| | |
MEDMEN ENTERPRISES INC. Condensed Consolidated Statements of Cash Flows (Unaudited) (Amounts Expressed in United States Dollars |
| | | | | | | | | | | |
| Six Months Ended |
| December 24,
2022 | | December 25,
2021 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net Loss from Continuing Operations | $ | (39,426,853) | | | $ | (54,380,916) | |
| Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: | | | |
| Deferred Tax Expense | — | | | (9,365,019) | |
| Depreciation and Amortization | 7,471,055 | | | 13,121,707 | |
| Non-Cash Operating Lease Costs | 6,200,503 | | | 8,854,752 | |
| Accretion of Debt Discount and Loan Origination Fees | 2,885,912 | | | 7,625,298 | |
| Loss on Disposals of Assets | 1,358,820 | | | — | |
| Gain on Lease Terminations | (3,464,947) | | | — | |
| Accretion of Deferred Gain on Sale of Property | (236,095) | | | (283,314) | |
| Impairment of Assets | 6,716,906 | | | 435,241 | |
| Realized and Unrealized Changes in Fair Value of Contingent Consideration | 863,856 | | | — | |
| Change in Fair Value of Derivative Liabilities | (3,106,786) | | | (16,211,785) | |
| Gain on Extinguishment of Debt | — | | | (10,233,610) | |
| Share-Based Compensation | 2,977,361 | | | 3,812,183 | |
| Interest Capitalized to Senior Secured Convertible Debt and Notes Payable | 12,319,509 | | | 13,008,234 | |
| Interest Capitalized to Finance Lease Liabilities | 969,427 | | | 777,564 | |
| Changes in Operating Assets and Liabilities: | | | |
| Accounts Receivable and Prepaid Expenses | 5,057,758 | | | (1,830,219) | |
| Inventory | (3,664,591) | | | (3,139,817) | |
| Other Current Assets | (412,535) | | | 321,953 | |
| Other Assets | 534,846 | | | 479,019 | |
| Accounts Payable and Accrued Liabilities | 7,659,848 | | | 3,218,996 | |
| Interest Payments on Finance Leases | (3,639,574) | | | (3,510,293) | |
| Cash Payments - Operating Lease Liabilities | (1,501,594) | | | (5,777,739) | |
| Income Taxes Payable | 12,072,079 | | | 17,776,242 | |
| Other Current Liabilities | (976,314) | | | (1,282,468) | |
| | | |
| NET CASH PROVIDED BY (USED IN) CONTINUED OPERATING ACTIVITIES | 10,658,591 | | — | | (36,583,991) | |
| Net Cash Used in Discontinued Operating Activities | (18,992,355) | | | (13,314,891) | |
| NET CASH USED IN OPERATING ACTIVITIES | (8,333,764) | | | (49,898,882) | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
| Purchases of Property and Equipment | (5,974,346) | | | (3,974,462) | |
| Additions to Intangible Assets | (30,999) | | | (486,759) | |
| Proceeds from the Sale of Assets Held for Sale | 51,500,000 | | | — | |
| | | |
| NET CASH PROVIDED BY (USED IN) CONTINUED INVESTING ACTIVITIES | 45,494,655 | | — | | (4,461,221) | |
| Net Cash Used in Discontinued Investing Activities | — | | | (3,107,056) | |
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | 45,494,655 | | | (7,568,277) | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| Issuance of Subordinate Voting Shares for Cash | — | | | 95,000,000 | |
| Payment of Stock Issuance Costs Relating to Private Placement | — | | | (5,352,505) | |
| Exercise of Warrants for Cash | — | | | 1,273,679 | |
| Payment of Debt Issuance Costs Relating to Senior Secured Convertible Credit Facility | — | | | (2,608,964) | |
| Proceeds from Issuance of Notes Payable | — | | | 5,000,000 | |
| Principal Repayments of Notes Payable | (32,388,433) | | | (152,887) | |
| Principal Repayments of Finance Lease Liability | (666) | | | (959) | |
| Distributions - Non-Controlling Interest | 37,561 | | | — | |
| NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | (32,351,538) | | | 93,158,364 | |
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 4,809,353 | | | 35,691,206 | |
| Cash Included in Assets Held for Sale | — | | | (275,178) | |
| Cash and Cash Equivalents, Beginning of Period | 10,795,999 | | | 11,575,868 | |
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 15,605,352 | | | $ | 46,991,896 | |
| | | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
| | |
MEDMEN ENTERPRISES INC. Condensed Consolidated Statements of Cash Flows (Unaudited) (Amounts Expressed in United States Dollars) |
| | | | | | | | | | | |
| Six Months Ended |
| December 24,
2022 | | December 25,
2021 |
| SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION | | | |
| Cash Paid for Interest | $ | 5,078,605 | | | $ | 1,940,280 | |
| | | |
| Non-Cash Investing and Financing Activities: | | | |
| Net Assets Transferred to Held for Sale | — | | | 4,476,993 | |
| Redemption of MedMen Corp Redeemable Shares | 705,134 | | | 1,521,604 | |
| Derivative Liability Incurred on Convertible Facility and Equity Financing | 805,590 | | | 30,500,000 | |
| Conversion of Convertible Debentures | — | | | 2,371,100 | |
| Shares Issued to Settle Debt and Lender Fees | — | | | 4,030,000 | |
| Shares Issued to Settle Accounts Payable and Liabilities | — | | | 715,000 | |
| Equity Component of Debt - New and Amended | — | | | 41,388,047 | |
| Deferred Tax Impact on Conversion Feature | — | | | 11,712,150 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (Unaudited).
| | |
MEDMEN ENTERPRISES INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Three and Six Months Ended December 24, 2022 and December 25, 2021 (Amounts Expressed in United States Dollars, Except for Share and Per Share Data) |
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, 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 provides exclusive access to promotions, product drops and content.
As of December 24, 2022, the Company operates 23 store locations across California (13), Nevada (3), Illinois (1), Arizona (1), Massachusetts (1), and New York (4). The Company continues to market its assets in New York and thus classifies all assets and liabilities and profit or loss allocable to its operations in the state of New York as discontinued operations. In August 2022, the Company completed the sale of its operations in the state of Florida of which all assets and liabilities and profit or loss allocable to Florida were classified as discontinued operations until the day of sale, on August 22, 2022. Subsequent to August 22, 2022, the remaining post-acquisition assets and liabilities, which is primarily comprised of a current receivable for the portion of the sales proceeds due to us in March 2023, and profit or loss allocable to Florida have been reclassified as continuing operations.
| | | | | |
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Preparation
The accompanying Condensed Consolidated Financial Statements have been prepared on a going concern basis in accordance with generally accepted accounting principles in the United States of America (“GAAP”), which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. The Condensed Consolidated Financial Statements include the accounts of MedMen Enterprises, its subsidiaries and variable interest entities (“VIEs”) where the Company is considered the primary beneficiary, if any, after elimination of intercompany accounts and transactions. Investments in entities in which the Company has significant influence, but less than a controlling financial interest, are accounted for using the equity method.
