the inability to secure traditional forms of operational financing, such as lines of credit, are some of the many challenges presented by the unavailability of traditional banking and financial services.
In February 2014, the Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”) issued a memo (the “FinCEN Memo”) providing instructions to banks seeking to provide services to cannabis-related businesses. The FinCEN Memo states that in some circumstances, it is permissible for banks to provide services to cannabis-related businesses without risking prosecution for violation of federal money laundering laws. It refers to supplementary guidance that former Deputy Attorney General James M. Cole issued to federal prosecutors relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the CSA. While the FinCEN Memo has not been rescinded by the Department of Justice at this time, it remains unclear whether the current administration will follow its guidelines. Overall, the Department of Justice continues to have the right and power to prosecute crimes committed by banks and financial institutions, such as money laundering and violations of the Bank Secrecy Act, that occur in any state, including in states that have legalized the applicable conduct and the DOJ’s current enforcement priorities could change for any number of reasons, including a change in the opinions of the President of the United States or the United States Attorney General. A change in the DOJ’s enforcement priorities could result in the DOJ prosecuting banks and financial institutions for crimes that previously were not prosecuted.
In the event that any of the Company’s operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations in the United States were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability to declare or pay dividends or effect other distributions. Furthermore, while there are no current intentions to declare or pay dividends on the Subordinate Voting Shares in the foreseeable future, in the event that a determination was made that proceeds from operations (or any future operations or investments in the United States) could reasonably be shown to constitute proceeds of crime, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
There remains doubt and uncertainty that the Company will be able to legally enforce contracts it enters into.
It is a fundamental principle of law that a contract will not be enforced if it involves a violation of law or public policy. Because cannabis remains illegal at a federal level, judges in multiple U.S. states have on a number of occasions refused to enforce contracts, including for the repayment of money when the loan was used in connection with activities that violate federal law, even if there is no violation of state law. There remains doubt and uncertainty that the Company will be able to legally enforce contracts it enters into, if necessary. The Company cannot be assured that it will have a remedy for breach of contract, which could have a material adverse effect on its business, revenues, operating results, financial condition and prospects.
Failure to comply with applicable environmental laws, regulations and permitting requirements may result in enforcement actions against us, and civil or criminal fines or penalties.
The Company’s operations are subject to environmental regulation in the various jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors (or the equivalent thereof) and employees. The Company cannot provide any assurance that future changes in environmental regulation, if any, will not adversely affect its operations.
Government approvals and permits are currently, and may in the future, be required in connection with the Company’s operations. To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from its current or proposed production, manufacturing or sale of cannabis or cannabis products or from proceeding with the development of its operations as currently proposed.
Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions against us, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. The Company may be required to compensate those suffering loss or damage by reason of its operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.
Amendments to current laws, regulations and permits governing the production, manufacturing or sale of cannabis or cannabis products, or more stringent implementation thereof, could have a material adverse impact on the business and cause increases in expenses, capital expenditures or production or manufacturing costs or reduction in levels of production, manufacturing or sale or require abandonment or delays in development.
Since Section 280E of the Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking in controlled substances, the Company will be precluded from claiming certain deductions otherwise available to non-marijuana businesses and, as a result, an otherwise profitable business may in fact operate at a loss after taking into account its income tax expenses.
Section 280E of the United States Internal Revenue Code, as amended (the “Code”), prohibits businesses from deducting certain expenses associated with trafficking in controlled substances (within the meaning of Schedule I and II of the CSA). The United States Internal Revenue Service (the “IRS”) has invoked Section 280E in tax audits against various cannabis businesses in the U.S. that are licensed under applicable state laws. Although the IRS issued a clarification allowing the deduction of certain expenses, the scope of such items is interpreted very narrowly, and the bulk of operating costs and general administrative costs are not permitted to be deducted. While there are currently several pending cases before various administrative and federal courts challenging these restrictions, there is no guarantee that these courts will issue an interpretation of Section 280E favorable to cannabis businesses.
Overall, under Section 280E of the Code, normal business expenses incurred in the business of selling marijuana and its derivatives are not deductible in calculating income tax liability. Therefore, the Company will be precluded from claiming certain deductions otherwise available to non-marijuana businesses and, as a result, an otherwise profitable business may in fact operate at a loss after taking into account its income tax expenses. There is no certainty that the impact that Section 280E has on the Company’s margins will ever be reduced.
If the Company was to experience a bankruptcy, there is no guarantee that U.S. federal bankruptcy protections would be available to its United States operations, which would materially adversely affect its prospects and on the rights of its lenders and securityholders.
Because the use of cannabis is illegal under federal law, many courts have denied cannabis businesses bankruptcy protections, thus making it very difficult for lenders to recoup their investments in the cannabis industry in the event of a bankruptcy. If the Company was to experience a bankruptcy, there is no guarantee that U.S. federal bankruptcy protections would be available to its United States operations, which could have a material adverse effect on the business, capital, financial condition and prospects and on the rights of its lenders and securityholders.
The Company’s emerging growth company status allows it certain exemptions from various reporting requirements.
The Company is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. The Company has elected to use this exemption from new or revised accounting standards and, therefore, it will not be subject to the same new or revised accounting standards as other public companies.
For as long as it continues to be an emerging growth company, the Company intends to take advantage of certain other exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in the periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. The Company cannot predict if investors will find the Subordinate Voting Shares less attractive because it will rely on these exemptions. If some investors find the Subordinate Voting Shares less attractive as a result, then there may be a less active trading market for the Subordinate Voting Shares and the Company’s stock price may be more volatile.
The Company will remain an emerging growth company until the earliest of (i) the last day of the year in which total annual gross revenue is $1.07 billion or more; (ii) the last day of the year following the fifth anniversary of the first sale of the common equity securities pursuant to an effective registration under the Securities Act of 1933, as amended (the “Securities Act”), expected to be December 31, 2024; (iii) the date on which the Company has issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which the Company is deemed to be a large accelerated filer under the rules of the SEC.
RISKS RELATED TO MACRO-ECONOMIC CONDITIONS
The global COVID-19 pandemic has and will continue to have an adverse effect on the results of operations.
The COVID-19 pandemic has adversely impacted commercial and economic activity and contributed to significant volatility in the equity and debt markets in the U.S. The impact of the outbreak continues to develop and many jurisdictions, including the State of California and local municipalities, have instituted quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues. Individual businesses and industries are also implementing similar precautionary measures. Those measures, as well as the general uncertainty surrounding the dangers and effects of COVID-19, have created significant disruption in supply chains and economic activity. New strains of the virus have been identified originating in the U.S. and elsewhere. These new strains may have different transmission, morbidity and mortality rates than the original virus, and the COVID-19 vaccines developed to date may not be effective to provide immunization against new strains of the virus. While the Company has continuously sought to assess the potential impact of the pandemic on its financial condition and operating results, any assessment is subject to extreme uncertainty as to probability, severity and duration. The continued spread of the virus globally could result in a protracted world-wide economic downturn, the effects of which could last for some period after the pandemic is controlled and/or abated and the business, financial condition, results of operations and cash flows could be materially adversely affected. The impact of COVID-19 could have the effect of heightening many of the other risk factors described herein.
Despite being deemed as an essential retailer in its core markets, the Company experienced a negative impact on sales in certain markets as a result of shelter-at-home orders, social distancing efforts, restrictions on the maximum allowable number of people within a retail establishment, and declining tourism. Revenue for the year ended June 25, 2022 decreased 7% compared to revenue for the year ended June 26, 2021 primarily as a result of these factors. The overall impact of the COVID-19 pandemic affected the Company’s operations for the majority of the current fiscal year compared to the latter four months of the prior fiscal year. The Company experienced decreased sales in certain locations within California due to reduced foot traffic as a result of business and occupancy restrictions and a slowdown in tourism, resulting in retail revenue in California for the year ended June 25, 2022 to decrease $21.6 million compared to the year ended June 26, 2021.
The Company has implemented certain safety measures to ensure the safety of its customers and associates, which may have the effect of discouraging shopping or limiting the occupancy of its stores. For the majority of the fiscal year ended June 26, 2021, the Company maintained modified store operations based on Centers for Disease Control and Prevention guidelines and local ordinances which limit in-store traffic for certain locations and consequently increased focus on direct-to-consumer delivery, including curbside pickup. These measures, and any additional measures that have been and may continue to be taken in response to the COVID-19 pandemic, have substantially decreased, and may continue to decrease, the number of customers that visit MedMen stores which has had, and will likely continue to have, a material adverse effect on the business, financial condition and results of operations.
The COVID-19 pandemic has continued to increase economic uncertainty and has led to disruption and volatility in the global capital markets, which could increase the cost of and accessibility to capital. Given that the COVID-19 pandemic has caused a significant economic slowdown, it appears increasingly likely that it could cause a global recession, which could be of an unknown duration. A global recession would have a significant impact on ongoing operations and cash flows. There has been a recent spike in the number of reported COVID-19 cases, including new variant and strains, in many states where a substantial portion of the Company’s business and operations are located.
The Company is unable to currently quantify the economic effect, if any, of this increase on the Company’s results of operations.
The ultimate magnitude of COVID-19, including the extent of its overall impact on the financial and operational results cannot be reasonably estimated at this time; however, the Company has experienced declines in sales. The overall impact will depend on the length of time that the pandemic continues, the extent to which it affects the ability to raise capital, and the effect of governmental regulations imposed in response to the pandemic, as well as uncertainty regarding all of the foregoing.
The Company’s operations and financial condition could be adversely impacted by a material downturn or recession in global financial conditions.
Global and U.S. financial conditions have historically experienced extreme volatility. Economic shocks may be precipitated by a number of causes, including a rise in the price of oil, geopolitical instability and natural disasters. U.S. GDP growth has been reported as negative for the last two completed calendar quarters in 2022, which has traditionally been interpreted to signal a recession for the U.S. economy. Therefore, recessionary risks are more pronounced in the current economic environment. Any sudden or rapid destabilization of global or U.S. economic conditions could impact the ability to obtain equity or debt financing in the future on terms favorable to the Company. Additionally, any such occurrence could cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. Further, in such an event, the operations and financial condition could be adversely impacted.
Furthermore, general market, political and economic conditions, including, for example, inflation, interest and currency exchange rates, structural changes in the cannabis industry, supply and demand for commodities, political developments, legislative or regulatory changes, social or labor unrest and stock market trends will affect the operating environment and its operating costs and profit margins and the price of its securities. Any negative events in the global economy could have a material adverse effect on the business, financial condition, results of operations or prospects.
RISKS RELATED TO FINANCIAL AND BUSINESS MATTERS
The historical audited financial statements were prepared on a going concern basis.
The audited financial statements for the fiscal year ended June 25, 2022 and June 26, 2021were prepared on a going concern basis under which an entity is considered to be able to realize its assets and satisfy its liabilities in the ordinary course of business. Generally, the primary sources of capital resources are comprised of cash and cash equivalents and the issuance of equity and debt securities. The Company continuously monitors its capital structure and, based on changes in operations and economic conditions, may adjust the structure by issuing new shares or new debt as necessary. Management does not believe that current cash on hand will be sufficient to fund projected operating requirements. This raises substantial doubt about the Company’s ability to continue as a going concern. In addition, the report of the independent registered public accounting firm in the audited financial statements for each of the two years ended June 25, 2022 and June 26, 2021 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. The ability to continue to implement the Company’s business strategy is dependent on obtaining additional financing, the ability to successfully settle liabilities and achieving and maintaining profitable operations. While the Company has been successful in securing both equity and debt financing from the public and private capital markets to date \in Canada, the United States and internationally, there are no guarantees that the Company will be able to continue to secure any such public or private equity or debt financing in the future on terms acceptable to the Company, if at all, or be able to achieve profitability. This going concern opinion could materially limit the ability to raise additional funds through the issuance of equity or debt securities or otherwise. If the Company cannot continue as a going concern, investors may lose their entire investment in the Company’s securities. Until the Company can generate significant cash flows, management expects to satisfy future cash needs through debt or equity financing; however, there can be no assurance that such capital will be available, or if available, that it will be on terms acceptable to the Company.
The Company has previously experienced negative cash flow from operating activities.
The Company does not have a history of profitability. The Company has previously experienced negative cash flow from operating activities and cannot provide assurance that it will achieve sufficient revenues to maintain profitability or positive cash flow from operating activities. The inability to maintain profitability or positive cash flow from operating activities could have a material adverse effect on the business, financial condition and results of operations. As such, the Company has immediate prospect of generating profit from its intended operations. The Company is therefore subject to many of the risks common to high growth enterprises, including under-capitalization, cash shortages, limitations with respect to personnel, financial, and other resources and lack of earnings. In addition, the Company is currently incurring expenditures related to its operating activities that have generated negative operating cash flows. The Company cannot provide any assurance that it will generate sufficient revenues in the near future, and it may continue to incur negative operating cash flows for the foreseeable future. The Company cannot provide assurance that we will be successful in achieving a return on shareholders’ investment.
The Company will require additional financing to achieve its business objectives.
The continued development of the business will require additional financing. There is no guarantee that the Company will be able to achieve its business objectives. The Company intends to fund its business objectives by way of additional offerings of equity and/or debt financing. The failure to raise or procure such additional funds could result in the delay or indefinite postponement of the current business objectives. The Company cannot provide any assurance that additional capital or other types of financing will be available if needed or that, if available, will be on terms acceptable to us. If additional funds are raised by offering equity securities or convertible debt, existing shareholders could suffer significant dilution. Any debt financing secured in the future could involve the granting of security against the assets and also contain restrictive covenants relating to capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Although the Company is in discussions with lenders to amend its secured term loan, the Company currently remains in default with respect to the repayment of $97.8 million payable under the secured term loan that matured on July 31, 2022. The Company has completed the sale and leaseback of certain properties, as well as the sale of properties in Florida. The reduction in real estate assets could cause securing any additional debt financing to be more difficult or on less favorable terms to us, such as on higher interest rates, than as otherwise may have been expected. The Company will require additional financing to fund its operations until positive cash flow is achieved. Although management believes that we will be able to obtain the necessary funding as in the past, there can be no assurance of the success of these plans.
The Company’s existing credit facilities impose significant restrictive provisions on its current and planned operations.
The Company has significant outstanding indebtedness further to which its assets and assets of its subsidiaries as well as the ownership interests of certain of its subsidiaries, have been pledged as security for the obligations thereunder. In addition, the terms and conditions of the credit facilities contain restrictive covenants that limit the ability to engage in activities that may be in the Company’s long-term best interest. In addition, the terms and conditions thereof contain financial, operational and reporting covenants, and compliance with the covenants by the Company may increase legal and financial costs, make certain activities, such as the payment of dividends or other distributions, more difficult or restricted, time-consuming or costly and increase demand on systems and resources. The failure to comply with any such covenants, which may be affected by events beyond the Company’s control, could result in an event of default which, if not cured or waived, could result in the acceleration of repayment of its debt or realization on the security granted or trigger cross-default or cross-acceleration provisions in any other agreements, including as between agreements pertaining to the existing credit facilities, any of which would have a material adverse effect on the business, capital, financial condition, results of operations, cash flows and prospects.
The Company has incurred substantial indebtedness and may not be able to refinance, extend or repay this indebtedness on a timely basis or at all.
The Company has a substantial amount of existing indebtedness. If it is unable to raise sufficient capital to repay these obligations at maturity and are otherwise unable to extend the maturity dates or refinance these obligations, the Company would be in default. The Company cannot provide any assurances that we will be able to raise the necessary amount of capital to repay these obligations, that any obligations that are convertible will be converted into equity or that the Company will be able to extend the maturity dates or otherwise refinance these obligations. As of June 25, 2022, the Company is in violation of minimum liquidity covenant of its term loans that require the Company to maintain $15.0 million of minimum cash. On July 31, 2022, the term loans of $97.8 million became due and the Company was unable to meet this financial obligation and pay the lender, which constitutes an event of default. The moneys owed under the Lender and Landlord Support Agreement which allowed us to defer $22.0 million of rent payment over three years beginning in 2020, will come due in July 2023. Upon a default, the lenders under such debt would have the right to exercise their rights and remedies to collect, which would include the ability to foreclose on the Company’s assets. Accordingly, a default by us that is not waived would have a material adverse effect on the business, capital, financial condition and prospects, and the Company would likely be forced to seek bankruptcy protection.
The Company has identified a material weakness in its internal control over financial reporting and may identify additional material weaknesses in the future that may cause us to fail to meet the reporting obligations or result in material misstatements of our financial statements. If the Company fails to remediate any material weaknesses or if the Company fails to establish and maintain effective control over financial reporting, its ability to accurately and timely report its financial results could be adversely affected.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.
In the course of preparing the financial statements for fiscal year 2022, management identified a material weakness determining that the Company’s financial record keeping process is deficient and that it does not have effective controls over the period-end reconciliation process. The Company plans to implement measures designed to improve our internal control over financial reporting to remediate material weakness, by standardizing the monthly reconciliation process for material accounts and balances with formalized procedures and accountability by process owners. The material weakness in the Company’s internal control over financial reporting will not be considered remediated until the remediated controls operate for a sufficient period of time and management has concluded that these controls are operating effectively.
If management is unable to further implement and maintain effective internal control over financial reporting or disclosure controls and procedures, the Company’s ability to record, process and report financial information accurately, and to prepare financial statements within required time periods could be adversely affected, which could subject it to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in the financial statements and adversely impact the stock price. If the Company is unable to assert that its internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of the financial reports, the market price of the shares could be adversely affected and the Company could become subject to litigation or investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.
Furthermore, the Company cannot assure you that the measures it has taken to date, and actions it may take in the future, will be sufficient to remediate the control deficiencies that led to the material weakness in its internal control over financial reporting or that they will prevent or avoid potential future material weaknesses. The current controls and any new controls that management develops may become inadequate because of changes in conditions in the business. Further, weaknesses in the disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm the Company’s operating results or cause the Company to fail to meet its reporting obligations and may result in a restatement of the financial statements for prior periods.
MedMen is a holding company and essentially all of its assets are the capital stock of its material subsidiaries.
MedMen is a holding company and essentially all of its assets are the capital stock of its material subsidiaries. As a result, investors in MedMen are subject to the risks attributable to its subsidiaries. Consequently, the cash flows and ability to complete current or desirable future opportunities are dependent on the earnings of the Company’s subsidiaries. The ability of these entities to pay dividends and other distributions will depend on their operating results and will be subject to applicable laws and regulations which require that solvency and capital standards be maintained by such entities and contractual restrictions contained in the instruments governing their debt. In the event of a bankruptcy, liquidation or reorganization of any of its material subsidiaries, holders of indebtedness and trade creditors may be entitled to payment of their claims from the assets of those subsidiaries before MedMen.
Adverse publicity reports or other media attention regarding the safety, efficacy and quality of marijuana in general, or associating the consumption of adult-use and medical marijuana with illness or other negative effects or events, could have such a material adverse effect on the results of operations.
The Company believes the adult-use and medical marijuana industries are highly dependent upon consumer perception regarding the safety, efficacy and quality of the marijuana produced. Consumer perception can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of marijuana products. There can be no assurance that future scientific research or findings, regulatory investigations, litigation, media attention or other publicity will be favorable to the marijuana market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory investigations, litigation, media attention or other publicity that are perceived as less favorable than, or that question, earlier research reports, findings or other publicity could have a material adverse effect on the demand for adult- use or medical marijuana and on the business, results of operations, financial condition, cash flows or prospects. Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of marijuana in general, or associating the consumption of adult-use and medical marijuana with illness or other negative effects or events, could have such a material adverse effect. There is no assurance that such adverse publicity reports, findings or other media attention will not arise.
The Company may be subject to various product liability claims, including, among others, that the marijuana product caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances.
As a manufacturer and distributor of products designed to be ingested by humans, the Company faces an inherent risk of exposure to product liability claims, regulatory action and litigation if its products are alleged to have caused significant loss or injury. In addition, the manufacture and sale of marijuana involve the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of marijuana alone or in combination with other medications or substances could occur. As a manufacturer, distributor and retailer of adult-use and medical marijuana, or in its role as an investor in or service provider to an entity that is a manufacturer, distributor and/or retailer of adult-use or medical marijuana, the Company may be subject to various product liability claims, including, among others, that the marijuana product caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances. A product liability claim or regulatory action against the Company could result in increased costs, could adversely affect its reputation with its clients and consumers generally, and could have a material adverse effect on the business, results of operations, financial condition or prospects. There can be no assurances that the Company will be able to maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of the potential products or otherwise have a material adverse effect on the business, results of operations, financial condition or prospects.
If one of the Company’s brands were subject to product recalls, the image of that brand and MedMen could be harmed.
Cultivators, manufacturers, distributors and retailers of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labeling disclosure. Such recalls cause unexpected expenses of the recall and any legal proceedings that might arise in connection with the recall. This can cause loss of a significant amount of sales. In addition, a product recall may require significant management attention. There can be no assurance that any of the products that the Company sells will not be the subject of a product recall, regulatory action or lawsuit. Although the Company has detailed procedures in place for testing its products, there can be no assurance that any quality, potency or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action or lawsuits. Additionally, if one of the Company’s brands were subject to recall, the image of that brand and MedMen could be harmed. Additionally, product recalls can lead to increased scrutiny of operations by applicable regulatory agencies, requiring further management attention and potential legal fees and other expenses.
The Company is subject to those risks inherent in an agricultural business.
Adult-use and medical marijuana are agricultural products. There are risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Although the products are usually grown indoors under climate-controlled conditions, with conditions monitored, there can be no assurance that natural elements will not have a material adverse effect on the production of its products.
Adult-use and medical marijuana growing operations consume considerable energy, making the Company potentially vulnerable to rising energy costs. Rising or volatile energy costs may adversely impact the business, results of operations, financial condition or prospects.
The Company’s business is dependent on suppliers and skilled labor.
The ability to compete and grow will be dependent on the Company having access, at a reasonable cost and in a timely manner, to skilled labor, equipment, parts and components. No assurances can be given that the Company will be successful in maintaining its required supply of skilled labor, equipment, parts and components. It is also possible that the final costs of the major equipment contemplated by the Company’s capital expenditure plans may be significantly greater than anticipated by management, and may be greater than funds available to the Company, in which circumstance management may curtail, or extend the timeframes for completing, its capital expenditure plans. This could have an adverse effect on the business, financial condition, results of operations or prospects.
The Company faces intense competition from other companies and increasing legalization of cannabis and rapid growth and consolidation in the cannabis industry may further intensify competition.
The cannabis industry is undergoing rapid growth and substantial change, and the legal landscape for medical and recreational cannabis is rapidly changing internationally. An increasing number of jurisdictions globally are passing legislation allowing for the production and distribution of medical and/or recreational cannabis in some form or another. Entry into the cannabis market by international competitors might lower the demand for the Company’s products.
The foregoing legalization and growth trends in the cannabis industry has resulted in an increase in competitors, consolidation and formation of strategic relationships. Such acquisitions or other consolidating transactions could harm us in a number of ways, including by losing strategic partners if they are acquired by or enter into relationships with a competitor, losing customers, revenue and market share, or forcing us to expend greater resources to meet new or additional competitive threats, all of which could harm operating results. As competitors enter the market and become increasingly sophisticated, competition in the cannabis industry may intensify and place downward pressure on retail prices for products and services, which could negatively impact profitability.
The Company also faces intense competition from other companies, some of which have longer operating histories and more financial resources and experience than MedMen. The Company also expects to face additional competition from new entrants. To become and remain competitive, the Company will require research and development, marketing, sales and support. The Company may not have sufficient resources to maintain research and development, marketing, sales and support efforts on a competitive basis which could materially and adversely affect the business, financial condition, results of operations or prospects. Increased competition could materially and adversely affect the business, financial condition, results of operations or prospects.
In addition, the pharmaceutical industry may attempt to dominate the marijuana industry through the development and distribution of synthetic products which emulate the effects and treatment of organic marijuana. If they are successful, the widespread popularity of such synthetic products could change the demand, volume and profitability of the marijuana industry. This could adversely affect the ability to secure long-term profitability and success through the sustainable and profitable operation of the business. There may be unknown additional regulatory fees and taxes that may be assessed in the future.
The Company is exposed to the risk that its employees, independent contractors and consultants may engage in fraudulent or other illegal activity.
The Company is exposed to the risk that its employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent unauthorized conduct that violates: (i) government regulations; (ii) manufacturing standards; (iii) federal and provincial healthcare fraud and abuse laws and regulations; (iv) laws that require the true, complete and accurate reporting of financial information or data; or (v) contractual arrangements, including confidentiality requirements. It may not always be possible for us to identify and deter misconduct by its employees and other third parties, and the precautions the Company takes to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with applicable laws or regulations or contractual requirements. If any such actions are instituted against us, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on the business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of its operations, any of which could have a material adverse effect on the business, financial condition, results of operations or prospects.
Certain remedies may be limited.
The governing documents may provide that the liability of the Board and its officers is eliminated to the fullest extent permitted under the laws of the Province of British Columbia. Thus, the Company and its shareholders may be prevented from recovering damages for alleged errors or omissions made by the members of the Board and its officers. The governing documents may also provide that the Company will, to the fullest extent permitted by law, indemnify members of the Board and its officers for certain liabilities incurred by them by virtue of their acts on behalf of MedMen.
Future material acquisitions or dispositions or strategic transactions.
Material acquisitions, dispositions and other strategic transactions involve a number of risks, including: (i) potential disruption of the ongoing business, (ii) distraction of management, (iii) the Company may become more financially leveraged, (iv) the anticipated benefits and cost savings of those transactions may not be realized fully or at all or may take longer to realize than expected, (v) increasing the scope and complexity the our operations, and (vi) loss or reduction of control over certain of assets. Additionally, the Company may issue additional equity interests in connection with such transactions, which would dilute a shareholder’s holdings in the Company.
Risks associated with pending transactions.
Pending transactions are subject to certain conditions, many of which are outside of the Company’s control and there can be no assurance that they will be completed, on a timely basis or at all. As a consequence, there is a risk that a proposed transaction will not close in a timely fashion or at all. In January 2022, the Company announced the termination of the investment agreement with Ascend Wellness Holdings, Inc. to sell a controlling interest in the Company’s operations in the state of New York. Subsequently, Ascend filed a complaint against the Company seeking specific performance of the investment agreement. Although the parties signed a non-binding term sheet to settle the lawsuit and move forward on the transaction, in August 2022, Ascend announced that it cancelled the transaction. If one or more proposed transactions is not completed for any reason, the ongoing business may be adversely affected and, without realizing any of the benefits of having completed such transactions, the Company will be subject to a number of risks, including, without limitation, (i) the Company may experience negative reactions from the financial markets, including negative impacts on its stock price, (ii) in the case of a proposed acquisition, the Company may need to find an alternative use for any capital earmarked for such proposed acquisitions, (iii) in the case of a proposed disposition, the Company will not receive the anticipated proceeds of such disposition and accordingly may not be able to execute on other business opportunities for which such proceeds have been earmarked, and (iv) matters relating to proposed transactions will require substantial commitments of time and resources by management which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to the Company.
If the Company is unable to attract and maintain qualified management and personnel, the business may be harmed.
To succeed, the Company must be able to attract and retain highly motivated and qualified management and personnel. Competition for skilled employees is intense and, if the Company is unable to attract and retain the personnel needed, the business may suffer. During recent years, the Company relied on SCP to provide executive officer and management support services and have had three Chief Executive Officers. In addition, several executive officers have resigned during the past year. A lack of continuity of management and personnel may make it difficult to implement the Company’s business strategy and turnaround and growth plan. Further, an inability to hire and retain highly qualified management and personnel could have a material adverse effect on the business, financial condition and results of operations.
RISKS RELATED TO INTELLECTUAL PROPERTY AND INFORMATION TECHNOLOGY
The Company may have limited intellectual property protection.
The Company possesses certain proprietary intellectual property, including but not limited to brands, trademarks, trade names, patents and proprietary processes. The Company relies on this intellectual property, know-how and other proprietary information, and require employees, consultants and suppliers to sign confidentiality agreements. However, these confidentiality agreements may be breached, and the Company may not have adequate remedies for such breaches. Third parties may independently develop substantially equivalent proprietary information without infringing upon any proprietary technology. Third parties may otherwise gain access to proprietary information and adopt it in a competitive manner. Any loss of intellectual property protection may have a material adverse effect on the business, results of operations or prospects.
As long as cannabis remains illegal under U.S. federal law as a Schedule I controlled substance pursuant to the CSA, the benefit of certain federal laws and protections which may be available to most businesses, such as federal trademark and patent protection regarding the intellectual property of a business, may not be available to MedMen. As a result, intellectual property may never be adequately or sufficiently protected against the use or misappropriation by third parties. In addition, since the regulatory framework of the cannabis industry is in a constant state of flux, the Company cannot provide assurance that it will ever obtain any protection of its intellectual property, whether on a federal, provincial, state or local level. While many states do offer the ability to protect trademarks independent of the federal government, patent protection is wholly unavailable on a state level, and state-registered trademarks provide a lower degree of protection than would federally-registered trademarks.
Any failure of information systems or the effect of any cyber-attacks may adversely impact the Company’s reputation and results of operations.
The Company’s operations depend, in part, on how well MedMen and its suppliers protect networks, equipment, information technology (“IT”) systems and software against damage from a number of threats, including, but not limited to, cable cuts, damage to physical plants, natural disasters, intentional damage and destruction, fire, power loss, hacking, computer viruses, vandalism and theft. The operations also depend on the timely maintenance, upgrade and replacement of networks, equipment, IT systems and software, as well as pre-emptive expenses to mitigate the risks of failures. Any of these and other events could result in information system failures, delays and/or increase in capital expenses. The failure of information systems or a component of information systems could, depending on the nature of any such failure, adversely impact the Company’s reputation and results of operations.
The Company has not experienced any material losses to date relating to cyber-attacks or other information security breaches, but there can be no assurance that the Company will not incur such losses in the future. The risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of controls, processes and practices designed to protect systems, computers, software, data and networks from attack, damage or unauthorized access is a priority. As cyber threats continue to evolve, the Company may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.
In addition, the Company collects and stores personal information about its customers and are responsible for protecting that information from privacy breaches. A privacy breach may occur through procedural or process failure, information technology malfunction, or deliberate unauthorized intrusions. Theft of data for competitive purposes, particularly customer lists and preferences, is an ongoing risk whether perpetrated via employee collusion or negligence or through deliberate cyber-attack. Any such theft or privacy breach would have a material adverse effect on the business, financial condition, results of operations and prospects.
ADDITIONAL RISKS RELATED TO LEGAL AND REGULATORY MATTERS
The Company has been and may in the future be subject to investigations, civil claims, lawsuits and other proceedings.
The Company may be subject to investigations (regulatory or otherwise), civil claims, lawsuits and other proceedings in the ordinary course of its business, across the various aspects of the business, including securities, employment, regulatory, intellectual property, commercial, real estate and other matters. The results of any legal proceedings to the which the Company is or may become subject cannot be predicted with certainty due to the uncertainty inherent in regulatory actions and litigation, the difficulty of predicting decisions of regulators, judges and juries and the possibility that decisions may be reversed on appeal. Defense and settlement costs of legal disputes can be substantial, even with claims that have no merit. There can be no assurance that any pending or future litigation, regulatory, agency or civil proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources.
The cannabis industry is a new industry, and MedMen is a fast growing and relatively new enterprise. It is therefore more difficult to predict the types of claims, proceedings and allegations and the quantum of costs related to such claims and proceedings and the direct and indirect effects of such allegations that the Company may face or experience. Management is committed to conducting business in an ethical and responsible manner, which the Company believes will reduce the risk of legal disputes and allegations. However, if the Company is subject to legal disputes or negative allegations, there can be no assurances that these matters will not have a material adverse effect on the business, financial condition, capital, results of operations, cash flows or prospects. Should any litigation, proceeding or audit in which the Company becomes involved be determined against it, such a decision could adversely affect the business, financial condition, capital, results of operations, cash flows or prospects and the market price for the Subordinate Voting Shares and other listed securities of the Company. Any such litigation, proceeding or audit may also create a negative perception of the brand.
United States Tax Classification of the Company.
The Company, which is a Canadian corporation, would be classified as a non-United States corporation under general rules of United States federal income taxation. Section 7874 of the Code, however, contains rules that can cause a non-United States corporation to be treated as a United States corporation for United States federal income tax purposes.
The Company intends to be treated as a United States corporation for United States federal income tax purposes under section 7874 of the Code and expect to be subject to United States federal income tax on its worldwide income. However, for Canadian tax purposes, the Company will be treated as a Canadian corporation (as defined in the Tax Act) for Canadian income tax purposes regardless of any application of section 7874 of the Code. As a result, the Company can be subject to taxation both in Canada and the United States which could have a material adverse effect on the financial condition and results of operations.
RISKS ASSOCIATED WITH THE SECURITIES OF THE COMPANY
Heightened scrutiny by securities regulatory authorities in the United States and Canada may impact investors’ ability to transact in the Company’s securities.
The Company’s operations in the United States cannabis market may become the subject of heightened scrutiny by regulators, stock exchanges, clearing agencies and other authorities in Canada. It has been reported by certain publications in Canada that the Canadian Depository for Securities Limited is considering a policy shift that would see its subsidiary, CDS Clearing and Depository Services Inc. (“CDS”), refuse to settle trades for cannabis issuers that have investments in the United States. CDS is Canada’s central securities depository, clearing and settlement hub settling trades in the Canadian equity, fixed income and money markets. CDS or its parent company has not issued any public statement with regard to these reports. On February 8, 2018, following discussions with the Canadian Securities Administrators and recognized Canadian securities exchanges, CDS signed the CDS Memorandum of Understanding (“MOU”) with The Aequitas NEO Exchange Inc., the CSE, the Toronto Stock Exchange, and the TSX Venture Exchange. The MOU outlines the parties’ understanding of Canada’s regulatory framework applicable to the rules and procedures and regulatory oversight of the exchanges and CDS as it relates to issuers with cannabis-related activities in the United States. The MOU confirms, with respect to the clearing of listed securities, that CDS relies on the exchanges to review the conduct of listed issuers. As a result, there currently is no CDS ban on the clearing of securities of issuers with cannabis -related activities in the United States. However, if CDS were to proceed in the manner suggested by these publications, and apply such a ban on the clearing of securities of the Company, it would have a material adverse effect on the ability of the Company’s shareholders to effect trades of shares through the facilities of a stock exchange in Canada, as a result of which such shares could become highly illiquid.
The Depositary Trust Company (“DTC”) is the primary depository for securities in the United States. Several major U.S. securities clearing companies that provide clearance, custody and settlement services in the United States terminated providing clearance services to issuers in the cannabis industry, including those that operate entirely outside the United States, in response to the Sessions Memo. As a result of these decisions, U.S. securityholders may experience difficulties depositing securities of cannabis companies in the DTC system or reselling their securities in open market transactions, including transactions facilitated through the CSE. Many larger U.S. broker-dealers own U.S. securities companies that self-clear transactions. However, some U.S. brokerages have adopted policies precluding their clients from trading securities of cannabis issuers.
Potential voting control and representation on the Company’s Board of Directors by significant shareholders may limit your ability to influence the outcome of director elections and other matters requiring shareholder approval.
On August 17, 2021, in connection with the Company’s Fourth Amended and Restated Securities Purchase Agreement (the “Fourth Restatement”), Superhero Acquisition, L.P. (“Superhero LP”), acquired from certain funds associated with Gotham Green Partners, LLC (“GGP”) an aggregate principal amount of approximately $165.8 million of the convertible notes and 135,266,664 warrants issued under the Convertible Facility. The general partner of Superhero LP is Superhero Acquisition Corp (“Superhero GP”). Tilray, Inc., a public company with Class 2 common stock listed on the Nasdaq Global Select Market, owns approximately two-thirds of the outstanding equity interests in Superhero GP and MOS Holdings Inc. (“MOS”), which is solely owned by Michael Serruya, holds approximately one-third of the outstanding equity interests in Superhero GP. Accordingly, for purposes of Rule 13d-3 under the Exchange Act of 1934, as amended (the “Exchange Act”), Tilray and MOS may be deemed the beneficial owners with respect to the securities held of record by Superhero LP and have shared voting and investment power with respect to such securities. As a result of the transfer of the notes and warrants from GGP to Superhero LP, Superhero LP, Superhero GP, Tilray and MOS, as of August 31, 2022, each beneficially owns approximately 43.8% of the Company’s Class B Subordinate Voting Shares and GGP beneficially owns for purposes of Rule 13d-3 under the Exchange Act approximately 19.1% of the Class B Subordinated Voting Shares, in each case assuming conversion of their respective notes and warrants. Tilray also owns an 68% interest as a limited partner in Superhero LP and S5 Holdings Inc. (“S5 Holdings”), which is owned by Michael Serruya, has an 8% interest as a limited partner in Superhero LP. Together with additional securities held directly by S5 Holdings, Michael Serruya beneficially owns approximately 44.8% of the Class B Subordinated Voting Shares. For further information about beneficial ownership of the Company’s securities, refer to Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.”
In connection with Fourth Restatement, the Company also entered into a Board Nomination Rights Agreement with S5 Holdings pursuant to which so long as S5 Holdings’ and its affiliates’ diluted ownership percentage of MedMen (including the proportionate equity ownership of securities held by Superhero LP) is at least 9%, S5 Holdings will be entitled to designate one individual to be nominated to serve as a director of the Company. S5 Holdings has initially designated Michael Serruya. The Company also entered into a Board Nomination Rights Agreement with GGP pursuant to which so long as GGP and certain associated investors’ diluted ownership percentage of MedMen is at least 10%, GGP will be entitled to designate one individual to be nominated to serve as a director of the Company. GGP has not yet designated a director. The Company also granted Tilray the right to appoint two non-voting observers to the Company’s board of directors.
This concentration of control, to the extent outstanding notes and warrants are converted and exercised, may adversely affect the trading price for the Class B Subordinate Voting Shares because investors often perceive disadvantages in owning stock in companies with potential controlling shareholders. Also, some or all of the Company’s significant shareholders, if they were to convert their notes and exercise their warrants and act together, would be able to control management and affairs and matters requiring shareholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of the Company’s assets. In addition, the interests of these shareholders may not align with the interests as a company or the interests of other shareholders. Accordingly, if these shareholders were to convert their notes and exercise the warrants, and subject to approval by the Board and requirements, if any, to obtain approval of a majority of the minority shareholders, they could cause us to enter into transactions or agreements of which the Company’s shareholders would not approve or make decisions with which shareholders would disagree. This concentration of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change of control would benefit other shareholders and may prevent shareholders from realizing a premium over the current market price for their shares. Furthermore, significant shareholders may also have interests that differ from yours and may vote their Class B Subordinate Voting Shares in a way with which you disagree and which may be adverse to your interests.
The Company’s capital structure may cause unpredictability.
Given the other unique features of the capital structure, including the existence of a significant amount of redeemable equity securities that have been issued by, and are issuable pursuant to the exercise, conversion or exchange of the applicable convertible securities of, certain subsidiaries of MedMen, such subsidiaries being MedMen Corp. and the LLC, which equity securities are redeemable from time to time for Subordinate Voting Shares or cash, in accordance with their terms, the Company is not able to predict whether this structure and control will result in a lower trading price for or greater fluctuations in the trading price of the Subordinate Voting Shares or will result in adverse publicity to MedMen or other adverse consequences.
Future sales of Subordinate Voting Shares in the public market, or the perception that such sales may occur, could adversely affect the prevailing market price of the Subordinate Voting Shares.
The Company may issue additional securities in the future, which may dilute shareholder’s holdings in MedMen. The articles permit the issuance of an unlimited number of Subordinate Voting Shares, and shareholders will have no preemptive rights in connection with such further issuance. The MedMen Board has discretion to determine the price and the terms of further issuances. Moreover, additional Subordinate Voting Shares will be issued by MedMen on the exercise, conversion or redemption of certain outstanding securities of MedMen, MedMen Corp. and the LLC in accordance with their terms. While the Company currently does not have any pending acquisitions, it may also issue Subordinate Voting Shares to finance future acquisitions. The Company cannot predict the size of future issuances of Subordinate Voting Shares or the effect that future issuances and sales of Subordinate Voting Shares will have on the market price of the Subordinate Voting Shares. Issuances of a substantial number of additional Subordinate Voting Shares, or the perception that such issuances could occur, may adversely affect prevailing market prices for the Subordinate Voting Shares. With any additional issuance of Subordinate Voting Shares, investors will suffer dilution to their voting power and the Company may experience dilution in its revenue per share.
Additionally, the subsidiaries of MedMen, such as MedMen Corp. and the LLC, may issue additional securities that may be redeemed into Subordinate Voting Shares of MedMen, including MedMen Corp Redeemable Shares, LLC Redeemable Units and LTIP Units to new or existing shareholders, members or securityholders, including in exchange for services performed or to be performed on behalf of such entities or to finance future acquisitions. Any such issuances could result in substantial dilution to the indirect equity interest of the holders of Subordinate Voting Shares.
The market price of the Subordinate Voting Shares is volatile and subject to wide fluctuations.
The market price of the Subordinate Voting Shares has been or may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond the Company’s control. This volatility may affect the ability of holders of Subordinate Voting Shares or such other securities to sell their securities at an advantageous price. Market price fluctuations in the Subordinate Voting Shares or such other securities may be due to the operating results failing to meet expectations of securities analysts or investors in any period, downward revision in securities analysts’ estimates, adverse changes in general market conditions or competitive, regulatory or economic trends, adverse changes in the economic performance or market valuations of companies in the industry in which it operates, acquisitions, dispositions, strategic partnerships, joint ventures, capital commitments or other material public announcements by us or competitors or government and regulatory authorities, operating and share price performance of the companies that investors deem comparable to us, addition or departure of executive officers, directors and other key personnel, along with a variety of additional factors. These broad market fluctuations may adversely affect the market price of the Subordinate Voting Shares or such other securities.