In the opinion of management, all adjustments considered necessary for a fair presentation of the consolidated financial position of the Company as of and for the interim periods presented have been included. The accompanying Condensed Consolidated Financial Statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to our ability to continue as a going concern.
The accompanying Condensed Consolidated Financial Statements do not include all of the information required for full annual financial statements. Accordingly, certain information, footnotes and disclosures normally included in the annual financial statements have been condensed or omitted in accordance with SEC rules for interim financial information. The financial data presented herein should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended June 25, 2022, as filed with the Securities and Exchange Commission on September 9, 2022 (the “2022 Form 10-K”).
Going Concern
As of December 24, 2022, the Company had cash and cash equivalents of $15,605,362 and working capital deficit of $137,433,003. The Company has incurred net losses from continuing operations of $15,086,276 and $39,426,853 for the three and six months ended December 24, 2022, respectively. The conditions described above raise substantial doubt with respect to the Company’s ability to meet its obligations for at least one year from the issuance of these Condensed Consolidated Financial Statements, and therefore, to continue as a going concern.
The Company plans to continue to fund its operations through the implementation and expansion 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, divestiture of non-core assets including but not limited to the current asset group held for sale, New York, as well continuing its on-going revenue and vendor strategy of market expansion and retail revenue and gross margin growth. The Company also needs to obtain an extension or a refinancing of its debt-in-default with the secured senior lender. The annual operating plan for fiscal year 2023 estimates the Company will be able to manage ongoing operations. However, its cash needs are significant and not achievable with the current cash flow from operations. If the above strategic actions, for any reason, are inaccessible, it will have a significantly negative effect on the Company’s financial condition. Additionally, management expects to continue to manage the Company’s operating expenses and reduce its projected cash requirements through reduction of its expenses by delaying new store development, permanently or temporarily closing stores that are deemed to be performing below expectations, and/or implementing other restructuring activities. Furthermore, COVID-19 and the impact the global pandemic on the broader retail environment could also have a significant impact on the Company’s financial position, results of operations, equity and or its access to capital and future financing.
COVID-19
In response to the COVID-19 pandemic, governmental authorities have enacted and implemented various recommendations and safety measures in an attempt to limit the spread and magnitude of the pandemic. The Company is continuously addressing the effects of the COVID-19 pandemic, a discussion of which is available in Item 1A “Risk Factors” of the 2022 Form 10-K. The company’s operating results continue to be impacted by the COVID-19 pandemic. The overall impact on our business continues to depend on the length of time that the pandemic continues, the impact on consumer purchasing behavior, macro-economic factors such as inflation, and the extent to which it affects our ability to raise capital, and the effect of governmental regulations imposed in response to the pandemic, which all remain uncertain at this time. The Company will continue to implement and evaluate actions to strengthen our financial position and support the continuity of our business and operations.
Basis of Consolidation
Subsidiaries are entities controlled by the Company. Control exists when the Company either has a controlling voting interest or is the primary beneficiary of a variable interest entity. The financial statements of subsidiaries are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases. With the exception of MME Florida, LLC, which the Company disposed on August 22, 2022, the list of the Company’s subsidiaries included in the Company’s 2022 Form 10-K remain complete as of December 24, 2022.
Significant Accounting Policies
The significant accounting policies and critical estimates applied by the Company in these Condensed Consolidated Financial Statements are the same as those applied in the Company’s audited Consolidated Financial Statements and accompanying notes included in the Company’s 2022 Form 10-K, unless otherwise disclosed in these accompanying notes to the Condensed Consolidated Financial Statements for the interim period ended December 24, 2022.
Earnings (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 earnings per share is determined by adjusting profit or loss attributable to common shareholders and the weighted-average number of common shares outstanding, for the effects of all dilutive potential common shares, which comprise convertible debentures, restricted stock units, warrants and stock options issued.
Reclassifications
Certain amounts reported in the Condensed Consolidated Financial Statements as of June 25, 2022 have non-material corrections and reclassified in order to conform to the current reporting period presentation.
In the Note related to Property and Equipment, the Company reclassified $940,000 to increase leasehold improvements and decrease furniture and fixtures. In the Note related to Intangibles, the Company reclassified $1,440,000 and $964,000 to decrease customer relationships and management agreements, along with the related accumulated amortization.
In the Condensed Consolidated Balance Sheet, the Company reclassified $3,662,000 between non-controlling interest and accumulated deficit. In addition, the Company reclassified $6,825,000 to decrease its short-term operating lease liabilities and increase its long-term operating lease liabilities.
There was no change to total current assets, total assets, total liabilities, total shareholders’ equity or cash flows as a result of these reclassifications and non-material corrections.
Recently Adopted Accounting Standards
In May 2021, the FASB issued Accounting Standards Update (“ASU”) 2021-04, “Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)” (“ASU 2021-04”), which amends existing guidance for earnings per share (“EPS”) in accordance with Topic 260. ASU 2021-04 is effective prospectively for fiscal years beginning after December 15, 2021. The Company adopted ASU 2021-04 on June 26, 2022. The adoption of the standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
Recently Issued Accounting Standards
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), provides optional expedients and exceptions for applying GAAP to debt instruments, derivatives, and other contracts that reference London Interbank Offered Rate (“LIBOR”) or other reference rates expected to be discontinued as a result of reference rate reform. This guidance is optional and may be elected through December 31, 2022 using a prospective application on all eligible contract modifications. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to instruments affected by reference rate reform if certain criteria are met. The Company did not modify any material contracts due to reference rate reform during the nine months ended September 30, 2022. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its financial position and results of operations.
In September 2022, the FASB issued ASU 2022-04, “Liabilities – Supplier Finance Programs (Subtopic 405-50)” (“ASU 2022-04”), which is intended to enhance transparency with supplier finance programs. ASU 2022-04 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Adoption is applied on a retrospective approach. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its financial position and results of operations.
The following table provides a summary of total Inventory as of December 24, 2022 and June 25, 2022:
| | | | | | | | | | | | | | |
| December 24,
2022 | | June 25,
2022 | |
| Raw Materials | $ | 736,389 | | | $ | 521,777 | | |
| Work-in-Process | 956,705 | | | 671,541 | | |
| Finished Goods | 11,982,228 | | | 8,817,413 | | |
| Total Inventory | $ | 13,675,322 | | | $ | 10,010,731 | | |
During the six months ended December 24, 2022 and December 25, 2021, the Company recognized impairment of nil and $900,000 respectively, to write down inventory to its net realizable value. The Company did not recognize any impairment of inventory during the three months ended December 24, 2022 and December 25, 2021.