Financial markets have at times historically experienced significant price and volume fluctuations that have particularly affected the market prices of equity and convertible securities of companies and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Subordinate Voting Shares and other listed securities of MedMen from time to time may decline even if the operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue or arise, the Company’s operations may be adversely impacted and the trading price of the Subordinate Voting Shares and such other securities may be materially adversely affected.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
The following is a list of the Company’s principal physical properties, all of which are leased, as of June 25, 2022:
State Name Facility Under Master Lease Location Primary Use Restructured Square Footage
AZ Mesa 2832 N Omaha Street
Scottsdale, AZ Cultivation and Processing
20,000
AZ Talking Stick 8729 E Manzanita Drive
Scottsdale, AZ Retail
3,337
AZ Mesa 4220 E McDowell Rd
Scottsdale, AZ Office Space
AZ Mesa 4220 E McDowell Rd
Scottsdale, AZ Addt’l Office Space
CA DHS 13300 Little Morongo Road √ Desert Hot Springs, CA Cultivation and Processing
45,000
CA DHS - Land 13300 Little Morongo Road √ Desert Hot Springs, CA Cultivation and Processing
n/a
CA Porter 2430 Porter Street
Los Angeles, CA Distribution Facility
39,068
CA San Jose 1075 N 10th Street
San Jose, CA Retail
21,024
CA Sutter 532-536 Sutter Street
San Francisco, CA Not in Use
16,596
CA Culver City 10115 Jefferson Blvd
Culver City, CA Office Space (1) 11,802
CA Other office 5324 Washington Blvd
Los Angeles, CA Office Space (2) 7,820
CA LAX 8740 South Sepulveda Blvd
Los Angeles, CA Retail
6,489
CA Abbot Kinney 1308-1312 Abbot Kinney Blvd √ Venice, CA Retail
5,220
CA Beverly Hills 106-110 Robertson Blvd √ Los Angeles, CA Retail
5,166
CA DTLA 735 South Broadway
Los Angeles, CA Retail
5,136
CA We - Ho 8208 Santa Monica Boulevard
West Hollywood, CA Retail
4,844
CA Santa Ana 2141 Wright Street √ Santa Ana, CA Retail
4,789
CA Venice 410-416 Lincoln Blvd √ Venice, CA Retail
4,780
CA Emeryville 3996 San Pablo Avenue Ste A/B
Emeryville, CA Retail
1,976
CA Emeryville 3996 San Pablo Avenue Ste C/D
Emeryville, CA Retail
1,870
CA Torrey Pines 10715 Sorrento Valley Blvd
San Diego, CA Retail
3,697
CA Union 1861 Union Street
San Francisco, CA Retail
3,222
CA Long Beach 2669 & 2671 E Broadway
Long Beach, CA Retail
3,000
CA Kearny Mesa 5125 Convoy Street √ San Diego, CA Retail
2,366
FL Eustis 25540 County Road √ Eustis, FL Cultivation and Processing
48,358
FL West Palm 539-37 Clematis Street √ West Palm Beach, FL Retail
7,876
FL Miami 1428-1434 Alton Road
Miami Beach, FL Not in Use
7,343
FL Key West 130 Duval Street
Key West, FL Not in Use
6,230
FL Jacksonville 1059 Park Street
Jacksonville, FL Not in Use
6,000
FL Jacksonville 11190 San Jose Blvd √ Jacksonville, FL Not in Use
5,556
FL Orlando 11551 University Blvd
Orlando, FL Retail
5,464
FL Jacksonville 308 3rd Street South
Jacksonville Beach, FL Not in Use
5,348
FL Sarasota 1410 Main Street
Sarasota, FL Not in Use
5,000
FL Orlando 6600 International Drive
Orlando, FL Not in Use
4,671
FL Miami Beach 550 Collins Avenue
Miami Beach, FL Retail
4,263
FL Tallahassee 1126 Thomasville Road
Tallahassee, FL Retail
4,011
FL Tampa 5900 N Florida Ave
Tampa, FL Not in Use
3,990
FL Pensacola 5048 Bayou Blvd
Pensacola, FL Retail
3,802
FL Deerfield 2009 NE 2nd Street √ Deerfield Beach, FL Not in Use
3,618
FL Ft. Lauderdale 2949 North Federal Highway
Ft Lauderdale, FL Retail
3,315
FL St. Petersburg 326 5th Ave N
St. Petersburg, FL Retail
3,015
IL Fulton 942-944 W Fulton St
Chicago, FL Not in Use
11,100
IL Oak Park 1136-1140 West Lake Street
Oak Park, FL Retail
4,400
MA Fenway 120 Brookline Avenue
Boston, MA Retail
6,475
MA Newton 232 Boylston Street
Chestnut Hill, MA Not in Use
5,000
NV Mustang 12000 Truckee Canyon Court √ Sparks, NV Cultivation and Processing
45,000
NV Mustang - Land Truckee Canyon Court √ Sparks, NV Cultivation and Processing
n/a
NV Paradise 4503 Paradise Road #210A
Las Vegas, NV Retail
3,072
NV Paradise 4503 Paradise Road #210B
Las Vegas, NV Retail
1,831
NV DTLV 823 South 3rd Street √ Las Vegas, NV Retail
3,897
NV Spring Valley 6332 S Rainbow
Las Vegas, NV Retail
2,500
NV Highlands 3025 & 3035 Highland Drive √ Las Vegas, NV Not in Use
n/a
NY Utica 1113 Herkimer Rd
Utica, NY Cultivation and Processing
25,641
NY Dewitt - PSO 3180 Erie Blvd East √ DeWitt, NY Not in Use
7,136
NY New York - PSO 33 Ninth Avenue
New York, NY Not in Use
6,667
NY New York 433 Fifth Avenue
New York, NY Retail
5,591
NY New York PSO 338 East 49th Street
New York, NY Not in Use
4,730
NY Salina 1304 Buckley Road
Salina, NY Retail
3,781
NY Buffalo 6850 Main Street
Williamsville, NY Retail
2,117
NY Lake Success 2001 Marcus Avenue
Lake Success, NY Retail
1,800
See Item 1. “Business -U.S. Regulatory Environment - State and Local License - California.”
(1) Lease terminated on July 31, 2022.
(2) Property is under sublease agreement.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
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 June 25, 2022, other than those described below, 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 June 25, 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.
On January 29, 2019, the Company’s former Chief Financial Officer (the “Former Officer”) filed a complaint against MM Enterprises USA in the Superior Court of California, County of Los Angeles, seeking damages for claims relating to his employment. including but not limited to contractual, compensatory, and punitive damages, interest, costs and fees, and any further relief the court deems proper. In November 2021 a jury completely exonerated the Company, finding in its favor on all counts. On March 1, 2022, the judge further ordered that the Former Officer repay MedMen $612,000 in legal fees that the Company had previously advanced to the Former Officer, affirming that the Former Officer was not entitled to such reimbursement due to his material breach of his employment agreement. The judge further ruled that the Former Officer was not entitled to reimbursement of any further fees or expenses from the Company, following his request that the Company reimburse him for an additional $1,000,000 of legal fees.
On February 25, 2021, MedMen NY, Inc. (“MMNY”), the New York subsidiary of the Company, and its parent, MM Enterprises USA, LLC (“MM Enterprises USA”) entered into an investment agreement (the “Investment Agreement”) with Ascend Wellness Holdings, LLC, a New York limited liability company (“AWH NY”), and Ascend Wellness Holdings, LLC, a Delaware limited liability company (“AWH”, and collectively, the “Investors”) whereby, subject to approval from the New York State Department of Health and other applicable regulatory bodies, AWH agreed to purchase shares of common stock of MMNY for an aggregate purchase price of up to $73.0 million. The Investment Agreement provided that all final regulatory approvals including from the State of New York shall be received by December 31, 2021 (the “Deadline”). All final regulatory approvals were not received by the Deadline and, on January 3, 2022, the Company advised the Investors of this failure. On January 14, 2022, the Investors filed a complaint in the Commercial Division of the Supreme Court of the State of New York in New York County against MMNY and MM Enterprises USA in which the Investors sought, among other things, to compel MMNY and the Company to close the transaction on the terms set forth in the Investment Agreement. On May 11, 2022, the Investors and the Company entered into a non-binding term sheet settling the legal dispute (the “Term Sheet”). The Term Sheet provided, among other things, that the transaction consideration set forth in the Investment Agreement would be increased by $15.0 million, to $88.0 million, $4.0 million of which was to be contingent on the start of adult-use sales at a MMNY dispensary. The Term Sheet required the parties to use their best efforts to execute a formal settlement agreement based on the terms of the Term Sheet within ten calendar days of their execution of the Term Sheet. The Term Sheet further required the parties to, within thirty days of executing the settlement agreement, complete the closing of the transaction on the same terms and conditions as originally set forth in the Investment Agreement except to the extent modified by the settlement agreement. Notwithstanding these agreements, AWH announced during an AWH earnings call on August 15, 2022 that AWH did not intend to close the transaction. This matter remains the subject of pending litigation with the Investors.
The Company is a party to two lawsuits related to previous acquisitions that closed in December 2018 and February 2019. Whitestar Solutions, LLC and Adakai Holdings, LLC filed a complaint on March 11, 2020 (the “Whitestar Litigation”) and Unisys Technical Solutions, LLC, Michael Colburn and Daryll DeSantis filed a complaint on May 26, 2020 (the “Unisys Litigation”), each in Superior Court of the State of Arizona, Maricopa County. The lawsuits involve disputes regarding purchase agreements for the sale of the membership interests in Kannaboost Management LLC and CSI solutions. The plaintiffs seek damages including, rescission, declaratory judgment, specific performance, monetary damages to be proven at trial and costs and reasonable attorneys’ fees. In the Whitestar Litigation, in which plaintiffs claimed fraudulent inducement and breach of contract and sought injunctive and declaratory relief including rescission the sale, the court granted summary judgment in favor of the Company on all counts in May 2022. The Company has submitted an application to recover its attorneys’ fees and costs from the plaintiffs, which motion the plaintiffs have opposed. That fee application is fully briefed and is awaiting ruling. Plaintiffs have indicated they intend to appeal the entry of summary judgment and seek a reversal of the trial court’s ruling.
In connection with a Unisys Litigation, in December 2020 the Company filed motions with the court regarding the Level Up auction sales for $25,150,000 demanding that the net proceeds from the auction sale be paid to the Company. The plaintiffs claimed that they were not obligated to remit the net proceeds from the auction sale to the Company. On February 23, 2021 and March 11, 2021, the court ruled and issued a judgment that the plaintiffs return extra proceeds from the auction sale in the amount of approximately $10.4 million, plus interest, to the Company. The plaintiffs appealed the court ruling and, on May 24, 2021, the Arizona Court of Appeals determined that the Superior Court improvidently determined the partial judgment to be final and dismissed the appeal based on lack of jurisdiction because it was premature. The Court of Appeals did not rule on the substance of the plaintiffs’ appeal. The other claims and counterclaims continue to remain outstanding. The trial court has subsequently ordered plaintiffs to place the surplus proceeds from the sale into the court registry and has held the plaintiffs in contempt for failure to do so with monetary sanctions accruing at the rate of $25,000 per day. Oral argument on the Company’s partial motion for summary judgment is currently set for October 17, 2022.
Ryan Rayburn and South Cord Management LLC filed a complaint on April 21, 2020 in Superior Court for the State of California, County of Los Angeles. The lawsuit involves a dispute regarding a purchase agreement for the sale of membership interests. The lawsuit alleges fraudulent inducement and breach of contract, breach of contract, breach of implied covenant of good faith and fair dealing, common law fraud and securities fraud. The plaintiff seeks damages including, rescission, declaratory judgment, specific performance, monetary damages to be proven at trial and costs and reasonable attorneys’ fees. The Company believes the likelihood of a loss contingency is neither probable nor remote and the amount cannot be estimated reliably. As such, no amount has been accrued in the financial statements.
In September 2020 and May 2020, arbitration disputes were filed against the Company related to the separation of and compensation due to former officers, as applicable, in which the severance issued and amounts allegedly owed are currently being disputed. On June 5, 2022, following arbitration brought by former officer Andrew Modlin, the arbitrator found in favor of the Company on all counts, finding that no amount was due from the Company. In August 2022 arbitration was completed with respect to the claims brought by former officer Andrew Modlin, with the parties waiting on the arbitrator’s determination. The Company believes the likelihood of loss is remote with respect to the remaining two unresolved disputes. As a result, no amount has been set up for potential damages in these financial statements.
In November 2020, entities affiliated with former officers of the Company initiated arbitration against a subsidiary of the Company in Los Angeles, California asserting breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, and unjust enrichment claims related to the management agreements for stores on Abbot Kinney Boulevard and Sepulveda Boulevard. The claimants are generally seeking damages and compensatory damages according to proof, including lost earnings and other 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 counter-claims, including for breach of the same management agreements. The arbitration is currently set for hearing beginning on December 12, 2022. While it is too early to predict the outcome of the case or whether an adverse result would have a material adverse impact on the Company’s operations or financial position, the Company believes it has meritorious defenses and intends to defend this legal matter vigorously.
On December 10, 2020, a lawsuit was filed against the Company in the Superior Court of California for Los Angeles by Matthew Abrams, Jeremy Abrams, Judith Abrams, Scott Angone 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 cash and shares as a true-up payment in connection with the acquisition by the Company of OneLove in September 2019. In the complaint, the plaintiffs allege breach of contract, breach of implied covenant of good faith 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 the Company’s operations or financial position, the Company believes it has meritorious defenses and intends to defend this legal matter vigorously.
On January 7, 2021, JTM Construction Group, Inc. filed a cross-complaint against MM Enterprises USA, a subsidiary of the Company, in the Los Angeles Superior Court alleging breach of contract, quantum merit and implied indemnity. The Company settled this litigation on April 4, 2022
The Company is the defendant 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 Company 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. Attempts to resolve the litigation at mediation conducted in June 2022 failed and the matter is currently in the discovery phase. If the litigation is not settled or resolved, trial will likely take place in the first half of 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 16, 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 the Florida business and the litigation is still in the early stages. While it is too early to predict the outcome of any of these cases or whether an adverse result would have a material adverse impact on the Company’s operations or financial position, the Company believes it has meritorious defenses and intends to defend these legal matters vigorously.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Class B Subordinate Voting Shares of the Company are traded on the CSE under the symbol “MMEN.” The Class B Subordinate Voting Shares are also quoted on the OTCQX under the symbol “MMNFF”; over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Holders
As of June 25, 2022, there were approximately 892 holders of record of Class B Subordinate Voting Shares.
Dividend Policy
The Company has never declared or paid cash dividends on its capital stock. The Company does not expect to pay dividends on its capital stock for the foreseeable future. Any future determination to declare cash dividends would be subject to the discretion of the Board of Directors and would depend upon various factors, including the operating results, financial condition, and capital requirements, restrictions that may be imposed by applicable law, and other factors deemed relevant by the Board of Directors. In addition, the Company’s ability to pay dividends on the Subordinate Voting Shares may be limited by the restrictions under the terms of its loan and security agreement.
Recent Sales of Unregistered Securities
During the fiscal quarter ended June 25, 2022, the Company issued the securities listed below, which were previously reported in Item 2 of the Company’s Quarterly Report on Form 10-Q for the period ended March 26, 2022 as filed with the SEC on May 10, 2022:
● On April 8, 2022, the Company issued 41,520,915 Subordinate Voting Shares pursuant to a settlement agreement with JTM & Convergint in April 2022.
● On April 13, 2022, the Company issued 1,376,932 Class B Subordinate Voting Shares to an unrelated third party in connection with services provided.
● On April 19, 2022, the Company issued an aggregate of 697,150 Class B Subordinate Voting Shares to non-employee directors of the Board of Directors in connection with their fees that are paid on a quarterly basis.
● On April 25, 2022, the Company issued to Matthew Lucero 22,497,786 Subordinate Voting Shares in connection with the settlement of a promissory note related to a building lease.
Furthermore, the Company also issued 692,023 Class B Subordinate Voting Shares and 1,505 Class B Subordinate Voting Shares on May 3, 2022 and May 18, 2022, respectively.
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.
Securities Authorized for Issuance Under Equity Compensation Plans.
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, restricted stock grants, LTIP units and warrants (together, “Awards”). 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. The maximum number of Awards that may be issued under the Incentive Plan shall be determined by the Compensation Committee or the Board in the absence of a Compensation Committee. Any shares subject to an Award under the Incentive Plan that are forfeited, 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 the Board in absence of one. 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 10 years.
The following table sets forth securities authorized for issuance under the Stock and Incentive Plan as of fiscal 2022 year-end.
Plan Category
(a)
Number of
securities
to
be issued
upon
exercise
of
outstanding
options,
warrants
and rights
(b)
Weighted-
average
exercise
price
of
outstanding
options,
warrants
and rights
(c)
Number of
securities
remaining
available
for future
issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))
Equity compensation plans approved by security holders
-
$ -
-
Equity compensation plans not approved by security holders
19,648,156
$ 1.35 (1)
157,079,925 (2)
Total
19,648,156
$ 1.35
157,079,925
(1) Reflects C$0.0750 based on the closing price per share on June 24, 2022 on the CSE and assumes CAD/USD exchange rate of $0.773216.
(2) The aggregate number of Subordinate Voting Shares that may be issued under all Awards under the Incentive Plan shall be the number of Subordinate Voting Shares as determined by the Board from time to time. On April 1, 2021, the Company amended the Plan to set the amount reserved for future issuance under the Incentive Plan to 200,000,000 Subordinate Voting Shares plus all shares underlying outstanding awards as of the effective date of the approval by the Board.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. RESERVED

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and the accompanying notes presented in Item 8 of this Form 10-K. 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 - Risk Factors” and elsewhere in this Form 10-K.
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 7 as permitted by applicable scaled disclosure rules.
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.
The Company’s fiscal year is a 52/53-week year ending on the last Saturday in June. For the current reporting period, the fiscal quarter ended June 25, 2022 and June 26, 2021 refer to the 13 weeks ended therein and the fiscal years ended June 25, 2022 and June 26, 2021 refer to the 52 weeks ended therein.
Company Overview
MedMen is a cannabis retailer based in the U.S. offering a robust selection of high-quality products, including MedMen-owned brands, LuxLyte, and MedMen Red through its premium retail stores, proprietary delivery service, as well as curbside and in-store pick up. As of June 25, 2022, the Company operates 30 store locations across California (13), Florida (7), New York (4) Nevada (3), Illinois (1), Massachusetts (1) and Arizona (1).
Selected Financial Data
The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) and the Consolidated Financial Statements and the accompanying notes presented in Item 8 of this Form 10-K. The Company’s 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. The following table sets forth the Company’s selected consolidated financial data for the periods, and as of the dates, indicated:
Three Months Ended
Year Ended
June 25,
June 26,
June 25,
June 26,
($ in Millions)
Revenue
$ 33.3
$ 38.0
$ 140.8
$ 132.2
Gross Profit
$ 17.2
$ 17.7
$ 69.7
$ 60.7
Loss from Operations
$ (103.4 )
$ (18.4 )
$ (168.9 )
$ (55.1 )
Total Other Expense
$ 4.5
$ 17.7
$ 6.5
$ 67.4
Net Loss from Continuing Operations
$ (86.4 )
$ (35.8 )
$ (165.5 )
$ (124.3 )
Net Loss from Discontinued Operations, Net of Taxes
$ (14.8 )
$ (10.3 )
$ (45.3 )
$ (33.3 )
Net Loss
$ (101.2 )
$ (46.1 )
$ (210.8 )
$ (157.6 )
Net Loss Attributable to Non-Controlling Interest
$ (8.9 )
$ (7.3 )
$ (15.7 )
$ (33.5 )
Net Loss Attributable to Shareholders of MedMen Enterprises Inc.
$ (92.3 )
$ (38.8 )
$ (195.1 )
$ (124.1 )
Adjusted Gross Profit (Non-GAAP)
$ 14.7
$ 17.7
$ 67.2
$ 60.7
Adjusted Net Loss from Continuing Operations (Non-GAAP)
$ (4.2 )
$ (31.8 )
$ (97.8 )
$ (112.0 )
EBITDA from Continuing Operations (Non-GAAP)
$ (95.9 )
$ (11.2 )
$ (106.7 )
$ (41.3 )
Adjusted EBITDA from Continuing Operations (Non-GAAP)
$ (0.9 )
$ (7.8 )
$ (26.3 )
$ (37.0 )
Fiscal Year 2022 Highlights
New Retail Locations
On December 21, 2021, we announced the opening of our newest store location in Boston’s famed Fenway Park area. MedMen Fenway marks the Company’s entry into Massachusetts’ booming adult-use market. Fenway’s asset group cash flows have not performed as the-then management team expected. We will continue to monitor the performance of this store.
On March 7, 2022, we announced the opening of our newest store location on Union Street in San Francisco’s Cow Hollow neighborhood. MedMen Union Street marks the Company’s inaugural partnership with equity-licensed partner Mirage Medicinal, led by Malcolm Joshua Weitz. Weitz, a Mission District native and founder of Mirage Medicinal, will serve as CEO and part owner of the MedMen Union Street location.
In June 2022, we restructured the lease arrangements in two of our locations in California. The changes resulted in immaterial changes in the amortization of our ROU but is anticipated to generate $1,063,000 in lower cash rents over the term of the leases.
On July 31, 2022, we vacated our corporate headquarters office in Culver City, California and are currently in transition to relocating to satellite offices located adjacent to our retail stores. We anticipate completing our relocation during the fiscal first quarter of 2023.
Changes to Existing Facilities
During the fiscal second quarter of 2022, the Company effectuated four contractual agreements (collectively, the “Management Agreement”) with American Family of Brands, LLC (“AFB”), an unrelated third party, and no longer has a controlling financial interest in previously consolidated entities, Manlin DHS Development, LLC (“DHS”) and Project Mustang Development, LLC (“Mustang”), its cultivation facilities in California and Nevada, respectively, therefore these entities are no longer included in the Company’s financial statements. The deconsolidation did not have a material impact on the Company’s Financial Statements. As of June 25, 2022, activity and sales to MedMen of its private label branded products from its third party have been minimal as the operations of the Cultivation Facilities ramp up under the new operators. On September 30, 2021, the landlord of the California and Nevada Cultivation Facilities 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 $1.00 (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 June 25, 2022, the Management Agreement remains in effect as neither termination condition has occurred, and the related cannabis licenses continue to be in our name.
On March 11, 2022, we completed the closure of our distribution facility in Los Angeles, California (“Porter”) as part of our strategic focus to reduce overhead costs and shift toward an asset-light operating model. Inventory purchases for cannabis products sold in our California stores are now drop-shipped directly by our suppliers to our stores.
Continued Strategic Partnership with Gotham Green Partners and Superhero
On April 23, 2019, the Company secured 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 date through issuances to the lenders of convertible senior secured notes (“Facility Notes”) co-issued by the Company and MM Can USA, Inc. (“MM CAN” or “MedMen Corp.”). Refer to “Note 17 - Senior Secured Convertible Credit Facility” of the Consolidated Financial Statements in Item 8 for further information. As of June 25, 2022, the Company has drawn down a total of $165,000,000 on the Convertible Facility, has accrued paid-in-kind interest of $72,000,000 and cannot draw more.
On August 17, 2021, the Company announced that Tilray, Inc. (“Tilray”) acquired a majority of the outstanding Facility Notes. 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, all of which were originally issued by MedMen and held by GGP, representing 75% of the outstanding Facility Notes and 65% of the outstanding warrants under the Convertible Facility. Specifically, Tilray’s interest in the SPV represents rights to 68% of the Facility Notes and related warrants held by Superhero. Tilray’s ability to convert the Facility 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 Facility 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 Facility 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 CSE. The Facility Notes may not be prepaid until the federal legalization of marijuana. The Facility 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 Facility 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%.
Backstopped Equity Investment
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 certain investors associated with SPE agreed to backstop the Private Placement (the “Backstop Commitment”). Each Unit consisted 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 allowed MedMen to expand its operations in key markets such as California, Illinois and Massachusetts and identify and accelerate further growth opportunities across the United States.
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 expired on December 31, 2021. At the option of the holders and upon payment of $30,000,000, the Short-Term Warrant entitled 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 Company will use any proceeds, less fees and expenses, from exercise of the Short-Term Warrant to pay down the existing senior secured term loan with Hankey Capital if any indebtedness is then outstanding.
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 S5 Holding the right to designate one individual to be nominated to serve as a director of the Company so long as S5 Holdings’ and its affiliates’ diluted ownership percentage is at least 9%.
Unsecured Promissory Note
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 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. 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 with SPE.
Secured Term Loan Amendments
In October 2018, MedMen Corp. completed a $77,675,000 senior secured term loan (the “2018 Term Loan”) with funds managed by Hankey Capital, LLC and with an affiliate of Stable Road Capital. On July 2, 2020, the 2018 Term Loan was amended wherein the entirety of the interest rate of 15.5% per annum was paid-in-kind effective March 1, 2020 through July 2, 2021. Thereafter through maturity, on January 31, 2022, one-half of the interest (7.75% per annum) payable monthly in cash and one-half of the interest (7.75% per annum) paid-in-kind. Refer to “Note 16 - Notes Payable” of the Consolidated Financial Statements in Item 8 for further information.
On September 16, 2020, the Company amended the 2018 Term Loan in which the funds available under the facility was increased by $12,000,000 available through incremental term loans (the “2020 Term Loan”), of which $10,705,279 was drawn down as of fiscal year 2021. The 2020 Term Loan accrues interest at 18.0% per annum wherein 12.0% will be paid in cash monthly in arrears and 6.0% per annum accrues monthly as payment-in-kind.
On February 2, 2022, the Company executed an amendment (the “Sixth Modification”) in which the maturity date of the 2018 Term Loan and 2020 Term Loan (collectively, the “Term Loans”) was extended to July 31, 2022 and August 1, 2022, respectively. The Sixth Modification provides that the definitive documentation with respect to the conditional purchase of the Term Loans by Superhero Acquisition, L.P. must be entered within 45 days or the stated maturity date of the Term Loans become due. An additional 5.0% interest accrues following the maturity date and compounds monthly. The Sixth Modification also requires that the Company make a mandatory prepayment of at least $37,500,000 in the event the sale of certain assets. As a result of the Sixth Modification, the Company prepaid $20,000,000 on the Term Loans in cash and paid a fee of $1,000,000 in Class B Subordinate Voting Shares (“Shares”) with a deemed price of $0.1247 (C$0.1582) for a total of 8,021,593 Class B Subordinate Voting Shares.
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 callable in tranches of $1,000,000 each. The debentures provided for the automatic conversion into Class B Subordinate Voting Shares in the event that the VWAP is 50% above the conversion price on the CSE for 45 consecutive trading days.
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 gross proceeds of $1,622,377. As of June 25, 2022, the Unsecured Convertible Facility has been paid off and there are no outstanding balances.
Landlord Support for Company Turnaround
The Company currently has lease arrangements with affiliates of Treehouse Real Estate Investment Trust (the “REIT”), which include 14 retail and cultivation properties across the U.S. On July 3, 2020, the Company announced modifications to its existing lease arrangements with the REIT, in which the REIT agreed to defer a portion of total current monthly base rent for the 36-month period between July 1, 2020 and July 1, 2023. The total amount of all deferred rent accrues interest at 8.6% per annum during the deferral period. As consideration for the rent deferral, the Company issued 3,500,000 warrants to the REIT, each exercisable at $0.34 per share for a period of five years. As part of the agreement, the Company will pursue a partnership with a cannabis cultivation company for the Company’s Desert Hot Springs and Mustang facilities that are leased from the REIT in order to continue the Company’s focus on retail operations. As of June 25, 2022, the deferred rent cost is $24,600,000 and expects the total amount due and payable in a lumpsum on July 1, 2023.
In April 2022, management engaged the restructuring firm of Hilco Real Estate to solicit a permanent reduction of rent costs from other landlords and the REIT, emphasizing stores in which the lease cost is “too high” to sustain. From negotiations completed as of June 25, 2022, we have deferred and additional $360,000 to be due in 2023 and obtained rent reductions from other landlords of approximately $650,000 annually on average and $3,340,000 through the term of the lease or six years. We continue in negotiations with all landlords, including the REIT and will continue to pursue permanent reductions in lease costs.
Discontinued Operations
In February 2021, the Company entered into an investment agreement with Ascend Wellness Holdings (“Ascend”) to sell a controlling interest in MedMen NY, Inc. wherein the cash proceeds would be used to repay a portion of the Senior Secured Term Loan with Hankey Capital. In January 2022, the Company announced the termination of the investment agreement with Ascend and, subsequently, Ascend filed a complaint against the Company seeking specific performance of the investment agreement. Although the parties signed a non-binding term sheet to settle the lawsuit and move forward on the transaction, in August 2022, Ascend announced that it intended to terminate the transaction. Our plans for the sale of our New York operations have not changed and we will continue to market to other interested parties. All assets and liabilities and profit or loss allocable to the Company’s operations in the state of New York are classified as discontinued operations for all periods presented.
In February 2022, the Company entered into an agreement with Green Sentry Holdings, LLC (“Buyer”) for the sale of MME Florida, LLC, including its license, dispensaries, inventory and cultivation operations, and assumption of certain liabilities. In addition, the Company will license the tradename “MedMen” to the Buyer for use in Florida for a period of two years, subject to termination rights, for a quarterly revenue-based fee. Of the total sales price of $83,000,000, the cash purchase price is to be used to repay a portion of the Senior Secured Term Loan with Hankey Capital. All assets and liabilities and profit or loss allocable to the Company’s operations in the state of Florida are classified as discontinued operations for all periods presented.
On August 22, 2022, the Company announced the closing of the sale of its operations in the state of Florida at the final sales price of $67,000,000 which comprised of $63,000,000 in cash and $4,000,000 in liabilities to be assumed by the Buyer. Refer to “Note 29 - Subsequent Events” of the Consolidated Financial Statements in Item 8 for further information.
COVID-19 Pandemic
We continuously address the effects of the COVID-19 pandemic, a discussion of which is available in Item 1A “Risk Factors” of this Form 10-K. Our business and operating results for the year ended June 25, 2022, continue to be impacted by the COVID-19 pandemic. We experienced declines in traffic during key holidays, including the week of Thanksgiving and of Christmas, which typically drive volume as customers shop for the holidays. In January, we experienced a further decline in traffic in our stores, which we attribute to the fast-spreading Omicron variant present across all of our communities. Comparatively, we noted a sharp decline in sales in March and April which we believe was a result of the expiration of the Biden administration’s “stimulus checks” that occurred a year ago same period under American Rescue Act and no longer available in fiscal year 2022 or 2023. The overall impact on our business continues to depend on the length of time that the pandemic continues, the impact on consumer purchasing behavior, inflation, and the extent to which it affects our ability to raise capital, and the effect of governmental regulations imposed in response to the pandemic as well as uncertainty regarding all of the foregoing. The Company continues to implement and evaluate actions to strengthen its financial position and support the continuity of its business and operations.
RESULTS OF OPERATIONS - FISCAL YEAR 2022 COMPARED TO FISCAL YEAR 2021
Our consolidated results, in millions, except for per share and percentage data, for the three months and year ended June 25, 2022, compared to three months and year ended June 26, 2021, are as follows:
Three Months Ended
Year Ended
June 25,
June 26,
June 25,
June 26,
($ in Millions)
$ Change
% Change
$ Change
% Change
Revenue
$ 33.3
$ 38.0
$ (4.7 )
(12 )%
$ 140.8
$ 132.2
$ 8.6
%
Cost of Goods Sold
16.1
20.3
(4.2 )
(21 )%
71.1
71.5
(0.4 )
(1 )%
Gross Profit
17.2
17.7
(0.5 )
(3 )%
69.7
60.7
9.0
%
Expenses:
General and Administrative
19.1
28.8
(9.7 )
(34 )%
108.7
109.1
(0.4 )
-
Sales and Marketing
0.5
0.5
-
-
3.2
1.0
2.2
%
Depreciation and Amortization
6.3
5.0
1.3
%
24.0
26.3
(2.3 )
(9 )%
Realized and Unrealized Changes in Fair Value of Contingent Consideration
3.6
-
3.6
-
3.3
0.4
2.9
%
Impairment Expense
93.2
-
93.2
-
101.8
2.4
99.4
4,142 %
Other Operating (Income) Expense
(2.1 )
1.8
(3.9 )
(217 )%
(2.4 )
(23.4 )
21.0
(90 )%
Total Operating Expenses
120.6
36.1
84.5
%
238.6
115.8
122.8
%
Loss from Operations
(103.4 )
(18.4 )
(85.0 )
%
(168.9 )
(55.1 )
(113.8 )
%
Other Expense (Income):
Interest Expense
5.8
8.5
(2.7 )
(32 )%
32.4
31.0
1.4
%
Interest Income
-
(0.1 )
0.1
(100 )%
(0.1 )
(0.6 )
0.5
(83 )%
Accretion of Debt Discount and Loan Origination Fees
(1.1 )
9.5
(10.6 )
(112 )%
10.7
21.7
(11.0 )
(51 )%
Change in Fair Value of Derivatives
(0.2 )
1.2
(1.4 )
(117 )%
(26.2 )
(0.8 )
(25.4 )
3,175 %
(Gain) Loss on Extinguishment of Debt
-
(1.4 )
1.4
(100 )%
(10.3 )
16.1
(26.4 )
(164 )%
Total Non-Operating Expense
4.5
17.7
(13.2 )
(75 )%
6.5
67.4
(60.9 )
(90 )%
Loss from Continuing Operations Before Provision for Income Taxes
(107.9 )
(36.1 )
(71.8 )
%
(175.4 )
(122.5 )
(52.9 )
%
Provision for Income Tax Benefit (Expense)
21.5
0.3
21.2
7,067 %
9.9
(1.8 )
11.7
(650 )%
Net Loss from Continuing Operations
(86.4 )
(35.8 )
(50.6 )
%
(165.5 )
(124.3 )
(41.2 )
%
Net Loss from Discontinued Operations, Net of Taxes
(14.8 )
(10.3 )
(4.5 )
%
(45.3 )
(33.3 )
(12.0 )
%
Net Loss
(101.2 )
(46.1 )
(55.1 )
%
(210.8 )
(157.6 )
(53.2 )
%
Net Loss Attributable to Non-Controlling Interest
(8.9 )
(7.3 )
(1.6 )
%
(15.7 )
(33.5 )
17.8
(53 )%
Net Loss Attributable to Shareholders of MedMen Enterprises Inc.
$ (92.3 )
$ (38.8 )
$ (53.5 )
%
$ (195.1 )
$ (124.1 )
$ (71.0 )
%
Revenue
Revenue for the three months ended June 25, 2022 was $33.3 million, a decrease of $4.7 million, or 12%, compared to revenue of $38.0 million for the three months ended June 26, 2021. Revenue for the year ended June 25, 2022 was $140.8 million, an increase of $8.6 million, or 7%, compared to revenue of $132.2 million for the year ended June 26, 2021.
Revenue in various states in which we operate is as follows:
Three Months Ended
Year Ended
June 25,
June 26,
June 25,
June 26,
($ in Millions)
$Change
%Change
$Change
%Change
California
$ 21.2
$ 25.7
$ (4.5 )
(18 )%
$ 91.6
$ 85.9
$ 5.7
%
Nevada
3.6
5.0
(1.4 )
(28 )%
15.3
15.4
(0.1 )
(1 )%
Illinois
3.7
4.0
(0.3 )
(8 )%
16.1
20.8
(4.7 )
(23 )%
Arizona
3.9
3.3
0.6
%
15.9
10.1
5.8
%
Massachusetts
0.9
-
0.9
-
1.9
-
1.9
-
Consolidated Revenue
33.3
38.0
(4.7 )
(12 )%
140.8
132.2
8.6
%
Discontinued Operations
9.2
11.9
(2.7 )
(23 )%
29.0
26.4
2.6
%
Total Revenue
$ 42.5
$ 49.9
$ (7.4 )
(15 )%
$ 169.8
$ 158.6
$ 11.2
%
In fiscal year 2022, overall across all markets, for the periods presented, we saw positive implications on retail store traffic from the lifting of COVID-19 restrictions; however, traffic, the number of patients and customers that entered our store on a daily basis was significantly impacted by 1) periods of low domestic travel in the United States affecting our high tourism stores in Los Angeles and Las Vegas, 2) increases in infection rates and COVID cases from the various disease variants including Omicron, BA.4.6. and more recently BA.5., and 3) the expiration of the Biden administration’s “stimulus checks” that occurred a year ago same period under American Rescue Act and no longer available in fiscal year 2022.
In California, on year over year basis, revenue increased $5.7 million or 7% as we continue to elevate its product offering, revamp its pricing and assortment strategy, and focus on driving retail traffic with promotions and other customer discounts. On average across the thirteen stores in California, we saw increased engagement through continued focus on customer experience at point of sale, and to lesser degree in delivery sales, an area we believe can continue to improve. On a quarter over quarter basis, we continued to see steadily rising declines, which we believe is primarily due to increased competition from new market entrants. California issued 539 new retail licenses. While not all of these became operational, those who entered the market have generally competed on the basis of selling price. On a consecutive quarter basis, during the fiscal fourth quarter of 2022, we experienced the highest decline at $4.5 million or 18% over third quarter. In fourth quarter, we noted more days in the month in which traffic, conversion and average days sales were down compared to the previous week. We expect revenue in California may continue to decrease albeit at slower rates, until such time our re-branding and new marketing and communication practices go live in late first quarter of fiscal year 2023.
In Nevada, on a year over year basis, revenue remained relatively consistent with a slight decrease of 1%. We expected to be able to capitalize in the returned tourism to Nevada, primarily to the City of Las Vegas. On a fiscal year basis, we believe tourism increased 30% or more over the same period. However, we experienced increased competition by other nearby stores that have more funding to invest in product assortment, in-store events, and available marketing. We expect we will not be able to maximize our market share in Las Vegas until such time we increase product availability from our private label brands and have the cash to invest in more lifestyle events that are part of the Las Vegas culture.
In Arizona, on a year over year basis, revenue increased $5.8 million or 57%. This increase is primarily due to the Company’s focus on driving retail traffic after the state-wide transition to adult-use during the spring of calendar year 2021. Beginning in the fourth quarter of 2021, we benefited from steady inclines in revenue on a quarter over quarter basis. Our best revenue performance quarter in Arizona was our third quarter of fiscal year 2022. On a quarter over quarter basis, in fourth quarter, revenue decreased $200,000 or 5%. Arizona issued 26 new retail licenses which contributed to the fourth quarter decline as well as the loss of a significant customer of our cultivation facility which changed cultivation practices affecting the flow of product we manufactured and sourced to our owned stores. We expect revenue in Arizona will hold at the current trend until such time we incorporate new products from our cultivation facility to our retail store anticipated for second quarter of fiscal year 2023.
In Illinois, revenue for the fiscal year ended June 25, 2022 declined $4.7 million or 23%. We continue to face market pressure from additional licenses issued by surrounding municipalities totaling an additional 149 new retail licenses.
In Massachusetts, our store near Fenway Park opened December 2021. Due to the premium location of our store, we anticipated an increase in foot traffic starting in April 2022 corresponding with the beginning of major league baseball’s Red Sox season and spring weather in Boston. We in fact noted a steady increase in revenue to 27% in fourth quarter over third quarter. We continue to monitor the performance ability of this retail location in light of the substantial regulatory limitations including open and close hours of our store, and inability to remain open during and completion of baseball games. Both of these conditions may be unfavorable to our ability to increase current run rate revenue.
Cost of Goods Sold, Gross Profit, and Adjusted Gross Profit (NON-GAAP)
Cost of goods sold for the three months and year ended June 25, 2022 was $16.1 million and $71.1 million compared to $20.3 million and $71.5 million for the three months and year ended June 26, 2021. Gross profit for the fiscal fourth quarter of 2022 was $17.2 million, representing a gross margin of 52% as compared to $17.7 million, representing a gross margin of 47%, in the prior year. Gross profit for fiscal year 2022 was $69.7 million, representing a gross margin of 50%, as compared to $60.7 million, representing a gross margin of 46%, in the prior year. This increase resulted primarily from a one-time adjustment related to overstatement of accounts payable for $2.5 million that accumulated over several periods, and not material to any one of those periods, as follows:
Three Months Ended
Year Ended
June 25,
June 26,
$
%
June 25,
June 26,
$
%
($ in Millions)
Change
Change
Change
Change
Revenue
$ 33.3
$ 38.0
$ (4.7 )
(12 %)
$ 140.8
$ 132.2
$ 8.6
%
Cost of Goods Sold
16.1
20.3
(4.2 )
(21 %)
71.1
71.5
(0.4 )
(1 %)
Gross Profit
17.2
17.7
(0.5 )
(3 %)
69.7
60.7
9.0
%
Gross Margin
%
%
%
%
%
%
%
%
Overstatement in Inventory Payable Amounts:
2.5
-
2.5
-
2.5
-
2.5
-
Adjusted Gross Profit(1) (Non-GAAP)
$ 14.7
$ 17.7
$ (3.0 )
(17 %)
$ 67.2
$ 60.7
$ 6.5
%
Adjusted Gross Margin(1) (Non-GAAP)
%
%
(2 %)
(5 %)
%
%
%
%
(1) Adjusted Gross Profit (Non-GAAP) is our gross profit (adjusted to exclude a one-time inventory payable adjustment) and Adjusted Gross Margin (Non-GAAP) is our gross margin adjusted to exclude inventory payable adjustments) and are non-GAAP financial measures. See “Use of Non-GAAP Measures” below for additional discussion regarding these non-GAAP measures. The Company’s management believes that Adjusted Gross Profit and Adjusted Gross Margin are useful to our management to evaluate our business and operations, measure our performance, identify trends affecting our business, project our future performance, and make strategic decisions.