A reconciliation of our assets held for sale is as follows:
| | | | | | | | | | | |
| | | | | Discontinued Operations & Other Assets |
| Balance as of June 25, 2022 | | | | | $ | 123,158,751 | |
| Ongoing Activities | | | | | (12,547,238) | |
Proceeds from Sale (1) | | | | | (67,000,000) | |
| | | | | |
| | | | | |
| Balance as of December 24, 2022 | | | | | 43,611,513 | |
_____________________________________
(1)See “Note 22 – Discontinued Operations” for further information.
| | | | | |
| 5. | PROPERTY AND EQUIPMENT. |
As of December 24, 2022 and June 25, 2022, property and equipment consists of the following:
| | | | | | | | | | | |
| December 24,
2022 | | June 25,
2022 |
| Land and Buildings | $ | 29,933,999 | | | $ | 29,933,999 | |
| Capital Leases | 5,318,516 | | | 5,315,625 | |
| Furniture and Fixtures | 8,651,132 | | | 8,776,994 | |
| Leasehold Improvements | 33,625,888 | | | 33,069,524 | |
| Equipment and Software | 15,972,636 | | | 16,897,649 | |
| Construction in Progress | 4,169,772 | | | 6,828,923 | |
| Total Property and Equipment | 97,671,943 | | | 100,822,714 | |
| Less Accumulated Depreciation | (40,026,614) | | | (36,714,922) | |
| Property and Equipment, Net | $ | 57,645,329 | | | $ | 64,107,792 | |
Depreciation expense related to continuing operations for three months ended December 24, 2022 and December 25, 2021 was $3,499,585 and $6,864,790, respectively. Depreciation expense related to continuing operations for six months ended December 24, 2022 and December 25, 2021 was $7,471,055 and $13,121,707, respectively.
The amount of depreciation recognized for capital leases during the three months ended December 24, 2022 and December 25, 2021 was $267,312. The amount of depreciation recognized for capital leases during the six months ended December 24, 2022 and December 25, 2021 was $534,624. see “Note 9 – Leases” for further information.
Borrowing costs were not capitalized as there were no active construction projects in progress during the three and six months ended December 24, 2022. During the three and six months ended December 25, 2021, borrowing costs totaling $375,241 were capitalized using an average capitalization rate of 11.95%.
As of December 24, 2022 and June 25, 2022, intangible assets consist of the following:
| | | | | | | | | | | |
| December 24,
2022 | | June 25,
2022 |
| Dispensary Licenses | $ | 40,814,762 | | | $ | 49,253,452 | |
| Customer Relationships | 16,409,600 | | | 16,409,600 | |
| Capitalized Software | 7,413,470 | | | 7,413,470 | |
| Intellectual Property | 12,455,287 | | | 4,016,597 | |
| Total Intangible Assets | $ | 77,093,119 | | | $ | 77,093,119 | |
| | | |
| Dispensary Licenses | $ | (18,084,368) | | | $ | (16,876,912) | |
| Customer Relationships | (15,378,567) | | | (15,870,284) | |
| Capitalized Software | (4,824,287) | | | (4,413,974) | |
| Intellectual Property | (6,152,763) | | | (4,185,835) | |
| Less Accumulated Amortization | (44,439,985) | | | (41,347,005) | |
| Intangible Assets, Net | $ | 32,653,134 | | | $ | 35,746,114 | |
The Company recorded amortization expense related to continuing operations for the three months ended December 24, 2022 and December 25, 2021 of $1,410,858 and $3,206,091, respectively and amortization expense related to continuing operations for the six months ended December 24, 2022 and December 25, 2021 of $3,123,979 and $6,431,928, respectively.
| | | | | |
| 7. | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
As of December 24, 2022 and June 25, 2022, accounts payable and accrued liabilities consist of the following:
| | | | | | | | | | | |
| December 24,
2022 | | June 25,
2022 |
| Accounts Payable | $ | 19,663,409 | | | $ | 14,627,746 | |
| | | |
| Accrued Liabilities | 9,862,983 | | | 9,464,567 | |
| Accrued Inventory | 6,397,508 | | | 5,868,831 | |
| Accrued Payroll | 1,405,253 | | | 1,682,517 | |
| Local & State Taxes Payable | 5,030,310 | | | 6,695,532 | |
| Deferred Gain on Sale of Assets | 566,627 | | | 566,627 | |
| Total Accounts Payable and Accrued Liabilities | $ | 42,926,090 | | | $ | 38,905,820 | |
A reconciliation of the beginning and ending balance of derivative liabilities and change in fair value of derivative liabilities for the three and six months ended December 24, 2022 is as follows:
| | | | | |
| TOTAL |
| Balance as of June 25, 2022 | $ | 6,749,563 | |
| |
| Change in Fair Value of Derivative Liabilities | (3,106,786) | |
| Balance as of December 24, 2022 | $ | 3,642,777 | |
On August 17, 2021, in connection with the amended and restated senior secured convertible credit facility (the Sixth Amendment”), the Company provided the note holders top-up and preemptive rights which were bifurcated from the
related notes and classified as a derivative due to the variability of the number and price of shares issuable under these rights. See “Note 11 – Senior Secured Convertible Credit Facility” for further information.
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 December 24, 2022:
| | | | | |
| Top-Up
Provision |
| Average Stock Price | $ | 0.02 | |
| Weighted-Average Probability | 50.00 | % |
| Term (in Years) | 5 |
| Expected Stock Price Volatility | 121.15 | % |
The following are the warrants issued related to the equity financing transactions that were accounted for as derivative liabilities:
| | | | | | | | | | | | | | | | | |
| Number of
Warrants | | Exercise
Price (C$) | | Expiration
Date |
March 2021 Private Placement (1) | 50,000,000 | | $0.50 | | March 27, 2024 |
| | | | | |
| 50,000,000 | | | | |
_____________________________________
(1)See “Note 12 – Shareholders’ Equity” for further information.
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:
| | | | | |
| Expected Stock Price Volatility | 161.95% |
| Risk-Free Annual Interest Rate | 2.35% |
| Expected Life (in Years) | 0.25 |
| Share Price | $0.02 |
| Exercise Price | $0.37 |
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.
The below are the details of the lease cost and other disclosures regarding the Company’s leases for the three months ended December 24, 2022 and June 25, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 24,
2022 | | December 25,
2021 | | December 24,
2022 | | December 25,
2021 |
| Finance Lease Cost: | | | | | | | |
| Amortization of Finance Lease Right-of-Use Assets | $ | 267,312 | | | $ | 251,221 | | | $ | 534,624 | | | $ | 534,627 | |
| Interest on Lease Liabilities | 1,835,068 | | | 1,725,752 | | | 3,639,574 | | | 3,510,293 | |
| Operating Lease Cost | 2,746,638 | | | 4,412,675 | | | 6,200,503 | | | 8,854,752 | |
| Total Lease Expenses | $ | 4,849,018 | | | $ | 6,389,648 | | | $ | 10,374,701 | | | $ | 12,899,672 | |
| | | | | | | |
Sublease Income (1) | $ | (1,521,651) | | | $ | (1,444,234) | | | $ | (3,043,302) | | | $ | (1,444,234) | |
| | | | | | | |
| Cash Paid for Amounts Included in the Measurement of Lease Liabilities: | | | | | | | |
| Financing Cash Flows from Finance Leases | $ | (1,818) | | | $ | — | | | $ | 666 | | | $ | 959 | |
| Operating Cash Flows from Operating Leases | $ | 474,802 | | | $ | 2,298,848 | | | $ | 1,501,594 | | | $ | 5,777,739 | |
_____________________________________
(1)See “Note 16 – Other Operating Income” for further information.
The weighted-average remaining lease term and discount rate related to the Company’s finance and operating lease liabilities as of December 24, 2022 and June 25, 2022, is as follows:
| | | | | | | | | | | |
| December 24,
2022 | | June 25,
2022 |
| Weighted-Average Remaining Lease Term (Years) - Finance Leases | 46 | | 46 |
| Weighted-Average Remaining Lease Term (Years) - Operating Leases | 7 | | 8 |
| Weighted-Average Discount Rate - Finance Leases | 24.81 | % | | 24.33 | % |
| Weighted-Average Discount Rate - Operating Leases | 16.66 | % | | 18.70 | % |
Future lease payments under non-cancellable operating leases and finance leases as of December 24, 2022 are as follows:
| | | | | | | | | | | | | | |
| Fiscal Year Ending | | Operating
Leases | | Finance
Leases |
| July 1, 2023 (remaining) | | $ | 4,692,026 | | | $ | 2,934,524 | |
| June 29, 2024 | | 12,931,089 | | | 10,961,495 | |
| June 28, 2025 | | 9,311,213 | | | 7,087,736 | |
| June 27, 2026 | | 9,495,658 | | | 7,300,368 | |
| June 26, 2027 | | 9,466,730 | | | 7,519,379 | |
| Thereafter | | 26,267,466 | | | 1,061,283,374 | |
| | | | |
| Total Lease Payments | | 72,164,182 | | | 1,097,086,876 | |
| Less Interest | | (19,541,732) | | | (1,065,503,555) | |
| | | | |
| Lease Liability Recognized | | $ | 52,622,450 | | | $ | 31,583,321 | |
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 December 24, 2022, the Management Agreement remains in effect as neither termination condition has occurred. During the three and six months ended December 24, 2022, the Company recorded sublease income under the Management Agreement. See “Note 16 – Other Operating Income” for further information.
Refer to the 2022 Form 10-K for complete disclosure of current terms of notes payable included in the footnotes of the annual financial statements as of June 25, 2022. There were no amendments during the six months ended December 24, 2022
As of December 24, 2022 and June 25, 2022, notes payable consist of the following:
| | | | | | | | | | | |
| December 24,
2022 | | June 25,
2022 |
Financing liability incurred on various dates between January 2019 through September 2019 with implied interest rates ranging from 0.7% to 17.0% per annum. | $ | 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. | 66,169,035 | | | 97,162,001 | |
| | | |
| | | |
| | | |
| | | |
Promissory notes dated November 7, 2018, issued to Lessor for tenant improvements as part of sales and leaseback transactions, which mature on November 7, 2028, bear interest at a rate of 10% per annum and require minimum monthly payments of $15,660 and $18,471. | 2,057,207 | | | 2,057,207 | |
| Other | 15,691 | | | 15,691 | |
| Total Notes Payable | 140,541,933 | | | 171,534,899 | |
| Less Unamortized Debt Issuance Costs and Loan Origination Fees | (137,478) | | | (158,079) | |
| Net Amount | 140,404,455 | | | 171,376,820 | |
| Less Current Portion of Notes Payable | (66,294,249) | | | (97,003,922) | |
| Notes Payable, Net of Current Portion | $ | 74,110,206 | | | $ | 74,372,898 | |
A reconciliation of the beginning and ending balances of notes payable for the six months ended December 24, 2022 is as follows:
| | | | | |
| December 24,
2022 |
| Balance at Beginning of Period | $ | 171,376,820 | |
| Paid-In-Kind Interest Capitalized | 1,257,988 | |
| Cash Payments | (32,388,433) | |
| Accretion of Debt Discount | (239,953) | |
| Accretion of Debt Discount Included in Discontinued Operations | 398,032 | |
| Balance at End of Period | $ | 140,404,454 | |
| Less Current Portion of Notes Payable | $ | (66,294,249) | |
| Notes Payable, Net of Current Portion | $ | 74,110,205 | |
Non-Revolving Senior Secured Term Loan Facility
In February 2022, the Company executed the Sixth Modification extending the maturity date of the senior secured term loan facility (the “Facility”) with Hankey Capital and Stable Road Capital (the “Lenders”) to July 31, 2022 with respect to the Facility, and August 1, 2022 with respect to the incremental term loans (collectively, the “Term Loans”). The Sixth Modification required that the Company make a mandatory prepayment of at least $37,500,000 in the event the sale of certain assets and imposed covenants in regard to strategic actions the Company would have to implement if unable to pay the Term Loans by the extended stated maturity date.
During the six months ended December 24, 2022, in connection with the sale of the Company’s Florida-based operations, the Company made a principal repayment of $31,600,000 with proceeds from the sale. An additional $ 8,500,000 principal repayment will be made in 2023 upon receipt of the final installment payment from the sale of the Company’s Florida-based operations. The Facility and Term Loans remain in default as of December 24, 2022 as the principal balance matured on July 31, 2022 and August 1, 2022, respectively. Beginning in December 2022, the interest assessed on the Facility and Term Loans include a default interest rate of 5%. As of December 24, 2022, the Company is in ongoing discussions with the Lenders.
| | | | | |
| 11. | SENIOR SECURED CONVERTIBLE CREDIT FACILITY |
Refer to the 2022 Form 10-K for complete disclosure of current terms of the senior secured convertible facility included in the footnotes of the annual financial statements as of June 25, 2022. There were no amendments during the three months ended December 24, 2022.