Operating Expenses
Operating expenses for the three months ended June 25, 2022 were $120.6 million, an increase of $84.5 million compared to $36.1 million for the three months ended June 26, 2021, and $238.6 million for the year ended June 25, 2022, an increase of $122.8 million compared to $115.8 million for the year ended June 26, 2021. The increase in total operating expenses was primarily impacted by impairment charges recognized in fiscal year 2022. In more detail changes in operating expenses were attributable to the factors described below.
General and administrative expenses for the three months and year ended June 25, 2022 were $19.1 million and $108.7 million, compared to $28.8 million and $109.1 million, a decrease of $9.7 million and $0.4 million, respectively, in the same prior year periods. The overall decrease in the three months period is primarily the results of even more intense costs savings management tactics across all categories of general and administrative expenses including completion of additional headcount reductions and lower spend on litigation matters. In addition, in April 2022, the Company closed its distribution facility in Los Angeles, California which reduced overhead costs. Management continues to focus in reducing company-wide selling, general and administrative expenses (“SG&A”). We expect general and administrative expense will continue to decrease in fiscal year 2023 as management believes the Company can achieve and become EBITDA neutral.
Sales and marketing expenses for the three months and year ended June 25, 2022 were $0.5 million and $3.2 million, compared to $0.5 million and $1.0 million for the three months and year ended June 26, 2021, an increase of nil and $2.2 million, respectively. In comparison to the prior year periods, the increase in sales and marketing expenses is primarily attributed to marketing initiatives to drive retail traffic as COVID-19 restrictions began to lift and tourism increased.
Depreciation and amortization for the three months and year ended June 25, 2022 was $6.3 million and $24.0 million, as compared to $5.0 million and $26.3 million in the prior year. The increase of $1.3 million from the prior fiscal quarter ended June 26, 2021 is attributable to the opening of store locations in Boston and San Francisco during fiscal year 2022. The decrease of $2.3 million compared to the prior year ended June 26, 2021 is attributable to the overall reduction in capital expenditures resulting from a delay in capital-intensive projects as part of the Company’s turnaround plan and the COVID-19 pandemic. We are currently evaluating the long-term benefits of continuing to pursue the build 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 Massachusetts in an effort to reach the best outcome for all parties including the communities that live and work near these unfinished locations possibly deterring from market values.
Impairment expense for the three months and year ended June 25, 2022 was $93.2 million and $101.8 million, as compared to nil and $2.4 million in the prior year. Impairment expense for fiscal year 2022 was related to the following:
June 25,
($ in Millions)
Impairment charges in fiscal year 2022 related to the following:
Abandoned equipment - Inactive location $ 4.9
Costs related to acquisitions no longer active 6.9
Write off related to closure of headquarters office, distribution center and other 13.1
Impairment of long-lived assets - California and Nevada 45.2
Impairment of goodwill - California 23.1
Fair value adjustment related to deconsolidation of cultivation facilities 8.6
Total impairment charges $ 101.8
Other operating expense (income) for the three months and year ended June 25, 2022 was $(2.1) million and $(2.4) million, as compared to $1.8 million and $(23.4) million for the three months and year ended June 26, 2021, respectively. For the year ended June 25, 2022, the change was primarily attributable to the $16.3 million gain related to the lease deferral with the REIT in the comparative prior period.
Non-Operating Expenses
Non-operating expense for the three months and year ended June 25, 2022 was $4.5 million and $6.5 million, respectively, compared to $17.7 million and $67.4 million in the prior year period. The decrease in non-operating expense was primarily driven by the recognition of a gain related to changes in the fair value of our derivative liability as a result of the Short-Term warrants recorded with a fair value of $21.2 million that expired unexercised. The decrease was also driven by the change in gain/loss on extinguishment debt as a result of the $12.4 million gain on extinguishment of debt related to the Sixth Amendment, offset by the $2.2 million loss on extinguishment of debt related to the settlement of the unsecured promissory note in connection with the Private Placement.
Provision for Income Taxes
The provision for income tax benefit for the three months and year ended June 25, 2022 was $21.5 million and $9.9 million, respectively, compared to the provision for income tax benefit of $0.3 million and an expense of $1.8 million for the three months and year ended June 26, 2021, primarily due to the Company’s operating results, related IRC Section 280E expenditures and interest due to the Internal Revenue Service. The Company has incurred a large amount of expenses that are not deductible due to IRC Section 280E limitations which resulted in income tax expense being incurred while there were pre-tax losses for the current period.
Net Loss
Net loss from continuing operations for the three months ended June 25, 2022 was $86.4 million, an increase of $50.6 million compared to $35.8 million for the three months ended June 26, 2021. For the fiscal fourth quarter of 2022, net loss was impacted by an increase in impairment charges during the current period, offset by the provision for income tax benefit.
Net loss from continuing operations for the year ended June 25, 2022 was $165.5 million, an increase of $41.2 million compared to $124.3 million for the year ended June 26, 2021. The increase for the current fiscal year as compared to the prior period was primarily due to the increase in impairment charges, offset by improvements in gross profits, the provision for income taxes, and the effects of non-operating activities during the comparative periods.
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 understand 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:
Adjusted Gross Profit
Gross Profit adjusted for a one-time inventory payable adjustment.
Adjusted Gross Margin
Gross Margin, which is Gross Profit as a percentage of consolidated revenue, adjusted for a one-time inventory payable adjustment.
Adjusted Net Loss from Continuing Operations
Net Loss from Continuing Operations adjusted for transaction costs, restructuring costs, share-based compensation, impairment expense, and other non-cash operating costs. This non-GAAP measure represents the profitability of the Company excluding unusual and infrequent expenditures and non-cash operating costs.
EBITDA from Continuing Operations
Net Loss from Continuing Operations adjusted for interest and financing costs, income taxes, depreciation, and amortization. This non-GAAP measure represents the Company’s current operating profitability and ability to generate cash flow.
Adjusted EBITDA from Continuing Operations
EBITDA from Continuing Operations (Non-GAAP) adjusted for transaction costs, restructuring costs, share-based compensation, impairment expense, and other non-cash operating costs, such as changes in fair value of derivative liabilities and unrealized changes in fair value of investments. This non-GAAP measure represents the Company’s current operating profitability and ability to generate cash flow excluding non-recurring, irregular or one-time expenditures in order improve comparability.
Working Capital
Current assets less current liabilities. This non-GAAP measure represents operating liquidity available to the Company.
Corporate SG&A
Selling, general and administrative expenses related to the Company’s corporate functions. This non-GAAP measure represents scalable expenditures that are not directly correlated with the Company’s retail operations.
Retail Revenue
Consolidated revenue less non-retail revenue, such as cultivation and manufacturing revenue. This non-GAAP measure provides a standalone basis of the Company’s performance as a cannabis retailer in the U.S. considering the Company’s long-term viability is correlated with cash flows provided by or used in retail operations.
Retail Cost of Goods Sold
Consolidated cost of goods sold less non-retail cost of goods sold. This non-GAAP measure provides a standalone basis of the Company’s performance as a cannabis retailer in the U.S. considering the Company’s long-term viability is correlated with cash flows provided by or used in retail operations.
Retail Gross Margin
Retail Revenue (Non-GAAP) less the related Retail Cost of Goods Sold (Non-GAAP). Retail Gross Margin (Non-GAAP) is reconciled to consolidated gross margin as follows: consolidated revenue less non-retail revenue reduced by consolidated cost of goods sold less non-retail cost of goods sold. This non-GAAP measure provides a standalone basis of the Company’s performance as a cannabis retailer in the U.S. considering the Company’s long-term viability is correlated with cash flows provided by or used in retail operations.
Retail Gross Margin Rate
Retail Gross Margin (Non-GAAP) divided by Retail Revenue (Non-GAAP). Retail Gross Margin Rate (Non-GAAP) is reconciled to consolidated gross margin rate as follows: consolidated revenue less non-retail revenue reduced by consolidated cost of goods sold less non-retail cost of goods sold, divided by consolidated revenue less non-retail revenue. This non-GAAP measure provides a standalone basis of the Company’s performance as a cannabis retailer in the U.S. considering the Company’s long-term viability is correlated with cash flows provided by or used in retail operations.
Retail Adjusted EBITDA Margin
Retail Gross Margin (Non-GAAP) less direct store operating expenses, including rent, payroll, security, insurance, office supplies and payment processing fees, local cannabis and excise taxes, distribution expenses, and inventory adjustments. This non-GAAP measure provides a standalone basis of the Company’s performance as a cannabis retailer in the U.S. considering the Company’s long-term viability is correlated with cash flows provided by or used in retail operations.
Retail Adjusted EBITDA Margin Rate
Retail Adjusted EBITDA Margin (Non-GAAP) divided by Retail Revenue (Non-GAAP), which is calculated as consolidated revenue less non-retail revenue. This non-GAAP measure provides a standalone basis of the Company’s performance as a cannabis retailer in the U.S. considering the Company’s long-term viability is correlated with cash flows provided by or used in retail operations.
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 understand 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. Non-GAAP financial measures are financial measures that are not defined under GAAP. Management believes that these non-GAAP financial measures assess the Company’s ongoing business in a manner that allows for meaningful comparisons and analysis of trends in 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, as well as to analyze how 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.
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 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:
● exclude certain tax payments that may reduce cash available to the Company;
● do not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future;
● do not reflect changes in, or cash requirements for, working capital needs; and
● do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on debt.
Other companies in the cannabis industry may calculate these measures differently than the Company does, limiting their usefulness as comparative measures.
Reconciliations of Non-GAAP Financial Measures to GAAP Measures
Retail Performance
Within the cannabis industry, MedMen is uniquely focused on the retail component of the value chain. On a sequential quarter basis, 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) follows our retail performance financial measures.
Retail Gross Margin (Non-GAAP)
Fiscal Quarter Ended
June 25,
March 26,
$ Change
% Change
Gross Profit
$ 17.2
$ 17.2
$ -
-
Gross Margin Rate
%
%
%
%
Cultivation & Wholesale Revenue
(1.1 )
(1.3 )
0.2
(15 )%
Cultivation & Wholesale Cost of Goods Sold
(1.1 )
(1.0 )
(0.1 )
%
Non-Retail Gross Margin
-
0.3
(0.3 )
(100 )%
Retail Gross Margin (Non-GAAP)
$ 17.2
$ 16.9
$ 0.3
%
Retail Gross Margin Rate (Non-GAAP)
%
%
%
%
Retail Adjusted EBITDA Margin (Non-GAAP)
Fiscal Quarter Ended
June 25,
March 26,
$ Change
% Change
Net Loss
$ (101.2 )
$ (30.0 )
$ (71.2 )
%
Net Loss from Discontinued Operations, Net of Taxes
14.8
10.6
4.2
%
Provision for Income Tax Benefit
(21.5 )
-
(21.5 )
-
Other Expense (Income)
4.5
(0.6 )
5.1
(850 )%
Excluded Items (1)
92.2
5.1
87.1
1,708
%
Loss from Operations Before Excluded Items
(11.2 )
(14.9 )
3.7
(25 )%
Non-Retail Gross Margin
-
0.3
(0.3 )
(100 )%
Non-Retail Operating Expenses (2)
(15.1 )
(20.4 )
5.3
(26 )%
Non-Retail EBITDA Margin
(15.1 )
(20.1 )
5.0
(25 )%
Retail Adjusted EBITDA Margin (Non-GAAP)
$ 3.9
$ 5.2
$ 1.3
(25 )%
Retail Adjusted EBITDA Margin Rate (Non-GAAP)
%
%
(3 )%
(21 )%
(1) Items adjusted from Net Loss for the fiscal quarters ended June 25, 2022 and March 26, 2022 include impairment expense of $93.2 million and $8.2 million, respectively, other operating income of $2.1 million and $3.1 million, respectively, and a one-time adjustment related to inventory recorded in the fourth quarter.
(2) Non-retail operating expenses is comprised of the following items:
Fiscal Quarter Ended
June 25,
March 26,
$ Change
% Change
Cultivation & Wholesale
$ 0.7
$ 0.3
$ 0.4
%
Corporate SG&A
6.7
9.3
(2.6 )
(28 )%
Depreciation & Amortization
6.3
5.5
0.8
%
Other (3)
1.4
5.3
(3.9 )
(74 )%
Non-Retail Operating Expenses
15.1
20.4
(5.3 )
(26 )%
Direct Store Operating Expenses (4)
10.8
11.8
(1.0 )
(8 )%
Excluded Items (1)
92.2
5.1
87.1
1,708
%
Total Expenses
$ 118.1
$ 37.3
$ 80.8
%
(3) Other non-retail operating expenses excluded from Retail Adjusted EBITDA Margin (Non-GAAP) for the fiscal quarters ended June 25, 2022 and March 26, 2022 primarily consist of transaction costs and restructuring costs of $0.2 million and $2.4 million, respectively, and share-based compensation of $0.9 million and $1.6 million, respectively, as commonly excluded from Adjusted EBITDA from Continuing Operations (Non-GAAP). Refer to “Reconciliations of Non-GAAP Financial Measures” below.
(4) For the fiscal quarters ended June 25, 2022 and March 26, 2022, direct store operating expenses include, but are not limited to, rent, utilities, payroll and payroll related expenses, employee benefits, security local cannabis and excise taxes, and distribution expenses, totaling $10.8 million and $11.8 million, respectively.
The non-GAAP retail performance measures demonstrate the Company’s four-wall margins which reflect the sales of the Company’s retail operations relative 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 June 25, 2022, Non-Retail Cost of Goods Sold related to cultivation and wholesale operations was $1.1 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).
For the fiscal fourth quarter of 2022, retail revenue was $32.2 million across the Company’s continuing operations in California, Nevada, Arizona, Illinois and Massachusetts. This represents a 5% decrease, or $1.7 million, over the third quarter of 2022 of $33.9 million. While there were multiple reasons for the decrease in retail revenue on a sequential quarter basis, we believe the primary factors were uncertainties and the changes in spending patterns of patients and customers after restrictions related to the COVID-19 pandemic began lifting and increased competition in certain markets.
Retail Gross Margin Rate (Non-GAAP) for the fiscal fourth quarter of 2022 was 53% compared to the fiscal third quarter of 2022 of 50%. The Company had an aggregate Retail Adjusted EBITDA Margin Rate (Non-GAAP) of 12% for the fiscal fourth quarter of 2022 which represents a decrease compared to the 15% realized in the fiscal third quarter of 2022 primarily due to a one-time inventory adjustment recognized during the current period.
Corporate SG&A as a Component of Adjusted EBITDA from Continuing Operations (Non-GAAP)
Corporate-level general and administrative expenses across various functions including Marketing, Legal, Retail Corporate, Technology, Accounting and Finance, Human Resources and Security (collectively referred to as “Corporate SG&A”) are combined to account for a significant proportion of the Company’s total general and administrative expenses. Corporate SG&A also includes pre-opening expenses related to general and administrative expenses incurred by the Company at non-operational retail locations, which such expenses would be classified as direct store operating expenses following its opening.
Fiscal Quarter Ended
June 25,
March 26,
($ in Millions)
$ Change
% Change
General and Administrative
$ 19.1
$ 25.7
$ (6.6 )
(26 )%
Sales and Marketing
0.6
1.0
(0.4 )
(40 )%
Consolidated SG&A
19.7
26.7
(7.0 )
(26 )%
Direct Store Operating Expenses
10.8
11.8
(1.0 )
(8 )%
Cultivation & Wholesale
0.7
0.3
0.4
%
Other (1)
1.5
3.9
(2.4 )
(62 )%
Less: Non-Corporate SG&A
13.0
16.0
(3.0 )
(19 )%
Corporate SG&A as a Component of Adjusted EBITDA from Continuing Operations (Non-GAAP)
$ 6.7
$ 10.7
$ (4.0 )
(37 )%
(1) Other non-Corporate SG&A for the fiscal quarters ended June 25, 2022 and March 26, 2022 primarily consist of transaction costs and restructuring costs of $0.2 million and $2.4 million, respectively, and share-based compensation of $0.9 million and $1.6 million, respectively, as commonly excluded from Adjusted EBITDA (Non-GAAP). Refer to Item 7 “Retail Performance” and notes therein for further information.
For the fiscal fourth quarter of 2022, Adjusted EBITDA from Continuing Operations (Non-GAAP) includes Corporate SG&A (Non-GAAP) of $6.7 million, representing a decrease of $4.0 million, or 37%, from the $10.7 million that Corporate SG&A (Non-GAAP) contributed to Adjusted EBITDA Loss from Continuing Operations (Non-GAAP) in the fiscal third quarter of 2022. The decrease was primarily attributable to a decrease in pre-opening expenses and a decrease in professional fees compared to the consecutive prior quarter.
Adjusted Net Loss from Continuing Operations (Non-GAAP)
The table below reconciles Net Loss to Adjusted Net Loss from Continuing Operations (Non-GAAP) for the periods indicated.
Three Months Ended Year Ended
June 25, June 26, June 25, June 26,
($ in Millions) 2021
Net Loss $ (101.2 ) $ (46.1 ) $ (210.8 ) $ (157.6 )
Less: Net Loss from Discontinued Operations, Net of Taxes 14.8 10.3 45.3 33.3
Add (Deduct) Impact of:
Transaction Costs & Restructuring Costs 0.2 3.0 9.4 10.9
Share-Based Compensation 0.9 1.0 4.8 3.8
Impairment Expense 93.2 - 101.8 2.4
Other Non-Cash Operating Costs (1) 0.7 (0.6 ) (35.6 ) (12.8 )
Income Tax Effects (2) (12.8 ) 0.6 (12.7 ) 8.0
Total Adjustments 82.2 4.0 67.7 12.3
Adjusted Net Loss from Continuing Operations (Non-GAAP) $ (4.2 ) $ (31.8 ) $ (97.8 ) $ (112.0 )
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) for the three months ended June 25, 2022 compared June 26, 2021 was primarily due to the increase in provision for income taxes, offset by lower general and administrative expenses. The increase in Adjusted Net Loss from Continuing Operations (Non-GAAP) for the years ended June 25, 2022 compared June 26, 2021 was primarily due to higher provision for income taxes.
EBITDA and Adjusted EBITDA from Continuing Operations (Non-GAAP)
The table below reconciles Net Loss to EBITDA from Continuing Operations (Non-GAAP) and Adjusted EBITDA from Continuing Operations (Non-GAAP) for the periods indicated.
Three Months Ended Year Ended
June 25, June 26, June 25, June 26,
($ in Millions) 2021
Net Loss $ (101.2 ) $ (46.1 ) $ (210.8 ) $ (157.6 )
Less: Net Loss from Discontinued Operations, Net of Taxes 14.8 10.3 45.3 33.3
Add (Deduct) Impact of:
Net Interest and Other Financing Costs(3) 4.6 17.9 43.1 52.7
Provision for Income Taxes (21.5 ) (0.3 ) (9.9 ) 1.8
Amortization and Depreciation 7.4 7.0 25.6 28.5
Total Adjustments (9.5 ) 24.6 58.8 83.0
EBITDA from Continuing Operations (Non-GAAP) $ (95.9 ) $ (11.2 ) $ (106.7 ) $ (41.3 )
Add (Deduct) Impact of:
Transaction Costs & Restructuring Costs 0.2 3.0 9.4 10.9
Share-Based Compensation 0.9 1.0 4.8 3.8
Impairment Expense 93.2 - 101.8 2.4
Other Non-Cash Operating Costs (1) 0.7 (0.6 ) (35.6 ) (12.8 )
Total Adjustments 95.0 3.4 80.4 4.3
Adjusted EBITDA from Continuing Operations (Non-GAAP) $ (0.9 ) $ (7.8 ) $ (26.3 ) $ (37.0 )
(1) Other non-cash operating costs for the periods presented were as follows:
Three Months Ended Year Ended
June 25, June 26, June 25, June 26,
2021
Change in Fair Value of Derivative Liabilities $ (0.2 ) $ 1.2 $ (26.2 ) $ (0.8 )
Gain on Disposal of Assets Held for Sale - (1.9 ) - (12.3 )
Change in Fair Value of Contingent Consideration 3.6 - 3.3 0.4
(Gain) Loss on Lease Termination (4.4 ) 1.7 (4.3 ) (16.2 )
(Gain) Loss on Extinguishment of Debt - (1.4 ) (10.3 ) 16.1
(Gain) Loss from Disposal of Assets 4.6 (0.1 ) 4.5 0.3
One-Time Inventory Adjustment (2.5 ) - (2.5 ) -
Other Non-Cash Operating Costs (0.4 ) (0.1 ) (0.2 ) (0.3 )
Total Other Non-Cash Operating Costs $ 0.7 $ (0.6 ) $ (35.7 ) $ (12.8 )
(2) Income tax effects to arrive at Adjusted Net Loss from Continuing Operations (Non-GAAP) are related to temporary tax differences in which a future income tax benefit exists, such as changes in fair value of investments, assets held for sale and other assets, changes in fair value of contingent consideration, gain/loss from disposal of assets, and impairment expense. The income tax effect is calculated using the federal statutory rate of 21.0% and statutory rate for the state in which the related asset is held or the transaction occurs, most of which is in California with a statutory rate of 8.84%.
(3) For the current period, net interest and other financing costs now include accretion of debt discount and loan origination fees of $(1.1) million and $10.7 million for the three months and year ended June 25, 2022, respectively. Prior year amounts of $9.5 million and $21.7 million for the three months and year ended June 26, 2021, respectively, 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 (Non-GAAP) and Adjusted EBITDA from Continuing Operations (Non-GAAP).
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 $(95.9) million and $(106.7) million for the three months and year ended June 25, 2022, respectively, compared $(11.2) million and $(41.3) million for the three months and year ended June 26, 2021, respectively. The change in EBITDA from Continuing Operations (Non-GAAP) was primarily due to the improvement in gross margin and lower operating costs at the cultivation facilities of California and Nevada as a result of the licensing and management agreement which includes lower rents.
For the three months and year ended June 25, 2022, Adjusted EBITDA from Continuing Operations (Non-GAAP) was $(0.9) million and $(26.3) million, respectively, compared to $(7.8) million and $(37.0) million for the three months and year ended June 26, 2021, respectively. The improvement is primarily due to changes in gross profit and general and administrative expenses. The financial performance of the Company is expected to further improve as the Company works towards profitability and coupled with significant deleveraging of its balance sheet, will reposition the Company for growth.
Refer to “Retail Performance” above for reconciliations of Retail Adjusted EBITDA.
Cash Flows
The following table summarizes the Company’s consolidated cash flows for the years ended June 25, 2022 and June 26, 2021:
Year Ended
June 25,
June 26,
($ in Millions)
$ Change
% Change
Net Cash Used in Operating Activities
$ (62.5 )
$ (59.4 )
$ (3.1 )
%
Net Cash (Used in) Provided by Investing Activities
(10.9 )
10.9
(21.8 )
(200 )%
Net Cash Provided by Financing Activities
72.9
50.7
22.2
%
Net (Decrease) Increase in Cash and Cash Equivalents
(0.5 )
2.2
(2.7 )
(123 )%
Cash Included in Assets Held for Sale
(0.3 )
-
(0.3 )
%
Cash and Cash Equivalents, Beginning of Period
11.6
9.3
2.3
%
Cash and Cash Equivalents, End of Period
$ 10.8
$ 11.5
$ (0.7 )
(6 )%
Cash Flow from Operating Activities
Net cash used in operating activities was $62.5 million for the fiscal year ended June 25, 2022, an increase of $3.1 million, or 5%, compared to $59.4 million for the fiscal year ended June 26, 2021. The increase was primarily driven by the increase in net loss from continuing operations as described in “Results of Operations” above.
Cash Flow from Investing Activities
Net cash used in investing activities was $10.9 million for the fiscal year ended June 25, 2022, an increase of $21.8 million, or 200%, compared to $10.9 million provided by investing activities for the year ended June 26, 2021. The prior period included $19.0 million received from proceeds from the sale of assets held for sale compared to none in the current year. In the current period, cash used in investing activities was related to construction for the opening or reopening of retail stores.
Cash Flow from Financing Activities
Net cash provided by financing activities was $72.9 million for the fiscal year ended June 25, 2022, an increase of $22.2 million, or 44%, compared to $50.7 million for the year ended June 26, 2021. The increase in change of net cash provided by financing activities was primarily due to the $95.0 million for the issuance of equity instruments for cash and the $5.0 million from the unsecured promissory note. The increase in debt and equity financings were offset by payments of stock issuance costs of $5.4 million in connection with such capital transactions and a prepayment of our term loans of $20.0 million. On January 31, 2022, the Company’s term loans became due and the Company entered into an agreement with the lender to extend the maturity date until July 31, 2022 with respect to the Senior Secured Term Loan Facility and August 1, 2022 with respect to the incremental term loans. Refer to “Note 16 - Notes Payable” of the Consolidated Financial Statements in Item 8 for further information. The prepayment was in consideration of the due date extension.
Financial Condition and Going Concern
As of June 25, 2022, the Company had cash and cash equivalents of $10.8 million and a working capital deficit of $164.9 million. The Company has incurred losses from continuing operations of $165.5 million and $124.3 million in fiscal year 2022 and 2021, respectively, used cash in continued operating activities of $18.9 million and anticipates that the Company will continue to incur losses until such time as revenues exceed operating costs and we are able to complete our restructuring plan. As of June 25, 2022, the Company is in violation of minimum liquidity covenant of these term loans. The term loans require the Company to maintain $15.0 million minimum cash. On July 31, 2022, these term loans of $97.8 million became due and we were unable to meet this financial obligation and pay the lender, which constitutes an event of default. The moneys owed under our Lender and Landlord Support Agreement which allowed us to defer $22.0 million of rent payment over three years beginning in 2020, will come due in July 2023. On August 22, 2022, the Company completed the sale of its Florida-based assets for $63.0 million and the assumption of certain liabilities that the Company valued at approximately $4.0 million, a reduction of $16.0 million from the originally announced sales price of $83.0 million. The purchase price was less than first negotiated due to factors that include changes in the market values of cannabis assets in Florida and the Company’s desire to close the transaction in a timely manner with a counterparty likely to achieve state regulatory approval. The buyer made a cash payment of $40.0 million at closing and is required to make two additional installment payments of $11.5 million each after the closing. The net proceeds to the Company at closing were $14.5 million, with a $25.0 million payment going to the Company’s secured senior lender. Proceeds of the transaction to the Company will be used to fund operations and pay interest to our secured senior lender while the term loans remain outstanding and in default. 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 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 groups 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 unsecured 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 impact the global pandemic has had and will continue to have on the broader retail environment could also have a significant impact on the Company’s financial operations.
As of June 25, 2022, the accompanying Consolidated Financial Statements 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 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 June 25, 2022 and June 26, 2021:
June 25, June 26,
($ in Millions) $ Change % Change
Cash and Cash Equivalents $ 10.8 $ 11.6 $ (0.8 ) (7 )%
Total Current Assets $ 161.5 $ 175.8 $ (14.3 ) (8 )%
Total Assets $ 323.2 $ 472.5 $ (149.3 ) (32 )%
Total Current Liabilities $ 326.4 $ 346.7 $ (20.3 ) (6 )%
Debt, Net of Current Portion $ 206.4 $ 247.3 $ (40.9 ) (17 )%
Total Liabilities $ 641.7 $ 726.1 $ (84.4 ) (12 )%
Total Shareholders’ Equity $ (318.5 ) $ (253.6 ) $ (64.9 ) 26 %
Working Capital Deficit $ (164.9 ) $ (170.8 ) $ 5.9 (3 )%
During the fiscal first quarter of 2022, the Company raised $100.0 million in the Private Placement which helped stabilize liquidity and allowed the Company to prioritize new market opportunities 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, 2028 and any cash interest obligation were eliminated, instead providing for paid-in-kind interest.
The $5.9 million improvement in working capital deficit was primarily related to the $14.2 million in deferred rent costs becoming due in fiscal year 2023, offset by a decrease in the current portion of notes payable. 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 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.
Refer to the Fiscal Year 2022 Highlights in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above.
Cash Burn Rate
For the fiscal year ended June 25, 2022, the Company’s monthly burn rate, which was calculated as cash spent per month in operating activities, was approximately $5.2 million compared to a monthly burn rate of approximately $5.0 million for the fiscal year ended June 26, 2021. 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 a plan for divestiture of non-core assets and lease modifications and turned to a growth plan with new capital to capitalize on further opportunities.
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.
As of June 25, 2022, 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.
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
A detailed description of our critical accounting policies and recent accounting pronouncements are contained in Item 8 of this Form 10-K.
The Company makes judgments, estimates and assumptions about the future that affect the policies and reported amounts of assets and liabilities, and revenues and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the review affects both current and future periods.
The preparation of the Company’s annual Consolidated Financial Statements in conformity with GAAP requires management to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities at the dates of the financial statements and the reported amounts of total net revenue and expenses during the reporting period which are not readily apparent from other sources. 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.
Significant judgments, estimates and assumptions that have the most significant effect on the amounts recognized in the annual Consolidated Financial Statements are described below.
Depreciation of Property and Equipment
Depreciation of property and equipment is dependent upon estimates of useful lives which are determined through the terms and methods in accordance with GAAP. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions and the useful lives of assets.
Amortization of Intangible Assets
Amortization of intangible assets is dependent upon estimates of useful lives and residual values which are determined through the exercise of judgment. Intangible assets that have indefinite useful lives are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions.
Inventory Valuation
The Company periodically reviews physical inventory for excess, obsolete, and potentially impaired items and reserves. The Company reviews inventory for obsolete, redundant and slow-moving goods and any such inventory is written down to net realizable value. The reserve estimate for excess and obsolete inventory is dependent on expected future use.
Convertible Instruments and Derivative Liabilities
The identification of components embedded within financial instruments is based on interpretations of the substance of the contractual arrangement and therefore requires judgment from management. The separation of the components affects the initial recognition of the financial instruments at issuance and the subsequent recognition of interest on the liability component. Where the conversion option has a variable conversion rate, the conversion option is recognized as a derivative liability measured at fair value, with changes in fair value reported in the Consolidated Statements of Operations. The instrument is recognized as a financial liability and subsequently measured at amortized cost. The determination of the fair value of the liability is also based on a number of assumptions, including contractual future cash flows, discount rates and the presence of any derivative financial instruments.
Share-Based Compensation
The Company uses the Black-Scholes option-pricing model or the Monte-Carlo simulation model to determine the fair value of equity-based grants. In estimating fair value, management is required to make certain assumptions and estimates such as the expected life of units, volatility of the Company’s future share price, risk-free rates, future dividend yields and estimated forfeitures at the initial grant date. Changes in assumptions used to estimate fair value could result in materially different results.
Goodwill Impairment, Other Intangible Assets, Long-Lived Assets and Purchase Asset Valuations
Goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that the carrying value of goodwill has been impaired. In the impairment test, the Company measures the recoverability of goodwill by comparing a reporting unit’s carrying amount to the estimated fair value of the reporting unit. The carrying amount of each reporting unit is determined based upon the assignment of the Company’s assets and liabilities, including existing goodwill, to the identified reporting units. The Company relies on a number of factors, including historical results, business plans, forecasts and market data. Changes in the conditions for these judgments and estimates can significantly affect the recoverable amount.
Long-lived assets, including amortizable intangible assets, are tested annually for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. Once a triggering event has occurred, the impairment test employed is based on whether the intent is to hold the asset for continued use or to hold the asset for sale. The impairment test for assets held for use requires a comparison of cash flows expected to be generated over the useful life of an asset group to the carrying value of the asset group. An asset group is established by identifying the lowest level of cash flows generated by a group of assets that are largely independent of the cash flows of other assets and could include assets used across multiple businesses or segments. If the carrying value of an asset group exceeds the estimated undiscounted future cash flows, an impairment would be measured as the difference between the fair value of the group’s long-lived assets and the carrying value of the group’s long-lived assets. The impairment is only to the extent the carrying value of each asset is above its fair value. For assets held for sale, to the extent the carrying value is greater than the asset’s fair value less costs to sell, an impairment loss is recognized for the difference. Determining whether a long-lived asset is impaired requires various estimates and assumptions, including whether a triggering event has occurred, the identification of the asset groups, estimates of future cash flows and the discount rate used to determine fair values.
The estimates and assumptions used in management’s impairment analysis 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 its impairment analysis. The impairment estimates and assumptions bear the risk of change due to its inherent nature and subjectivity. The unanticipated effects of a longer or more severe COVID-19 outbreaks and decreases in consumer demand could reasonably expected to negatively affect the key assumptions and estimates.
Deferred Tax Assets
Deferred tax assets, including those arising from tax loss carryforwards, require management to assess the likelihood that the Company will generate sufficient taxable earnings in future periods in order to utilize recognized deferred tax assets. Assumptions about the generation of future taxable profits depend on management’s estimates of future cash flows. In addition, future changes in tax laws could limit the ability of the Company to obtain tax deductions in future periods. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company to realize the net deferred tax assets recorded at the reporting date could be impacted.
Income Taxes
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.
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
Uncertain tax positions are recorded in accordance with ASC Topic 740, “Income Taxes”, on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
Right-of-Use Assets and Lease Liabilities
Right-of-use assets are measured at cost, which is calculated as the amount of the initial measurement of lease liability plus any lease payments made at or before the commencement date, any initial direct costs and related restoration costs. The right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term or estimates of economic life. The Company’s lease liability is recognized net of lease incentives receivable. The lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be determined, the lessee’s incremental borrowing rate. The period over which the lease payments are discounted is the expected lease term, including renewal and termination options that the Company is reasonably certain to exercise. Refer to “Note 2 - Summary of Significant Accounting Policies” of the Consolidated Financial Statements in Item 8.
Assets Held for Sale and Discontinued Operations
Assets held for sale are measured at the lower of their carrying amount or fair value less cost to sell unless the asset held for sale meets the exceptions as denoted by ASC Topic 360, “Property, Plant, and Equipment”. Fair value is the amount obtainable from the sale of the asset in an arm’s length transaction, less the costs of disposal. A component of an entity is identified as operations and cash flows that can be clearly distinguished, operationally and financially, from the rest of the entity. A discontinued operation is a component of an entity that either has been disposed of, or is classified as held for sale.
Down Round Features
In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260)” wherein the amendments change the classification of certain equity-linked financial instruments (or embedded features) with down round features. For freestanding equity-classified financial instruments, the amendments require entities that present earnings per share (“EPS”) in accordance with ASC Topic 260, “Earnings Per Share” to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. For freestanding equity-classified financial instruments, the value of the effect of the down round feature is measured as the difference in fair value of the financial instrument without the down round feature with a strike price corresponding to the stated strike price versus the reduced strike price upon the down round feature being triggered. The fair value is measured in accordance with the measurement guidance in ASC Topic 820, “Fair Value Measurement” in which the Company utilizes the Black-Scholes pricing model. Convertible instruments with embedded conversion options that have down round features are subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt-Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). During the fiscal year ended June 26, 2021, a down round feature present in the Convertible Facility and the 2020 Term Loan was triggered. Refer to “Note 16 - Notes Payable” and “Note 17 - Senior Secured Convertible Credit Facility” of the Consolidated Financial Statements in Item 8.
Allocation of Interest to Discontinued Operations
Under ASC Subtopic 205-20 “Presentation of Financial Statements - Discontinued Operations”, interest on debt that is to be assumed by the buyer and interest on debt that is required to be repaid as a result of a disposal transaction is allocated to discontinued operations. The amount of interest expense reclassified to discontinued operations is directly related to the amount of debt that will be repaid with funds received from the sale of discontinued operations. Refer to “Note 28 - Discontinued Operations” of the Consolidated Financial Statements in Item 8. The Company elected not to reclassify other interest expenses which are not directly attributable to discontinued operations as permitted under ASC Subtopic 205-20.
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.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting company.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MEDMEN ENTERPRISES INC.
Index to Consolidated Financial Statements
Page(s)
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 25, 2022 and June 26, 2021
Consolidated Statements of Operations for the Years Ended June 25, 2022 and June 26, 2021
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended June 25, 2022 and June 26, 2021
96 -
Consolidated Statements of Cash Flows for the Years Ended June 25, 2022 and June 26, 2021
98 - 99
Notes to Consolidated Financial Statements
100 - 162
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of MedMen Enterprises Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of MedMen Enterprises Inc. (the “Company”) as of June 25, 2022 and June 26, 2021, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended June 25, 2022, and the related notes (collectively referred to as the consolidated financial statements).
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of June 25, 2022 and June 26, 2021, and the results of its consolidated operations and its consolidated cash flows for each of the years in the two-year period ended June 25, 2022, in conformity with accounting principles generally accepted in the United States of America.
Material Uncertainty Related to Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations, is in violation of various debt covenants and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Chartered Professional Accountants
We have served as the Company’s auditor since 2018.
Calgary, Canada
September 8, 2022
MEDMEN ENTERPRISES INC.
Consolidated Balance Sheets
As of June 25, 2022 and June 26, 2021
(Amounts Expressed in United States Dollars, Except for Share Data)
ASSETS
Current Assets:
Cash and Cash Equivalents
$ 10,795,999
$ 11,575,138
Restricted Cash
-
Accounts Receivable and Prepaid Expenses
7,539,767
7,618,174
Inventory
10,010,731
16,014,431
Current Assets Held for Sale
123,158,751
132,763,631
Other Current Assets
9,990,992
7,869,974
Total Current Assets
161,496,240
175,842,078
Operating Lease Right-of-Use Assets
47,649,270
61,801,327
Property and Equipment, Net
64,107,792
107,059,485
Intangible Assets, Net
35,746,114
83,438,199
Goodwill
9,810,049
32,900,457
Other Assets
4,414,219
11,422,144
TOTAL ASSETS
$ 323,223,684
$ 472,463,690
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Current Liabilities:
Accounts Payable and Accrued Liabilities
$ 38,905,818
$ 45,264,815
Income Taxes Payable
58,646,291
61,301,044
Other Current Liabilities
16,704,283
17,088,693
Derivative Liabilities
6,749,563
6,935,520
Current Portion of Operating Lease Liabilities
17,750,863
8,073,692
Current Portion of Finance Lease Liabilities
4,061,273
205,595
Current Portion of Notes Payable
97,003,922
103,496,394
Current Liabilities Held for Sale
86,595,102
104,293,656
Total Current Liabilities
326,417,115
346,659,409
Operating Lease Liabilities, Net of Current Portion
44,091,509
62,136,044
Finance Lease Liabilities, Net of Current Portion
26,553,287
29,047,099
Other Non-Current Liabilities
3,082,277
3,648,904
Deferred Tax Liabilities
35,213,671
37,265,526
Senior Secured Convertible Credit Facility
132,005,663
170,821,393
Notes Payable, Net of Current Portion
74,372,898
76,518,934
TOTAL LIABILITIES
641,736,420
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, 1,301,423,950 and 726,866,374 shares issued and outstanding as of June 25, 2022 and June 26, 2021, respectively)
-
-
Additional Paid-In Capital
1,057,228,873
908,992,686
Accumulated Deficit
(905,420,836 )
(717,232,706 )
Total Equity Attributable to Shareholders of MedMen Enterprises Inc.
151,808,037
191,759,980
Non-Controlling Interest
(470,320,773 )
(445,393,599 )
TOTAL SHAREHOLDERS’ EQUITY
(318,512,736 )
(253,633,619 )
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$ 323,223,684
$ 472,463,690
The accompanying notes are an integral part of these Consolidated Financial Statements.
MEDMEN ENTERPRISES INC.
Consolidated Statements of Operations
Fiscal Years Ended June 25, 2022 and June 26, 2021
(Amounts Expressed in United States Dollars, Except for Share Data)
Revenue
$ 140,811,689
$ 132,247,342
Cost of Goods Sold
71,084,231
71,519,702
Gross Profit
69,727,458
60,727,640
Expenses:
General and Administrative
108,724,757
109,176,634
Sales and Marketing
3,205,697
1,006,079
Depreciation and Amortization
24,057,830
26,305,707
Realized and Unrealized Changes in Fair Value of Contingent Consideration
3,304,685
390,727
Impairment Expense
101,799,182
2,363,272
Other Operating Income
(2,432,795 )
(23,422,243 )
Total Expenses
238,659,374
115,820,176
Loss from Operations
(168,931,916 )
(55,092,536 )
Other Expense (Income):
Interest Expense
32,383,954
31,069,011
Interest Income
(91,594 )
(649,230 )
Accretion of Debt Discount and Loan Origination Fees
10,688,872
21,680,282
Change in Fair Value of Derivatives
(26,187,075 )
(838,767 )
Loss on Extinguishment of Debt
(10,274,932 )
16,142,113
Total Other Expense
6,519,225
67,403,409
Loss from Continuing Operations Before Provision for Income Taxes
(175,451,141 )
(122,495,945 )
Provision for Income Tax (Benefit) Expense
9,896,186
(1,834,188 )
Net Loss from Continuing Operations
(165,554,955 )
(124,330,133 )
Net Loss from Discontinued Operations, Net of Taxes
(45,338,954 )
(33,267,626 )
Net Loss
(210,893,909 )
(157,597,759 )
Net Loss Attributable to Non-Controlling Interest
(15,707,304 )
(33,452,234 )
Net Loss Attributable to Shareholders of MedMen Enterprises Inc.
$ (195,186,605 )
$ (124,145,525 )
Loss Per Share - Basic and Diluted:
From Continuing Operations Attributable to Shareholders of MedMen Enterprises Inc.
$ (0.13 )
$ (0.18 )
From Discontinued Operations Attributable to Shareholders of MedMen Enterprises Inc.
$ (0.04 )
$ (0.06 )
Weighted-Average Shares Outstanding - Basic and Diluted
1,153,538,255
530,980,011
The accompanying notes are an integral part of these Consolidated Financial Statements.
MEDMEN ENTERPRISES INC.