As of December 24, 2022 and June 25, 2022, senior secured convertible credit facility consists of the following:
| | | | | | | | | | | | | | | | | |
| Tranche | | December 24,
2022 | | June 25, 2022 |
Senior secured convertible notes dated August 17, 2019, issued to accredited investors, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | 1A | | $ | 23,944,485 | | | $ | 22,880,556 | |
| | | | | |
Senior secured convertible notes dated May 22, 2019, issued to accredited investors, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | 1B | | 103,124,572 | | | 98,542,422 | |
| | | | | |
Senior secured convertible notes dated July 12, 2019, issued to accredited investors, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | 2 | | 33,534,018 | | | 32,043,996 | |
| | | | | |
Senior secured convertible notes dated November 27, 2019, issued to accredited investors, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | 3 | | 12,985,058 | | | 12,408,091 | |
| | | | | |
| | | | | | | | | | | | | | | | | |
Senior secured convertible notes dated March 27, 2020, issued to accredited investors, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | 4 | | 15,273,641 | | | 14,594,985 | |
| | | | | |
Amendment fee converted to senior secured convertible notes dated October 29, 2019, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | — | | 24,512,781 | | | 23,424,438 | |
| | | | | |
Senior secured convertible notes dated April 24, 2020, issued to accredited investors, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | IA-1 | | 3,428,182 | | | 3,275,857 | |
| | | | | |
Senior secured convertible notes dated September 14, 2020, issued to accredited investors, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | IA-2 | | 6,629,552 | | | 6,334,980 | |
| | | | | |
Restatement fee issued in senior secured convertible notes dated March 27, 2020, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | — | | 10,348,746 | | | 9,888,919 | |
| | | | | |
Second restatement fee issued in senior secured convertible notes dated July 2, 2020, which mature on August 17, 2028 and bear interest at LIBOR plus 6.0% per annum. | — | | 2,292,231 | | | 2,190,380 | |
| | | | | |
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. | — | | 12,893,031 | | | 12,320,154 | |
| | | | | |
| Total Drawn on Senior Secured Convertible Credit Facility | | | 248,966,298 | | | 237,904,778 | |
| | | | | |
| Less Unamortized Debt Discount | | | (102,773,249) | | | (105,899,115) | |
| | | | | |
| Senior Secured Convertible Credit Facility, Net | | | $ | 146,193,049 | | | $ | 132,005,663 | |
A reconciliation of the beginning and ending balances of senior secured convertible credit facility for the six months ended December 24, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tranche 1 | | Tranche 2 | | Tranche 3 | | Tranche 4 | | Incremental Advance
- 1 | | Incremental Advance
- 2 | | 3rd Advance | | Amendment
Fee Notes | | Restatement Fee Notes | | 2nd Restatement Fee
Notes | | TOTAL |
| Balance as of June 25, 2022 | $ | 80,178,586 | | $ | — | | $ | 21,218,356 | | $ | — | | $ | 8,217,079 | | $ | — | | $ | 1,051,827 | | $ | — | | $ | 224,585 | | $ | — | | $ | 433,598 | | $ | — | | $ | 842,981 | | $ | — | | $ | 15,512,409 | | | $ | 2,211,711 | | | $ | 2,114,531 | | $ | — | | $ | 132,005,663 | |
| | | | | | | | | | | | | | | | | $ | — | | | | | |
| Paid-In-Kind Interest Capitalized | 5,646,079 | | | 1,490,022 | | | 576,967 | | | 678,656 | | | 152,325 | | | 294,572 | | | 572,878 | | | 1,088,344 | | | 459,827 | | | 101,851 | | | 11,061,521 | |
| Accretion of Debt Discount | 1,954,788 | | | 514,561 | | | 199,249 | | | — | | | — | | | — | | | — | | | 376,148 | | | 73,578 | | | 7,541 | | | 3,125,865 | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 24, 2022 | $ | 87,779,453 | | | $ | 23,222,939 | | | $ | 8,993,295 | | | $ | 1,730,483 | | | $ | 376,910 | | | $ | 728,170 | | | $ | 1,415,859 | | | $ | 16,976,901 | | | $ | 2,745,116 | | $ | — | | $ | 2,223,923 | | | $ | 146,193,049 | |
Issued and Outstanding
A reconciliation of the beginning and ending issued and outstanding shares is as follows:
| | | | | | | | | | | | | | | | | |
| Subordinate
Voting Shares | | MM CAN USA
Class B
Redeemable Units | | MM Enterprises USA
Common Units |
| Balance as of June 25, 2022 | 1,301,423,950 | | 65,066,106 | | 725,016 |
| Redemption of MedMen Corp Redeemable Shares | 259,814 | | (259,814) | | — |
| Balance as of September 24, 2022 | 1,301,683,764 | | 64,806,292 | | 725,016 |
| Redemption of MedMen Corp Redeemable Shares | 445,320 | | (445,320) | | — |
| Balance as of December 24, 2022 | 1,302,129,084 | | 64,360,972 | | 725,016 |
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 December 24, 2022 and June 25, 2022, the holders of the MM CAN USA Redeemable Shares represent approximately 4.71% and 4.76%, respectively, of the Company and holders of the MM Enterprises USA Common Units represent approximately 0.05% 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 six months ended December 24, 2022, the balances and activities attributable to the VIEs consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Venice Caregivers
Foundation, Inc. | | LAX Fund II Group, LLC | | Natures Cure, Inc. | | TOTAL |
| Current Assets | $ | 1,471,651 | | | $ | — | | | $ | 27,171,414 | | | $ | 28,643,065 | |
| Non-Current Assets | 8,482,483 | | | 3,011,882 | | | 4,874,353 | | | 16,368,718 | |
| Total Assets | $ | 9,954,134 | | | $ | 3,011,882 | | | $ | 32,045,767 | | | $ | 45,011,783 | |
| | | | | | | |
| Current Liabilities | $ | 10,984,598 | | | $ | 16,687,993 | | | $ | 10,031,350 | | | $ | 37,703,941 | |
| Non-Current Liabilities | 6,957,566 | | | 1,922,553 | | | 1,342,632 | | | 10,222,751 | |
| Total Liabilities | $ | 17,942,164 | | | $ | 18,610,546 | | | $ | 11,373,982 | | | $ | 47,926,692 | |
| | | | | | | |
| Non-Controlling Interest | $ | (7,988,030) | | | $ | (15,598,664) | | | $ | 20,671,785 | | | $ | (2,914,909) | |
| | | | | | | |
| Revenues | $ | 3,766,847 | | | $ | — | | | $ | 6,562,185 | | | $ | 10,329,032 | |
| Net (Loss) Income Attributable to Non-Controlling Interest | $ | (944,589) | | | $ | (1,622,510) | | | $ | 1,917,227 | | | $ | (649,872) | |
As of and for the fiscal year ended June 25, 2022, the balances of the VIEs consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Venice Caregivers
Foundation, Inc. | | LAX Fund II Group, LLC | | Natures Cure, Inc. | | TOTAL |
| Current Assets | $ | 1,735,304 | | | $ | 1,067,636 | | | $ | 23,557,168 | | | $ | 26,360,108 | |
| Non-Current Assets | 10,073,880 | | | 3,379,412 | | | 4,973,459 | | | 18,426,751 | |
| Total Assets | $ | 11,809,184 | | $ | — | | $ | 4,447,048 | | $ | — | | $ | 28,530,627 | | | $ | 44,786,859 | |
| | | | | | | |
| Current Liabilities | $ | 9,238,460 | | | $ | 16,238,249 | | | $ | 8,433,436 | | | $ | 33,910,145 | |
| Non-Current Liabilities | 9,614,164 | | | 2,184,953 | | | 1,342,633 | | | 13,141,750 | |
| Total Liabilities | $ | 18,852,624 | | $ | — | | $ | 18,423,202 | | $ | — | | $ | 9,776,069 | | | $ | 47,051,895 | |
| | | | | | | |
| Non-Controlling Interest | $ | (7,043,440) | | $ | — | | $ | (13,976,154) | | $ | — | | $ | 18,754,558 | | $ | — | | $ | (2,265,036) | |
| | | | | | | |
| Revenues | $ | 4,815,688 | | | $ | — | | | $ | 8,816,113 | | | $ | 13,631,801 | |
| Net (Loss) Income Attributable to Non-Controlling Interest | $ | (607,858) | | | $ | (2,206,450) | | | $ | 3,911,125 | | | $ | 1,096,817 | |
The net change in the consolidated VIEs and other non-controlling interest are as follows for the six months ended December 24, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Venice Caregivers
Foundation, Inc. | | LAX Fund II Group, LLC | | Natures Cure, Inc. | | Other Non- Controlling
Interests | | TOTAL |
| Balance as of June 25, 2022 | $ | (7,043,440) | | | $ | (13,976,154) | | | $ | 18,754,558 | | | $ | (471,717,698) | | | $ | (473,982,734) | |
| | | | | | | | | |
| Net (Loss) Income | $ | (944,589) | | | $ | (1,622,510) | | | $ | 1,917,227 | | | $ | (597,289) | | | $ | (1,247,161) | |
| | | | | | | | | |
| Balance as of December 24, 2022 | $ | (7,988,029) | | | $ | (15,598,664) | | | $ | 20,671,785 | | | $ | (472,314,987) | | | $ | (475,229,895) | |
| | | | | |
| 13. | SHARE-BASED COMPENSATION |
The Company has a stock and equity incentive plan (the “Incentive Plan”) under which the Company may issue various types of equity instruments to any employee, officer, consultant, advisor or director. The types of equity instruments issuable under the Incentive Plan encompass, among other things, stock options, stock grants, and restricted stock units (together, “Awards”). Stock based compensation expenses are recorded as a component of general and administrative expenses. The maximum number of Awards that may be issued under the Incentive Plan shall be determined by the Compensation Committee or the Board of Directors in the absence of a Compensation Committee. Any shares subject to an Award under the Incentive Plan that are forfeited, 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 a Compensation Committee. The exercise price for Awards (if applicable) will generally not be less than the fair market value of the Award at the time of grant and will generally expire after 5 or 10 years.
A summary of share-based compensation expense for the three and six months ended December 24, 2022 and December 25, 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 24,
2022 | | December 25,
2021 | | December 24,
2022 | | December 25,
2021 |
| Stock Options | $ | 1,912,792 | | | $ | 97,746 | | | $ | 2,625,581 | | | $ | 1,314,193 | |
| Stock Grants for Compensation | — | | | 207,494 | | | — | | | 540,827 | |
| Restricted Stock Grants | 200,884 | | | 402,866 | | | 351,780 | | | 1,957,163 | |
| Total Share-Based Compensation | $ | 2,113,676 | | | $ | 708,106 | | | $ | 2,977,361 | | | $ | 3,812,183 | |
Stock Options
A reconciliation of the beginning and ending balance of stock options outstanding is as follows:
| | | | | | | | | | | |
| Number of
Stock Options | | Weighted-Average
Exercise Price |
| Outstanding at June 25, 2022 | 8,649,673 | | $ | 1.35 | |
| Granted | 92,382,965 | | 0.05 | |
| Forfeited | (312,032) | | 3.60 | |
| Outstanding at December 24, 2022 | 100,720,606 | | $ | 0.15 | |
| | | |
| Stock Options Exercisable as of December 24, 2022 | 8,037,095 | | |
Long-Term Incentive Plan (“LTIP”) Units and LLC Redeemable Units
A reconciliation of the beginning and ending balances of the LTIP Units and LLC Redeemable Units issued for compensation outstanding is as follows:
| | | | | | | | | | | | | | | | | |
| LTIP Units | | LLC
Redeemable
Units | | Weighted
Average
Grant Date
Fair Value |
| Issued and
Outstanding | | |
| Balance as of June 25, 2022 and December 24, 2022 | 19,323,878 | | 725,016 | | $ | 0.52 | |
Restricted Stock Units
A reconciliation of the beginning and ending balance of restricted stock units outstanding is as follows:
| | | | | | | | | | | | | | | | | |
| Issued and
Outstanding | | Vested | | Weighted-Average
Fair Value |
| Balance as of June 25, 2022 | 10,998,483 | | 4,030,460 | | $ | 0.20 | |
| Granted | — | | — | | — | |
| Vested | — | | 490,661 | | 0.21 | |
Forfeited (1) | (1,813,408) | | — | | (0.22) | |
| Non-vested at December 24, 2022 | 9,185,075 | | 4,521,121 | | $ | 0.30 | |
_____________________________________
(1)Restricted stock units represent units forfeited upon resignation of certain employees prior to their vesting.
Warrants
A reconciliation of the beginning and ending balance of warrants outstanding is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Warrants Outstanding | | |
| Subordinate
Voting Shares | | MM CAN USA
Redeemable Shares | | TOTAL | | Weighted-Average
Exercise Price |
| Balance as of June 25, 2022 | 352,704,355 | | 97,430,456 | | 450,134,811 | | $ | 0.25 | |
| | | | | | | |
| Expired | (6,023,696) | | — | | (6,023,696) | | $ | 2.03 | |
| | | | | | | |
| Balance as of December 24, 2022 | 346,680,659 | | 97,430,456 | | 444,111,115 | | $ | 0.22 | |
The following is a reconciliation for the calculation of basic and diluted loss per share for the three and six months ended December 24, 2022 and December 25, 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 24,
2022 | | December 25,
2021 | | December 24,
2022 | | December 25,
2021 |
| Net Loss from Continuing Operations Attributable to Shareholders of MedMen Enterprises, Inc. | $ | (15,086) | | | $ | (8,217) | | | $ | (39,427) | | | $ | (54,381) | |
| Net Income (Loss) from Discontinued Operations | (2,256) | | | (12,141) | | | 26,132 | | | (26,587) | |
| Total Loss | $ | (17,342) | | | $ | (20,358) | | | $ | (13,294) | | | $ | (80,968) | |
| | | | | | | |
| Denominator: | | | | | | | |
| Weighted-Average Shares Outstanding - Basic | 1,301,874,615 | | | 1,198,515,279 | | | 1,301,767,158 | | | 1,070,605,666 | |
| | | | | | | |
| Dilutive effect of LTIP and LLC Redeemable Units issued for compensation | 19,323,878 | | | 19,323,878 | | | 19,323,878 | | | 19,323,878 | |
| Dilutive effect of restricted stock granted under the Equity Plan | 9,185,075 | | | 25,673,720 | | | 9,185,075 | | | 25,673,720 | |
| Dilutive effect of warrants and top-up warrants | 194,720,261 | | | 138,498,284 | | | 258,878,685 | | | 175,668,177 | |
| Dilutive effect of convertible debentures | 3,255,897,270 | | | 1,007,089,116 | | | 3,255,897,270 | | | 1,007,089,116 | |
Weighted-Average Shares Outstanding - Diluted (1) | 4,781,001,100 | | | 2,389,100,278 | | | 4,845,052,067 | | | 2,298,360,557 | |
| | | | | | | |
(1) For all periods presented wherein the Company incurred net losses from continuing operations and/or discontinued operations, the calculation of diluted net loss per share gives no consideration to the potentially anti-dilutive securities shown in the above reconciliation, and as such is the same as basic net loss per share.