Consolidated Statements of Changes in Shareholders’ Equity
Fiscal Year Ended June 25, 2022
(Amounts Expressed in United States Dollars, Except for Share Data)
Units
$ Amount
TOTAL EQUITY ATTRIBUTABLE
Subordinate
Voting
Shares
Subordinate
Voting
Shares
Additional
Paid-In
Capital
Accumulated
Deficit
TO
SHAREHOLDERS
OF MEDMEN
Non-
Controlling
Interest
TOTAL
SHAREHOLDERS’
EQUITY
BALANCE AS OF JUNE 26, 2021
-
-
726,866,374
$ -
$ 908,992,686
$ (717,232,706 )
$ 191,759,980
$ (445,393,599 )
$ (253,633,619 )
Net Loss
-
-
-
(195,186,605 )
(195,186,605 )
(15,707,304 )
(210,893,909 )
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
43,331,119
-
6,570,000
-
6,570,000
-
6,570,000
Shares Issued to Settle Accounts Payable and Liabilities
45,874,448
-
7,234,164
-
7,234,164
-
7,234,164
Issuance of Top-Up Warrants
-
-
4,498,882
-
4,498,882
-
4,498,882
Equity Component of Debt - New and Amended
8,021,593
-
42,392,351
-
42,392,351
-
42,392,351
Redemption of MedMen Corp Redeemable Shares
30,146,495
-
3,323,614
6,998,475
10,322,089
(10,322,089 )
-
Shares Issued for Vested Restricted Stock Units and Cashless Exercise of Options
11,894,834
-
-
-
-
-
-
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
4,216,844
-
1,828,153
-
1,828,153
-
1,828,153
Deferred Tax Impact on Conversion Feature
-
-
3,025,797
-
3,025,797
3,025,797
Share-Based Compensation
-
-
-
2,324,702
-
2,324,702
1,102,219
3,426,921
BALANCE AS OF JUNE 25, 2022
-
-
1,301,423,950
$ -
$ 1,057,228,873
$ (905,420,836 )
$ 151,808,037
$ (470,320,773 )
$ (318,512,736 )
The accompanying notes are an integral part of these Consolidated Financial Statements.
MEDMEN ENTERPRISES INC.
Consolidated Statements of Changes in Shareholders’ Equity
Fiscal Year Ended June 26, 2021
(Amounts Expressed in United States Dollars, Except for Share Data)
Mezzanine Equity
TOTAL EQUITY
Units
$ Amount
Units
$ Amount
ATTRIBUTABLE
Super
Voting
Shares
Super
Voting
Shares
Subordinate
Voting
Shares
Subordinate
Voting
Shares
Additional
Paid-In
Capital
Accumulated
Deficit
TO
SHAREHOLDERS
OF MEDMEN
Non-
Controlling
Interest
TOTAL
SHAREHOLDERS’
EQUITY
BALANCE AS OF JUNE 27, 2020
815,295
$ 82,500
403,907,218
$ -
$ 791,172,613
$ (631,365,896 )
$ 159,889,217
$ (336,777,697 )
$ (176,888,480 )
Net Loss
-
-
-
-
-
(124,145,525 )
(124,145,525 )
(33,452,234 )
(157,597,759 )
Controlling Interest Equity Transactions
Shares Issued for Cash
-
-
89,050,000
-
28,885,912
-
28,885,912
-
28,885,912
Shares Issued to Settle Debt and Lender Fees
-
-
4,305,148
-
2,010,504
-
2,010,504
-
2,010,504
Shares Issued to Settle Accounts Payable and Liabilities
-
-
17,872,181
-
3,610,650
-
3,610,650
-
3,610,650
Equity Component of Debt - New and Amended
-
-
-
-
61,689,375
-
61,689,375
-
61,689,375
Redemption of MedMen Corp Redeemable Shares
-
-
175,140,972
-
33,365,851
44,642,898
78,008,749
(78,008,749 )
-
Shares Issued for Vested Restricted Stock Units
-
-
11,658,293
-
1,782,993
-
1,782,993
-
1,782,993
Shares Issued for Exercise of Warrants
-
-
8,807,605
-
1,622,377
-
1,622,377
-
1,622,377
Shares Issued for Conversion of Debt
-
-
16,014,663
-
2,371,782
-
2,371,782
-
2,371,782
Stock Grants for Compensation
-
-
110,294
-
55,163
-
55,163
-
55,163
Deferred Tax Impact on Conversion Feature
-
-
-
-
(20,418,996 )
-
(20,418,996 )
(1,210,052 )
(21,629,048 )
Share-Based Compensation
-
-
-
-
3,625,990
-
3,625,990
-
3,625,990
Cancellation of Super Voting Shares
(815,295 )
(82,500 )
-
-
82,500
-
-
-
-
Deemed Dividend - Down Round Feature of Warrants
-
-
-
-
6,364,183
(6,364,183 )
-
-
-
Warrants Issued Pursuant to Private Placements
-
-
-
-
(7,228,211 )
-
(7,228,211 )
-
(7,228,211 )
Non-Controlling Interest Equity Transactions
Equity Component on Debt and Debt Modification
-
-
-
-
-
-
-
4,055,133
4,055,133
BALANCE AS OF JUNE 26, 2021
-
$ -
726,866,374
$ -
$ 908,992,686
$ (717,232,706 )
$ 191,759,980
$ (445,393,599 )
$ (253,633,619 )
The accompanying notes are an integral part of these Consolidated Financial Statements.
MEDMEN ENTERPRISES INC.
Consolidated Statements of Cash Flows
Fiscal Years Ended June 25, 2022 and June 26, 2021
(Amounts Expressed in United States Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss from Continuing Operations
$ (165,554,955 )
$ (124,330,133 )
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Deferred Tax (Recovery)
(13,321,522 )
(19,570,524 )
Depreciation and Amortization
25,647,687
28,477,521
Non-Cash Operating Lease Costs
16,368,806
18,620,507
Accretion of Debt Discount and Loan Origination Fees
10,688,872
21,680,282
Loss on Disposals of Asset
4,452,376
669,601
Gain on Lease Terminations
(4,250,649 )
(16,203,404 )
Accretion of Deferred Gain on Sale of Property
(566,631 )
(566,629 )
Impairment of Assets
101,799,182
2,363,272
Gain on Disposal of Assets Held for Sale
-
(12,338,123 )
Realized and Unrealized Changes in Fair Value of Contingent Consideration
3,304,685
390,727
Change in Fair Value of Derivative Liabilities
(26,187,075 )
(838,767 )
(Gain) Loss on Extinguishment of Debt
(10,274,938 )
16,142,220
Share-Based Compensation
5,255,074
5,464,146
Interest Capitalized to Senior Secured Convertible Debt and Notes Payable
26,531,185
36,393,137
Interest Capitalized to Finance Lease Liabilities
1,567,534
-
Changes in Operating Assets and Liabilities:
Accounts Receivable and Prepaid Expenses
(257,330 )
(2,093,338 )
Inventory
4,613,460
1,960,304
Other Current Assets
(768,934 )
2,147,239
Due from Related Party
-
3,109,718
Other Assets
26,612
2,765,640
Accounts Payable and Accrued Liabilities
8,939,776
3,022,559
Interest Payments on Finance Leases
(6,976,492 )
(5,898,723 )
Cash Payments - Operating Lease Liabilities
(10,035,716 )
(16,059,492 )
Income Taxes Payable
11,640,711
25,595,390
Other Current Liabilities
(1,584,619 )
(1,716,979 )
NET CASH USED IN CONTINUED OPERATING ACTIVITIES
(18,942,901 )
(30,813,849 )
Net Cash Used in Discontinued Operating Activities
(43,586,540 )
(28,606,582 )
NET CASH USED IN OPERATING ACTIVITIES
(62,529,441 )
(59,420,431 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment
(9,040,193 )
(2,687,627 )
Additions to Intangible Assets
(616,263 )
(1,175,252 )
Proceeds from Sale of Assets Held for Sale and Other Assets
-
19,002,185
Restricted Cash
NET CASH (USED IN) PROVIDED BY CONTINUED INVESTING ACTIVITIES
(9,655,726 )
15,139,605
Net Cash Used in Discontinued Investing Activities
(1,218,797 )
(4,200,076 )
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
(10,874,523 )
10,939,529
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Subordinate Voting Shares for Cash
95,000,000
28,885,912
Payment of Stock Issuance Costs Relating to Private Placement
(5,352,505 )
-
Exercise of Warrants for Cash
1,273,679
1,622,377
Payment of Loan Amendment Fee
-
(225,036 )
Proceeds from Issuance of Senior Secured Convertible Credit Facility
(2,604,593 )
-
Proceeds from Issuance of Senior Secured Convertible Credit Facility
-
14,577,000
Proceeds from Issuance of Notes Payable
5,000,000
15,830,279
Principal Repayments of Notes Payable
(20,215,864 )
(742,860 )
Principal Repayments of Senior Secured Convertible Credit Facility
-
(8,000,000 )
Principal Repayments of Finance Lease Liability
(205,668 )
(1,201,609 )
NET CASH PROVIDED BY FINANCING ACTIVITIES
72,895,049
50,746,063
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(508,915 )
2,265,161
Cash Transferred to Assets Held for Sale
(270,224 )
-
Cash and Cash Equivalents, Beginning of Year
11,575,138
9,309,977
CASH AND CASH EQUIVALENTS, END OF YEAR
$ 10,795,999
$ 11,575,138
MEDMEN ENTERPRISES INC.
Consolidated Statements of Cash Flows
Fiscal Years Ended June 25, 2022 and June 26, 2021
(Amounts Expressed in United States Dollars)
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION
Cash Paid for Interest
$ 4,342,265
$ 3,496,914
Non-Cash Investing and Financing Activities:
Net Assets Transferred to Held for Sale
$ 4,472,039
$ 6,614,987
Receivable Recorded on Asset Held for Sale
$ -
$ 1,615,600
Lease Terminations and Amendments
$ -
$ 28,163,062
Redemption of MedMen Corp Redeemable Shares
$ 10,322,089
$ 78,008,749
Derivative Liability Incurred on Convertible Facility and Equity Financing
$ 30,500,000
$ 7,228,211
Conversion of Convertible Debentures
$ 2,371,100
$ 2,371,782
Shares Issued to Settle Debt and Lender Fees
$ 6,570,000
$ 2,010,504
Shares Issued to Settle Accounts Payable and Liabilities
$ 7,238,467
$ 3,610,650
Issuance of Top-Up Warrants
$ 4,498,882
$ -
Equity Component of Debt - New and Amended
$ 41,388,047
$ 61,734,380
Release of Investments for Liabilities
$ -
$ 750,000
Accrued Interest Added to Senior Secured Convertible Debt and Notes Payable
$ -
$ 4,614,291
Debt Discount Recognized on Modifications
$ 1,000,000
$ -
Deferred Tax Impact on Conversion Feature
$ 3,025,797
$ 21,629,048
The accompanying notes are an integral part of these Consolidated Financial Statements.
MEDMEN ENTERPRISES INC.
Notes to Consolidated Financial Statements
Fiscal Years Ended June 25, 2022 and June 26, 2021
(Amounts Expressed in United States Dollars, Except for Share and Per Share Data)
1. NATURE OF OPERATIONS
MedMen Enterprises Inc. and its subsidiaries over which the company has control (collectively, “MedMen”, the “Company”, “we” or “us”) is a premier cannabis retailer based in the U.S. with an operational footprint in California, Nevada, Illinois, Arizona, Massachusetts, Florida, 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 well as curbside and in-store pick up. MedMen Buds, an industry-first loyalty program, provides exclusive access to promotions, product drops and content.
As of June 25, 2022, the Company owns 30 store locations across California (13), Nevada (3), Illinois (1), Arizona (1), Massachusetts (1), Florida (7) and New York (4). In December 2021, the Company opened its retail store in Boston’s Fenway Park area, and in March 2022, the Company opened its newest store location on Union Street in San Francisco’s Cow Hollow neighborhood. Beginning on October 1, 2021, the Company no longer operates the cultivation and production facilities in California and Nevada pursuant to its management agreement with an unrelated third party, AFB. In February 2021, the Company entered into an investment agreement to sell a controlling interest in MedMen NY, Inc. and thus classified all assets and liabilities and profit or loss allocable to its operations in the state of New York as discontinued operations. In January 2022, the investment agreement was terminated; however, it continues to meet the accounting criteria for assets held for sale and discontinued operations are shown apart from continuing operations. On February 28, 2022, the Company entered into an agreement to sell MME Florida, LLC, including license, dispensaries, inventory and cultivation operations, and thus classified all assets and liabilities and profit or loss allocable to its operations in the state of Florida as discontinued operations. The sale of the Florida-based assets was completed subsequent to the fiscal year ended June 25, 2022.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation
The accompanying Consolidated Financial Statements have been prepared on a going concern basis in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for annual financial information. The 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. All intercompany transactions and balances have been eliminated in consolidation. 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 June 25, 2022 and June 26, 2021, the consolidated results of operations and cash flows for the years ended June 25, 2022 and June 26, 2021 have been included. In accordance with the provisions of FASB ASC Topic 810, “Consolidation” (“ASC Topic 810”), the Company consolidates any VIE, of which the Company is the primary beneficiary.
Fiscal Year-End
The Company’s 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 week 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 2023. The Company’s fiscal years ended June 25, 2022 and June 26, 2021 included 52 weeks.
Going Concern
As of June 25, 2022, the Company had cash and cash equivalents of $10.8 million and a working capital deficit of $164.9 million. The Company has incurred losses from continuing operations of $165.5 million and $124.3 million in fiscal year 2022 and 2021, respectively, used cash in continued operating activities of $18.9 million and anticipates that the Company will continue to incur losses until such time as revenues exceed operating costs and the Company is able to complete its restructuring plan. As of June 25, 2022, the Company is in violation of minimum liquidity covenant of its term loans. The term loans require the Company to maintain $15.0 million minimum cash. On July 31, 2022, these term loans of $97.8 million became due and the Company was unable to meet this financial obligation and pay the lender, which constitutes an event of default. The moneys owed under its Lender and Landlord Support Agreement which allowed the Company to defer $22.0 million of rent payment over three years beginning in 2020, will come due in July 2023. On August 22, 2022, the Company completed the sale of its Florida-based assets for $63.0 million and the assumption of certain liabilities that the Company valued at approximately $4.0 million, a reduction of $16.0 million from the originally announced sales price of $83.0 million. The purchase price was less than first negotiated due to factors that include changes in the market values of cannabis assets in Florida and the Company’s desire to close the transaction in a timely manner with a counterparty likely to achieve state regulatory approval. The buyer made a cash payment of $40.0 million at closing and is required to make two additional installment payments of $11.5 million each after the closing. The net proceeds to the Company at closing were $14.5 million, with a $25.0 million payment going to the Company’s secured senior lender. Proceeds of the transaction to the Company will be used to fund operations and pay interest to its secured senior lender while the term loans remain outstanding and in default. 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 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 groups 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 unsecured 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 has had and will continue to have on the broader retail environment could also have a significant impact on the Company’s financial operations.
As of June 25, 2022, the accompanying Consolidated Financial Statements 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 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 the Company’s ability to continue as a going concern.
COVID-19
The COVID-19 pandemic has promoted various recommendations and safety measures from governmental authorities to try and limit the pandemic. The response of governmental authorities continues having a significant impact on the private sector and individuals, including unprecedented business, employment and economic disruptions. During the current reporting period, aspects of the Company’s business continue to be affected by the COVID-19 pandemic, with the Company’s retail stores operating within local rules and regulations. While the ultimate severity of the outbreak and its impact on the economic environment remains uncertain, the Company is monitoring this closely. 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. 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.
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. An adjustment has been made to the Consolidated Balance Sheet and Consolidated Statements of Cash Flows for year ended June 26, 2021 to reclassify Due to Related Party.
Under ASC Subtopic 205-20, “Presentation of Financial Statements - Discontinued Operations” (“ASC Subtopic 205-20”), a component of an entity that is classified as discontinued operations is presented separately from continuing operations in the Consolidated Statements of Operations and the Consolidated Statements of Cash Flows for all periods presented. All assets and liabilities related to such discontinued operations are classified as held for sale and presented separately in the Consolidated Balance Sheets for all periods presented. Accordingly, the presentation of prior period balances may not agree to prior issued financial statements.
During the fiscal third quarter ended March 26, 2022, the Company classified its operations in the state of Florida as discontinued operations. Consequently, assets and liabilities allocable to the operations within the state of Florida were reclassified as held for sale in the Consolidated Balance Sheets as of June 26, 2021. All revenue and expenses relating to the Florida operations are presented separately from continuing operations in the Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the year ended June 26, 2021.
Emerging Growth Company
The Company is an emerging growth company as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”) under which emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies.
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.
Consolidation of Variable Interest Entities (“VIE”)
ASC Topic 810 requires a variable interest holder to consolidate a VIE if that party has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. To determine whether or not a variable interest the Company holds could potentially be significant to the VIE, the Company considers both qualitative and quantitative factors regarding the nature, size and form of the Company’s involvement with the VIE. The equity method of accounting is applied to entities in which the Company is not the primary beneficiary or the entity is not a VIE and the Company does not have effective control, but can exercise influence over the entity with respect to its operations and major decisions. The Company does not consolidate a VIE in which it is not considered the primary beneficiary. The Company evaluates its relationships with all the VIEs on an ongoing basis to reassess if it continues to be the primary beneficiary.
The following are the Company’s VIE that are included in these Consolidated Financial Statements as of and for the fiscal years ended June 25, 2022 and June 26, 2021:
Schedule of retail entities
Ownership
Entity
Location
Purpose
Nature’s Cure, Inc. (1) (3)
Los Angeles - LAX Airport
Dispensary
0%
0%
LAX Fund II Group, LLC (1) (4)
0%
0%
Venice Caregiver Foundation, Inc. (2) (3)
Venice Beach - Abbot Kinney
Dispensary
0%
0%
(1)
Nature’s Cure, Inc. is wholly-owned by MedMen Opportunity Fund II, LP, a related party, and under control of the Company through a management agreement. The Company does not hold any ownership interests in the entity.
(2)
Venice Caregivers Foundation, Inc. is wholly-owned by MedMen Opportunity Fund II, LP, a related party, and under control of the Company through a management agreement. The Company does not hold any ownership interests in the entity.
(3)
California Corporation
(4)
California Limited Liability Company
Basis of Consolidation
These Consolidated Financial Statements as of and for the years ended June 25, 2022 and June 26, 2021 include the accounts of the Company, its wholly-owned subsidiaries and entities over which the Company has control as defined in ASC Topic 810. Subsidiaries over which the Company has control are fully consolidated from the date control commences until the date control ceases. Control exists when the Company has ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity. In assessing control, potential voting rights that are currently exercisable are taken into account.
The following are the Company’s subsidiaries over which the Company has control that are included in these Consolidated Financial Statements as of and for the years ended June 25, 2022 and June 26, 2021:
Corporate Entities
Schedule of corporate entities
Ownership
Entity
Location
Purpose
MM CAN USA, Inc. (1)
California
Manager of MM Enterprises USA, LLC
100%
100%
MM Enterprises USA, LLC (4)
Delaware
Operating Entity
100%
100%
Management Entities
Schedule of management entities
Ownership
Subsidiaries
Location
Purpose
LCR SLP, LLC (4)
Delaware
Holding Company
100%
100%
The following are MM Enterprises USA’s wholly-owned subsidiaries and entities over which the Company has control that are included in these Consolidated Financial Statements as of and for the fiscal years ended June 25, 2022 and June 26, 2021:
Retail Entities
Schedule of retail entities
Ownership
Subsidiaries
Location
Purpose
Manlin I, LLC (2)
Los Angeles - West Hollywood
Payroll
100%
100%
Farmacy Collective (3)
Los Angeles - West Hollywood
Dispensary
100%
100%
The Source Santa Ana (2)
Orange County - Santa Ana
Dispensary
100%
100%
SA Fund Group RT, LLC
Orange County - Santa Ana
Payroll
100%
100%
MME CYON Retail, Inc. (1)
Los Angeles - Beverly Hills
Dispensary
100%
100%
BH Fund II Group, LLC (2)
Los Angeles - Beverly Hills
Payroll
100%
100%
MMOF Downtown Collective, LLC (2)
Los Angeles - Downtown
Holding Company
100%
100%
Advanced Patients’ Collective (1)
Los Angeles - Downtown
Dispensary/ Distribution
100%
100%
DT Fund II Group, LLC (1)
Payroll
100%
100%
MMOF San Diego Retail, Inc. (2)
San Diego - Kearny Mesa
Dispensary
100%
100%
San Diego Retail Group II, LLC (1)
San Diego - Kearny Mesa
Payroll
100%
100%
MMOF Venice, LLC (2)
Venice Beach - Lincoln Blvd.
Holding Company
100%
100%
The Compassion Network, LLC (1)
Venice Beach - Lincoln Blvd.
Dispensary
100%
100%
MMOF SM, LLC (2)
Santa Monica
Dispensary
100%
100%
MMOF Santa Monica, Inc. (1)
100%
100%
MMOF Fremont, LLC (6)
Las Vegas - Downtown Arts District
Holding Company
100%
100%
MMOF Fremont Retail, Inc. (5)
Las Vegas - Downtown Arts District
Dispensary
100%
100%
MME Union Retail, LLC (2)
San Francisco
Dispensary
60%
60%
MME Sutter Retail, LLC (1)
San Francisco
Dispensary
60%
60%
MMOF Vegas, LLC (6)
Las Vegas - North Las Vegas
Holding Company
100%
100%
MMOF Vegas Retail, Inc. (5)
Las Vegas - North Las Vegas
Dispensary
100%
100%
MMOF Vegas 2, LLC (6)
Las Vegas - Cannacopia
Holding Company
100%
100%
MMOF Vegas Retail 2, Inc. (5)
Las Vegas - Cannacopia
Dispensary
100%
100%
MME VMS, LLC (3)
San Jose
Payroll
100%
100%
Viktoriya’s Medical Supplies, LLC (3)
San Jose
Dispensary
100%
100%
Project Compassion Venture, LLC (4)
New York (Manhattan / Syracuse / Lake Success / Buffalo / Utica)
Holding Company
100%
100%
Project Compassion Capital, LLC (4)
New York (Manhattan / Syracuse / Lake Success / Buffalo / Utica)
Holding Company
100%
100%
Project Compassion NY, LLC (4)
New York (Manhattan / Syracuse / Lake Success / Buffalo / Utica)
Holding Company
100%
100%
MedMen NY, Inc. (7)
New York
(Manhattan / Syracuse / Lake Success / Buffalo / Utica)
Dispensary / Cultivation / Manufacturing
100%
100%
MME IL Group LLC (11)
Oak Park, Illinois
Payroll
100%
100%
Future Transactions Holdings, LLC (11)
Oak Park, Illinois
Dispensary
100%
100%
MME Sorrento Valley, LLC (2)
San Diego - Sorrento Valley
Dispensary
100%
100%
Sure Felt, LLC (2)
San Diego - Sorrento Valley
Dispensary
100%
100%
Rochambeau, Inc. (1)
Emeryville, California
Dispensary
100%
100%
MME AZ Group, LLC (9)
Mesa, Arizona
Payroll
100%
100%
EBA Holdings, Inc. (10)
Scottsdale and Mesa, Arizona
Dispensary / Cultivation / Manufacturing
100%
100%
MattnJeremy, Inc. (1)
Long Beach, California
Dispensary
100%
100%
MME 1001 North Retail, LLC (11)
Chicago, Illinois
Dispensary
100%
100%
MME Evanston Retail, LLC (11) (14)
Evanston, Illinois
Dispensary
0%
100%
MME Morton Grove Retail, LLC (11)
Morton Grove, Illinois
Dispensary
100%
100%
MedMen Boston, LLC (12)
Boston, Massachusetts
Dispensary
90%
90%
MedMen Newton Retail, LLC (12)
Newton, Massachusetts
Dispensary
90%
90%
Cultivation Entities
Schedule of cultivation entities
Ownership
Subsidiaries
Location
Purpose
Project Mustang Development, LLC (6) (13)
Northern Nevada
Cultivation and Production Facility
100%
100%
MMNV2 Holdings I, LLC (6)
100%
100%
Manlin DHS Development, LLC (6) (13)
Desert Hot Springs, California
Cultivation and Production Facility
100%
100%
Desert Hot Springs Green Horizon, Inc. (3)
100%
100%
Project Compassion Venture, LLC (4)
Utica, New York
Cultivation and Production Facility
100%
100%
EBA Holdings, Inc. (10)
Mesa, Arizona
Cultivation and Production Facility
100%
100%
MME Florida, LLC (8)
Eustis, Florida
Cultivation and Production Facility
100%
100%
(1)
California Corporation
(2)
California Limited Liability Company
(3)
California Non-Profit Corporation
(4)
Delaware Limited Liability Company
(5)
Nevada Corporation
(6)
Nevada Limited Liability Company
(7)
New York Corporation
(8)
Florida Limited Liability Company
(9)
Arizona Limited Liability Company
(10)
Arizona Corporation
(11)
Illinois Limited Liability Company
(12)
Massachusetts Limited Liability Company
(13)
During the fiscal second quarter of 2022, the Company effectuated the Management Agreement with an unrelated third party and no longer has a controlling financial interest in previously consolidated entities, Manlin DHS Development, LLC (“DHS”) and Project Mustang Development, LLC (“Mustang”), and therefore these entities are no longer included in the Company’s financial statements. The deconsolidation did not have a material impact on the Consolidated Financial Statements.
(14) On August 10, 2020, all operational control and risk of loss was transferred and Evanston operates through a consulting agreement. See “Note 7 - Assets Held for Sale” for further information.
Non-Controlling Interest
Non-controlling interest represents equity interests owned by parties that are not shareholders of the ultimate parent. The share of net assets attributable to non-controlling interests is presented as a component of equity. Their share of net income or loss is recognized directly in equity. Changes in the parent company’s ownership interest that do not result in a loss of control are accounted for as equity transactions.
Use of Estimates
The preparation of the Consolidated 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 Consolidated Financial Statements and the reported amounts of total net revenue and expenses during the reporting period. The Company regularly evaluates significant estimates and assumptions related to the consolidation or non-consolidation of variable interest entities, estimated useful lives, depreciation of property and equipment, amortization of intangible assets, inventory valuation, stock-based compensation, business combinations, goodwill impairment, long-lived asset impairment, purchased asset valuations, fair value of financial instruments, compound financial instruments, derivative liabilities, deferred income tax asset valuation allowances, incremental borrowing rates, lease terms applicable to lease contracts 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 could be negatively impacted.
Cash and Cash Equivalents
Cash and cash equivalents comprised of cash and highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less.
Inventory
Inventory is comprised of raw materials, finished goods and work-in-process such as pre-harvested cannabis plants and by-products to be extracted. 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 recorded to cost of goods sold in the Consolidated Statements of Operations at the time the inventory is sold. Work-in-process is stated at the lower of cost or net realizable value, determined using the weighted average cost. Raw materials and finished goods inventory are stated at the lower of cost or net realizable value, with cost being determined on the first-in, first-out (“FIFO”) method of accounting. Net realizable value is determined as the estimated selling price in the ordinary course of business less estimated costs to sell. The Company periodically reviews physical inventory for excess, obsolete, and potentially impaired items and reserves. The Company reviews inventory for obsolete, redundant and slow-moving goods and any such inventory is written down to net realizable value. Packaging and supplies are initially valued at cost. The reserve estimate for excess and obsolete inventory is based on expected future use. The reserve estimates have historically been consistent with actual experience as evidenced by actual sale or disposal of the goods. As of June 25, 2022 and June 26, 2021, the Company determined that no reserve was necessary.
Investments
Long-term investments are recorded in Other Assets and related to investments in equity and debt securities of entities over which the Company does not have a controlling financial interest or significant influence and are accounted for at fair value in accordance with ASC Topic 321, “Investments-Equity Securities” (“ASC Topic 321”), as well as investments and joint ventures in which the Company can exert significant influence but does not control.
Equity investments without readily determinable fair values (which are classified as Level 3 investments in the fair value hierarchy) are measured at cost with adjustments for observable changes in price or impairments (referred to as the “measurement alternative”). In applying the measurement alternative, the Company performs a qualitative assessment on a quarterly basis and recognizes an impairment if there are sufficient indicators that the fair value of the equity investments is less than carrying values. Changes in value are recorded in Other Expense (Income) in the Consolidated Statement of Operations.
Equity Method and Joint Venture Investments
The Company accounts for investments in which it can exert significant influence but does not control as equity method investments in accordance with ASC Topic 323, “Investments-Equity Method and Joint Ventures” (“ASC Topic 323”). In accordance with ASC Topic 825, “Financial Instruments” (“ASC Topic 825”), the fair value option to measure eligible items at fair value on an instrument-by-instrument basis can be applied. Joint ventures are joint arrangements whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Investments in joint ventures are accounted for under the equity method. These investments are recorded at the amount of the Company’s investment and adjusted each period for the Company’s share of the investee’s income or loss, and dividends paid.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and impairment losses, if any. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset using the following terms and methods:
Schedule of property plant and equipment
Land
Not Depreciated
Buildings
39 Years
Right of Use Assets
Shorter of Lease Term or Economic Life
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
The assets’ residual values, useful lives and methods of depreciation are reviewed at the end of 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 de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is included in the Consolidated Statements 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 the end of 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:
Schedule of intangible assets
Dispensary Licenses
15 Years
Customer Relationships
5 Years
Management Agreement
30 Years
Intellectual Property
10 Years
Capitalized Software
3 Years
In accordance with ASC Topic 350, “Intangibles-Goodwill and Other” (“ASC Topic 350”), costs of internally developing, maintaining or restoring intangible assets are expensed as incurred. Inversely, costs are capitalized when certain criteria are met through the point at which the intangible asset is substantially complete and ready for its intended use.
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 Topic 350, goodwill and other intangible assets with indefinite lives are not subject to amortization. The Company reviews goodwill and other intangible assets allocated to each of the Company’s reporting units for impairment on an annual basis as of year-end or whenever events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The carrying amount of each reporting unit 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. The Company has seven reporting units which are the geographic states in which it operates. In order to determine if goodwill is impaired, the Company measures the impairment of goodwill by comparing a reporting unit’s carrying amount to the estimated fair value of the reporting unit. If the carrying amount of a reporting unit is in excess of its fair value, the Company recognizes an impairment charge equal to the amount in excess. A goodwill impairment loss associated with a discontinued operation is included within the results of discontinued operations.
Impairment of Long-Lived Assets
For purposes of the impairment test, long-lived assets such as property, plant and equipment and definite-lived intangible assets are grouped with other assets and liabilities at the lowest level for which identifiable independent cash flows are available (“asset group”). In accordance with ASC Topic 360, “Property, Plant, and Equipment” (“ASC Topic 360”), the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In order to determine if assets have been impaired, the impairment test is a two-step approach wherein the recoverability test is performed first to determine whether the long-lived asset is recoverable. The recoverability test (Step 1) compares the carrying amount of the asset to the sum of its future undiscounted cash flows using entity-specific assumptions generated through the asset’s use and eventual disposition. If the carrying amount of the asset is less than the cash flows, the asset is recoverable and an impairment is not recorded. If the carrying amount of the asset is greater than the cash flows, the asset is not recoverable and an impairment loss calculation (Step 2) is required. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the carrying value of the asset group. Fair value can be determined using a market approach, income approach or cost approach. The cash flow projection and fair value represents management’s best estimate, using appropriate and customary assumptions, projections and methodologies, at the date of evaluation. The reversal of impairment losses is prohibited.
Leased Assets
The Company leases land, buildings, equipment and other capital assets which it plans to use for corporate purposes and the production and sale of cannabis products. The majority of the Company’s leases are operating leases for its company-operated retail store locations. The Company also leases cultivation facilities, distribution center and office space for corporate administrative purpose. In accordance with ASU 2016-02, “Leases (Topic 842)” (“ASC Topic 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 Consolidated Balance Sheets. Finance lease ROU assets are included in property and equipment, net and accrued obligations under finance lease (current and non-current) liabilities in the Consolidated Balance Sheets. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets and are expensed in the Consolidated Statements of Operations on the straight-line basis over the lease term.
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. A finance lease is a lease in which 1) ownership of the property transfers to the lessee by the end of the lease term; 2) the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise; 3) the lease is for a major part of the remaining economic life of the underlying asset; 4) the present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already included in the lease payments equals or exceeds substantially all of the fair value; or 5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. The Company classifies a lease as an operating lease when it does not meet any one of these criteria.
The Company applies judgment in determining whether a contract contains a lease and if a lease is classified as an operating lease or a finance lease. The Company applies judgement in determining the lease term as the non-cancellable term of the lease, which may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. All relevant factors that create an economic incentive for it to exercise either the renewal or termination are considered. The Company reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise or not to exercise the option to renew or to terminate. The Company applies judgment in allocating the consideration in a contract between lease and non-lease components. It considers whether the Company can benefit from the ROU asset either on its own or together with other resources and whether the asset is highly dependent on or highly interrelated with another ROU asset.
The Company also applies judgement in determining the incremental borrowing rate using estimates which are based on the information available at commencement date and determines the present value of lease payments if the implicit rate is unavailable. In accordance with ASC Topic 842, the Company initially measures the ROU asset at cost, which is primarily comprised of the initial amount of the lease liability, plus initial direct costs and lease payments at or before the commencement date, less any lease incentives received. The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company utilizes its secured borrowing rate. Measurement of the lease payments are comprised using 1) fixed lease payments less any incentives; 2) variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date; 3) the amount expected to be payable by the lessee under residual value guarantees; 4) the exercise of purchase options, if the lessee is reasonably certain to exercise the options; 5) payments of penalties for early termination of a lease unless the Company is reasonably certain not to terminate early.
Most operating leases contain renewal options that provide for rent increases based on prevailing market conditions. The terms used to calculate the ROU assets for these properties include the renewal options that the Company is reasonably certain to exercise. Both ROU assets and lease liabilities exclude variable payments not based on an index or rate, which are treated as period costs. The Company’s lease agreements do not contain significant residual value guarantees, restrictions or covenants. For finance leases, lease expenses are the sum of interest on the lease obligations and amortization of the ROU assets. Finance lease ROU assets are amortized based on the lesser of the lease term and the useful life of the leased asset according to the capital asset accounting policy. If ownership of the ROU assets transfers to the Company at the end of the lease term or if the Company is reasonably certain to exercise a purchase option, amortization is calculated using the estimated useful life of the leased asset.
If a sale and leaseback transaction was accounted for as a sale and leaseback under ASC Topic 840, then the entity continues recognizing any deferred gain or loss under ASC Topic 842. Sale and leaseback transactions are assessed to determine whether a sale has occurred under ASC Topic 606, “Revenue from Contracts with Customers” (“ASC Topic 606”). If a sale is determined not to have occurred, the underlying “sold” assets are not derecognized and a financing liability is established in the amount of cash received. At such time that the lease expires, the assets are then derecognized along with the financing liability, with a gain recognized on disposal for the difference between the two amounts, if any. ROU assets and lease liabilities are recognized on the Company’s Consolidated Balance Sheets and reflect the present value of the Company’s current minimum lease payments over the lease terms, which include options that are reasonably certain to be exercised, discounted using the Company’s incremental borrowing rate. Refer to “Note 15 - Leases” for further discussion.
Additionally, management monitors for events or changes in circumstances that may require a reassessment of one of its leases and determine if a remeasurement is required. During fiscal year 2022, and in connection with the Company’s strategic initiatives to improve cash flow from operations, the Company shut down operations at its distribution center and moved to a drop-ship model.
Income Taxes
The Company accounts for income taxes 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 or the tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Tax benefits from uncertain tax positions are 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. The amount recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon effective settlement.
Convertible Instruments
The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC Topic 815, “Accounting for Derivative Instruments and Hedging Activities” (“ASC Topic 815”). ASC Topic 815 generally provide three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not remeasured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance ASC Topic 470, “Accounting for Convertible Securities with Beneficial Conversion Features”, as those professional standards pertain to “Certain Convertible Instruments”. Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. ASC Topic 815 provides that generally, if an event that is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a liability.
Derivative Liabilities
The Company evaluates all of its agreements to determine if such instruments have derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the Consolidated Statements of Operations. In calculating the fair value of derivative liabilities, the Company uses a valuation model when Level 1 inputs are not available to estimate fair value at each reporting date. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the Consolidated Balance Sheets as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the Consolidated Balance Sheets date. Critical estimates and assumptions used in the model are discussed in “Note 14 - Derivative Liabilities”.
Down-Round Features
The Company calculates down-round features under Accounting Standards Update (“ASU”) No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features”, in which down round features do not meet the criteria for derivative accounting and no liability is to be recorded until an actual issuance of securities triggers the down-round feature.
Assets Held for Sale
The Company classifies assets held for sale in accordance with ASC Topic 360. When the Company makes the decision to sell an asset or to stop some part of its business, the Company assesses if such assets should be classified as an asset held for sale. To classify as an asset held for sale, the asset or disposal group must meet all of the following conditions: i) management, having the authority to approve the action, commits to a plan to sell the asset, ii) the asset is available for immediate sale in its present condition subject to certain customary terms, iii) an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated, iv) the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale, within one year, subject to certain exceptions, v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current value, and vi) actions required to complete the plan indicate that it is unlikely that the plan will be significantly changed or withdrawn. Assets held for sale are measured at the lower of their carrying amount or fair value less cost to sell (“FVLCTS”). FVLCTS is the amount obtainable from the sale of the asset in an arm’s length transaction, less the costs of disposal. Once classified as held for sale, any depreciation and amortization on an asset cease to be recorded. For long-lived assets or disposals groups that are classified as held for sale but do not meet the criteria for discontinued operations, the assets and liabilities are presented separately on the balance sheet of the initial period in which it is classified as held for sale. The major classes of assets and liabilities classified as held for sale are disclosed in the notes to the Consolidated Financial Statements. See “Note 7 - Assets Held for Sale” and “Note 28 - Discontinued Operations”.
Discontinued Operations
A component of an entity is identified as operations and cash flows that can be clearly distinguished, operationally and financially, from the rest of the entity. Under ASC Subtopic 205-20, “Presentation of Financial Statements - Discontinued Operations” (“ASC Subtopic 205-20”), a discontinued operation is a component of an entity that either has been disposed of, or is classified as held for sale and represents a strategic shift that has or will have a major effect on the entity’s operations and financial results, or a newly acquired business or nonprofit activity that upon acquisition is classified as held for sale. Discontinued operations are presented separately from continuing operations in the Consolidated Statements of Operations and the Consolidated Statements of Cash Flows. See “Note 28 - Discontinued Operations”.
Allocation of Interest to Discontinued Operations
Under ASC Subtopic 205-20, interest on debt that is to be assumed by the buyer and interest on debt that is required to be repaid as a result of a disposal transaction is allocated to discontinued operations. The amount of interest expense reclassified to discontinued operations is directly related to the amount of debt that will be repaid with funds received from the sale of discontinued operations. See “Note 28 - Discontinued Operations” for further information. The Company elected not to reclassify other interest expenses which are not directly attributable to discontinued operations as permitted under ASC Subtopic 205-20.
Revenue Recognition
Revenue is recognized by the Company in accordance with ASC Topic 606. Through application of the standard, the Company recognizes revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. In order to recognize revenue under ASC Topic 606, the Company applies the following five (5) steps:
● Identify a customer along with a corresponding contract;
● Identify the performance obligation(s) in the contract to transfer goods or provide distinct services to a customer;
● Determine the transaction price the Company expects to be entitled to in exchange for transferring promised goods or services to a customer;
● Allocate the transaction price to the performance obligation(s) in the contract; and
● Recognize revenue when or as the Company satisfies the performance obligation(s).
Revenues consist of wholesale, retail sales of cannabis and delivery, which are generally recognized at a point in time when control over the goods have been transferred to the customer and is recorded net of sales discounts. During the years ended June 25, 2022 and June 26, 2021, wholesale revenues were insignificant. Payment is typically due upon transferring the goods to the customer or within a specified time period permitted under the Company’s credit policy. During the years ended June 25, 2022 and June 26, 2021, sales discounts were $22,936,092 and $14,128,079, respectively.
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.
General and Administrative Expenses
General and administrative expenses comprised primarily of personnel costs, including salaries, incentive compensation, benefits, share-based compensation, professional service costs, including legal, accounting, consulting and other professional fees, and corporate insurance and other facilities costs associated with the Company’s corporate offices.
Stock-Based Compensation
The Company has a stock-based compensation plan comprised of stock options, stock grants, restricted stock units (“RSU”) and three classes of member units: 1) Common Units; 2) Appreciation Only Long-Term Incentive Performance Units (“AO LTIP Units”); and 3) Fair Value Long-Term Incentive Performance Units (“FV LTIP Units”). AO LTIP Units and FV LTIP Units are convertible into Long-Term Incentive Performance Units (“LTIP Units”). LTIP Units are convertible into Common Units on a one-for-one basis.
The Company accounts for its stock-based awards in accordance with ASC Topic 718, “Compensation - Stock Compensation” (“ASC Topic 718”), which requires fair value measurement on the grant date and recognition of compensation expense for all stock-based payment awards made to employees and directors, including RSUs. For stock options, the Company estimates the fair value using a closed option valuation (Black-Scholes) model. When there are market-related vesting conditions to the vesting term of the share-based compensation, the Company uses a valuation model to estimate the probability of the market-related vesting conditions being met and will record the expense. The fair value of RSUs is based upon the quoted market price of the common shares on the date of grant. The fair value is then expensed over the requisite service periods of the awards, net of estimated forfeitures, which is generally the performance period and the related amount is recognized in the Consolidated Statements of Operations.
The fair value models require the input of certain assumptions that require the Company’s judgment, including the expected term and the expected stock price volatility of the underlying stock. The assumptions used in calculating the fair value of stock-based compensation represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change resulting in the use of different assumptions, stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If the actual forfeiture rate is materially different from management’s estimates, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.
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 loss 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.
Fair Value Measurements
The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
In accordance with the fair value accounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair value. The Company has not elected the fair value option for any eligible financial instruments. There have been no transfers between fair value levels during the year.
Financial instruments are measured at amortized cost or at fair value. Financial instruments measured at amortized cost consist of accounts receivable, due from and due to related party, other liabilities, and accounts payable and accrued liabilities wherein the carrying value approximates fair value due to its short-term nature. Other financial instruments measured at amortized cost include notes payable and senior secured convertible credit facility wherein the carrying value at the effective interest rate approximates fair value as the interest rate for notes payable and the interest rate used to discount the host debt contract for senior secured convertible credit facility approximate a market rate for similar instruments offered to the Company.
Cash and cash equivalents and restricted cash are measured at Level 1 inputs. Acquisition related liabilities resulting from business combinations are measured at fair value using Level 1 or Level 3 inputs. Investments that are measured at fair value use Level 3 inputs. Refer to “Note 6 - Other Current Assets” for assumptions used to value investments. Refer to “Note 13 - Other Current Liabilities and Other Non-Current Liabilities” for assumptions used to value the contingent consideration related to business combinations. Derivative liabilities are measured on quoted market prices in active markets at Level 1 inputs. Refer to “Note 14 - Derivative Liabilities” for assumptions used to value the derivative liabilities.
The individual fair values attributed to the different components of a financing transaction, notably derivative financial instruments, convertible debentures and loans, are determined using valuation techniques. The Company uses judgment to select the methods used to make certain assumptions and derive estimates. Significant judgment is also used when attributing fair values to each component of a transaction upon initial recognition, measuring fair values for certain instruments on a recurring basis and disclosing the fair values of financial instruments subsequently carried at amortized cost. These valuation estimates could be significantly different because of the use of judgment and the inherent uncertainty in estimating the fair value of instruments that are not quoted or observable in an active market.
Receivable and Allowances for Credit Losses
The Company’s receivables are mainly comprised of receivables for wholesale product sales and promotional rebates provided by its vendors. The primary indicators of the credit quality of the Company’s receivables are aging, payment history, economic sector information and outside credit monitoring, and are assessed on a quarterly basis. The Company’s credit loss exposure is mainly concentrated in its uncollected vendor promotional rebates. The Company assesses all information available, including on a forward-looking basis the expected credit loss associated with its assets carried at amortized cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk. To assess whether there is a significant increase in credit risk, the Company compares the risk of a default occurring on the asset at the reporting date with the risk of default at the date of initial recognition based on all information available, and reasonable and supportive forward-looking information. For accounts receivable only, the Company applies the simplified approach as permitted by ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The simplified approach to the recognition of expected losses does not require the Company to track the changes in credit risk; rather, the Company recognizes a loss allowance based on lifetime expected credit losses at each reporting date from the date of the trade receivable.
Expected credit losses are measured as the difference in the present value of the contractual cash flows that are due to the Company under the contract, and the cash flows that the Company expects to receive. The Company assesses all information available, including past due status, credit ratings, the existence of third-party insurance, and forward-looking macro-economic factors in the measurement of the expected credit losses associated with its assets carried at amortized cost. The Company measures expected credit loss by considering the risk of default over the contract period and incorporates forward-looking information into its measurement.
Recently Adopted Accounting Standards
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), 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 adopted ASU 2019-12 on June 27, 2021. The adoption of the standard did not have a material impact on the Company’s Consolidated Financial Statements.
In January 2020, the FASB issued ASU 2020-01, “Investments - Equity Securities (Topic 321)”, “Investments-Equity Method and Joint Ventures (Topic 323)”, and “Derivatives and Hedging (Topic 815)” (“ASU 2020-01”), 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. ASU 2020-01 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 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, 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.
In May 2021, the FASB issued 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 2021-04”), which amends existing guidance for earnings per share (“EPS”) in accordance with Topic 260. ASU 2021-04 is effective for the Company beginning June 1, 2022. This update should be applied prospectively on or after the effective date of the amendments. The Company is currently evaluating the effect of adopting this ASU.
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Subtopic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”), which is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency. ASU 2021-08 is effective for the Company beginning June 1, 2023. This update should be applied prospectively on or after the effective date of the amendments. The Company is currently evaluating the effect of adopting this ASU.
In March 2022, the FASB issued ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”), which eliminates the accounting guidance on troubled debt restructurings (TDRs) for creditors and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination. The ASU also updates the requirements related to accounting for credit losses under the current guidance and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. ASU 2022-02 is effective for the Company in fiscal year 2023. The Company is currently evaluating the effect of adopting this ASU.
3. CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company maintains cash with various U.S. banks and credit unions with balances in excess of the Federal Deposit Insurance Corporation and National Credit Union Share Insurance Fund limits, respectively. The failure of a bank or credit union where the Company has significant deposits could result in a loss of a portion of such cash balances in excess of the insured limit, which could materially and adversely affect the Company’s business, financial condition and results of operations.
The Company provides credit in the normal course of business to customers located throughout the U.S. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information. There were no customers that comprised more than 10% of the Company’s revenue for the years ended June 25, 2022 and June 26, 2021.
4. ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
As of June 25, 2022 and June 26, 2021, accounts receivable and prepaid expenses consist of the following:
Schedule of prepaid expenses
Accounts Receivable
$ 1,150,599
$ 916,715
Prepaid Expenses
4,141,568
4,499,662
Prepaid Insurance
2,247,600
2,201,797
Total Accounts Receivable and Prepaid Expenses
$ 7,539,767
$ 7,618,174
As of June 25, 2022 and June 26, 2021, an allowance for doubtful accounts of $2,469,444 and $1,676,249, respectively, was included as a component of accounts receivable.
5. INVENTORY
As of June 25, 2022 and June 26, 2021, inventory consists of the following:
Schedule of inventories
Raw Materials
$ 521,777
$ 544,219
Work-in-Process
671,541
2,884,354
Finished Goods
8,817,413
12,585,858
Total Inventory
$ 10,010,731
$ 16,014,431
During the years ended June 25, 2022 and June 26, 2021, the Company recognized an impairment of approximately nil and $1,714,000, respectively, to write down inventory to its net realizable value. During the years ended June 25, 2022 and June 26, 2021, overhead expenses of approximately $1,791,931 and $3,190,422, respectively, were included in inventory, of which $324,429 and $1,003,446, respectively, remain in inventory as of each balance sheet date.
6. OTHER CURRENT ASSETS
As of June 25, 2022 and June 26, 2021, other current assets consist of the following:
Schedule of Other current assets
Investments
$ 2,738,491
$ 3,036,791
Excise Tax Receivable
1,469,622
-
Note Receivable (1)
1,189,284
1,339,000
Other Current Assets
4,593,595
3,494,183
Total Other Current Assets
$ 9,990,992
$ 7,869,974
(1)
See “Note 7 - Assets Held for Sale” for further information.
During the year ended June 25, 2022, the Company recorded an impairment expense of $38,569 for certain assets. There were no such impairments during the year ended June 26, 2021.
As of June 25, 2022 and June 26, 2021, investments included in other current assets consist of the following:
Schedule of Investments
The Hacienda Company, LLC
Old Pal
Other Investments
TOTAL
(1)
(2)
(3)
Fair Value as of June 27, 2020
$ 750,000
$ 1,970,000
$ 1,066,791
$ 3,786,791
Settlement of Liabilities
(750,000 )
-
-
(750,000 )
Fair Value as of June 26, 2021
$ -
$ 1,970,000
$ 1,066,791
$ 3,036,791
Dissolution of Investment
-
-
(287,000 )
(287,000 )
Transfer to Assets Held for Sale
-
-
(11,300 )
(11,300 )
Fair Value as of June 25, 2022
$ -
$ 1,970,000
$ 768,491
$ 2,738,491
(1)
In July 2018, the Company purchased units of The Hacienda Company, LLC, a California limited liability company, which owns Lowell Herb Co., a California-based cannabis brand known for its pack of pre-rolls called Lowell Smokes, for an aggregate purchase price of $1,500,000, amounting to 3.2% of the outstanding units. Pursuant to SEC guidance under ASC Topic 323, the application of equity method to investments applies to limited liability companies and are required unless the investor holds less than 3-5%. Accordingly, the Company was deemed to have significant influence resulting in equity method accounting. The Company has elected the fair value option under ASC Topic 825 and the investment was recorded at FVTPL as of June 27, 2020. As of June 25, 2022 and June 26, 2021, the Company did not hold any equity ownership or voting interests in this investment.
(2)
In October 2018 and March 2019, the Company purchased an aggregate of 125.3 units of Old Pal, a California-based brand that provides high-quality cannabis flower for its customers, for an aggregate purchase price of $2,000,000, amounting to approximately 10.0% of the outstanding units with 8.7% voting interests. Pursuant to SEC guidance under ASC Topic 323, the application of equity method to investments applies to limited liability companies and are required unless the investor holds less than 3-5%. Accordingly, the Company was deemed to have significant influence resulting in equity method accounting. The Company decreased their level of ownership in which Old Pal no longer qualified under equity method accounting and elected the fair value option under ASC Topic 825. The investment was previously recorded at FVTPL and the Company continues to measure Old Pal at the previously elected FVTPL under ASC Topic 323 as of June 25, 2022. As of June 25, 2022 and June 26, 2021, the Company holds 2.6% of the equity ownership and 1.4% of the voting interests in this investment.
(3) In July 2018, the Company purchased 9,000,000 common shares of ToroVerde Inc., an investment company focused on emerging international cannabis markets, for an aggregate purchase price of $5,000,000, or $0.56 per common share, amounting to 14.3% of the outstanding common shares. As the Company was not deemed to exert any significant influence, the investment was recorded at FVTPL of nil as of June 25, 2022 and June 26, 2021. As of June 25, 2022 and June 26, 2021, the Company holds 14.3% of the equity ownership and voting interests in this investment.
During the fiscal second quarter of 2022, the Company effectuated the Management Agreement with an unrelated third party and no longer has a controlling financial interest in previously consolidated entities, Manlin DHS Development, LLC (“DHS”) and Project Mustang Development, LLC (“Mustang”). As a result, the ownership interest in these entities are presented as other investments at fair value which the Company determined was nil as of the date of deconsolidation.
During the year ended June 26, 2021, the Company entered into an agreement to exchange all of its investment in The Hacienda Company, LLC to settle outstanding balances totaling approximately $750,000. As of June 26, 2021, the Company’s investment balance in ToroVerde Inc. and The Hacienda Company, LLC was nil and nil, respectively. The Company determined that the fair value of its investment in Old Pal LLC was $1,970,000 as of June 26, 2021.
The fair value of investments included in other current assets is considered a Level 3 categorization in the fair value hierarchy. Investments are measured at fair value using a market approach that is based on unobservable inputs.
7. ASSETS HELD FOR SALE
A reconciliation of the beginning and ending balances of assets held for sale for the year ended June 25, 2022 is as follows:
Schedule of asset held for sale
Available for Sale Subsidiaries (1)
Discontinued
Operations (2)
Other Assets
TOTAL
Balance as of June 27, 2020
$ 12,066,428
$ 156,669,447
$ 212,400
$ 168,948,275
Transferred In
6,614,987
-
-
6,614,987
Gain on the Sale of Assets Held for Sale
12,338,123
-
-
12,338,123
Proceeds from Sale
(24,750,298 )
-
-
(24,750,298 )
Ongoing Activity from Continued and Discontinued Operations
(6,269,240 )
(24,057,605 )
-
(30,326,845 )
Other
-
-
(60,611 )
(60,611 )
Balance as of June 26, 2021
$ -
$ 132,611,842
$ 151,789
$ 132,763,631
Transferred In
4,477,723
-
-
4,477,723
Deconsolidation of Subsidiary
(1,965,695 )
-
-
(1,965,695 )
Ongoing Activity from Discontinued Operations
(2,512,028 )
(9,483,436 )
-
(11,995,464 )
Other
-
-
(121,444 )
(121,444 )
Balance as of June 25, 2022
$ -
$ 123,128,406
$ 30,345
$ 123,158,751
(1)
Long-lived assets classified as held for sale that do not qualify as discontinued operation and classified as held for sale. Significant classes of assets and liabilities are presented in the notes to the consolidated financial in accordance with ASC Subtopic 360-10, “Property, Plant and Equipment - Impairment and Disposal of Long-Lived Assets” (“ASC Subtopic 360-10”).
(2)
See “Note 28 - Discontinued Operations” for further information.
Available for Sale Subsidiaries
Fiscal Year 2022
During the fiscal first quarter ended 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 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 Topic 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 Consolidated Balance Sheet. Upon effectiveness of the Management Agreement, the Company no longer had a controlling financial interest and deconsolidated the entities related to the Cultivation Facilities as of June 25, 2022. See “Note 15 - Leases” for further information.
Fiscal Year 2021
During the year ended June 26, 2021, the Company agreed to transfer all outstanding membership interests in MME Evanston Retail, LLC (“Evanston”), for a dispensary operation located in Evanston, Illinois, to an unaffiliated third party (“Purchaser”). The Company received an aggregate consideration of $20,000,000, of which, $10,000,000 cash was received at closing on July 1, 2020 (“Closing Date”), an additional $8,000,000 cash was received on November 17, 2020 and an additional $2,000,000 in the form of a secured promissory note payable three months following the Closing Date in exchange for all of the Company’s membership interests in Evanston. As of March 12, 2021 (“Amendment Date”), the secured promissory note was amended to waive any default arising from non-payment of principal and interest prior to the Amendment Date if Purchaser pays principal of $1,000,000 and all accrued interest of 2% per annum through the Amendment Date. Interest will accrue at 9% per annum following the Amendment Date. As of June 26, 2021, the Company received cash payment in accordance with the amended secured promissory note. On August 10, 2020 (“Effective Date”), all operational control and risk of loss was transferred to the Purchaser and the Company had no further obligation to fund operations of Evanston through a Consulting Agreement. Management performed an assessment and determined that the Company no longer has a controlling financial interest as of the Effective Date. The transfer of the cannabis license was completed in April 2022. The Company recognized a gain upon sale of membership interests of $12,415,479 for the difference between the aggregate consideration and the book value of the assets as of the disposition date, less direct costs to sell, which is recognized in the Consolidated Statements of Operations during the year ended June 26, 2021. As of June 25, 2022 and June 26, 2021, the note receivable balance is $1,117,500 and $1,026,500, respectively, and is included as a component of other current assets in the Consolidated Balance Sheets.
During the year ended June 26, 2021, the Company decided to divest two cannabis licenses and entered into separate agreements to sell 100% of its membership interests in these two locations, located in California. On June 26, 2020, the Company entered into a non-binding term sheet for the retail location located in Seaside, California for an aggregate sales price of $1,500,000 wherein $750,000 is to be paid upon the date of close in addition to $750,000 paid in equal monthly installments over twelve months through a promissory note. The transaction closed in October 2020 and the Company transferred all outstanding membership interests in PHSL, LLC. Upon deconsolidation, the Company will not have any continuing involvement with the former subsidiary. The Company recognized a loss upon sale of membership interests of $332,747 for the difference between the aggregate consideration and the book value of the assets as of the disposition date, less direct costs to sell, which is recognized in the Consolidated Statements of Operations during the year ended June 26, 2021.
In December 2020, the Company entered into a purchase agreement for the sale of its membership interests in a retail operation located in Grover Beach, California. The Company received an aggregate consideration of $3,750,000 in which $3,500,000 cash was received thirty days following the closing on March 5, 2021, an additional equity consideration equal to $250,000 was recognized as a gain upon sale of membership interests for a total gain of $255,391 for the difference between the aggregate consideration and the book value of the assets as of the disposition date, less direct costs to sell, which is recognized in the Consolidated Statements of Operations during the year ended June 26, 2021.
In accordance with ASC Subtopic 360-10, the Company performed an analysis of any impairments prior to reclassifying certain assets as held for sale. During the year ended June 26, 2021, the Company recorded an impairment charge of $789,709 which is included as a component of impairment expense in the accompanying Consolidated Statements of Operations.
8. PROPERTY AND EQUIPMENT
As of June 25, 2022 and June 26, 2021, property and equipment consists of the following:
Schedule of property and equipment
Land and Buildings
$ 29,933,999
$ 35,788,150
Finance Lease Right-of-Use Assets
5,315,625
8,809,636
Furniture and Fixtures
9,718,378
11,174,351
Leasehold Improvements
32,128,140
46,375,867
Equipment and Software
16,897,649
21,773,287
Construction in Progress
6,828,923
22,006,259
Total Property and Equipment
100,822,714
145,927,550
Less Accumulated Depreciation
(36,714,922 )
(38,868,065 )
Property and Equipment, Net
$ 64,107,792
$ 107,059,485
Depreciation expense related to continuing operations of $13,002,223 and $14,700,029 was recorded for the years ended June 25, 2022 and June 26, 2021, respectively, of which $1,589,857 and $2,171,814, respectively, is included in cost of goods sold. The amount of depreciation recognized for the right of use assets for capital leases during the years ended June 25, 2022 and June 26, 2021 was $1,069,253 and $935,807, respectively, see “Note 15 - Leases” for further information.
During the year ended June 25, 2022, borrowing costs totaling $1,310,733 were capitalized using an average capitalization rate of 12.0%. Borrowing costs were not capitalized during the year ended June 26, 2021 as there were no active construction projects in progress. In addition, during the years ended June 25, 2022 and June 26, 2021, total labor related costs of $289,724 and $456,163, respectively, were capitalized to Construction in Progress, of which $289,724 and $134,203, respectively, was share-based compensation.
During the year ended June 25, 2022, management noted indicators of impairment of its long-lived assets of asset groups in California and Nevada as well as certain long-lived assets relating to its discontinued operations, principally due to economic performance as compared to the high carrying basis of the underlying long-lived assets. Accordingly, the Company recorded an impairment of $32,448,691 of its property of which $32,309,044 and $139,647 are included as a component of impairment expense from continuing operations and net loss from discontinued operations, respectively, in the accompanying Consolidated 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.
During the year ended June 26, 2021, management noted indicators of impairment of its long-lived assets of certain cultivation assets in California and Nevada. In accordance with ASC Subtopic 360-10, the Company performed an analysis of any long-lived asset impairment and recognized an impairment of nil during the year ended June 26, 2021.
9. INTANGIBLE ASSETS
As of June 25, 2022 and June 26, 2021, intangible assets consist of the following:
Schedule of Intangible assets
Dispensary Licenses
$ 49,253,452
$ 76,303,452
Customer Relationships
17,849,600
17,747,600
Management Agreement
964,301
7,594,937
Capitalized Software
7,413,470
9,696,903
Intellectual Property
4,016,597
6,276,959
Total Intangible Assets
79,497,420
117,619,851
Dispensary Licenses
(16,876,912 )
(18,742,446 )
Customer Relationships
(17,310,284 )
(6,799,371 )
Management Agreement
(964,301 )
(765,136 )
Capitalized Software
(4,413,974 )
(4,667,235 )
Intellectual Property
(4,185,835 )
(3,207,464 )
Less Accumulated Amortization
(43,751,306 )
(34,181,652 )
Intangible Assets, Net
$ 35,746,114
$ 83,438,199
The Company recorded amortization expense related to continuing operations of $12,645,464 and $13,777,492 for the year ended June 25, 2022 and June 26, 2021, respectively.
During the year ended June 25, 2022, management noted indicators of impairment of its long-lived assets of certain asset groups in California and Nevada. The Company used various Level 3 inputs and a discounted cash flow model to determine the fair value of these asset groups. Accordingly, the Company recorded an impairment of $35,531,877 which is included as a component of impairment expense in the accompanying Consolidated Statements of Operations.
During the year ended June 26, 2021, the Company recorded impairment on an intellectual property asset in the amount of $1,573,563.
10. GOODWILL
As of June 25, 2022 and June 26, 2021, goodwill was $9,810,0509,810,050 and $32,900,457, respectively. As of June 25, 2022 and June 26, 2021, the carrying amounts of goodwill were allocated to each group of reporting units as follows:
Schedule of carrying amounts of goodwill
California
Illinois
Nevada
Arizona
TOTAL
Balance as of June 27, 2020 and June 26, 2021
$ 23,090,408
$ 9,810,049
$ -
$ -
$ 32,900,457
Impairment Losses
(23,090,408 )
-
-
-
(23,090,408 )
Balance as of June 25, 2022
$ -
$ 9,810,049
$ -
$ -
$ 9,810,050
Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment. 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, “Intangibles - Goodwill and Other (Topic 350)” 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. 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 as of the last day of the year. For the purpose of the goodwill impairment test, the Company 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 June 25, 2022, the Company recorded a goodwill impairment loss in the amount of $23,090,408 as a result of its assessment, which is recorded as a component of impairment expense in the Consolidated Statements of Operations. The goodwill impairment loss reflects the decline in expected operating cash flows coupled with a decline in market values of dispensaries primarily due to increase availability of cannabis licenses and lessening barriers to entry in the legal cannabis industry.
11. OTHER ASSETS
As of June 25, 2022 and June 26, 2021, other assets consist of the following:
Schedule of other assets
Long-Term Security Deposits for Leases
$ 3,623,044
$ 3,760,618
Loans and Other Long-Term Deposits
791,175
7,661,526
Total Other Assets
$ 4,414,219
$ 11,422,144
In fourth quarter of 2022, management recorded an impairment charge related to Loans and Other Long-Term Deposits. Management determined that the planned acquisition of a retail location in Long Beach, California was no longer viable and recorded an impairment charge of $6,864,725. During the year ended June 26, 2021, management did not identify indicators of realizability. Accordingly, the Company recorded impairment of nil for other assets.
12. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As of June 25, 2022 and June 26, 2021, accounts payable and accrued liabilities consist of the following:
Schedule of accounts payable and accrued liabilities
Accounts Payable
$ 20,496,577
$ 23,621,316
Accrued Liabilities
9,464,567
11,249,200
Other Accrued Liabilities
8,944,674
10,394,299
Total Accounts Payable and Accrued Liabilities
$ 38,905,818
$ 45,264,815
13. OTHER CURRENT LIABILITIES AND OTHER NON-CURRENT LIABILITIES
As of June 25, 2022 and June 26, 2021, other current liabilities consist of the following:
Schedule of other current liabilities
Accrued Interest Payable (1)
$ 628,251
$ 685,281
Contingent Consideration
-
87,893
Other Current Liabilities
16,076,032
16,315,519
Total Other Current Liabilities
$ 16,704,283
$ 17,088,693
(1)
See “Note 16 - Notes Payable” and “Note 17 - Senior Secured Convertible Facility” for further information on paid-in-kind interest.
Contingent consideration recorded relates to the September 2019 acquisition of One Love Beach Club and is based upon fair value of the additional shares required to be paid upon the expiration of the lock-up and the fair market value of the Company’s trading stock, which is considered a Level 1 categorization in the fair value hierarchy. Contingent consideration is classified as a liability and measured at fair value in accordance with ASC Topic 480, “Distinguishing Liabilities from Equity”. The contingent consideration is remeasured at fair value at each reporting period with changes recorded in profit and loss in the Consolidated Statements of Operations. During the year ended June 26, 2021, the lock-up period expired and the contingent consideration in the amount of $9,254,635 was reclassified as other current liabilities on the Consolidated Balance Sheets. During the year ended June 25, 2022, the Company recorded a change in fair value of $3,304,685.
As of June 25, 2022 and June 26, 2021, other non-current liabilities, net of current portion, consist of the following:
Schedule of other non-current liabilities
Deferred Gain on Sale of Assets (1)(2)
$ 3,082,277
$ 3,648,904
Total Other Non-Current Liabilities
$ 3,082,277
$ 3,648,904
(1)
See “Note 15 - Leases” for further information.
(2)
The current portion of Deferred Gain on Sale of Assets of $566,627 is recorded in Accounts Payable and Accrued Liabilities.
14. DERIVATIVE LIABILITIES
A reconciliation of the beginning and ending balance of derivative liabilities and change in fair value of derivative liabilities for the years ended June 25, 2022 and June 26, 2021 is as follows:
Schedule of reconciliation of the beginning and ending balance of derivative liabilities and change in fair value of derivative liabilities
Balance at Beginning of Year
$ 6,935,520
$ 546,076
Initial Recognition of Derivative Liabilities
30,500,000
7,228,211
Issuance of Top-Up Warrants
(4,498,882 )
-
Change in Fair Value of Derivative Liabilities
(26,187,075 )
(838,767 )
Balance at End of Year
$ 6,749,563
$ 6,935,520
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 17 - Senior Secured Convertible Credit Facility” for further information. On February 2, 2022, the issuance of the Fee Shares in connection with the Sixth Modification of the Senior Secured Term Loan Facility triggered the issuance of top-up warrants. Refer to “Note 16 - Notes Payable” 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 $0.24 per unit (the “Private Placement”). 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 was 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 18 - 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 Consolidated Statements of Operations. On December 31, 2021, the Short-Term Warrant expired unexercised and resulted in a gain of $19,400,000 equal to the balance of the derivative of liability at that time as a component on non-operating (income) expense in the Consolidated Statements of Operations.
The fair value of the top-up provision in connection with Sixth Amendment of the Convertible Facility was determined using the Black Scholes simulation model based on Level 3 inputs on the fair value hierarchy. The following assumptions were used at June 25, 2022:
Schedule of assumptions to measure fair value
Top-Up Provision
Average Stock Price
$ 0.06
Weighted-Average Probability
50.00 %
Term (in Years)
5.00
Expected Stock Price Volatility
124.37 %
The following are the warrants issued related to the bought deals that were accounted for as derivative liabilities:
Number of Warrants
Exercise Price
Expiration Date
September Bought Deal Equity Financing
7,840,909
C$ 6.87
September 27, 2021
December Bought Deal Equity Financing
13,640,000
C$ 6.87
September 27, 2021
March 2021 Private Placement(1)
50,000,000
C$ 0.50
March 27, 2024
71,480,909
(1)
See “Note 18 - Shareholders’ Equity” for further information.
The fair value of the September and December 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
124.37 %
Risk-Free Annual Interest Rate
2.67 %
Expected Life (in Years)
0.75
Share Price
$ 0.06
Exercise Price
$ 0.39
15. LEASES
The Company has various operating and finance leases for land, buildings, equipment and other assets that are used for corporate purposes as well as for the production and sale of cannabis products. These leases are subject to covenants and restrictions standard to the industry in which the Company operates.
During the year ended June 25, 2022, management noted indicators of impairment of its long-lived assets of certain assets in California which include right-of-use assets related to operating leases, and was a result of economic performance. In accordance with ASC Subtopic 360-10, the Company performed an analysis of any long-lived asset impairment and recognized an impairment of $3,964,559 on its right-of-use assets related to operating leases during the year ended June 25, 2022.
During the year ended June 26, 2021, management noted indicators of impairment of its long-lived assets of certain cultivation assets in California and Nevada as well as certain long-lived assets relating to discontinued operations in Florida, which include right-of-use assets related to operating leases, and was a result of economic performance. In accordance with ASC Subtopic 360-10, the Company performed an analysis of any long-lived asset impairment and recognized an impairment of nil on its right-of-use assets related to operating leases during the year ended June 26, 2021.
In June 2022, the Company restructured the lease arrangements in two of its locations in California. The changes resulted in immaterial changes in the amortization of ROU.
The below are the details of the lease cost and other disclosures regarding the Company’s leases as of June 25, 2022 and June 26, 2021:
Schedule of lease cost
Finance Lease Cost:
Amortization of Finance Lease Right-of-Use Assets
$ 1,069,253
$ 935,807
Interest on Lease Liabilities
6,976,492
5,898,633
Operating Lease Cost
16,368,806
27,700,475
Total Lease Expenses
$ 24,414,551
$ 34,534,915
Cash Paid for Amounts Included in the Measurement of Lease Liabilities:
Financing Cash Flows from Finance Leases
$ 205,668
$ 1,201,609
Operating Cash Flows from Operating Leases
$ 10,035,714
$ 16,059,492
Weighted-Average Remaining Lease Term (Years) - Finance Leases
Weighted-Average Remaining Lease Term (Years) - Operating Leases
Weighted-Average Discount Rate - Finance Leases
24.33 %
24.86 %
Weighted-Average Discount Rate - Operating Leases
18.70 %
13.79 %
Future lease payments under non-cancellable operating leases and finance leases as of June 25, 2022 are as follows:
Schedule of future leases payments
Fiscal Year Ending
Operating Leases
Finance Leases
July 1, 2023
$ 13,753,282
$ 5,836,273
June 29, 2024
17,297,914
10,961,495
June 28, 2025
13,037,436
7,087,736
June 27, 2026
13,312,723
-
June 26, 2027
13,464,871
-
Thereafter
33,808,603
1,067,719,897
Total Lease Payments
104,674,829
1,091,605,402
Less Interest
(42,832,457 )
(1,060,990,842 )
Present Value of Lease Liability
$ 61,842,372
$ 30,614,560
Finance leases noted above contain required security deposits, refer to “Note 11 - Other Assets”.
The Company entered into a management agreement (the “Management Agreement”) with a third party to operate 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 June 25, 2022, the Management Agreement remains in effect as neither termination condition has occurred. During the year ended June 25, 2022, the Company recorded fees of services under the Management Agreement. See “Note 21 - Other Operating Income” for further information.
Sale and Leaseback Transactions
During the year ended June 27, 2020, the Company sold two properties and subsequently leased them back with the Treehouse Real Estate Investment Trust (the “REIT”) and other third parties for total proceeds of $20,400,000. One of the transactions did not qualify for sale-leaseback accounting as the resulting lease was a finance lease under ASC Topic 842 and thus did not meet the criteria for transfer of control under ASC Topic 606. Accordingly, the asset remained on the Company’s Consolidated Balance Sheets as of June 27, 2020 at its cost basis and the Company recorded a financing liability for the amount of consideration received. The financing liability is included in notes payable on the Consolidated Balance Sheets. Refer to “Note 16 - Notes Payable” for further information. The other transaction qualified for sale-leaseback accounting and the Company recognized a gain immediately upon sale.
As of June 25, 2022 and June 26, 2021, the total deferred gain recorded for sale and leaseback transactions was as follows:
Schedule of deferred gain
Balance at Beginning of Year
$ 4,164,715
$ 4,731,340
Amortization
(566,631 )
(566,625 )
Balance at End of Year
3,598,084
4,164,715
Less Current Portion of Deferred Gain
(566,627 )
(566,627 )
Deferred Gain on Sale of Assets, Net of Current Portion
$ 3,031,457
$ 3,598,088
The current portion and non-current portion of deferred gains are included as a component of accounts payable and accrued liabilities and other non-current liabilities, respectively, in the Consolidated Balance Sheets.
Lease Deferral Arrangements
During the year ended June 26, 2021, the Company modified its existing lease arrangements with the REIT in which the REIT agreed to defer a portion of total current monthly base rent on certain cultivation facilities and ground leases for the 36-month period between July 1, 2020 through July 1, 2023 for a total of fourteen properties. Amendments for eight of the properties were accounted for as lease modifications in accordance with ASC Topic 842, whereas nine leases related to failed sales leaseback transactions in which the related finance obligation was modified and accounted for in accordance with ASC Topic 470, “Debt” (“ASC Topic 470”), see “Note 16 - Notes Payable”, for further discussion. The total amount of all deferred rent accrues interest at 8.6% per annum during the deferral period. As consideration for the rent deferral, the Company issued 3,500,000 warrants to the REIT, each exercisable at $0.34 per share for a period of five years. Upon the analysis of the warrants issued under ASC Topic 815, the Company determined that the warrants are accounted for as a direct cost in relation to the lease and to be measured at fair value and accounted for as an equity instrument. During the year ended June 26, 2021, the Company recorded $17,748,458 in gain on lease terminations of which, $16,274,615 was recognized as a result of the modification to the leases discussed above and is included as a component of other operating income in the accompanying Consolidated Statements of Operations.
16. NOTES PAYABLE
As of June 25, 2022 and June 26, 2021, notes payable consist of the following:
Schedule of notes payable
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.
$ 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 August 1, 2022 and July 31, 2022, and bear interest at a rate of 15.5% and 18.0% per annum.
97,162,001
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.
-
2,204,476
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.
2,057,207
2,195,896
Other
15,691
15,418
Total Notes Payable
171,534,899
188,533,906
Less Unamortized Debt Issuance Costs and Loan Origination Fees
(158,079 )
(8,518,578 )
Net Amount
$ 171,376,820
$ 180,015,328
Less Current Portion of Notes Payable
(97,003,922 )
(103,496,394 )
Notes Payable, Net of Current Portion
$ 74,372,898
$ 76,518,934
A reconciliation of the beginning and ending balances of notes payable for the years ended June 25, 2022 and June 26, 2021 is as follows:
Schedule of reconciliation senior secured convertible credit facilty
Balance at Beginning of Period
$ 180,015,328
$ 157,898,601
Cash Additions
5,000,000
15,830,279
Non-Cash Addition - Debt Modification
-
1,877,439
Debt Discount Recognized on Modification
-
(2,002,544 )
Extinguishment of Acquisition Promissory Note
-
(12,173,250 )
Paid-In-Kind Interest Capitalized
8,169,286
19,046,232
Cash Payments
(20,215,864 )
(742,860 )
Derivative Liability Incurred on Settlement of Debt
(3,146,251 )
-
Equity Component of Debt - New and Amended
(1,000,000 )
(5,583,407 )
Conversion of Convertible Debentures
(2,371,100 )
(2,371,782 )
Shares Issued to Settle Debt
(6,570,000 )
(1,351,774 )
Cash Paid for Debt Issuance Costs
-
(99,931 )
Accretion of Debt Discount
364,000
687,937
Accretion of Debt Discount Included in Discontinued Operations
8,996,498
9,000,388
Non-Cash Loss on Extinguishment of Debt
2,134,923
-
Balance at End of Period
171,376,820
180,015,328
Less Current Portion of Notes Payable
(97,003,922 )
(103,496,394 )
Notes Payable, Net of Current Portion
$ 74,372,898
$ 76,518,934
Scheduled maturities of debt as of June 25, 2022 are as follows:
Schedule of maturities of debt
Fiscal Year Ending
Scheduled Maturity
July 1, 2023
$ 97,177,693
June 29, 2024
-
June 28, 2025
-
June 27, 2026
-
June 26, 2027
-
Thereafter
74,357,206
Total Notes Payable
$ 171,534,899
Non-Revolving Senior Secured Term Loan Facility
On October 1, 2018, the Company closed a $73,275,000 senior secured term loan facility (the “Facility”) with funds managed by Hankey Capital and with an affiliate of Stable Road Capital (the “Lenders”). On October 3, 2018, the Company closed an additional tranche of the Facility, which increased the principal amount of the loan to $77,675,000. The principal amount under the Facility will accrue interest at a rate of 7.5% per annum, paid monthly, with a maturity date of 24 months following the date of closing on October 1, 2018. The Company may repay the balance of the Facility at any time and from time to time, in whole or in part, with a prepayment penalty of 1% of the outstanding principal amount repaid if repaid before December 31, 2019. In connection with the Facility, the Company’s equity interests in MMOF SD LLC, MMOF VENICE LLC, MMOF DOWNTOWN COLLECTIVE LLC, MMOF BH LLC, and MMOF VEGAS 2 LLC were pledged as security.
Additionally, MM CAN issued to the Lenders 8,105,642 warrants, each being exercisable for one Class B Common Share of such company at a purchase price per share of $4.97 for 30 months. Such Class B Common Shares are redeemable in accordance with their terms for Class B Subordinate Voting Shares of the Company. In connection with the increased principal under the Facility, MM CAN issued to the Lenders an additional 511,628 warrants, each being exercisable for one Class B Common Share of such affiliate at a purchase price per share of $4.73 for a period of 30 months. Such Class B Common Shares are redeemable in accordance with their terms for Class B Subordinate Voting Shares of the Company.
In addition to providing a portion of the Facility, Stable Road Capital provided advisory services to the Company. Advisory services included introducing the Company to brands and various service providers, advice on the Facility and providing advice with respect to the Company’s planned structured sale of real estate assets. For its advisory services, MM CAN issued to Stable Road Capital 8,105,642 warrants at a purchase price per share of $4.97 and 511,628 warrants at a purchase price per share of $4.73, each being exercisable for one Class B Common Share of such company for a period of 30 months. Such Class B Common Shares are redeemable in accordance with their terms for Class B Subordinate Voting Shares of the Company.
On January 13, 2020, the Company completed an amendment of the Facility wherein the maturity date was extended from October 1, 2020 to January 31, 2022 and the interest rate was increased from a fixed rate of 7.5% per annum to 15.5% per annum. In addition, the Company may prepay the amounts outstanding, on a non-revolving basis, at any time and from time to time, in whole or in part, without penalty. The amendment secured the Facility by a pledge of 100% of the equity interest in Project Compassion NY, LLC, which includes MedMen NY, Inc. and MMOF NY Retail, LLC. The amendment to the term loan facility was not deemed to be a substantial modification under ASC Subtopic 470-50, “Debt - Modifications and Extinguishments” (“ASC Subtopic 470-50”).
Further, the Company cancelled the existing 16,211,284 and 1,023,256 warrants issued to the lenders exercisable at $4.97 and $4.73 per share, respectively, representing 100% of the loan amount. The Company issued new warrants to the lenders totaling 40,455,729 warrants exercisable at $0.60 per share until December 31, 2022. The new warrants may be exercised at the election of their holders on a cashless basis. The warrants issued in connection with the term loan facility met the scope exception under ASC Topic 815, “Derivatives and Hedging” and are classified as equity instruments. The warrants are measured at fair value and recorded as a debt discount in connection with the term loan facility. See “Note 19 - Share-Based Compensation” for further information regarding the valuation method and assumptions used in determining the fair value of these equity instruments. As a result of the modification, the Company recorded an additional debt discount of $5,331,969 related to the change in terms of the warrants during the fiscal year ended June 27, 2020.
On July 2, 2020, the Company completed an amendment of the Facility wherein the entirety of the interest at a rate of 15.5% per annum shall accrue monthly to the outstanding principal as payment-in-kind effective March 1, 2020 through July 2, 2021. Thereafter until maturity on January 31, 2022, one-half of the interest (7.75% per annum) shall be payable monthly in cash and one-half of the interest (7.75% per annum) shall be paid-in-kind. In addition, the Company may request an increase to the Facility through December 31, 2020 to be funded through incremental term loans. Certain reporting and financial covenants were added, and the minimum liquidity covenant was waived until September 30, 2020 wherein the amount of required cash balance thereafter was amended. The amendment to the Facility was not deemed to be a substantial modification under ASC Subtopic 470-50.
The Company incurred an amendment fee of $834,000 that was added to the outstanding principal balance. As consideration for the amendment to the Facility, the Company issued approximately 20,227,863 warrants exercisable at $0.34 per share until July 2, 2025. The Company also cancelled 20,227,863 existing warrants held by the lenders exercisable at $0.60 per share until December 31, 2022. The warrants may be exercised at the election of their holders on a cashless basis. The warrants issued in connection with the term loan facility met the scope exception under ASC Topic 815 and are classified as equity instruments. The change in fair value of the warrants was recorded as a debt discount in connection with the Facility. As a result of the modification, the Company recorded an additional debt discount of $906,436 related to the change in terms of the warrants during the year ended June 26, 2021. See “Note 19 - Share-Based Compensation” for further information regarding the valuation method and assumptions used in determining the fair value of these equity instruments.
On September 16, 2020, the Company entered into further amendments wherein the amount of funds available under the Facility was increased by $12,000,000, of which $5,700,000 was fully committed by the lenders through October 31, 2020. The additional amounts are funded through incremental term loans at an interest rate of 18.0% per annum wherein 12.0% shall be paid in cash monthly in arrears and 6.0% shall accrue monthly as payment-in-kind. In connection with each incremental draw under the amended Facility, the Company shall issue warrants equal to 200% of the incremental term loan amount, divided by the greater of (a) $0.20 per share and (b) 115% multiplied by the volume-weighted average trading price (“VWAP”) of the shares for the five consecutive trading days ending on the trading day immediately prior to the applicable funding date of the second tranche, which shall be the exercise price of the issued warrant. Such warrants are subject to a down round feature wherein the exercise price would be decreased in the event of the exercise of a down-round price reset of select warrants under the senior secured convertible credit facility with Gotham Green Partners (“GGP”). Refer to “Note 17 - Senior Secured Convertible Credit Facility” for further information. In addition, certain covenants and terms were added or amended, and the minimum liquidity covenant was waived until December 31, 2020. The amendment to the Facility was not deemed to be a substantial modification under ASC Subtopic 470-50. As consideration for the amendment, the Company issued approximately 20,227,863 warrants exercisable at $0.34 per share until September 16, 2025. The Company also cancelled 20,227,863 existing warrants held by the lenders exercisable at $0.60 per share until December 31, 2022. The change in fair value of the warrants was recorded as a debt discount in connection with the Facility. Accordingly, the Company recorded an additional debt discount of $542,986 related to the change in terms of the warrants during the fiscal year ended June 26, 2021.
On September 16, 2020, the Company closed on an incremental term loan of $3,000,000 under the amended Facility and issued 30,000,000 warrants with an exercise price of $0.20 per share until September 16, 2025. On October 30, 2020, the Company closed on an incremental term loan of $7,705,279 under the amended Facility and issued 77,052,790 warrants with an exercise price of $0.20 per share until September 14, 2025. The warrants may be exercised at the election of their holders on a cashless basis and are classified as equity instruments. See “Note 18 - Shareholders’ Equity” and “Note 19 - Share-Based Compensation” for further information.
On September 16, 2020 and September 28, 2020, the down round feature on the warrants issued in connection with the incremental term loan of $3,000,000 on September 16, 2020 was triggered wherein the exercise price was adjusted to $0.17 and $0.15 per share, respectively. The value of the effect of the down round feature was determined to be $405,480 and recognized as an increase in additional paid-in capital during the fiscal year ended June 26, 2021.