| | | | | |
| 15. | GENERAL AND ADMINISTRATIVE EXPENSES |
During the three and six months ended December 24, 2022 and December 25, 2021, general and administrative expenses consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 24,
2022 | | December 25,
2021 | | December 24,
2022 | | December 25,
2021 |
| Salaries and Benefits | $ | 6,536,411 | | | $ | 9,991,545 | | | $ | 13,468,859 | | | $ | 19,903,033 | |
| Professional Fees | 2,137,010 | | | 7,815,185 | | | 3,509,420 | | | 15,245,844 | |
| Rent | 3,021,217 | | | 4,712,476 | | | 6,649,162 | | | 9,467,359 | |
| Licenses, Fees and Taxes | 1,823,436 | | | 1,293,194 | | | 3,866,945 | | | 3,830,982 | |
| Share-Based Compensation | 2,113,676 | | | 722,802 | | | 2,977,361 | | | 2,370,111 | |
| Deal Costs | — | | | 1,174,357 | | | 429,272 | | | 2,811,944 | |
| Other General and Administrative | 2,709,471 | | | 5,583,195 | | | 5,551,538 | | | 10,312,715 | |
| Total General and Administrative Expenses | $ | 18,341,221 | | | $ | 31,292,754 | | | $ | 36,452,557 | | | $ | 63,941,988 | |
| | | | | |
| 16. | OTHER OPERATING (INCOME) EXPENSE |
During the three and six months ended December 24, 2022 and December 25, 2021, other operating (income) expense consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 24,
2022 | | December 25,
2021 | | December 24,
2022 | | December 25,
2021 |
| Other Operating (Income) Expense: | | | | | | | |
| Loss (Gain) on Disposals of Assets | $ | 1,153,225 | | | $ | (141,662) | | | $ | 1,358,820 | | | $ | (126,516) | |
| Restructuring and Reorganization Expense | — | | | 385,652 | | | 423,793 | | | 2,764,327 | |
| Gain on Settlement of Accounts Payable | 215,659 | | | — | | | 141,022 | | | (177,990) | |
| (Gain) Loss on Lease Terminations | (1,877,298) | | | 173,765 | | | (3,464,947) | | | 173,765 | |
| (Gain) Loss on Disposal of Assets Held for Sale | (112,225) | | | — | | | 532,598 | | | — | |
| | | | | | | |
| Legal Settlements | (3,491,431) | | | — | | | (3,491,431) | | | — | |
| Other Income | (1,522,280) | | | 213,216 | | | (3,043,918) | | | 196,413 | |
| Total Other Operating (Income) Expense | $ | (5,634,350) | | | $ | 630,971 | | | $ | (7,544,063) | | | $ | 2,829,999 | |
During the three and six months ended December 24, 2022, the Company recorded $1,521,651 and $3,043,302, respectively of sublease income related to the cultivation facilities in California and Nevada as a component of Other Operating Income in the Consolidated Statements of Operations.
| | | | | |
| 17. | PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES |
The following table summarizes the Company’s income tax expense and effective tax rates for the three and six months ended December 24, 2022 and December 25, 2021
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 24,
2022 | | December 25,
2021 | | December 24,
2022 | | December 25,
2021 |
| | | | | | | |
| Loss from Continuing Operations Before Provision for Income Taxes | $ | (14,025,468) | | | $ | (16,355,274) | | | $ | (32,673,967) | | | $ | (42,826,906) | |
| Provision for Income Tax Expense | (1,060,808) | | | 8,137,898 | | | (6,752,886) | | | (11,554,010) | |
| Effective Tax Rate | 8 | % | | -50 | % | | 21 | % | | 27 | % |
We have historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate (“AETR”) for the full fiscal year to “ordinary” income or loss (pre-tax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. For the three and six months ended December 25, 2021, we determined we could no longer reliably estimate income taxes utilizing an AETR. The AETR estimate is highly sensitive to estimates of ordinary income (loss) and permanent differences such that minor fluctuations in these estimates could result in significant fluctuations of the Company’s AETR. Accordingly, we used our actual year-to-date effective tax rate to calculate income taxes for the three and six months ended December 24, 2022.
As the Company operates in the legal cannabis industry, the Company is subject to the limits of IRC Section 280E for U.S. federal, Illinois state, Massachusetts state and New York state income tax purposes under which the Company is only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E. However, the State of California does not conform to IRC Section 280E and, accordingly, the Company deducts all operating expenses on its California Franchise Tax Returns.
The Company has approximately gross $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.
The effective tax rate for the three and six months ended December 24, 2022 is different from the three months ended September 25, 2021, respectively, primarily due to the Company’s income and related 280E expenditures. The Company’s non-deductible expenses related to IRC Section 280E limitations have remained relatively consistent.
The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, and in Canada. The Company is generally subject to audit by taxing authorities in various U.S., state, and in foreign jurisdictions for fiscal years 2014 through the current fiscal year. As of December 24, 2022, the Company had $18,781,424 of unrecognized tax benefits, all of which would reduce income tax expense and the effective tax rate if recognized. During the three and six months ended December 24, 2022, the Company recognized a net discrete tax expense of $407,993 primarily related on interest of past liabilities. During the next twelve months, the Company does not estimate any material reduction in its unrecognized tax benefits.
| | | | | |
| 18. | COMMITMENTS AND CONTINGENCIES |
Contingencies
The Company’s operations are subject to a variety of local and state regulations. Failure to comply with one or more of these regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local
and state regulations as of December 24, 2022 and June 25, 2022, marijuana regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties or restrictions in the future.
Claims and Litigation
From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. The Company recognizes legal settlement expense when litigation losses related to pending or threatening lawsuits could be reasonably assessed to have resulted in a probable loss to the Company in an amount that can be reasonably estimated. The Company recognizes legal settlement gains when a favorable settlement is awarded to the Company and payment is received. Gain and losses related to claims and litigation are recorded as a component of Other Operating (Income) Expense in the Condensed Consolidated Financial Statements. As of December 24, 2022, there are also no proceedings in which any of the Company’s current 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, and the plaintiffs have filed an appeal of the summary judgment decision. The Company believes the likelihood of a loss contingency is neither probable nor estimable. As such, no amount has been accrued in these financial statements.