On May 11, 2021, the Company completed an amendment of the Facility wherein certain covenants were added and amended. Specifically, the minimum liquidity covenant was amended to which the covenant will not apply if the Company pays and has paid the cash portion of interest accrued under the Facility when such cash interest becomes due and payable. Such covenant will continue to be applied in the event the Company has failed to make payments. The minimum liquidity balance was not amended. In addition, application of payments was added wherein proceeds from the sale of the New York disposal group shall be applied to the amended and restated Facility as of the amendment on July 2, 2020 in the principal amount of $83,123,291. As consideration for the amendment, the Company incurred a modification fee of $1,000,000 which is due from the earliest of (a) receipt of Level-Up proceeds, (b) the date of the Investment Agreement, and (c) the earlier of January 31, 2022. Fees paid to the Lender in connection with the amendment totaled $225,035. The amendment to the Facility was not deemed to be a substantial modification under ASC Subtopic 470-50.
On February 2, 2022, the Company executed the Sixth Modification extending the stated maturity date of January 31, 2022 of the Facility for a period of six months; specifically, July 31, 2022 with respect to 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. The Company also agreed to prepay $20,000,000 on the Term Loans and pay a fee of $1,000,000 to the Term Loan lenders in consideration of the Sixth Modification, which fee will be paid in Class B Subordinate Voting Shares (“Shares”) with a deemed price of $0.1247 (C$0.1582) for a total of 8,021,593 Class B Subordinate Voting Shares (the “Fee Shares”), with any difference in realized net proceeds that is less than $1,000 from the sale of the Fee Shares during a 30-day period, to the extent such Fee Shares are sold, reimbursed in cash. The Company agreed to file with the Securities and Exchange Commission a registration statement on Form S-1 registering for resale the Fee Shares. The amendment to the Facility was not deemed to be a substantial modification under ASC Subtopic 470-50.
The issuance of the Fee Shares as part of the Sixth Modification triggered the right of holders of convertible notes under the Convertible Facility to be issued five-year warrants in order to maintain their pro rata ownership interest (on a partially diluted basis) in the Shares. A total of 6,682,567 warrants (the “Top-up Warrants”), each entitling the holder to purchase one Class B Subordinate Voting Share at a purchase price of $0.1247 (C$0.1582), were issued to the holders of convertible notes under the Convertible Facility. Refer to “Note 14 - Derivative Liabilities” and “Note 17 - Senior Secured Convertible Credit Facility” for further information.
Unsecured Convertible Facility
On September 16, 2020, the Company entered into an unsecured convertible debenture facility for total available proceeds of $10,000,000 wherein the convertible debentures shall have a conversion price equal to the closing price on the trading day immediately prior to the closing date, a maturity date of 24 months from the date of issuance and will bear interest at a rate of 7.5% per annum payable semi-annually in cash. The unsecured facility is callable in additional tranches in the amount of $1,000,000 each, up to a maximum of $10,000,000 under all tranches. The timing of additional tranches can be accelerated based on certain conditions. The Company has the right to prepay, in whole or in part, the outstanding principal amount and accrued interest prior to maturity, upon payment of 7.5% of the principal amount being repaid, less the amount of interest paid during the year of prepayment. The debentures provide for the automatic conversion into Subordinate Voting Shares in the event that the VWAP is greater than $0.25 on the CSE for 45 consecutive trading days, at a conversion price per Subordinate Voting Share equal to $0.17.
On September 16, 2020, the Company closed on an initial $1,000,000 of the facility with a conversion price of $0.17 per Subordinate Voting Share. In connection with the initial tranche, the Company issued 3,293,413 warrants with an exercise price of $0.21 per share. On September 28, 2020, the Company closed on a second tranche of $1,000,000 under its existing unsecured convertible facility with a conversion price of $0.15 per Subordinate Voting Share. In connection with the second tranche, the Company issued 3,777,475 warrants with an exercise price of $0.17 per Subordinate Voting Share. On November 20, 2020, the Company closed on a third tranche of $1,000,000 under the facility with a conversion price of $0.15 per Subordinate Voting Share. In connection with the third tranche, the Company issued 3,592,425 warrants with an exercise price of $0.17 per share. On December 17, 2020, the Company closed on a fourth tranche of $1,000,000 under the facility with a conversion price of $0.15 per Subordinate Voting Share. In connection with the fourth tranche, the Company issued 3,597,100 warrants with an exercise price of $0.18 per share. On January 29, 2021, the Company closed on a fifth tranche of $1,000,000 under its existing unsecured convertible facility with a conversion price of $0.16 per Subordinate Voting Share. In connection with the fifth tranche, the Company issued 3,355,000 warrants with an exercise price of $0.19 per share. Under ASC Topic 815, the conversion option and warrants were recorded as an equity instrument. As of June 26, 2021, the relative fair value of the warrants with a value of $799,949 has been recorded to equity.
On February 10, 2021, the Company entered into an agreement with Wicklow Capital to issue additional warrants for Subordinate Voting Shares within 12 months based on the borrowed amount of the unsecured convertible facility tranches. These warrants will consist of 644,068, 761,205, 775,510, 741,260, and 693,575 warrants with an exercise price of $0.21, $0.18, $0.17, $0.18, and $0.19, respectively. The commitment to issue warrants related to the existing unsecured convertible facility was deemed to be a substantial modification of the facility under ASC Subtopic 470-50 and a loss on extinguishment of $4,010,022 was recorded in the Consolidated Statements of Operations for the year ended June 26, 2021.
On June 14, 2021, a portion of the principal amount was automatically converted into 16,014,663 Class B Subordinate Voting Shares in the amount of $2,371,782. In addition, 8,807,605 of the outstanding warrants under the unsecured convertible facility were exercised at varying prices for gross proceeds of $1,622,377.
On June 28, 2021, the remaining principal amount of the unsecured convertible debenture 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 gross proceeds of $1,622,377. As of June 25, 2022, the outstanding balance of the Unsecured Convertible Facility was nil.
Unsecured Promissory Note
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 18 - 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 during the year ended June 25, 2022.
Acquisition Promissory Note
On January 30, 2020, the Company amended the secured promissory note issued in connection with the acquisition of Kannaboost Technology Inc. and CSI Solutions LLC (collectively referred to as “Level Up”) wherein the principal amount was amended from $12,000,000 to $13,000,000 and the maturity date was extended to April 8, 2020. On February 10, 2020, the secured promissory note was amended in which the Company was required to pay a $500,000 extension fee wherein the amendment was deemed to be a substantial modification under ASC Subtopic 470-50. Accordingly, the Company recorded a loss on extinguishment of debt of $571,897. The loss was recorded as a component of other expense in the Consolidated Statements of Operations for the fiscal year ended June 27, 2020.
On April 8, 2020, the Company entered into a third amendment of the Level Up secured promissory note wherein the maturity date was extended to the earlier of December 31, 2020 or in the event of default. No payments shall be due prior to the maturity date unless certain events occur. The balance of the secured promissory note will bear interest at a rate of 9.0% per annum until paid in full. The effectiveness of the amendment on April 8, 2020 is currently in dispute with the counterparty. The Company disputes the claims filed by the counterparty. The Company also disputes any default of the promissory note, has entered into a counterclaim and continues to seek resolution of the undisputed portion of the promissory note.
During the year ended June 26, 2021, as a result of the legal proceedings and decisions by the applicable governing bodies, the Company derecognized the acquisition promissory note and the related accrued interest in the amount of $12,173,250 and $1,202,180, respectively, and recorded as a component discontinued operations on the Consolidated Statements of Operations for the year ended June 26, 2021. Refer to the May 2020 litigation disclosed in “Note 23 - Commitments and Contingencies”.
Amendments to Promissory Note
On March 31, 2020, the Company completed the first amendment of its existing promissory note in the principal amount of $3,500,000 issued in connection with the acquisition of Viktoriya’s Medical Supplies LLC d/b/a Buddy’s Cannabis wherein the Company paid $400,000 in partial satisfaction of the outstanding debt and accrued interest. The amendment was deemed to be a substantial modification under ASC Subtopic 470-50 and the Company recorded a loss on extinguishment of debt of $400,000 in the Consolidated Statements of Operations for the fiscal year ended June 26, 2021.
On February 25, 2021, the Company completed the second amendment of the promissory note wherein the maturity date was amended to the earlier of April 1, 2022 or in the event of default. Pursuant to the amendment, the Company issued Subordinate Voting Shares in the aggregate amount of $2,000,000 to the lender to settle a portion of the debt in which the difference in fair value on the date the shares were settled by the seller was recorded as a fee. The remaining balance of the promissory note will bear interest at a rate of 9.0% per annum and be paid monthly commencing on May 1, 2021 until the amended maturity date. The second amendment to the existing promissory note was deemed to be a substantial modification under ASC Subtopic 470-50 and a loss on extinguishment of debt of $658,730 was recorded in the Consolidated Statements of Operations for the fiscal year ended June 26, 2021. In April 2022, the Company issued 22,497,786 Subordinate Voting Shares totaling $2,540,000 and extinguished the promissory note.
Financing Liability
In connection with the Company’s failed sale and leaseback transactions described in “Note 15 - Leases”, a financing liability was recognized equal to the cash proceeds received upon inception. The cash payments made on the lease less the portion considered to be interest expense, will decrease the financing liability. The financing liability was modified due to an amended lease agreement during the year ended June 26, 2021 in which the new terms of the amended agreement do not qualify as a substantial modification under ASC Subtopic 470-50.
17. SENIOR SECURED CONVERTIBLE CREDIT FACILITY
As of June 25, 2022 and June 26, 2021, senior secured convertible credit facility consists of the following:
Schedule of senior secured convertible credit facility
Tranche
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
$ 22,880,556
$ 21,112,530
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
98,542,422
91,185,378
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.
32,043,996
29,580,445
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.
12,408,091
11,454,144
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.
14,594,985
13,496,906
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.
-
23,424,438
21,623,561
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
3,275,857
3,027,003
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
6,334,980
5,847,933
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.
-
9,888,919
9,104,665
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.
-
2,190,380
2,021,984
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.
-
12,320,154
11,372,828
Total Drawn on Senior Secured Convertible Credit Facility
237,904,778
219,827,377
Less Unamortized Debt Discount
(105,899,115 )
(49,005,984 )
Senior Secured Convertible Credit Facility, Net
$ 132,005,663
$ 170,821,393
A reconciliation of the beginning and ending balances of senior secured convertible credit facility for the years ended June 25, 2022 and June 26, 2021 is as follows:
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 27, 2020
$ 102,833,447
$ 25,352,687
$ 9,680,433
$ 286,691
$ 2,168,540
$ -
$ -
$ 18,964,600
$ 7,082,065
$ -
$ 166,368,463
Cash Additions
-
-
-
-
-
5,420,564
10,937,127
-
-
-
16,357,691
Repayments
(8,000,000 )
-
-
-
-
-
-
-
-
-
(8,000,000 )
Principal Reallocation
585,058
(3,276 )
(1,277 )
(404,451 )
(340 )
(589 )
-
(2,395 )
(24,084 )
(148,646 )
-
Fees Capitalized to Debt Related to Debt Modifications
-
-
-
-
-
(468,564 )
(937,127 )
-
-
-
(1,405,691 )
Paid-In-Kind Interest Capitalized
11,925,650
3,012,776
1,166,607
1,401,357
290,061
427,165
435,701
2,202,363
928,886
170,630
21,961,196
Net Effect on Debt from Extinguishment
4,812,996
962,750
497,175
2,167,870
(453,979 )
-
-
455,792
630,758
2,000,000
11,073,362
Equity Component Debt - New and Amended
(23,562,662 )
(6,147,968 )
(2,480,673 )
(2,839,499 )
(1,296,844 )
(3,239,507 )
(7,694,405 )
(4,337,438 )
(4,551,977 )
-
(56,150,973 )
Cash Paid for Debt Issuance Costs
-
-
-
-
-
(175,000 )
(200,000 )
-
-
-
(375,000 )
Amortization of Debt Discounts
9,306,004
2,089,165
854,194
1,794,998
684,720
1,231,345
1,539,902
1,690,108
1,800,653
1,256
20,992,345
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
9,278,324
2,498,848
967,614
1,114,155
244,132
472,233
918,515
1,826,681
831,571
209,826
18,361,899
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 )
(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 from 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 )
(19,650 )
(2,604,593 )
Amortization of Debt Discounts
5,175,536
1,220,474
478,223
684,871
192,678
343,773
744,785
972,560
508,820
3,152
10,324,872
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
On March 22, 2019, the Company signed a binding term sheet for a senior secured convertible credit facility (the “Convertible Facility”) of up to $250,000,000 from funds managed by Gotham Green Partners (“GGP”), an investor in the global cannabis industry. The Company subsequently entered into a definitive agreement on April 23, 2019 and closed on a portion of the initial funding tranche.
Under the definitive terms, Notes were issuable in up to five tranches, with each tranche being issuable at the option of the Company, subject to certain conditions and, in certain cases, price thresholds for the Class B Subordinate Voting Shares of the Company. The initial tranche, which the Company and MM CAN drew down on April 23, 2019 and May 22, 2019, was for gross proceeds of $100,000,000 (“Tranche 1”).
All Notes have a maturity date of 36 months from the Closing Date (the “Maturity Date”), with a 12-month extension feature available to the Company on certain conditions, including payment of an extension fee of 1.0% of the principal amount under the outstanding Notes. All Notes will bear interest from their date of issue at LIBOR plus 6.0% per annum. During the first 12 months, interest was paid-in-kind (“PIK”) at the Company’s option such that any amount of PIK interest was added to the outstanding principal of the Notes. The Company had the right after the first year, to prepay the outstanding principal amount of the Notes prior to maturity, in whole or in part, upon payment of 105% of the principal amount in the second year and 103% of the principal amount thereafter.
The Notes (including all accrued interest and fees thereon) is 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. The conversion price for each tranche of Notes is determined based upon a predefined formula as defined in the agreement immediately prior to funding of each tranche.
The Company may force the conversion of up to 75% of the then outstanding Notes if the volume weighted average price (“VWAP”) of the Subordinate Voting Shares (converted to U.S. dollars) is at least $8.00 for any 20 consecutive trading day period, at a conversion price per Subordinate Voting Share equal to $8.00. If 75% of the then outstanding Notes are converted by the Company, the term of the remaining 25% of the then outstanding Notes will be extended by 12 months (if such extended period is longer than the maturity date of such Notes), subject to an outside date of 48 months from the Closing Date.
Upon issuance of Notes pursuant to any tranche, the lenders were issued share purchase warrants of the Company (“Warrants”), each of which would be exercisable to purchase one Subordinate Voting Share for 36 months from the date of issue. The number of Warrants issued represented an approximate 50% Warrant coverage for each tranche. The exercise prices for each tranche of Warrants are determined based upon a predefined formula as defined in the agreement immediately prior to funding of each tranche.
In connection with Tranche 1, the Company issued to the lenders 10,086,066 Warrants with an exercise price per share equal to $3.72 and 42,913,752 Warrants with an exercise price per share equal to $4.29. Under ASC Topic 815, the conversion option and warrants were recorded as an equity instrument. In addition, the Company paid cash financing fees of $2,276,757 and issued 1,748,251 Subordinate Voting Shares valued at an aggregate price of $3,979,119 using the trading share price of the Company at the issuance date. The cash consideration and Subordinate Voting Shares issued were allocated between debt and equity.
As additional consideration for the purchase of the Notes, at the time of each Tranche closing, the lenders were paid an advance fee of 1.5% of the principal amount of the Notes purchased in such Tranche. While the Notes are outstanding, the lenders are entitled to the collective rights (a) to nominate an individual to the board of directors of the Company, and (b) to appoint a representative to attend all meetings of the board of directors in a non-voting observer capacity. 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, were 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.
Amendments to Senior Secured Convertible Credit Facility
On August 12, 2019, the Company amended certain provisions of the Convertible Facility led by GGP (the “First Amendment”). The Company agreed to pay GGP 15% of the $125,000,000 drawn down prior to entering into the amendment as an amendment fee, which was calculated at $18,750,000 and was subsequently converted into convertible notes on October 29, 2019 at a conversion price of $1.28 per Class B Subordinate Voting Share (the “Amendment Fee Notes”). The Amendment Fee Notes may be cancelled in the event that either: the obligations, excluding the amendment fee, are paid in full, whether by prepayment or when due; or the lender elects to convert a portion of the obligations and the price per share is greater than $2.95. Tranche 1 and Tranche 2 had been fully drawn down as of May 22, 2019 and July 12, 2019, respectively. The amount of funds available to the Company in Tranche 3 and Tranche 4 was amended to $50,000,000 and $75,000,000, respectively. The aggregate amount available to be borrowed remained the same. The new terms of the First Amendment were deemed to be substantial modifications under ASC Subtopic 470-50. Accordingly, the Company recorded a loss on extinguishment of debt of $31,816,659. The loss was recorded as a component of loss on extinguishment of debt in the Consolidated Statements of Operations for the fiscal year ended June 27, 2020.
On October 29, 2019, the Company completed the second amendment of the Convertible Facility with GGP (the “Second Amendment”) wherein certain reporting and financial covenants were modified. The Amendment removed the senior debt to market capitalization ratio covenant. The conversion of any portion of the obligations into shares became restricted until on or after October 29, 2020. As a result of the Second Amendment, the Company obtained the right to repay, in whole or in part, the outstanding principal amount of the Note together with accrued and unpaid interest and fees, plus the applicable premium which is five percent (5%) of the principal amount being repaid before the second anniversary of the date of issuance of each convertible note, and three percent (3%) of the principal amount being repaid thereafter. The amount of available credit in the remaining tranches was amended to $10,000,000 for Tranche 3 and $115,000,000 for Tranche 4, of which the full amount of Tranche 3 was funded on November 27, 2019. The aggregate amount available to be borrowed remained the same. Further, the Second Amendment provided that the funding of Tranche 4 will require the consent of both the Company and the lenders under the Convertible Facility. The new terms of the Second Amendment did not qualify as a substantial modification under ASC Subtopic 470-50.
On March 27, 2020, the Company amended and restated the securities purchase agreement with GGP (the “Third Amendment”) wherein GGP committed to fund up to $150,000,000 through Tranche 4 and subsequent tranches (each such subsequent tranche, an “Incremental Advance”) subject to the funding requirements of the Company and certain other conditions. The maximum funding capacity under the Convertible Facility, as amended on March 27, 2020 is $285,000,000 of which $135,000,000 had been drawn down in prior tranches. The final $25,000,000 is subject to acceptance by the Company. Certain financial covenants were also modified which include a reduction in the required go-forward minimum cash balance and the removal of the fixed charge coverage ratio requirement that was to become effective in calendar 2021. The Third Amendment removed the accelerated and forced conversion rights previously held by GGP under the agreement as amended on August 12, 2019.
As part of the Third Amendment, the Company agreed to pay GGP 10% of the existing Notes outstanding prior to Tranche 4, including paid-in-kind interest accrued on such Notes (the “Existing Notes”), or $163,997,255, as a restatement fee (the “Restatement Fee”), of which the first 50% of the Restatement Fee was paid through the issuance of additional Notes in an aggregate principal amount equal to $8,199,863 at a conversion price of $0.26 (the “Restatement Fee Notes”). The remaining 50% of the Restatement Fee, or $8,199,863, will be due upon each Incremental Advance on a pro-rata basis of $87,500,000. As additional consideration for the purchase of the Tranche 4 Notes, the lenders participating in Tranche 4 Advance were paid an advance fee of 1.5% (the “Advance Fee”) of the aggregate principal amount, or $187,500, which was withheld from the Tranche 4 funding amount. The 1.5% Advance Fee will also be paid in respect of any Incremental Advances.
Under the Amended and Restated SPA, each Incremental Advance will be issued at a conversion price per Subordinate Voting Share equal to the five (5) day VWAP of the Subordinate Voting Shares as of the trading day immediately preceding the date of completion of such Incremental Advance, subject to a minimum price of $0.20 and maximum price of $0.40 (in respect of each Incremental Advance, a “Restatement Conversion Price”), provided that the first Incremental Advance (the “Tranche 4 Advance”) will have a Restatement Conversion Price of $0.26. In addition, as any Incremental Advances are funded, the conversion price of the relative portion of the Existing Notes will be amended to the Restatement Conversion Price.
In connection with each Incremental Advance, the Company will also issue share purchase warrants (“Incremental Warrants”) representing 100% coverage on the aggregate principal amount of such Incremental Advance, each of which will be exercisable to purchase one Subordinate Voting Share for a period of five (5) years from the date of issuance, at an exercise price per Subordinate Voting Share equal to the Restatement Conversion Price for such Incremental Advance. In addition, as any Incremental Advances are funded, the relative portion of the existing share purchase warrants issued under the Convertible Facility and outstanding prior to Tranche 4 (the “Existing Warrants”) will be cancelled and replaced by new share purchase warrants of the Company (the “Replacement Warrants”), each of which will be exercisable to purchase one Subordinate Voting Share for a period of five (5) years from the date of issuance at an exercise price equal to the Restatement Conversion Price for such Incremental Advance. The Incremental Warrants, including the Tranche 4 Warrants, and the Replacement Warrants will be exercisable on a cashless (net exercise) basis. In addition, if the Company’s retail operations achieve two (2) consecutive three-month periods of positive after-tax free cash flow during any time prior to the expiry date for the Replacement Warrants, then all outstanding Replacement Warrants will be automatically cancelled upon achieving the milestone.
The principal amount of the Existing Notes that will be repriced and the number of Existing Warrants that will be cancelled and replaced upon an Incremental Advance will be based on the percentage that the amount of such Incremental Advance is of a total funding target of $100,000,000 (the “Funding Target Percentage”). The applicable Existing Notes will be repriced to the Restatement Conversion Price for such Incremental Advance. The Incremental Replacement Warrants issued as a part of such Incremental Advance will represent 50% coverage on the amount determined by multiplying the Funding Target Percentage by $135,000,000. The Third Amendment was a substantial modification in accordance ASC Subtopic 470-50. As a result of the Third Amendment, the Company recorded a loss on extinguishment of debt in the amount of $10,706,883. The loss was recorded as a component of other expense in the Consolidated Statements of Operations for the fiscal year ended June 27, 2020.
On July 2, 2020, the Company amended and restated the securities purchase agreement with GGP under the Convertible Facility (the “Fourth Amendment”) wherein the minimum liquidity covenant was waived until September 30, 2020 and resetting at $5,000,000 thereafter with incremental increases on March 31, 2021 and December 31, 2021. The payment-in-kind feature on the Convertible Facility was also extended, such that 100% of the cash interest due prior to June 2021 will be paid-in-kind and 50% of the cash interest due thereafter will be paid-in-kind. The Fourth Amendment released certain assets from its collateral to allow greater flexibility to generate proceeds through the sale of non-core assets. The Fourth Amendment allows for immediate prepayment of amounts under the Convertible Facility with a 5% prepayment penalty until 2nd anniversary of the Fourth Amendment and 3% prepayment penalty thereafter. As part of the Fourth Amendment, holders of notes under the Convertible Facility were provided down-round protection where issuances of equity interests (including securities that are convertible or exchangeable for equity interests) by the Company at less than the higher of (i) lowest conversion price under the amended and restated notes of the Convertible Facility amendment dated March 27, 2020 and (ii) the highest conversion price determined for any incremental advances, will automatically adjust the conversion/exercise price of the previous tranches and incremental tranche 4 warrants and the related replacement warrants to the price of the newly issued equity interests. Certain issuances of equity interests are exempted such as issuances to existing lenders, equity interests in contemplation at the time of Fourth Amendment and equity interests issued to employees, consultants, directors, advisors or other third parties, in exchange for goods and services or compensation. Pursuant to ASU 2017-11, the down-round protection was not considered a derivative and was recognized when the down-round protection adjustments were triggered.
As consideration for the amendment, the conversion price for 52% of the tranches 1 through 3 and the first amendment fee notes outstanding under the Convertible Facility were amended to $0.34 per share. An amendment fee of $2,000,000 was also paid through the issuance of additional notes at a conversion price of $0.28 per share. The Fourth Amendment to the Convertible Facility was deemed to be a substantial modification under ASC Subtopic 470-50 and a loss on extinguishment of $10,129,655 was recorded in the Consolidated Statements of Operations for the year ended June 26, 2021.
On September 14, 2020, the Company closed on an incremental advance in the amount of $5,000,000 under its existing Convertible Facility with GGP at a conversion price of $0.20 per share. In connection with the incremental advance, the Company issued 25,000,000 warrants with an exercise price of $0.20 per share. In addition, 1,080,255 existing warrants were cancelled and replaced with 16,875,001 warrants with an exercise price of $0.20 per share. Pursuant to the terms of the Convertible Facility, the conversion price for 5.0% of the existing Notes outstanding prior to Tranche 4 and Incremental Advance (including paid-in-kind interest accrued on such Notes), being 5.0% of an aggregate principal amount of $170,729,923, was amended to $0.20 per share. As consideration for the additional advance, the Company issued convertible notes as consideration for a $468,564 fee with a conversion price of $0.20 per share.
On September 16, 2020 and September 28, 2020, the down round feature on the convertible notes and warrants issued in connection with Tranche 4, Incremental Advances and certain amendment fees was triggered wherein the exercise price was adjusted to $0.17 and $0.15 per share, respectively. The value of the effect of the down round feature on convertible notes and warrants was determined to be $32,744,770 and $6,723,954, respectively, for the year ended June 26, 2021. The effect related to convertible notes was recognized as additional debt discount and an increase in additional paid-in-capital. The effect related to warrants was recognized as a deemed distribution and an increase in additional paid-in capital.
On November 1, 2020, the Company repaid $8,000,000 of borrowings under the Convertible Facility and recorded a loss $943,707 on the partial extinguishment of debt and is included in the net effect on equity component of new and amended debt in the reconciliation of the beginning and ending balances of senior secured convertible credit facility for the year ended June 26, 2021.
On January 11, 2021, the Company amended and restated the securities purchase agreement under the Convertible Facility (the “Fifth Amendment”) wherein the minimum liquidity covenant was waived until June 30, 2021 and resetting at $7,500,000 effective on July 1, 2021 through December 31, 2021, and $15,000,000 thereafter, and waiver of the minimum liquidity covenant if the Company is current on cash interest. Furthermore, covenants with regards to non-operating leases, capital expenditures and corporate SG&A will now be tied to a board of directors approved budget. In conjunction with the Fifth Amendment, the Company received an additional advance of $10,000,000 under its existing Convertible Facility with GGP with a conversion price of $0.16 per share. The Company also issued 62,174,567 warrants exercisable for five years at a purchase price of $0.16 per share. The notes, restatement fee notes and warrants are subject to down round adjustment provisions, with certain exceptions, if the Company issues securities at a lower price. The Fifth Amendment to the Convertible Facility was not deemed to be a substantial modification under ASC Subtopic 470-50.
As a result of the amendments during fiscal year ended June 27, 2020, all convertible notes had a maturity date of 36 months from April 23, 2019 (the “Maturity Date”), with a twelve-month extension feature available to the Company on certain conditions, including payment of an extension fee of 1.0% of the principal amount under the outstanding Convertible Facility, provided that if the Tranche 4 Notes and Funding Commitments reach at least $100,000,000 in the aggregate, GGP will have certain options to extend the Maturity Date up to April 23, 2027. The Convertible Facility will bear interest from their date of issue at LIBOR plus 6.0% per annum. During the first twelve months, interest may be PIK at the Company’s option such that any amount of PIK interest will be added to the outstanding principal of the Convertible Facility. The Company had the right after the first year, to prepay the outstanding principal amount of the Convertible Facility prior to maturity, in whole or in part, upon payment of 105% of the principal amount in the second year and 103% of the principal amount thereafter. The Notes (including all accrued interest and fees thereon) were then 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.
On May 11, 2021, the Company entered into an agreement letter (the “Letter”) with GGP. Pursuant to the Letter with GGP, the Company received reprieve from certain potential non-compliance with certain covenants under the Fifth Amendment dated January 11, 2021, such as potential non-compliance with certain reporting and notice requirements, pay certain liabilities when due, deliver control agreements for certain bank accounts, obtain consent from the lenders prior to hiring certain executives, obtain consent from the lenders for certain matters and related items. No amounts were paid by the Company for the Letter.
On August 17, 2021, the Company announced that Tilray Brands, Inc. (“Tilray”) acquired a majority of the outstanding senior secured convertible notes (the “Notes”) under the Convertible Facility with 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 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 CSE. A&R 4 PIK was classified as a liability in accordance with ASC Topic 480. 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 Sixth Amendment was deemed to be a substantial modification under ASC Subtopic 470-50 and the Company recorded a gain on extinguishment of debt in the amount of $12,409,861 for the year ended June 25, 2022.
The Notes 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 Topic 815, “Derivatives and Hedging”. See “Note 14 - 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%.
Warrants Issued for the Senior Secured Convertible Credit Facility
Upon funding of Tranche 2 in the amount of $25,000,000 on July 12, 2019, the Company issued 2,967,708 and 857,336 warrants to the lenders at an exercise price of $3.16 and $3.65 per share, respectively. Upon funding of Tranche 3 in the amount of $10,000,000 on November 27, 2019, the Company issued 3,708,772 and 1,071,421 warrants to the lenders at an exercise price of $1.01 and $1.17 per share, respectively.
Upon funding of the Tranche 4 Advance in the amount of $12,500,000 on March 27, 2020, the Company issued 48,076,923 Warrants with an exercise price of $0.26, representing 100% coverage of the Tranche 4 Advance. Additionally, in accordance with the Third Amendment, the Company cancelled 2,700,628 of the 21,605,061 Existing Warrants issued under Tranche 1, Tranche 2 and Tranche 3 and reissued 32,451,923 Replacement Warrants with an exercise price per share equal to $0.26. Upon funding of the Tranche 4 Advance on March 27, 2020, the conversion price for $20,499,657 of the convertible notes, representing 12.5% of each under Tranche 1, Tranche 2 and Tranche 3 was amended to $0.26 per Subordinate Voting Share. Upon funding of the incremental advance in the amount of $2,500,000 on April 24, 2020, the Company issued 9,615,385 warrants with an exercise price of $0.26. In addition, 540,128 Existing Warrants were cancelled and replaced with 6,490,385 warrants with an exercise price of $0.26 in accordance with the Third Amendment.
Pursuant to the terms of the Convertible Facility, the conversion price of $47,100,000 of the existing Notes outstanding prior to Tranche 4 and Incremental Advance (including paid-in-kind interest accrued on such Notes), of an aggregate principal amount of $168,100,000, was amended to $0.17 per share, of which $16,800,000 of the Notes outstanding will continue to be subject to down round adjustment provisions. In addition, the Company cancelled an aggregate of 2,160,507 warrants that were issued with such notes and, in exchange, issued 41,967,832 warrants with an exercise price of $0.16 per share. In connection with the Fifth Amendment, the Company issued convertible notes as consideration for a $937,127 fee with a conversion price of $0.16 per share.
On April 21, 2021, the Company cancelled existing warrants issued to GGP pursuant to the Fifth Amendment of the Senior Secured Credit Facility. The following warrants were immediately and automatically cancelled in the amounts of 32,451,923, 6,490,385, 16,875,000 and 41,967,832 which were exercisable at $0.26, $0.26, $0.20 and $0.16, respectively.
Warrants issued pursuant to the Third Amendment may be exercised at the election of their holders on a cashless basis. All Existing and Replacement Warrants issued in connection with the Convertible Facility met the scope exception under ASC Topic 815 and classified as equity instruments. The warrants are measured at fair value and recorded as a debt discount in connection with the Convertible Facility. See “Note 19 - Share-Based Compensation” for further information regarding the valuation method and assumptions used in determining the fair value of these equity instruments.
While the Notes are outstanding, the lenders were entitled to the collective rights to (a) nominate an individual to the Board of Directors of the Company, and (b) appoint a representative to attend all meetings of the Board of Directors in a non-voting observer capacity. Pursuant to the Side Letter executed on October 29, 2019 in conjunction with the Third Amendment, GGP had the right to nominate a majority of the Company’s Board of Directors while the aggregate principal amount outstanding under the Notes being more than $25,000,000. The Side Letter was superseded by the terms and arrangements entered into in conjunction with the Sixth Amendment. The Notes are secured by substantially all assets of the Company.
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, were 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. Closing of any tranche of the Convertible Facility subsequent to Tranche 1 is subject to certain conditions being satisfied including, but not limited to, there is no event of default, reconfirmation of representations and warranties and compliance with applicable covenants and agreements.
18. SHAREHOLDERS’ EQUITY
Authorized
The authorized share capital of the Company is comprised of the following:
Unlimited Number of Class B Subordinate Voting Shares
Holders of Class B Subordinate Voting Shares (“Subordinate Voting Shares” or “Class B Shares”) are entitled to notice of and to attend at any meeting of the shareholders of the Company, except a meeting of which only holders of another particular class or series of shares of the Company will have the right to vote. At each such meeting, holders of Subordinate Voting Shares are entitled to one vote in respect of each Subordinate Voting Share held. As long as any Subordinate Voting Shares remain outstanding, the Company will not, without the consent of the holders of the Subordinate Voting Shares by separate special resolution, prejudice or interfere with any right attached to the Subordinate Voting Shares. Holders of Subordinate Voting Shares are entitled to receive as and when declared by the directors of the Company, dividends in cash or property of the Company. In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders, the holders of Class B Subordinate Voting Shares shall, subject to the prior rights of the holders of any shares of the Company ranking in priority rights of the holders of any shares of the Company ranking in priority to the Class B Shares (including without restriction the Class A Super Voting Shares) be entitled to participate ratably along with all other holders of Class B Shares.
Unlimited Number of Class A Super Voting Shares
The Company is authorized to issue unlimited Class A Super Voting Shares. Holders of Super Voting Shares are entitled to 1,000 votes in respect of each Super Voting Share held. The Company has the option to redeem the Super Voting Shares at a fixed rate of $0.10119 per share. As of June 25, 2022 and June 26, 2021, there are no Super Voting Shares outstanding.
Unlimited Number of Preferred Shares
The Preferred Shares may be issued at any time or from time to time in one or more series. The board of directors of the Company may, by resolution, alter its Notice of Articles of the Company to create any series of Preferred Shares and to fix before issuance, the designation, rights, privileges, restrictions and conditions to attach to the Preferred Shares of each series, including the rate, form, entitlement and payment of preferential dividends, the dates and place for payment thereof, the redemption price, terms, procedures and conditions of redemption, if any, voting rights and conversion rights, if any, and any sinking fund, purchase fund or other provisions attaching to the Preferred Shares of such series; provided, however, that no Preferred Shares of any series shall be issued until the Company has filed an alteration to its Notice of Articles with the British Columbia Registrar of Companies. Preferred shares shall be entitled to preference over other classes of shares, dividends when declared and any distribution of assets in event of liquidation, dissolution or winding up the Company, whether voluntary or involuntary.
2,000,000,000 Units of MM CAN USA Redeemable Shares
The Company’s subsidiary, MM CAN USA, Inc. has two authorized classes of units, Class A and Class B Redeemable Stock with a $0.001 USD par value, having an authorized limit of 1,000,000,000 units each. Class A Units are not redeemable, while Class B Redeemable Units are redeemable into shares of the Company’s Class B Subordinate Voting Shares. Holders of Class B Redeemable Units can redeem at their election. There are no mandatory redemption features. Class A Units are entitled to vote per unit held while Class B Redeemable Units are non-voting. Each Class recognizes on a pro-rata basis dividends when declared. Upon the dissolution or liquidation of the Corporation, whether voluntary or involuntary, holders of Class B Redeemable Units, together with holders of Class A Units on a pro-rata basis, will be entitled to receive all assets of the Corporation available for distribution to its shareholders.
Unlimited Number of MM Enterprises USA Common Units
The Company’s subsidiary, MM Enterprises USA has one authorized class of units being Common Units. Common Units contain no voting rights and are redeemable into Class B Redeemable Units of MM CAN USA, Inc. or of the Company’s Class B Subordinate Voting Shares. Distributions to members, upon the dissolution or liquidation of the Company, whether voluntary or involuntary may be declared by out of distributable cash or other funds or property legally available therefor in such amounts and on such terms as the Company shall determine using such record date as the Company may designate on a pro-rata basis in accordance with each member’s percentage interest in the Company.
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 27, 2020
403,907,218
815,295
236,123,851
725,016
Cancellation of Super Voting Shares
-
(815,295 )
-
-
Shares Issued for Cash
89,050,000
-
-
-
Shares Issued to Settle Debt and Accrued Interest
4,305,148
-
-
-
Shares Issued to Settle Accounts Payable and Liabilities
17,872,181
-
-
-
Redemption of MedMen Corp Redeemable Shares
175,140,972
-
(175,140,972 )
-
Shares Issued for Vested Restricted Stock Units
11,658,293
-
-
-
Shares Issued for Exercise of Warrants
8,807,605
-
34,229,722
-
Shares Issued for Conversion of Debt
16,014,663
-
-
-
Stock Grants for Compensation
110,294
-
-
-
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
43,331,119
-
-
-
Shares Issued to Settle Accounts Payable and Liabilities
45,874,448
-
-
-
Equity Component of Debt - New and Amended
8,021,593
-
-
-
Redemption of MedMen Corp Redeemable Shares
30,146,495
-
(30,146,495 )
-
Shares Issued for Vested Restricted Stock Units and Cashless Exercise of Options
11,894,834
-
-
-
Shares Issued for Exercise of Warrants
8,807,605
-
-
-
Shares Issued for Conversion of Debt
16,014,665
-
-
-
Stock Grants for Compensation
4,216,844
-
-
-
Balance as of June 25, 2022
1,301,423,950
-
65,066,106
725,016
Cancellation of Super Voting Shares
Effective as of December 10, 2020, the Company cancelled the remaining 815,295 Class A Super Voting Shares that were granted via proxy to Benjamin Rose wherein no consideration was paid. The effect of the cancellation was recognized as a reduction in the mezzanine equity for the book value of $82,500 and the difference over the repurchase price of nil was recorded to additional paid-in capital. There was no effect on total shareholders’ equity as a result of this cancellation. As of June 25, 2022 and June 26, 2021, there are no outstanding Class A Super Voting Shares.
Private Placements
Fiscal Year 2021
Effective as of February 16, 2021, the Company executed the sale of 7,800,000 units through an investor agreement for a purchase price of $0.37 per share or aggregated total proceeds of approximately $2,866,000. Each unit consisted of one Class B Subordinate Voting Share and one share purchase warrant. Each warrant permits the holder to purchase one additional Class B Subordinate Voting Share at an exercise price of $0.46 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 Subtopics Topic 815-10, “Derivatives and Hedging - Overall” (“ASC Subtopic 815-10”) and recorded at fair value.
Effective as of March 18, 2021, the Company executed the sale of 50,000,000 units (“Private Placement Units”) and 50,000,000 warrants that were granted through a separate private placement for a purchase price of C$0.40 per Private Placement Unit for aggregated total proceeds of approximately C$20,000,000 (or $16,019,597 U.S. dollars). Each Private Placement Unit consisted of one Class B Subordinate Voting Share and one share purchase warrant of the Company (“Private Placement Warrant”). Each Private Placement Warrant entitles the holder to purchase one Subordinate Voting Share at an exercise price of C$0.50 for a period of three years following the closing of the transaction. See “Note 14 - Derivative Liabilities” for further information.
Effective as of May 17, 2021, the Company executed the sale of 31,250,000 units and 31,250,000 warrants that were granted through a subscription agreement for a purchase price of $0.32 or aggregated total proceeds of approximately $10,000,000. Each unit consisted of one Class B Subordinate Voting Share and one share purchase warrant of the Company. Each warrant entitles the holder to purchase one Subordinate Voting Share at an exercise price of $0.35 for a period of three years following the closing of the transaction. The warrants were classified within shareholders’ equity as additional-paid-in-capital in accordance with ASC Subtopic 815-10 and recorded at fair value.
Fiscal Year 2022
Effective as of August 17, 2021, the Company entered into subscription agreements with various investors led by Serruya Private Equity Inc. (“SPE”) to purchase $100,000,000 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 Subtopic 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. Refer to “Note 16 - Notes Payable” for further information on the promissory note. The Company incurred stock issuance costs of $5,352,505, excluding the Backstop Commitment fee noted below, which were recorded as reductions in additional paid-in capital. Accordingly, the Company received proceeds in connection with the private placement totaling $89,647,495 net of fees during the fiscal year ended June 25, 2022. In connection with private placement, S5 Holdings LLC, an entity controlled by Michael Serruya, has the ability to nominate an individual to serve on the Company’s Board of Directors for so long as their diluted ownership percentage is at least 9%.
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”). At the option of the holders and upon payment of $30,000,000, the Short-Term Warrant entitled 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 have been 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 Subtopic 815-10 and recorded at fair value in the amount of $19,400,000. See “Note 14 - Derivative Liabilities” for further information. The Short-Term Warrant expired unexercised on December 31, 2021. The previously recorded derivative liability was reversed with the offsetting adjustment recorded in Non-Operating (Income) Expense in the Consolidated Statements of Operations.
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. The shares issued were recorded as a reduction in additional paid-in capital.
Cashless Exercise of Warrants
During the fiscal year ended June 26, 2021, 50,078,058 warrants were exercised on a cashless basis for 34,229,722 MM CAN USA Class B Redeemable Shares, of which 30,697,023 were redeemed for Class B Subordinate Voting Shares. During the fiscal year ended June 25, 2022, there were no such issuances.
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 June 25, 2022 and June 26, 2021, the holders of the MM CAN USA Redeemable Shares represent approximately 4.76% and 11.58%, respectively, of the Company and holders of the MM Enterprises USA Common Units represent approximately 0.05% and 0.09%, 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 year ended June 25, 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
Current Assets
$ 1,735,304
$ 1,067,636
$ 23,557,168
$ 26,360,108
Non-Current Assets
11,081,880
3,379,412
4,973,459
19,434,751
Total Assets
$ 12,817,184
$ 4,447,048
$ 28,530,627
$ 45,794,859
Current Liabilities
$ 8,736,278
$ 16,425,013
$ 5,899,771
$ 31,061,062
Non-Current Liabilities
9,614,164
2,269,784
1,146,320
13,030,268
Total Liabilities
$ 18,350,442
$ 18,694,797
$ 7,046,091
$ 44,091,330
Non-Controlling Interest
$ (5,533,258 )
$ (14,247,749 )
$ 21,484,536
$ 1,703,529
Revenues
$ 8,732,449
$ 1,857
$ 16,157,388
$ 24,891,694
Net (Loss) Income Attributable to Non-Controlling Interest
$ (1,384,751 )
$ (4,868,632 )
$ 7,190,809
$ 937,426
As of and for 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
$ 9,247,506
$ -
$ 14,620,618
$ 23,868,124
Net (Loss) Income Attributable to Non-Controlling Interest
$ 1,776,677
$ (3,308,795 )
$ 7,514,101
$ 5,981,983
The net change in the consolidated VIEs and other non-controlling interest are as follows for the year ended June 25, 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)
(1,384,751 )
(4,868,632 )
7,190,809
(16,644,730 )
(15,707,304 )
Share-Based Compensation
-
-
-
1,102,219
1,102,219
Redemption of MedMen Corp Redeemable Shares
-
-
-
(10,322,089 )
(10,322,089 )
Balance as of June 25, 2022
$ (5,533,259 )
$ (14,247,754 )
$ 21,484,537
$ (472,024,297 )
$ (470,320,773 )
The net change in the consolidated VIEs and other non-controlling interest are as follows for the year ended June 26, 2021:
Venice Caregivers
Foundation, Inc.
LAX Fund II
Group, LLC
Natures
Cure, Inc.
Other Non-
Controlling
Interests
TOTAL
Balance as of June 27, 2020
$ (5,925,185 )
$ (6,070,327 )
$ 6,779,627
$ (331,561,812 )
$ (336,777,697 )
Net Income (Loss)
1,776,677
(3,308,795 )
7,514,101
(39,434,217 )
(33,452,234 )
Deferred Tax Impact on Conversion Feature
-
-
-
(1,210,052 )
(1,210,052 )
Equity Component on Debt and Debt Modification
-
-
-
4,055,133
4,055,133
Redemption of MedMen Corp Redeemable Shares
-
-
-
(78,008,749 )
(78,008,749 )
Balance as of June 26, 2021
$ (4,148,508 )
$ (9,379,122 )
$ 14,293,728
$ (446,159,697 )
$ (445,393,599 )
Le Cirque Rouge, LP (the “OP”) is a Delaware limited partnership that holds substantially all of the real estate assets owned by the REIT, conducts the REIT’s operations, and is financed by the REIT. Under ASC Topic 810, “Consolidation”, the OP was determined to be a variable interest entity in which the Company has an implicit variable interest based on the leasing relationship and arrangement with the REIT. However, the Company is not the primary beneficiary under ASC Topic 810. Accordingly, Le Cirque Rouge, LP is not consolidated as a variable interest entity within the Consolidated Financial Statements. As of and during the fiscal years ended June 25, 2022 and June 26, 2021, the Company continues to have a variable interest in the OP 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 15 - Leases”.
19. 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. 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, 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. 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 10 years.
A summary of share-based compensation expense for the years ended June 25, 2022 and June 26, 2021 is as follows:
Schedule of share-based compensation expense
Stock Options
$ 2,209,992
$ 2,092,273
Stock Grants for Services
754,238
55,163
Restricted Stock Grants
2,290,844
2,197,255
Total Share-Based Compensation
$ 5,255,074
$ 4,344,691
On February 1, 2020, Adam Bierman resigned as Chief Executive Officer of the Company and surrendered all Class A Super Voting Shares to the Company. See “Note 18 - Shareholders’ Equity” for further information on Mr. Bierman’s Super Voting Shares. As payment of severance to Mr. Bierman, the Company will compensate Mr. Bierman in the form of securities, of which the number of issued securities and the aggregate amount is approximately 3,700,000 of which half are in Class B Subordinate Voting Shares and half are in RSUs. The RSUs have a term of 10 years and vest when the Company’s Class B Subordinate Voting Shares have a daily VWAP of at least $2.05 for 25 consecutive days. As of June 25, 2022 and June 26, 2021, $475,650 was accrued in current liabilities for the amount owed to Adam Bierman related to the Super Voting Shares cancelled. This liability is to be settled in Class B Subordinate Voting Shares and RSUs. In addition, the Company amended the terms of the 9,661,939 LTIP Units held by Mr. Bierman wherein the vesting period was extended to 10 years from February 1, 2020.
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 27, 2020
8,618,204
$ 2.78
Granted
7,858,643
$ 0.17
Forfeited
(1,723,887 )
$ (2.73 )
Balance as of June 26, 2021
14,752,960
$ 1.40
Granted
4,084,005
$ 0.28
Exercised
(1,473,534 )
$ (0.17 )
Forfeited and Expired
(8,713,758 )
$ (0.28 )
Balance as of June 25, 2022
8,649,673
$ 1.35
The following table summarizes the stock options that remain outstanding as of June 25, 2022:
Schedule of stock options that remain outstanding
Security Issuable
Exercise
Price
Weighted Average Remaining Life in Years
Stock Options
Outstanding
Stock Options
Exercisable
Subordinate Voting Shares
$5.71
218,923
205,588
Subordinate Voting Shares
$4.03 - $4.05
759,186
759,186
Subordinate Voting Shares
$3.06 - $3.84
943,922
892,887
Subordinate Voting Shares
$2.02 - $2.79
1,160,807
982,206
Subordinate Voting Shares
$1.38 - $1.99
202,228
139,926
Subordinate Voting Shares
$0.11 - $0.53
5,364,607
5,262,656
Total
8,649,673
8,242,449
For the years ended June 25, 2022 and June 26, 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 Black-Scholes option-pricing model
Weighted-Average Risk-Free Annual Interest Rate
0.97 %
1.05 %
Weighted-Average Expected Annual Dividend Yield
0.0 %
0.0 %
Weighted-Average Expected Stock Price Volatility
131.7 %
116.5 %
Weighted-Average Expected Life in Years
5.00
7.50
Stock price volatility was estimated by using the historical volatility of the Company’s Subordinate Voting Shares and the average historical volatility of comparable companies from a representative peer group of publicly-traded cannabis companies and beginning March 28, 2021, was solely based on the historical volatility of the Company’s Subordinate Voting Shares. The expected life represents the period of time that stock options granted are expected to be outstanding. The risk-free rate was based on Bank of Canada zero coupon bond with a remaining term equal to the expected life of the options.
The fair value of stock options granted during the year ended June 27, 2020 with vesting contingent upon achievement of certain price targets was determined using a Monte Carlo simulation model taking into account the fair value of the Company’s Subordinate Voting Shares on the date of grant and into the future encompassing a wide range of possible future market conditions. The following assumptions were used at the time of grant:
Schedule of fair value grant
Weighted-Average Stock Price
C$2.65
Weighted-Average Probability
6.0 %
Weighted-Average Term in Years
3.0
Weighted-Average Volatility
83.3 %
During the years ended June 25, 2022 and June 26, 2021, the weighted-average fair value of stock options granted was $0.28 and $0.17, respectively, per option. As of June 25, 2022 and June 26, 2021, stock options outstanding have a weighted-average remaining contractual life of 4.6 years and 5.4 years, respectively.
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
LTIP Units
LLC
Weighted Average
Issued and
Outstanding
Redeemable
Units
Grant Date
Fair Value
Balance as of June 26, 2021 and June 25, 2022
19,323,878
725,016
$ 0.52
(1) LTIP Units and LLC Redeemable Units will vest as follows:
● 19,323,878 of the LTIP Units will vest contingent upon achievement of certain price targets in respect of the Subordinate Voting Shares, whereby one third of such aggregate LTIP Units will vest when the price of the Subordinate Voting Shares reaches C$10 in the open market, another third will vest when such share price reaches C$15 in the open market and the final third will vest when such share price reaches C$20 in the open market. Such share price will be determined as a 5-day volume weighted-average trading price on any exchange on which the Subordinate Voting Shares are traded. 9,661,939 of the LTIPs were modified to extend the vesting periods to 10 years from the modification date of February 1, 2020.
Restricted Stock Units
During the years ended June 25, 2022 and June 26, 2021, the Company granted an entitlement to 19,288,397 and 31,632,112, respectively, of restricted Subordinate Voting Shares to certain officers and directors. 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 27, 2020
7,159,164
192,459
$ 0.68
Granted
31,632,112
-
$ 0.17
Forfeiture of Restricted Stock (2)
(6,244,589 )
-
$ 0.19
Redemption of Vested Stock
(11,658,293 )
(11,658,293 )
$ (0.21 )
Vesting of Restricted Stock
-
12,363,128
$ 0.24
Balance as of June 26, 2021
20,888,394
897,294
$ 0.24
Granted
19,288,397
-
$ 0.32
Forfeiture of Restricted Stock (2)
(17,564,682 )
-
$ 0.27
Redemption of Vested Stock
(11,613,626 )
(11,613,626 )
$ (0.42 )
Vesting of Restricted Stock
-
14,746,792
$ 0.35
Balance as of June 25, 2022
10,998,483
4,030,460
$ 0.20
(1)
Restricted stock units will vest as follows:
● 3,000,000 of the restricted stock units will vest as follows: one-fourth upon the 12-month employment anniversary, with the remaining three-fourths vesting in amounts of one third each when the trading price of the Subordinate Voting Shares on the then current stock exchange at any time during the term of employment reaches a minimum of C$10, C$15 and C$20, respectively.
● 46,331 of the restricted stock units on July 11, 2018 will vest in four (4) equal quarterly installments on each three-month anniversary of the Date of Grant.
● 131,859 of the restricted stock units on August 29, 2018 will vest in four (4) equal quarterly installments on each three-month anniversary of the Date of Grant.
● 918,785 of the restricted stock units will vest ratably as follows: one-fourth within 30-days of the grant date, with the remaining three-fourths in three equal installments on every anniversary of the grant date, beginning on December 18, 2018 and concluding with all restricted stock units being fully vested on December 18, 2021.
● 23,082 of the restricted stock units will vest on a straight-line basis, beginning on January 3, 2019, and concluding with all restricted stock units being fully vested on August 28, 2019.
● 162,455 of the restricted stock units will vest as follows: one-fourth of the total number of restricted stock shall vest on March 26, 2019. Thereafter, 1/36 of the remainder shall vest on the first day of each month over a period of three years until all restricted stock shall have vested.
● 72,202 of the restricted stock units will vest as follows: one-fourth of the total number of restricted stock shall vest on May 7, 2019. Thereafter, 1/36 of the remainder shall vest on the first day of each month over a period of three years until all restricted stock shall have vested.
● 5,458,749 of the restricted stock units will vest as follows on the first anniversary of the grant date, December 10, 2020.
● 1,885,408 of the restricted stock units will vest as follows: on the second anniversary of the grant date, July 30, 2021.
● 50,181 of the restricted stock units will vest as follows: on the first anniversary of the grant date, August 26, 2020.
● 49,616 of the restricted stock units will vest as follows: on August 1, 2021.
● 28,210,512 of restricted stock units vest 37.5%, 12.5%, 37.5%, 12.5% on the 1st, 2nd, 3rd and 4th anniversary, respectively.
● 19,288,397 of the restricted stock units will vest 37.5% on the first anniversary, 12.5% on the second anniversary, 37.5% on the third anniversary, and 12.5% on the fourth anniversary of the grant date.
(2)
17,564,682 and 6,244,589 of the restricted stock units were forfeited upon resignation of certain employees prior to their vesting for the fiscal years ended June 25, 2022 and June 26, 2021, respectively.
For restricted stock units that have no market condition vesting, the fair value was determined using the trading value of the Subordinate Voting Shares on the date of grant. During the year ended June 25, 2022 and June 26, 2021, there were no restricted stock units with a market vesting condition.
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
MM CAN USA
Redeemable Shares
TOTAL
Weighted-Average
Exercise Price
Balance as of June 27, 2020
114,998,915
40,455,729
155,454,644
$ 0.71
Issued
260,852,951
147,508,516
408,361,467
$ 0.21
Exercised
(8,807,607 )
(50,078,066 )
(58,885,673 )
$ 0.20
Cancelled
(107,581,650 )
(40,455,723 )
(148,037,373 )
$ 0.23
Balance as of June 26, 2021
259,462,609
97,430,456
356,893,065
$ 0.33
Issued
111,149,227
-
111,149,227
$ 0.28
Exercised
(8,807,607 )
-
(8,807,607 )
$ (0.18 )
Expired
(9,099,874 )
-
(9,099,874 )
$ (3.85 )
Balance as of June 25, 2022
352,704,355
97,430,456
450,134,811
$ 0.25
The following table summarizes the warrants that remain outstanding as of June 25, 2022:
Schedule of remainning warrants outstanding
Security Issuable
Exercise Price
Number of
Warrants
Weighted Average Remaining Life in Years
Warrants
Exercisable
MM CAN USA Redeemable Shares
$0.34
40,455,732
3.1
40,455,732
MM CAN USA Redeemable Shares
$0.20
38,345,772
3.3
38,345,772
MM CAN USA Redeemable Shares
$0.15
18,628,952
3.2
18,628,952
Total MM CAN USA Redeemable Shares
97,430,456
97,430,456
Subordinate Voting Shares
$5.27
299,999
4.3
299,999
Subordinate Voting Shares
$3.16 - $3.65
2,677,535
0.1
2,677,535
Subordinate Voting Shares
$1.01 - $1.17
3,346,161
0.4
3,346,161
Subordinate Voting Shares
$0.15 - $0.46
346,380,660
3.3
346,380,660
Total Subordinate Voting Shares
352,704,355
352,704,355
Total Warrants Outstanding
450,134,811
450,134,811
The fair value of warrants exercisable for MM CAN USA Redeemable Shares was determined using the Black-Scholes option-pricing model with the following assumptions on the date of issuance:
Schedule of fair value of warrants
Weighted-Average Risk-Free Annual Interest Rate
0.13 %
Weighted-Average Expected Annual Dividend Yield
%
Weighted-Average Expected Stock Price Volatility
92.06 %
Weighted-Average Expected Life of Warrants
1 year
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:
Schedule of fair value of warrants
Weighted-Average Risk-Free Annual Interest Rate
0.06% - 1.65 %
Weighted-Average Expected Annual Dividend Yield
%
Weighted-Average Expected Stock Price Volatility
126.28% - 175.50 %
Weighted-Average Expected Life of Warrants
1 - 5 year(s)
Stock price volatility was estimated by using the historical volatility of the Company’s Subordinate Voting Shares and the average historical volatility of comparable companies from a representative peer group of publicly-traded cannabis companies and beginning March 28, 2021, was solely based on 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. 97,785,140 of warrants are cancellable if the Company meets certain cash flow metrics for nine consecutive months. The effects of contingent cancellation feature were included in determining the fair value of the related warrants. On April 21, 2021, the contingent cancellation feature was met and the related warrants were cancelled.
As of June 25, 2022 and June 26, 2021, warrants outstanding have a weighted-average remaining contractual life of 38.4 and 44.7 months, respectively.
20. LOSS PER SHARE
The following is a reconciliation for the calculation of basic and diluted loss per share for the years ended June 25, 2022 and June 26, 2021:
Schedule of basic and diluted loss per share
Net Loss from Continuing Operations Attributable to Shareholders of MedMen Enterprises, Inc.
$ (149,847,651 )
$ (90,877,899 )
Less Deemed Dividend - Down Round Feature of Warrants
-
(6,364,183 )
Net Loss from Continuing Operations Available to Shareholders of MedMen Enterprises, Inc.
(149,847,651 )
(97,242,082 )
Net Loss from Discontinued Operations
(45,338,954 )
(33,267,626 )
Total Net Loss
$ (195,186,605 )
$ (130,509,708 )
Weighted-Average Shares Outstanding - Basic and Diluted
1,153,538,255
530,980,011
Loss Per Share - Basic and Diluted:
From Continuing Operations Attributable to Shareholders of MedMen Enterprises Inc.
$ (0.13 )
$ (0.18 )
From Discontinued Operations Attributable to Shareholders of MedMen Enterprises Inc.
$ (0.04 )
$ (0.06 )
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.
21. OTHER OPERATING INCOME
During the years ended June 25, 2022 and June 26, 2021, other operating income consisted of the following:
Schedule of other operating expenses
Loss on Disposals of Assets
$ 4,452,376
$ 308,348
Restructuring and Reorganization Expense
2,324,266
5,038,182
(Gain) Loss on Settlement of Accounts Payable
(177,990 )
579,265
Gain on Lease Terminations
(4,250,649 )
(16,203,314 )
Gain on Disposal of Assets Held for Sale
-
(12,338,123 )
Other Income
(4,780,798 )
(806,601 )
Total Other Operating Income
$ (2,432,795 )
$ (23,422,243 )
During the fiscal year ended June 25, 2022, the Company recorded $4,932,319 of sublease income related to the cultivation facilities in California and Nevada in Other Income.
22. PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES
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, Florida 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 intends to be treated as a United States corporation for United States federal income tax purposes under section 7874 of the U.S. Tax Code and is expected to be subject to United States federal income tax. However, for Canadian tax purposes, the Company is expected, regardless of any application of section 7874 of the U.S. Tax Code, to be treated as a Canadian resident company (as defined in the Income Tax Act (Canada) (the “ITA”) for Canadian income tax purposes. As a result, the Corporation will be subject to taxation both in Canada and the United States.
The Company has approximately gross $12,230,000 (tax effected $3,240,000) of Canadian non-capital losses and $6,000,000 (tax effected $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 $22,000,000 of gross California net operating losses which begin expiring in 2033 as of June 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 $217,300,000 will not be realized.
Provision for income taxes consists of the following for the years ended June 25, 2022 and June 26, 2021:
Schedule of provision for income taxes
Current:
Federal
$ (5,661,480 )
$ (20,173,107 )
State
285,047
(3,231,255 )
Total Current
(5,376,433 )
(23,404,362 )
Deferred:
Federal
9,214,263
15,762,423
State
3,792,499
4,241,991
Total Deferred
13,006,762
20,004,414
Total Provision for Income Tax Benefit (Expense)
$ 7,630,329
$ (3,399,948 )
As of June 25, 2022 and June 26, 2021, the components of deferred tax assets and liabilities were as follows:
Schedule of deferred tax assets and liabilities
Deferred Tax Assets:
Sale and Leaseback
$ 1,040,316
$ 1,209,397
Net Operating Loss
15,800,323
18,947,040
Notes Payable
16,156,489
16,156,489
Fair Value of Investments
796,903
797,641
Lease Liability
16,442,102
23,036,902
Held For Sale
40,850,059
5,167,362
Total Deferred Tax Assets
91,086,192
65,314,831
Total Valuation Allowance
(70,536,266 )
(43,164,332 )
Net Deferred Tax Assets
$ 20,549,926
$ 22,150,499
Deferred Tax Liabilities:
Property, Plant & Equipment
$ (12,473,603 )
$ (18,492,895 )
Intangible Assets
(13,358,615 )
(28,243,281 )
Senior Secured Convertible Credit Facility
(25,264,721 )
(17,171,778 )
Derivatives
(1,959,939 )
-
Leases
(8,804,316 )
(10,546,564 )
Total Deferred Tax Liabilities
(61,861,194 )
(74,454,518 )
Net Deferred Tax Liabilities
$ (41,311,268 )
$ (52,304,019 )
The reconciliation between the effective tax rate on loss from operations and the statutory tax rate is as follows:
Schedule of effective Income tax rate reconciliation
Expected Income Tax Benefit at Statutory Tax Rate
$ (46,010,112 )
$ (32,381,541 )
Section 280E Permanent and Other Non-Deductible Items
50,225,557
30,846,236
State Rate
(14,667,861 )
1,878,787
Effect of Held for Sale
(35,682,697 )
11,413,523
Effect of ASC 842
4,852,551
3,056,613
Benefit on Recognized California Net Operating Loss
4,396,449
(9,268,041 )
Interest and Penalties on Uncertain Tax Positions
1,883,850
4,629,178
Valuation Allowance
27,371,934
(6,774,807 )
Reported Income Tax (Benefit) Expense
$ (7,630,329 )
$ 3,399,948
Effective Tax Rate
3.48 %
(2.05 )%
During the years ended June 25, 2022 and June 26, 2021, the activities related to the Company’s gross unrecognized tax benefits are as follows:
Schedule of unrecognized tax benefits
Balance at Beginning of Year
$ 15,464,185
$ 15,016,935
Increase in Balance Related to Tax Positions Taken During the Year
23,444
447,250
Decrease in Balance Related to Tax Positions During Prior Year
(1,197,253 )
-
Balance at End of Year
$ 14,290,376
$ 15,464,185
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 2013 through the current fiscal year.
As of June 25, 2022, and June 26, 2021, the total amount of gross unrecognized tax benefits was $18,642,352 and $20,093,363, respectively, including $3,300,000 and $4,400,000 of interest and penalties. As of June 25, 2022, all of the total unrecognized tax benefits, if recognized, would have an impact on the Company’s effective tax rate. The Company estimates that there will be no material changes in its uncertain tax positions in the next 12 months. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.
23. 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 June 25, 2022 and June 26, 2021, 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 June 25, 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 Consolidated Financial Statements relating to claims and litigations. As of June 25, 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 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 in process of recovering certain fees and costs associated with the lawsuit 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. A trial is set in this matter for June 2022.
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 seeking declaratory relief and specific performance. The Company 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 remote. As such, no amount has been accrued in the financial statements. A trial is set in the matter for September 2022.
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. 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. The plaintiffs filed an appeal to the ruling on the entitlement of proceeds in excess of the secured promissory note 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 July 2020, a complaint for fraud in the inducement, misrepresentation, breach of contract and breach of oral contract was filed in Los Angeles Superior Court in which the Company was a defendant. The parties entered into a settlement agreement in December 2021.
In September 2020 and May 2020, legal disputes were filed against the Company related to the separation of former officers 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.
In November 2020, entities affiliated with former officers of the Company initiated arbitration against a subsidiary of the Company in Los Angeles, California asserting breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, and unjust enrichment. The claimants are generally seeking damages and compensatory damages according to proof, including lost earnings and other 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 counter-claims, 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. As a result, no amount has been set up for potential damages in these financial statements.
In October 2021, a suit 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 in Los Angeles Superior Court. The matter is in the process of being litigated. 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.
In January 2021, a general contractor filed a cross-complaint against the Company, MM Enterprises, and MME Florida, LLC in Los Angeles Superior Court alleging breach of contract, quantum meruit and implied indemnity. The cross-complaint sought payment of funds asserted to be due and owing in connection with various construction projects. In addition, in 2020 and 2021 several subcontractors filed lawsuits in Florida alleging non-payment damages in which the defendant general contractor filed cross-suits against MedMen Florida as well as third party claims against the Company. A settlement agreement and release resolving these matters was entered in April 2022.
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 allege breach of contract, breach of implied covenant of good faith and fair delaying, fraud and unjust enrichment, among other causes of actions. The plaintiffs are seeking the issuance of 51,716,141 shares, which has been accrued in the Consolidated Balance Sheet as of June 25, 2022, and other monetary damages. 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, no amount has been accrued in these financial statements. During the year ended June 25, 2022, the parties entered into a partial settlement in the amount of $1,050,000 of which $245,000 is remaining as of June 25, 2022 and has been accrued in the Consolidated Balance Sheet.
The Company is the defendant 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 Company 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 the Florida business and the litigation is at an early stage and the likelihood of a loss contingency is remote. As a result, no amount has been set up for potential damages in these financial statements.
24. RELATED PARTY TRANSACTIONS
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 Topic 850, “Related Party Disclosures” (“ASC Topic 850”) and accordingly, Wicklow Capital is a related party of the Company.
The Company determined GGP to be a related party as a result of GGP having significant influence over the Company as of June 26, 2021. See “Note 17 - Senior Secured Convertible Credit Facility” for a full disclosure of transactions and balances related to GGP. For the years ended June 25, 2022 and June 26, 2021, there were no additional amounts incurred or due to this related party.
On August 17, 2021, Superhero Acquisition, L.P., in which Tilray and S5 Holdings LLC, an entity controlled by Michael Serruya, are investors, acquired the majority of the outstanding senior secured convertible notes and warrants held by GGP. As a result, GGP no longer held significant influence over the Company and was not considered a related party under ASC Topic 850 as of June 25, 2022. 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 17 - Senior Secured Convertible Credit Facility” for a full disclosure of the SPV and A&R 4. For the year ended June 25, 2022, there were no amounts incurred or due to this related party.
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 18 - Shareholders’ Equity” for discussion on the private placement transaction. In November 2021, the Company appointed Mr. Serruya as Chairman of the Board and Interim Chief Executive Officer. In April 2022, Mr. Serruya resigned from his position of Interim Chief Executive Officer. For the year ended June 25, 2022, the Company reimbursed Mr. Serruya $40,000 in employee reimbursable expenses and there were no amounts outstanding. For the year ended June 26, 2021, there were no amounts paid or incurred to this related party.
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.
25. FAIR VALUE MEASUREMENTS
The following table summarizes the Company’s assets and liabilities measured at fair value as of June 25, 2022:
Schedule of assets and liabilities at fair value on recurring basis
Fair Value Measurements at Reporting Date Using
Quoted Prices in Active Market for Identical Assets (Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Balance as of
June 25,
Assets:
Cash and Cash Equivalents
$ 10,795,999
$ -
$ -
$ 10,795,999
Accounts Receivable
1,150,603
-
-
1,150,603
Investments
-
-
2,738,491
2,738,491
Total Assets
$ 11,946,602
$ -
$ 2,738,491
$ 14,685,093
Liabilities:
Notes Payable
-
-
171,376,820
171,376,820
Derivative Liabilities
6,631,111
-
118,452
6,749,563
Senior Secured Convertible Credit Facility
-
-
132,005,663
132,005,663
Total Liabilities
$ 6,631,111
$ -
$ 303,500,935
$ 310,132,046
The following table summarizes the Company’s assets and liabilities measured at fair value as of June 26, 2021:
Fair Value Measurements at Reporting Date Using
Quoted Prices in Active Market for Identical Assets (Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Balance as of
June 26,
Assets:
Cash and Cash Equivalents
$ 11,575,138
$ -
$ -
$ 11,575,138
Accounts Receivable
916,715
-
-
916,715
Investments
-
-
3,036,791
3,036,791
Total Assets
$ 12,491,853
$ -
$ 3,036,791
$ 15,528,644
Liabilities:
Notes Payable
-
-
180,015,328
180,015,328
Derivative Liabilities
524,035
-
6,411,485
6,935,520
Senior Secured Convertible Credit Facility
-
-
170,821,393
170,821,393
Total Liabilities
$ 524,035
$ -
$ 357,248,206
$ 357,772,241
There were no material transfers between levels and there was no significant activity within Level 3 instruments during the periods presented. The fair values of any financial instruments presented above exclude the impact of netting assets and liabilities when a legally enforceable master netting agreement exists.
26. SEGMENTED 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.
27. REVENUE
While the Company operates in one segment as disclosed in “Note 26 - Segment Information”, the Company is disaggregating its revenue by geographical region in accordance with ASC Topic 606, “Revenue from Contracts with Customers”. Revenue by state for the periods presented are as follows:
Schedule of disaggregation of revenue
California
$ 91,576,297
$ 85,897,952
Nevada
15,346,702
15,406,022
Illinois
16,096,998
20,797,988
Arizona
15,943,974
10,145,380
Massachusetts
1,847,718
-
Revenue from Continuing Operations
$ 140,811,689
$ 132,247,342
Revenue from Discontinued Operations
29,026,128
26,354,950
Total Revenue
$ 169,837,817
$ 158,602,292
28. DISCONTINUED OPERATIONS
Florida
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, for $83,000,000. In connection with the sale transaction, the Company will license the tradename “MedMen” to Buyer for use in Florida for a period of two years, subject to termination rights. Consequently, assets and liabilities allocable to the operations within the state of Florida have been classified as a discontinued operation. All profit or loss relating to the Florida operations were eliminated from the Company’s continuing operations and are shown as a single line item in the Consolidated Statements of Operations. Of the total sales price of $83,000,000, the cash purchase price was to be used to repay a portion of the Senior Secured Term Loan Facility. On August 22, 2022, the Company announced the closing of the transaction at the final sales price of $67,000,000, which comprised of $63,000,000 in cash and $4,000,000 in liabilities to be assumed by the Buyer.
New York
On February 25, 2021, the Company entered into a definitive investment agreement (the “Investment Agreement”) to sell a controlling interest in its wholly owned subsidiary, MedMen NY, Inc., 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. The aggregate sales price consisted 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 the holder of the Company’s term debt, Hankey Capital (“Hankey”) 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. would be purchased for $10,000,000 in cash. The proceeds in cash would be used to repay a portion of term debt due by the Company. On January 3, 2022, the Company announced the termination of this Investment Agreement. On January 13, 2022, the buyer filed a lawsuit with the Supreme Court of the State of New York, New York County- Commercial Division, claiming the Investment Agreement was improperly terminated and seeking specific performance of the Investment Agreement.
As of June 26, 2021, the Company recorded a goodwill impairment loss in the amount of $960,692 as a result of its assessment, of which is included as a component of impairment expense in the Consolidated Statements of Operations for Discontinued Operations.
As of June 25, 2022, the net proceeds from the sale of the Florida and New York operations will be used to repay the Company’s term loans. Accordingly, the total amount of interest expense and accretion of debt discounts allocated to discontinued operations was $25,640,747, and $25,228,736 for the years ended June 25, 2022 and June 26, 2021, respectively.
The operating results of the discontinued operations are summarized as follows:
Schedule of net operating loss of discontinued operation
Revenue
$ 29,026,128
$ 26,354,950
Cost of Goods Sold
17,460,540
13,434,854
Gross Profit
11,565,588
12,920,096
Expenses:
General and Administrative
25,324,726
24,837,579
Sales and Marketing
355,535
127,603
Depreciation and Amortization
3,692,660
6,631,761
Impairment Expense
139,647
960,692
Gain on Disposal of Assets and Other Income
(514,630 )
(13,162,864 )
Total Expenses
28,997,938
19,394,771
Loss from Operations
(17,432,350 )
(6,474,675 )
Other Expense:
Interest Expense
16,644,249
16,228,348
Interest Income
-
(1,545 )
Amortization of Debt Discount and Loan Origination Fees
8,996,498
9,000,388
Total Other Expense
25,640,747
25,227,191
Loss from Discontinued Operations Before Provision for Income Taxes
(43,073,097 )
(31,701,866 )
Provision for Income Tax Expense
(2,265,857 )
(1,565,760 )
Net Loss from Discontinued Operations
$ (45,338,954 )
$ (33,267,626 )
The carrying amounts of assets and liabilities in the disposal group are summarized as follows:
Schedule of assets included in discontinued operation
Carrying Amounts of the Assets Included in Discontinued Operations:
Cash and Cash Equivalents
$ 1,124,076
$ 1,200,004
Restricted Cash
5,280
5,280
Accounts Receivable and Prepaid Expenses
334,621
406,491
Inventory
6,866,833
8,977,868
TOTAL CURRENT ASSETS (1)
10,589,643
Property and Equipment, Net
41,273,597
43,453,570
Operating Lease Right-of-Use Assets
31,543,058
34,757,529
Intangible Assets, Net
40,799,146
42,523,888
Other Assets
1,181,795
1,287,212
TOTAL NON-CURRENT ASSETS (1)
122,022,199
TOTAL ASSETS OF THE DISPOSAL GROUP CLASSIFIED AS HELD FOR SALE
$ 123,128,406
$ 132,611,842
Carrying Amounts of the Liabilities Included in Discontinued Operations:
Accounts Payable and Accrued Liabilities
$ 6,295,745
$ 14,955,999
Income Taxes Payable
1,671,380
1,697,245
Other Current Liabilities
89,069
191,172
Current Portion of Operating Lease Liabilities
4,209,512
3,488,132
Current Portion of Finance Lease Liabilities
174,000
TOTAL CURRENT LIABILITIES (1)
20,333,373
Operating Lease Liabilities, Net of Current Portion
56,410,071
58,460,999
Deferred Tax Liabilities
6,097,597
14,569,884
Notes Payable
11,100,000
11,100,000
TOTAL NON-CURRENT LIABILITIES (1)
84,130,883
TOTAL LIABILITIES OF THE DISPOSAL GROUP CLASSIFIED AS HELD FOR SALE
$ 86,047,374
$ 104,464,256
(1)
The assets and liabilities of the disposal group classified as held for sale are classified as current on the Consolidated Balance Sheets as of June 25, 2022 because it is probable that the sale will occur and proceeds will be collected within one year.
29. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through September 8, 2022, which is the date these Consolidated Financial Statements were issued, and has concluded that the following subsequent events have occurred that would require recognition in the Consolidated Financial Statements or disclosure in the notes to the Consolidated Financial Statements.
On July 31, 2022, the Company vacated its corporate headquarters office in Culver City, California and is currently in transition to relocating to satellite offices located adjacent to the Company’s retail stores. The Company anticipates completing its relocation during the fiscal first quarter of 2023.
On August 22, 2022, the Company announced the closing of the sale of its operations in the state of Florida at the final sales price of $67,000,000, which comprised $63,000,000 in cash and $4,000,000 in liabilities to be assumed by the Buyer.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. 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”), as of June 25, 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 the period covered by this report.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of Consolidated Financial Statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”). Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
● Pertain to the maintenance of records that accurately and fairly reflect in reasonable detail the transactions and dispositions of the assets of our Company;
● Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
● Provide reasonable assurances regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material adverse effect on our financial statements.
Management assessed its internal control over financial reporting as of June 25, 2022, the end of its fiscal year. Management based its assessment on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on this assessment and the identification of the material weakness described below, management has concluded that its internal control over financial reporting was not effective as of June 25, 2022.
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Material Weakness in Internal Control over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis by the Company’s internal controls.
For fiscal year 2022, management identified a material weakness determining that the Company’s financial record keeping process is deficient and that it does not have effective controls over the period-end reconciliation process. The reconciliation process is 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.
Remediation Plan to Address Material Weaknesses in Internal Control over Financial Reporting
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.
The material weakness in the Company’s internal control over financial reporting will not be considered remediated until the remediated controls operate for a sufficient period of time and management has concluded, that these controls are operating effectively. The Company is working to have the material weakness remediated as soon as possible. No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls will be met, and no evaluation of controls can provide absolute assurance that all control deficiencies or material weaknesses have been or will be detected. There is no assurance that the remediation will be fully effective. If these remediation efforts do not prove effective and control deficiencies and material weaknesses persist or occur in the future, the accuracy and timing of the Company’s financial reporting may be materially and adversely affected.
Despite the existence of these material weaknesses, the Company believes that the Consolidated Financial Statements included in the period covered by this Annual Report on Form 10-K fairly present, in all material respects, the financial condition, results of operations and cash flows for the periods presented in conformity with GAAP.
Attestation Report of the Registered Public Accounting Firm.
This annual report does not include an attestation report of the Company’s registered public accounting firm due to the rules for emerging growth companies of the Securities and Exchange Commission for newly public companies.
Changes in Internal Control Over Financial Reporting
There were no changes in internal control over financial reporting during the fiscal fourth quarter ended June 25, 2022 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers and Directors
The following are our executive officers and directors.
Name
Position Held with Our Company
Age
Ed Record
Chief Executive Officer and Director
Ana Bowman
Chief Financial Officer
David Hsu
Director
Melvin Elias
Director
Cameron Smith
Director
Michael Serruya
Director
Business Experience
The following is a brief overview of the education and business experience of each of our directors and executive officers during at least the past five years, including their principal occupations or employment during the period, the name and principal business of the organization by which they were employed, and certain of their other directorships:
Ed Record was appointed Chief Executive Officer in April 2022 and has been a director of the Company since November 2021. Mr. Record previously served as Executive Vice President and Chief Financial Officer at Hudson’s Bay Company from 2017 to January 2021. From 2014 until July 2017, he served as Executive Vice President and Chief Financial Officer of JC Penney. Prior to joining JC Penney, Mr. Record served in positions of increasing responsibility with Stage Stores, Inc. (apparel retailer), including Executive Vice President and Chief Operating Officer from 2010 to 2014, Chief Financial Officer from 2007 to 2010 and Executive Vice President and Chief Administrative Officer from May 2007 to September 2007. Mr. Record also served as Senior Vice President of Finance of Kohl’s Corporation (department store retailer) from 2005 to 2007. Prior to that, he served with Belk, Inc. (department store retailer) as Senior Vice President of Finance and Controller from April 2005 to October 2005 and Senior Vice President and Controller from 2002 to 2005. Mr. Record received his Bachelor of Arts in Economics from Princeton University in 1990 and an MSIA from Carnegie Mellon University in 1995. Mr. Record’s qualifications to serve on our Board include his operational and financial experience with retail companies.
Ana Bowman was appointed Chief Financial Officer in February 2022. Ms. Bowman was Vice President, Financial Reporting and FP&A at Tilray Brands, Inc., a global cannabis lifestyle and consumer packaged goods company, since April 2021, previously serving as Global Controller since April 2020. Prior to that, from September 2015 to April 2020, Ms. Bowman was Controller at Omeros Corporation, a biopharmaceutical company. Ms. Bowman received a BA in Business Administration, Accounting from the University of Washington.
Melvin Elias has been a director since February 2020. Mr. Elias is an active investor, entrepreneur and developer in Los Angeles. He has past and present board experience in CPG and consumer facing businesses both in the US and internationally. Since October 2019, Mr. Elias has been actively involved with DivergentIP, LLC, a start-up he recently co-founded, which will be launching a coffee capsule system in the U.S., and is currently an advisor to various venture funds and businesses. He was President and CEO of The Coffee Bean & Tea Leaf for six years, until it was sold to private equity in 2013 where he was responsible for almost 1,000 stores and a global omni-channel business in excess of $500 million in systemwide sales. He remained on the board of The Coffee Bean & Tea Leaf with additional advisory duties until the company was recently sold again in September 2019. Prior to his career in coffee retail, Mr. Elias was the Managing Director of the Tower Records Franchise in Malaysia and practiced law in Singapore for two years. Mr. Elias graduated from the London School of Economics and served in the Singapore Military for two and a half years. Mr. Elias’s qualifications to serve on our Board includes leadership and transactional experience, as well as special expertise with respect to large retail business and operations.
David Hsu has been a director since November 2021. Mr. Hsu has served on the Board of Directors of Urban-Gro, Inc., where he is a member of the Audit and Compensation committees, since June 2021. Mr. Hsu completed a Certification in Financing and Deploying Clean Energy from Yale University in 2021. Prior to that, Mr. Hsu served as the Chief Operating Officer of The Cronos Group, a leading global cannabinoid company (“Cronos”), from 2016 to 2019. While at Cronos, Mr. Hsu’s primary duties included overseeing all of Cronos’s operations including construction, cultivation, and manufacturing. Prior to joining Cronos, from 2006 to 2016, Mr. Hsu served in various roles with CRG Partners (“CRG”), and later Deloitte upon Deloitte’s acquisition of CRG in 2012, including as Vice President, where he operated and managed distressed companies with revenues of more than $500.0 million. Mr. Hsu received his Bachelor of Science in Business Management from Babson College in 2003 and holds a Certification in Artificial Intelligence: Business Strategies and Applications from the University of California Berkley, which he received in 2020. Mr. Hsu’s qualifications to serve on our Board includes his prior business and management experience, as well as experience in the cannabis industry.
Cameron Smith has been a director since February 2020. Since July 2017, Mr. Smith has operated a private angel investment and advisory fund that focuses on better-for-you foods. Prior to his investment and advisory business, since October 2007, Mr. Smith was the President of Quantlab Financial, a Houston based quantitative trading company that trades globally in multiple asset classes. Mr. Smith came to Quantlab after working for various electronic markets that pioneered the introduction of fair, open, transparent stock exchanges in the United States, Europe and Canada. Mr. Smith began his career at the United States Securities and Exchange Commission and was the General Counsel for Island ECN, Inc. Mr. Smith’s qualifications to serve on our Board includes experience engaging with regulators, government and the media as an executive at various high-profile companies in the heavily regulated securities industry.
Michael Serruya was appointed to the Board in August 2021. Mr. Serruya currently serves as Managing Director of Serruya Private Equity Inc. Previously, Mr. Serruya co-founded (and remains an owner of) Yogen Früz Worldwide Inc., and co-founded CoolBrands International Inc. where from 1994 to 2000 he served as Chairman and Chief Executive Officer. CoolBrands was a leading consumer packaged goods company focused on frozen desserts, which included such brands as Weight Watchers, Eskimo Pie, Tropicana and Godiva Ice Cream. From 2013 to 2016, Mr. Serruya was Chairman and Chief Executive Officer of Kahala Brands, a multinational franchisor with over 1,400 stores globally. Kahala Brands owned Cold Stone Creamery, Taco Time and Blimpie Subs. From 2018 to 2021, Mr. Serruya was Chairman of Global Franchise Group, a multinational franchisor with over 700 stores globally. Global Franchise Group owned Round Table Pizza Royalty, Marble Slab Creamery, Hot Dog on a Stick, Pretzelmaker and MaggieMoo’s Ice Cream and Treatery. Mr. Serruya’s qualifications to serve on our Board includes his business experience in the consumer and retail industry. Michael Serruya was appointed to the Board in connection with a Board Nomination Rights Agreement with S5 Holdings LLC (“S5 Holdings”) pursuant to which so long as S5 Holdings’ and its affiliates’ diluted ownership percentage of MedMen (including the proportionate equity ownership of securities held by a newly formed partnership (the “SPV”) established by Tilray, Inc. and other strategic investors) is at least 9%, S5 Holdings will be entitled to designate one individual to be nominated to serve as a director of the Company. Mr. Serruya controls S5 Holdings.
Family Relationships
There are no family relationships among any of our executive officers or directors.
Board Leadership Structure
Our board of directors does not have a policy on whether or not the role of the Chief Executive Officer and Chairman should be separate or, if it is to be separate, whether the Chairman should be selected from the non-employee directors or be an employee. Currently, we operate with Mr. Record serving as our Chief Executive Officer and Mr. Serruya serving as Chairman. We currently believe that Mr. Record and Mr. Serruya serving in their respective capacities best serve the Company and suits the talents, expertise and experience that they each bring to the Company.
Board Committees
Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and responsibilities of each of the committees of our board of directors is described below. Members will serve on these committees until their resignation or until as otherwise determined by our board of directors.
Audit Committee
We have established an audit committee consisting of Mel Elias, David Hsu and Michael Serruya. In addition, our Board has determined that Mel Elias, Chairman of the audit committee, is an audit committee financial expert within the meaning of Item 407(d) of Regulation S-K under the Securities Act. The audit committee’s duties, which are specified in our Audit Committee Charter, include, but are not limited to:
● assist the Board in the discharge of its duties relating to the Company’s financial reporting, including the audits of the Company’s financial statements and the integrity of the Company’s financial statements and internal controls;
● establish and maintain a direct line of communication with the Company’s external auditor and assess their performance and independence;
● oversee the work of the external auditor engaged to prepare or issue an auditor’s report or to prepare other audit, review or attest services for the Company, including resolution of disagreements between management and the external auditor regarding financial reporting;
● ensure that management has designed, implemented and is maintaining an effective system of internal controls and disclosure controls and procedures;
● monitor the credibility and objectivity of the Company’s financial reports;
● report regularly to the Board on the fulfillment of the Committee’s duties, including any issues that arise with respect to the quality or integrity of the Company’s financial statements, the Company’s compliance with legal or regulatory requirements, the performance and independence of the external auditor or the internal audit function;
● assist, with the assistance of the Company’s legal counsel, the Board in discharging its duties relating to the Corporation’s compliance with legal and regulatory requirements; and
● assist the Board in discharging its duties relating to risk assessment and risk management.
Compensation Committee
Our compensation committee currently consists of Cameron Smith, who is the chair of the committee, David Hsu, and Michael Serruya, each of whom, except for Mr. Serruya, are independent in accordance with the standards of Nasdaq. Each member of our compensation committee, except for Mr. Serruya, is also a non-employee director, as defined pursuant to Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The functions of the compensation committee include:
● reviewing and, if deemed appropriate, recommending to our board of directors, policies, practices and procedures relating to the compensation of our directors, officers and other managerial employees and the establishment and administration of our employee benefit plans;
● determining or recommending to the board of directors the compensation of our executive officers; and
● advising and consulting with our officers regarding managerial personnel and development.
Our compensation committee operates under a written charter adopted by our board of directors, a current copy of which is available on our website at https://investors.medmen.com/governance/governance-documents.
Corporate Governance and Nominating Committee
Our corporate governance and nominating committee currently consists of Michael Serruya, who is the chair of the committee, and Ed Record. The corporate governance and nominating committee has adopted a committee charter, which details the principal functions of the committee, including:
● developing and recommending to the Board a set of corporate governance guidelines, policies and procedures, and annually assessing the Company’s corporate governance guidelines, policies and procedures, as well as the charter for the Board committees;
● making recommendations regarding the size and composition of the Board with a view to maintaining the composition of the Board in a way which provides the best mix of skills, experience, age, gender and diversity to guide the long-term strategy and ongoing business operations of the Company;
● establishing and recommending to the Board, qualification criteria for the selection of directors to serve on the Board and annually reviewing the appropriate experience, skills and characteristics required of each existing and new director of the Company;
● approving an appropriate orientation and education program for directors and overseeing the training and orientation of directors, and evaluating the performance and effectiveness of the Board, the Chair, and each committee; and
● reviewing and recommending to the Board, succession planning programs for Senior Executives and contingency preparedness.
In recommending nominations to the Board, the Nominating Committee is to (i) consider whether the candidate’s competencies, skills and personal qualities are aligned with the Company’s needs and any criteria for selecting new directors established by the Nominating Committee; (ii) consider the commitment of time and resources that the candidate is able to devote to the Company as a member of the Board in light of what the Company expects from the candidate; (iii) consider the recommendations of the Chair of the Board, if any; and (iv) ensure that the candidate understands the demands and expectations of being a director of the Company.
Code of Ethics
MedMen Enterprises Inc. and its subsidiaries, including MM Enterprises USA, LLC have adopted the Code of Business Conduct and Ethics (the “Code”) to assist all directors, officers, employees (whether temporary, fixed-term or permanent), consultants and contractors (collectively, the “MedMen Representatives”) of the Company and its subsidiaries to maintain the highest standards of ethical conduct in corporate affairs. Our Code also includes codes of ethics for our chief executive and principal financial officers and any persons performing similar functions.
The purpose of this Code is to encourage among MedMen Representatives a culture of honesty, accountability and fair business practice. We believe our Code is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of code violations; and provide accountability for adherence to the Code. Each MedMen Representative must adhere to this Code and cooperate fully in any investigations initiated by MedMen under this Code or by securities regulators or other competent legal authorities.
The Code is not intended to limit, prevent, impede or interfere in any way with any MedMen Representatives’ right, without prior notice to the Company, to provide information to the government, participate in investigations, testify in proceedings regarding the Company’s past or future conduct, or engage in any activities protected under whistleblower statutes.
Further information on the Company’s Code can be found on the investor relations portal on our website at https://investors.medmen.com/governance/governance-documents. Any waivers of the application, and any amendments to, our code of ethics must be made by our board of directors. Any waivers of, and any amendments to, our code of ethics will be disclosed promptly on our Internet website.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires our directors, executive officers, and the persons who beneficially own more than ten percent of our Class B Subordinate Voting Shares, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Copies of all filed reports are required to be furnished to us. Based solely on the reports received by us and on the representations of the reporting persons, we believe that our directors and executive officers complied with all applicable filing requirements during the fiscal year ended June 25, 2022, except for the following: (i) Edward J. Record and David Hsu each did not timely file a Form 3 and each have not timely file one Form 4 reporting one transaction; (ii) Michael Serruya and MOS Holdings Inc. did not timely file a Form 4 reporting one transaction; (iii) Melvin Elias and Cameron Smith each did not timely file two late Form 4s reporting two transactions and each has not timely filed a Form 4 reporting one transaction; (iv) former Chief Executive Officer and director Thomas Lynch, former Chief Operating Officer Tim Bossidy, and former Chief Revenue Officer Tracy McCourt each filed one late Form 4 reporting three transactions; (v) former Chief Information Officer Michael Lane did not timely file one late Form 4 reporting two transactions; (vi) former Chief Financial Officer Reece Fulgham filed one late Form 4 reporting two transactions; (vii) former Chief Strategy Officer Tyson Rossi did not timely file a Form 3; (viii) former director Albert Harrington filed one late Form 4 reporting one transaction; (ix) former director Errol Schweizer filed one late Form 4 reporting one transaction and has not timely filed one Form 4 reporting one transaction; and (ix) former director Nicole Christoff filed one late Form 4 reporting one transaction.
Further, based solely on the reports received by us and on the representations of the reporting persons, we believe each greater than ten percent holder complied with all applicable filing requirements during the fiscal year ended June 25, 2022, except for the following: (i) Tilray, Inc. did not timely file a Form 3; (ii) Superhero Acquisition L.P. and Superhero Acquisition Corp. each filed one late Form 4 reporting one transaction; and (iii) Pura Vida Investments, LLC did not timely file a Form 3 and filed four late Form 4s reporting transactions relating to certain senior secured convertible notes and warrants under the Company’s Convertible Facility.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
Overview of Executive Compensation
The Board is authorized to review and approve annually all compensation decisions relating to the executive officers of the Company. In accordance with reduced disclosure rules applicable to emerging growth companies as set forth in Item 402 of Regulation S-K, this section explains how the Company’s compensation program is structured for its Chief Executive Officer and the other executive officers named in the Summary Compensation Table (the “named executive officers”).
Compensation Governance
The Board has not adopted any formal policies or procedures to determine the compensation of the Company’s directors or executive officers. The compensation of the directors and executive officers is determined by the Board, based on the recommendations of the Compensation Committee. Recommendations of the Compensation Committee are made giving consideration to the objectives discussed below and, if applicable, considering applicable industry data.
The Compensation Committee currently consists of four directors: David Hsu, Mel Elias, Michael Serruya and Cameron Smith (Chairman), all of whom have direct and indirect experience relevant to their roles as members of the Compensation Committee. For details regarding the experience of the members of the Compensation Committee, see “Director and Executive Officers.”
The role and responsibility of the Compensation Committee is to assist the Board in fulfilling its responsibilities for establishing compensation philosophy and guidelines. Additionally, the Compensation Committee has responsibility for fixing compensation levels for the directors and executive officers and for entering into employment, severance protection, change in control and related agreements and plans for the CEO and other executive officers, provided that any individual agreement with the CEO is subject to Board approval. In addition, the Compensation Committee is charged with reviewing the Stock and Incentive Plan (as hereinafter defined) and proposing changes thereto, approving any awards of options under the Stock and Incentive Plan and recommending any other employee benefit plans, incentive awards and perquisites with respect to the directors and executive officers. The Compensation Committee is also responsible for reviewing, approving and reporting to the Board annually (or more frequently as required) on the Company’s succession plans for its executive officers.
The Compensation Committee endeavors to ensure that the philosophy and operation of the Company’s compensation program reinforces its culture and values, creates a balance between risk and reward, attracts, motivates and retains executive officers over the long-term and aligns their interests with those of the Company’s shareholders. In addition, the Compensation Committee is to review the Company’s annual disclosure regarding executive compensation for inclusion where appropriate in the Company’s disclosure documents.
Elements of Compensation
Base Salary
Base salary is the fixed portion of each executive officer’s total compensation. It is designed to provide income certainty. In determining the base level of compensation for the executive officers, weight is placed on the following factors: the particular responsibilities related to the position, salaries or fees paid by companies of similar size in the industry, level of experience of the executive and overall performance and the time which the executive officer is required to devote to the Company in fulfilling his or her responsibilities.
Short-Term Incentive Awards
A cash incentive payment or bonus is a short-term incentive that is intended to reward each executive officer for his or her individual contribution and performance of personal objectives in the context of overall corporate performance. Cash bonuses are designed to motivate executive officers to achieve personal business objectives and to be accountable for their relative contribution to the Company’s performance, as well as to attract and retain executives. In determining compensation and, in particular, bonuses, the Compensation Committee and the Board consider factors over which the executive officer can exercise control, such as their role in identifying and completing acquisitions and integrating such acquisitions into the Company’s business, meeting any budget targets established by controlling costs, taking successful advantage of business opportunities and enhancing the competitive and business prospects of the Company.
Long-Term Equity Incentive Awards
Long-term incentives are intended to align the interests of the Company’s directors and executive officers with those of the shareholders and to provide a long-term incentive that rewards these parties for their contribution to the creation of shareholder value. In establishing the number of, Long-Term Incentive Plan Units, (“LTIP”), nonqualified stock options (“NQSOs”), incentive stock options (“ISOs”) (collectively, “Options”) and restricted stock units (“RSU Awards”) to be granted, reference is made to the recommendations made by the Compensation Committee as well as, from time to time, the number of similar awards granted to officers and directors of other publicly-traded companies of similar size in the same business as the Company. The Compensation Committee and the Board also consider previous grants of Options or RSU Awards and the overall number of Options or RSU Awards that are outstanding relative to the number of outstanding securities in determining whether to make any new grants of Options or RSU Awards and the size and terms of any such grants. With respect to executive officers, the Compensation Committee and the Board also consider the level of effort, time, responsibility, ability, experience and level of commitment of the executive officer in determining the level of long-term equity incentive awards. With respect to directors, the Compensation Committee and the Board also consider committee assignments and committee chair responsibilities, as well as the overall time requirements of the Board members in determining the level of long-term equity incentive awards.
Summary Compensation Table
The following table sets forth all compensation paid to or earned by the named executive officers of the Company during the fiscal years ended June 25, 2022 and June 26, 2021.
Summary Compensation Table
Name and Principal Position Fiscal Year Salary
($) Bonus
($) Stock Awards
($) (1) Option Awards
($) (1) Non-Equity Incentive Plan Compensation
($) All Other Compensation
($) (10) Total ($)
Edward Record (2) $ 64,000 $ - $ - $ - $ - $ 62,751 $ 126,751
Chief Executive Officer
Michael Serruya (3) $ - $ - $ - $ - $ - $ 39,098 $ 39,098
Former Chief Executive Officer
Tom Lynch (4) $ - $ - $ 238,831 $ 59,928 $ - $ - $ 298,759
Former Chief Executive Officer $ - $ - $ 635,553 $ 16,607 $ - $ - $ 652,160
Ana Bowman (5) $ 88,846 $ - $ - $ - $ - $ - $ 88,846
Chief Financial Officer
Reece Fulgham (6) $ - $ - $ 127,595 $ 32,017 $ - $ - $ 159,611
Former Chief Financial Officer
Roz Lipsey (7) $ 253,191 $ - $ 143,778 $ 36,077 $ - $ - $ 433,047
Former Chief Operating Officer
Tim Bossidy (8) $ 145,719 $ - $ 238,831 $ 59,928 $ - $ - $ 444,478
Former Chief Operating Officer $ - $ - $ 635,553 $ 16,607 $ - $ - $ 652,160
Tracy McCourt (9) $ 231,767 $ - $ 134,138 $ 33,659 $ - $ - $ 399,563
Former Chief Revenue Officer $ 299,000 $ - $ - $ 40,854 $ - $ - $ 339,854
(1) The amounts disclosed above reflect the full grant date fair values in accordance with FASB ASC Topic 718. See “Note 19 - Share-Based Compensation” to our Consolidated Financial Statements for the fiscal year ended June 25, 2022.
(2) Mr. Record was appointed Chief Executive Officer in April 2022 and has been a director of the Company since November 2021.
(3) Mr. Serruya was appointed interim Chief Executive Officer in November 2021 through April 2022 upon the appointment of Mr. Record to Chief Executive Officer. Mr. Serruya, who has been a director of the Company since August 2021, continues to serve as Chairman of the Board of Directors. Mr. Serruya serves as Managing Director of Serruya Private Equity Inc.
(4) Mr. Lynch was appointed interim Chief Executive Officer in March 2020, appointed permanent Chief Executive Officer in July 2021 and resigned in November 2021. Mr. Lynch is a Partner and Senior Managing Director at SierraConstellation Partners LLC (“SCP”), which in March 2020 was retained to support the Company in the development and execution of its turnaround and restructuring plan. The agreement between the Company and SCP was terminated on November 21, 2021. For a description of the terms of the Management Services Agreement as well as the Retention Agreement with SCP and the Separation Agreement with Mr. Lynch, see below under “Employment and Severance Agreements” and “Item 13 - Certain Relationships and Related Transactions.” During the fiscal year ended June 25, 2022, Mr. Lynch was granted options to purchase 214,030 Subordinate Voting Shares with an exercise price of $0.28 per share and an aggregate of 850,036 RSUs.
(5) Ana Bowman was appointed Chief Financial Officer in February 2022.
(6) Mr. Fulgham was appointed Chief Financial Officer in December 2020. On February 18, 2022, Mr. Fulgham notified the Company of his resignation effective February 22, 2022. Mr. Fulgham is a Managing Director at SCP, which in March 2020 was retained to support the Company in the development and execution of its turnaround and restructuring plan. The agreement between the Company and SCP was terminated on November 21, 2021. For a description of the terms of the Management Services Agreement, see “Item 13 - Certain Relationships and Related Transactions.” During the fiscal year ended June 25, 2022, Mr. Fulgham was granted options to purchase 114,345 Subordinate Voting Shares with an exercise price of $0.28 and an aggregate 454,129 RSUs.
(7) Mr. Lipsey was appointed Chief Operating Officer in October 2021 and had been employed by the Company since January 2019. On April 27, 2022, Mr. Lipsey notified the Company of his resignation effective May 20, 2022.
(8) Mr. Bossidy was appointed Chief Operating Officer in March 2020. On October 8, 2022, Mr. Bossidy notified the Company of his resignation effective October 15, 2021. Mr. Bossidy is Senior Director at SCP, which in March 2020 was retained to support the Company in the development and execution of its turnaround and restructuring plan. The agreement between the Company and SCP was terminated on November 21, 2021. For a description of the terms of the Management Services Agreement, see below under “Employment and Severance Agreements” and “Item 13 - Certain Relationships and Related Transactions.” During the fiscal year ended June 25, 2022, Mr. Bossidy was granted options to purchase 214,030 Subordinate Voting Shares with an exercise price of $0.28 per share and an aggregate of 1,696,135 RSUs.
(9) Ms. McCourt was appointed Chief Revenue Officer in December 2020. On February 8, 2022, Ms. McCourt notified the Company of her resignation effective March 4, 2022. During the fiscal year ended June 25, 2022, Ms. McCourt was granted options to purchase 120,209 Subordinate Voting Shares with an exercise price of $0.28 per share and an aggregate of 477,417 RSUs.
(10) The amounts disclosed above reflect compensation earned as a director of the Company.
Employment and Severance Agreements
Edward Record
As compensation for Mr. Record’s services, he receives an annual salary of $416,000. He is also eligible to receive up to $8,000 in Subordinate Voting Shares of the Company in compensation for each week he is employed as Chief Executive Officer during the prior fiscal year, to be granted at the end of each fiscal year, pursuant to the Company’s 2018 Stock and Incentive Plan, at the discretion of the Board as a bonus based on an annual review of performance, and $12,000 in options to acquire Subordinate Voting Shares for each week he is employed as Chief Executive Officer, to be granted at the end beginning of each fiscal quarter, vesting within 30 days of each fiscal quarter end based upon the Company achieving performance metrics that are aligned with the interests of shareholders which metrics are to be mutually agreed upon between Mr. Record and the Board. The number of Subordinate Voting Shares issued or granted by the Board will be based on the trailing 10-day volume weighted average price of the Subordinate Voting Shares trading on the Canadian Securities Exchange (“CSE”)or any National Securities Exchange prior to the date of grant. Options will expire five years from the date of grant.
Ana Bowman
As compensation for Ms. Bowman’s services, she receives an annual salary of $275,001 and will participate in the Company’s Employee Bonus Program which, unless otherwise determined by the Compensation Committee of the Board, in its sole discretion, any performance bonuses granted under the Program will be comprised of 80% restricted stock units and 20% in options to acquire Subordinate Voting Shares (herein referred to as the “Awards”) granted pursuant to the Company’s 2018 Stock and Incentive Plan. The value of the Awards granted under the Program will equal up to 100% of Ms. Bowman’s applicable salary and may be subject to change only upon approval by the Committee in its sole discretion. Additionally, in the event a change of control of the Company any unvested stock Awards outstanding on the date of the change of control will immediately vest. Furthermore, if during the 12-month period commencing on the date of the change of control, the Company terminates Ms. Bowman without cause or Ms. Bowman initiates a termination of employment by resigning for good reason (reduction in compensation or material change in duties and responsibilities), Ms. Bowman will receive six months of her base salary at the time of employment termination.
Sierra Constellation Partners
On July 12, 2021, in connection with Mr. Lynch’s appointment as former Chief Executive Officer (“Former CEO”), the Company and SCP entered into a Transaction and Retention Bonus Agreement (the “Retention Agreement”). Previously, in March 2020, the Company retained SCP, an interim management and advisory firm, to support the Company in the development and execution of its turnaround and restructuring plan and Mr. Lynch to serve as the Company’s interim Chief Executive Officer. Mr. Lynch is a Partner and Senior Managing Director at SCP. For fees paid to SCP, of which Mr. Lynch, the Company’s Chief Executive Officer, is a Partner and Senior Managing Director, see “Item 13 - Certain Relationships and Related Transactions.”
Pursuant to the Retention Agreement, the Company paid SCP, in connection with the Former CEO’s continued service, a bonus award in the aggregate amount of $750,000 (the “Bonus Award”), $500,000 of which would became payable upon the consummation of a company sale, recapitalization or restructuring transaction that occurred prior to June 1, 2022 (the “Transaction Bonus”), and $250,000 of which became payable on June 1, 2022, each subject to the CEO’s continued service (the “Retention Bonus”). The Retention Bonus was payable regardless of the consummation of a Transaction prior to June 1, 2022 and was paid to SCP by the Company. Since no qualifying transaction was consummated prior to June 1, 2022, the Company did not pay any amount under the Transaction Bonus, which was forfeited.
On November 21, 2021, the Company provided notice to SCP of its termination of the Retention Agreement. As a result of the termination of the Retention Agreement, the Board also terminated Mr. Lynch as CEO of the Company.
Separation Agreement
On November 21, 2021, in connection with the termination of the Retention Agreement and the resignation of Tom Lynch as Chief Executive Officer, the Company and Mr. Lynch entered into a Mutual Release and Separate Agreement (the “Separation Agreement”). Pursuant to the Separation Agreement, the Company agreed that 124,868 stock options with an exercise of price of C$0.22 per share and 214,030 non-qualified stock options with an exercise price of C$0.355 per share would continue to remain exercisable for a period of six months from the date of the Separation Agreement. Furthermore, 477,351 unvested RSUs vested immediately and the remaining unvested 1,439,521 RSUs were immediately terminated and forfeited pursuant to the terms of the 2018 Stock and Incentive Plan and applicable award agreements.
Outstanding Equity Awards at Fiscal Year-End
The following table provides information with respect to option awards held by the named executive officers as of June 25, 2022.
Option Awards Stock Awards
Name Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable Option
Exercise
Price ($)(1) Option Expiration Date Number of Shares or Units of Stock that Have Not Vested (#) Market Value of Shares or Units of Stock That Have Not Vested ($)(1)
Edward Record - - $ - - - $ -
Tom Lynch(5) - - $ - - - $ -
Ana Bowman(5) - - $ - - - $ -
Reece Fulgham(5) - - $ - - - $ -
Tim Bossidy(5) - - $ - - - $ -
Roz Lipsey(5) 8,541 (2) 1,459 $ 2.64 01/25/2029 - $ -
247,185 (3) - $ 0.13 09/09/2030 - $ -
128,848 (4) - $ 0.22 08/29/2031 - $ -
Tracy McCourt(5) - - $ - - - $ -
(1) Market value of stock awards is based on the closing price per share on June 24, 2022 on the CSE and assumes CAD/USD exchange rate of $0.773216.
(2) Options were granted on January 25, 2019 and vest 25% on the one-year anniversary of the grant date and 1/48 per month thereafter.
(3) Options were granted on September 9, 2020 and vest 25% on the one-year anniversary of the grant date and 1/48 per month thereafter.
(4) Options were granted on August 29, 2021 and vest 25% on the one-year anniversary of the grant date and 1/48 per month thereafter.
(5) No longer an executive officer of the Company as of June 25, 2022.
Director Compensation
The Company’s non-employee directors each receive an annual fee, which is paid on a quarterly basis, of $250,000, of which one-third is paid in cash and two-thirds is paid in Subordinate Voting Shares. The number of shares is based upon the higher of the closing share price on the CSE on either of the two days prior to each individual non-employee director’s appointment to the Board. In addition, the Chairperson of the Audit Committee receives an additional $50,000 annually, which is paid on a quarterly basis, in the form of Subordinate Voting Shares, the number of which is based on the closing price of the Subordinate Voting Shares on the CSE as of the last trading day of the fiscal quarter. The annual fee for non-employee directors is reviewed annually. Directors are also reimbursed for Company-related out-of-pocket expenses, including travel expenses. The following table sets forth all compensation paid to or earned by each non-employee director of the Company during fiscal year 2022.
Role Name Fees Earned or Paid in Cash ($) Stock Awards ($)(1)(2) Total ($)
Director Michael Serruya 39,098 - 39,098
Director Cameron Smith 63,133 87,516 150,649
Director David Hsu 24,780 56,658 81,438
Chair of Audit Committee Melvin Elias 62,500 98,085 160,585
Director Edward Record 6,093 56,658 62,751
Director Tom Lynch(3) - - -
Director Nicole Christoff(4) 38,630 104,134 142,764
Director Al Harrington(5) 38,015 104,134 142,149
Director Errol Schweizer(6) 57,711 109,920 167,632
(1) The amounts disclosed above reflect the full grant date fair values in accordance with FASB ASC Topic 718. See “Note 19 - Share Based Compensation” to our Consolidated Financial Statements for the year ended June 25, 2022. For each director, the number of shares issued was determined by dividing the issue date value of the award by the closing price of the Subordinate Voting Shares on the date of issuance.
(2) During fiscal year ended June 25, 2022, the directors received the following Subordinate Voting Shares as part of their compensation:
Name
Subordinate
Voting
Shares (#)
Mr. Serruya
-
Mr. Smith
286,948
Mr. Hsu
158,373
Mr. Elias
321,599
Mr. Record
158,373
Mr. Lynch
-
Mr. Harrington
118,343
Ms. Christoff
118,343
Mr. Schweizer
249,527
(3) Mr. Lynch resigned as a director on November 21, 2021.
(4) Ms. Christoff resigned as a director on November 5, 2021.
(5) Mr. Harrington resigned as a director on November 5, 2021.
(6) Mr. Schweizer resigned as a director on January 28, 2022.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information with respect to the beneficial ownership of our Subordinate Voting Shares for:
● Each of our directors.
● Each of our named executive officers.
● All of our directors and executive officers as a group.
● Each person who we know beneficially owns more than five percent of our Subordinate Voting Shares.
Unless otherwise noted below, the address of each beneficial owner listed in the table is c/o MedMen Enterprises Inc., 10115 Jefferson Boulevard, Culver City, California, 90232.
We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of Subordinate Voting Shares that they beneficially own, subject to applicable community property laws.
Applicable percentage ownership is based on 1,301,683,764 Subordinate Voting Shares outstanding at August 31, 2022. There are no Class A Super Voting Shares outstanding. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares subject to options, warrants, units, Redeemable Units, LTIP Units and MedMen Corp. Redeemable Shares held by that person that are currently exercisable or exercisable within 60 days of August 31, 2022. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Beneficial ownership representing less than one percent is denoted with an “*”.
Shares Beneficially Owned
Subordinate Voting Shares
Name of Beneficial Owner Option
Shares RSU
Shares Outstanding Shares Subordinate Voting Shares underlying Facility Notes* Subordinate Voting Shares underlying Warrants Total
Shares %
Named Executive Officers and Directors
Edward Record - - 158,373 - - 158,373 *
Ana Bowman - - - - - - -
Michael Serruya(1)(2) - - 17,273,371 893,337,210 144,490,837 1,055,101,418 44.8 %
Cameron Smith - - 1,039,169 - - 1,039,169 *
David Hsu - - 158,373 - - 158,373 *
Melvin Elias - - 1,094,245 - - 1,094,245 *
All executive officers and directors as a group (6 persons)
1,057,551,578 43.8 %
5% Security Holders
Superhero Acquisition Corp.(2) - - - 893,337,210 140,172,495 1,033,509,704 43.8 %
Tilray, Inc.(2) - - - 893,337,210 140,172,495 1,033,509,704 43.8 %
MOS Holdings Inc.(2) - - - 893,337,210 140,172,495 1,033,509,704 43.8 %
Gotham Green Partners, LLC(3) - - - 252,658,143 52,871,453 305,529,596 19.1 %
Parallax Master Fund, LP(4) - - 31,250,000 10,402,101 42,803,770 84,455,871 6.3 %
(1) Includes the following securities held directly by Superhero Acquisition L.P. (“Superhero LP”): (a) 893,337,210 Subordinate Voting Shares issuable upon conversion of the outstanding principal and accrued interest of Facility Notes as of August 31, 2022, and (b) 140,172,494 Subordinate Voting Shares issuable upon exercise of warrants. Superhero Acquisition Corp. (“Superhero GP”) is the general partner of Superhero LP. See footnote (3) below for a further description of Superhero LP and Superhero GP. Also includes the following securities held directly by S5 Holdings Limited Liability Company (“S5 Holdings”), which is controlled by Michael Serruya: (a) 17,273,371 Subordinate Voting Shares, and (b) 4,318,343 Subordinate Voting Shares issuable upon exercise of warrants. Excludes 781,250 Subordinate Voting Shares held in trust by S5 Holdings, over which it does not have voting or investment power. Mr. Serruya for purposes of Rule 13d-3 under the Exchange Act may be deemed the beneficial owner with respect to the securities held directly record by Superhero LP and S5 Holdings. Michael Serruya has sole voting and investment power with respect to securities directly held by S5 Holdings and shared voting and investment power with respect to securities held directly by Superhero LP. Mr. Serruya disclaims beneficial ownership over the securities held directly by Superhero LP, except with respect to such securities that represent the proportionate interest held by S5 Holdings in Superhero LP. The address for Michael Serruya is 210 Shields Court, Markham, Ontario L3R 8V2 Canada.
(2) Consists of 893,337,210 Subordinate Voting Shares issuable upon conversion of the outstanding principal and accrued interest of Facility Notes as of August 31, 2022, and 140,172,494 Subordinate Voting Shares issuable upon exercise of warrants held directly by Superhero LP, of which Superhero GP is the general partner. Tilray, Brands Inc., a public company with Class 2 common stock listed on the Nasdaq Global Select Market, owns approximately two-thirds of the outstanding equity interests in Superhero GP. MOS, which is solely owned by Michael Serruya, holds approximately one-third of the outstanding equity interests in Superhero GP. Accordingly, for purposes of Rule 13d-3 under the Exchange Act, Tilray and MOS may be deemed the beneficial owners with respect to the securities held of record by Superhero LP and have shared voting and investment power with respect to such securities. The address of MOS is 210 Shields Court, Markham, Ontario L3R 8V2 Canada. The address of Tilray Brands, Inc. is 265 Talbot Street West, Leamington, Ontario N8H 4H3.
(3) Based on information provided in a Schedule 13G/A filed on August 27, 2021. Consists of securities held by the following entities:
Entity
Subordinate Voting
Shares underlying
Facility Notes*
Subordinate Voting
Shares underlying
Warrants
Gotham Green Fund I HoldCo, LLC
5,075,521
1,543,099
Gotham Green Fund I(Q) HoldCo, LLC
20,305,256
6,173,364
Gotham Green Fund II HoldCo, LLC
11,193,403
1,081,183
Gotham Green Fund II(Q) HoldCo, LLC
65,149,544
6,292,857
Gotham Green Partners SPV IV Hold Co, LLC
116,692,043
4,015,044
Gotham Green Partners SPV VI HoldCo, LLC
34,242,377
37,672,740
* Includes outstanding principal and accrued interest of such convertible notes as of August 31, 2022.
Gotham Green Partners LLC is the SEC registered investment adviser to the funds referenced below. Gotham Green GP 1 LLC is the manager of Gotham Green Fund 1 HoldCo, LLC and Gotham Green Fund 1(Q) HoldCo, LLC, and also the general partner of Gotham Green Fund 1, L.P. and Gotham Green Fund 1(Q), L.P. Gotham Green GP II, LLC is the manager of Gotham Green Fund II HoldCo, LLC and Gotham Green Fund II(Q) HoldCo, LLC, and also the general partner of Gotham Green Fund II, L.P. and Gotham Green Fund II(Q), L.P. Gotham Green Partners SPV IV GP, LLC is the manager of Gotham Green Partners SPV IV HoldCo, LLC, and also the general partner of Gotham Green Partners SPV IV, L.P. Gotham Green Partners SPV VI GP, LLC is the manager of Gotham Green Partners SPV VI HoldCo, LLC and the general partner of Gotham Green Partners SPV VI, L.P. Jason Adler is the managing member of each manager of each HoldCo and Gotham Green Partners, LLC. Each HoldCo also has an independent committee that has exclusive control over operational and governance decisions of the Company, to the extent applicable, that each HoldCo may be able to influence as a result of its holding of MedMen securities. Gotham Green Partners, LLC disclaims beneficial ownership, as defined in Rule 13d-3 under the Securities Act, of any of such securities. The address of Gotham Green Partners, LLC is 1437 4th Street, Santa Monica, CA 90401.
(4) Consists of (a) 31,250,000 Subordinate Voting Shares, (b) 10,402,101 Subordinate Voting Shares issuable upon conversion of a Senior Secured Convertible Note, including outstanding principal and accrued interest as of August 31, 2022, (c) 11,445,389 Subordinate Voting Shares issuable on exercise of warrants dated as of August 17, 2021, (d) 108,381 Subordinate Voting Shares issuable on exercise of warrants dated as of March 4, 2022, and (e) 31,250,000 shares issuable on exercise of Warrants dated as of May 17, 2021. Parallax Volatility Advisers, L.P. (the “Parallax Advisers”), and Parallax Partners, LLC (the “Parallax Partners”), are the investment adviser and general partner, respectively, of investment funds, including the Parallax Master Fund, L.P. S. Daniel Hutchison and William F. Bartlett are the control persons of Parallax Advisors and Parallax Partners. Such persons share voting and investment power. Each disclaims membership in a group and disclaims beneficial ownership of such Subordinate Voting Shares except to the extent of that person’s pecuniary interest therein. Ownership is based on information provided in a Schedule 13G/A filed on August 23, 2021. The address for such holders is 88 Kearny Street, 20th Floor, San Francisco, California 94108.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Parties
All related party balances due to the Company as of June 25, 2022 and June 26, 2021 did not have any formal contractual agreements regarding payment terms or interest. As of June 25, 2022, there were no amounts due from or due to other related parties that were recorded in the Consolidated Balance Sheets. As of June 26, 2021, other amounts due to related parties was $1,476,921.
Senior Secured Convertible Credit Facility
As discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Fiscal Year 2022 Highlights - Continued Strategic Partnership with Gotham Green Partners and Superhero” and “Item 1. Business - Turnaround and Growth Plan - Senior Secured Convertible Note Facility”, which are incorporated by reference in this Item 13, in April 2019, the Company entered into a senior secured convertible credit facility (the “Convertible Facility”) to provide up to $250.0 million in gross proceeds, originally arranged by Gotham Green Partners (“GGP”). The Convertible Facility is accessed through issuances by the Company to the lenders of convertible senior secured notes with an interest rate equal to LIBOR plus 6.0% per annum (“Facility Notes”). In connection with the Convertible Facility, the Company has also issued share purchase warrants (the “Warrants”) to purchase Subordinate Voting Shares. During fiscal years ended June 25, 2022 and June 26, 2021, the Convertible Facility was amended at various times modifying certain covenants, amending the conversion and exercise prices of securities issued pursuant to the Convertible Facility, cancelling and issuing new warrants and providing additional financing with the issuance of Facility Notes. On August 17, 2021, Superhero Acquisition L.P. (“Superhero LP”) acquired 75% of the outstanding Facility Notes and 65% of the outstanding Warrants held by GGP. Tilray and MOS Holdings Inc., an entity controlled by Michael Serruya, a director of the Company, own approximately 68% and 32%, respectively, of the outstanding equity interests of Superhero Acquisition Corp, the general partner of Superhero LP. Tilray and S5 Holdings, an entity controlled by Mr. Serruya, are hold interests in Superhero LP. The Company and Tilray also entered into a Board Observer Agreement pursuant to which the Company granted Tilray the right to appoint two non-voting observers to the Company’s board of directors.
As of June 25, 2022, the Company has drawn down a total of $165.0 million on the Convertible Facility, has accrued paid-in-kind interest of $72.0 million, with an aggregate weighted average conversion price of approximately $0.24 per share, share and an aggregate of 199,005,128 warrants with a weighted average exercise price of $0.21 per share. As of June 26, 2021, there was outstanding $219.6 million of Facility Notes, including accrued interest, with a weighted average conversion price of approximately $0.24 per share and an aggregate of 208,102,561 warrants with a weighted average exercise price of $0.37 per share.
$100 Million Equity Investment
On August 17, 2021, the Company entered into subscription agreements with various investors, including a backstop letter agreement (the “Backstop Commitment”) with investors associated Serruya Private Equity Inc. (“SPE”), including S5 Holdings which is controlled by Michael Serruya, a director of the Company, to purchase $100 million of units (“Units”) of MedMen at a purchase price of US$0.24 (C$0.32) per Unit (the “August 2021 Private Placement”). Each Unit consisted of one Subordinate Voting Share and one quarter share purchase warrant (each, a “August 2021 Warrant”). Each whole August 2021 Warrant permits the holder to purchase one Subordinate Voting Share for a period of five years from the date of issuance at an exercise price of $0.288 per Share. In consideration for providing the Backstop Commitment, the applicable SPE investors received a fee of $2.5 million paid in the form of 10,416,666 Subordinate Voting Shares at a deemed price of $0.24 per Share. Pursuant to the August 2021 Private Placement, the Company issued an aggregate of 416,666,640 Subordinate Voting Shares and August 2021 Warrants to purchase 104,166,660 Subordinate Voting Shares.
Each Unit issued to certain funds associated with SPE also included a proportionate interest in a short-term subscription right (the “Short-Term Subscription Right”), which expired on December 31, 2021 without being exercised. The Short-Term Subscription Right entitles the holders to acquire, on payment of $30 million, at the option of the holders, an aggregate of 125,000,000 Units at an exercise price of $0.24 per Unit, or $30 million principal amount of notes at par, convertible into 125,000,000 Subordinate Voting Shares at a conversion price of $0.24 per Share.
Unsecured Promissory Note
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 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. 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 with SPE.
Board Nomination Rights Agreements
On August 17, 2021, the Company entered into a Board Nomination Rights Agreement with S5 Holdings pursuant to which so long as S5 Holdings’ and its affiliates’ diluted ownership percentage of MedMen (including the proportionate equity ownership of securities held by Superhero LP) is at least 9%, S5 Holdings will be entitled to designate one individual to be nominated to serve as a director of the Company. S5 Holdings has initially designated Michael Serruya.
On August 17, 2021, the Company entered into a Board Nomination Rights Agreement with GGP pursuant to which so long as GGP and certain associated investors’ diluted ownership percentage of MedMen is at least 10%, GGP will be entitled to designate one individual to be nominated to serve as a director of the Company.
SierraConstellation Partners
In March 2020, the Company 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 was appointed as interim Chief Executive Officer and Chief Restructuring Officer, Tim Bossidy was appointed as Chief Operating Officer, and in December 2020, Reece Fulgham was appointed as interim Chief Financial Officer. On July 12, 2021, in connection with Mr. Lynch’s appoint as the permanent Chief Executive Officer, the Company and SCP entered into the Retention Agreement, as further described above under Item 11. “Executive Compensation - Employment and Severance Agreements”. Mr. Lynch is a Partner and Senior Managing Director at SCP. Mr. Bossidy is a Director at SCP. Mr. Fulgham is a Managing Director of SCP. On November 21, 2021, the Company provided notice to SCP of its termination of the Retention Agreement. As a result of the termination of the Retention Agreement, the Board also terminated Mr. Lynch as CEO of the Company. The Management Support Agreement dated March 30, 2020, and amended on May 1, 2020, pursuant to which SCP provides interim management and restructuring support, continues to remain effective. As of June 25, 2022 and June 26, 2021, the Company had paid $2,047,760 and $3,113,364 in fees to SCP for interim management and restructuring support, respectively. In addition, during the years ended June 25, 2022 and June 26, 2021, Mr. Lynch, Mr. Bossidy and Mr. Fulgham each received awards of stock options and restricted stock units, as further described above under Item 11. “Executive Compensation”.
Director Independence
Our board of directors is composed of three “independent directors” as defined under the rules of NASDAQ. Although the Company’s securities are not listed on NASDAQ, solely for disclosure purposes in accordance with SEC rules, we use the definition of “independence” of NASDAQ to make this determination. Nasdaq Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the company or any other individual having a relationship which, in the opinion of the Company’s Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:
● the director is, or at any time during the past three (3) years was, an employee of the company;
● the director or a family member of the director accepted any compensation from the company in excess of $120,000 during any period of twelve (12) consecutive months within the three (3) years preceding the independence determination (subject to certain exemptions, including, among other things, compensation for board or board committee service);
● the director or a family member of the director is a partner in, controlling shareholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exemptions);
● the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three (3) years, any of the executive officers of the company served on the compensation committee of such other entity; or
● the director or a family member of the director is a current partner of the Company’s outside auditor, or at any time during the past three (3) years was a partner or employee of the Company’s outside auditor, and who worked on the Company’s audit.
Under such definitions, our Board has undertaken a review of the independence of each director. Based on information provided by each director concerning his or her background, employment and affiliations, our Board has determined that Mel Elias, Cameron Smith and David Hsu are all independent directors of the Company. However, our shares are not currently quoted or listed on any national exchange or interdealer quotation system with a requirement that a majority of our Board be independent and, therefore, the Company is not subject to any director independence requirements, other than as may be required pursuant to rules of the CSE.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table provides information regarding the fees billed to us by MNP LLP in the fiscal years ended June 25, 2022 and June 26, 2021. All fees described below were approved by the Board:
For the
fiscal years ended
June 25,
June 26,
Audit Fees (1)
$ 1,694,636
$ 1,719,653
Audit Related Fees (2)
-
-
Tax Fees
-
-
All Other Fees (3)
9,229
4,708
Total Fees
$ 1,703,865
$ 1,724,361
(1) Audit Fees include fees for services rendered for the audit of our financial statements included in our Annual Report on Form 10-K and assurance and related services by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements.
(2) Audit Related Fees include consultation regarding our correspondence with the SEC and other accounting consulting.
(3) All Other Fees consists of fees for other miscellaneous items.

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
The following documents are filed as part of this report:
(1) Financial Statements and Report of Independent Registered Public Accounting Firm
(2) Financial Statement Schedules have been omitted because they are not applicable, not material or because the information is included in the Consolidated Financial Statements or the notes thereto.
(b) Exhibits
The exhibits are incorporated by reference from the Exhibit Index attached hereto.