In April 2020, a complaint was filed against the Company in Los Angeles Superior Court related to a contemplated acquisition in which the plaintiffs are seeking damages for alleged breach of contract and breach of implied covenant of good faith and fair dealing seeking declaratory relief and specific performance. The Company filed counterclaims including for breach of contract, breach of promissory note, unjust enrichment and declaratory relief. After the end of the quarter ending December 24, 2022, the parties reached a tentative agreement to resolve the litigation; however, the probable loss to the Company cannot be reasonably estimated. As such, no amount has been accrued 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 counterclaims, including for breach of the same management agreements. The arbitration hearing has been rescheduled and the matter is being disputed. The litigation remains at an early stage and the likelihood of a loss contingency is remote. As such, no amount has been accrued 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 such, no amount has been accrued in these financial statements.
In July 2022, a complaint was filed in Los Angeles Superior Court by Baker & McKenzie LLP, a former law firm to the Company, seeking in excess of $600,000 in legal fees plus accrued interest. The Company has filed a counterclaim against Baker & McKenzie claiming overbilling on total invoices propounded by the law firm to the Company exceeding $18,500,000. The litigation remains at an early stage and the likelihood of a loss contingency is remote. As such, no amount has been accrued in these financial statements
The Company is the defendant in several complaints filed by various of its landlords seeking rents and damages under lease arrangements. First, 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, for which the landlord is seeking rents and damages. Plaintiff has filed a motion for summary judgment which remains pending. If the litigation is not settled or resolved, trial will likely take place during the fiscal year ended 2023 or possibly the fiscal year ended 2024. This matter is preliminary and the Company believes the likelihood of loss is remote. As such, no amount has been accrued in these financial statements. Second, 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 filed an answer to the complaint arguing that the subject matter of the
case was not appropriate for determination by a federal court in New York. The court thereafter permitted the action to be dismissed without prejudice, after which the plaintiff refiled the case in California against the Company as guarantor of the lease. The matter is in the process of being litigated in the Los Angeles Superior Court. The Company believes the likelihood of loss is remote. As such, no amount has been accrued in these financial statements. Third, 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 sought to enforce a land purchase agreement and is seeking damages. The Company settled this dispute during the quarter ending December 24, 2022 in the amount of $350,000. In April 2022, the landlord at the Company’s dispensary location in Tampa, Florida, filed suit seeking damages under a lease, shortly after which the Company announced its plans to sell its Florida operations. The Company retained this lease and the associated litigation following the sale of its Florida operations. The litigation is at an early stage and the likelihood of a loss contingency is remote. As such, no amount has been accrued in these financial statements.
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| 19. | RELATED PARTY TRANSACTIONS |
The Company’s Board of Directors each receive quarterly fees of $200,000 of which one-third is paid in cash and two-thirds is paid in Class B Subordinate Voting Shares.
The 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.
While the Company operates in one segment as disclosed in “Note 20 – Segment Information”, the Company is disaggregating its revenue by geographical region in accordance with ASC 606, “Revenue from Contracts with Customers”. Revenue by state for the periods presented are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 24,
2022 | | December 25,
2021 | | December 24,
2022 | | December 25,
2021 |
| California | $ | 19,575,393 | | | $ | 23,368,439 | | | $ | 39,504,378 | | | $ | 47,994,994 | |
| Nevada | 2,812,902 | | | 3,855,371 | | | 5,810,371 | | | 7,934,522 | |
| Illinois | 3,082,089 | | | 4,104,970 | | | 6,624,159 | | | 8,433,572 | |
| Arizona | 3,343,592 | | | 4,173,609 | | | 6,138,238 | | | 7,875,206 | |
| Massachusetts | 734,394 | | | 14,772 | | | 1,515,277 | | | 14,771 | |
| Revenue from Continuing Operations | 29,548,370 | | | 35,517,161 | | | 59,592,423 | | | 72,253,065 | |
| Revenue from Discontinued Operations | 2,282,288 | | | 8,065,341 | | | 5,911,927 | | | 15,405,440 | |
| Total Revenue | $ | 31,830,658 | | | $ | 43,582,502 | | | $ | 65,504,350 | | | $ | 87,658,505 | |
| | | | | | | |
| | | | | |
| 22. | DISCONTINUED OPERATIONS |
The operating results of the discontinued operations are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 24,
2022 | | December 25,
2021 | | December 24,
2022 | | December 25,
2021 |
| Revenue | $ | 2,282,288 | | | $ | 8,065,341 | | | $ | 5,911,927 | | | $ | 15,405,440 | |
| Cost of Goods Sold | 439,466 | | | 5,672,043 | | | 2,630,135 | | | 10,899,596 | |
| Gross Profit | 1,842,822 | | | 2,393,298 | | | 3,281,792 | | | 4,505,844 | |
| Expenses: | | | | | | | |
| General and Administrative | 2,134,342 | | | 6,329,144 | | | 6,853,135 | | | 11,946,739 | |
| Sales and Marketing | 15,015 | | | 127,844 | | | 58,326 | | | 231,647 | |
| Depreciation and Amortization | 21,107 | | | 1,189,331 | | | 894,002 | | | 2,411,090 | |
| Impairment Expense | — | | | — | | | (78,433) | | | — | |
| Gain on Disposal of Assets and Other Income | — | | | — | | | (36,305,166) | | | (597,591) | |
| Total (Income) Expenses | $ | 2,170,464 | | | $ | 7,646,319 | | | $ | (28,578,136) | | | $ | 13,991,885 | |
| Income (Loss) from Discontinued Operations | (327,642) | | | (5,253,021) | | | 31,859,928 | | | (9,486,041) | |
| Other Expense: | | | | | | | |
| Interest Expense | 1,783,685 | | | 4,755,126 | | | 5,545,446 | | | 9,371,955 | |
| Accretion of Debt Discount and Loan Origination Fees | — | | | 3,446,949 | | | 398,032 | | | 6,987,857 | |
| Total Other Expense | 1,783,685 | | | 8,202,075 | | | 5,943,478 | | | 16,359,812 | |
| Income (Loss) from Discontinued Operations Before Provision for Income Taxes | (2,111,327) | | | (13,455,096) | | | 25,916,450 | | | (25,845,853) | |
| Provision for Income Tax Benefit (Expense) | (144,651) | | | 1,314,496 | | | 216,039 | | | (741,238) | |
| Net Income (Loss) from Discontinued Operations | $ | (2,255,978) | | | $ | (12,140,600) | | | $ | 26,132,489 | | | $ | (26,587,091) | |
The carrying amounts of assets and liabilities in the disposal group are summarized as follows:
| | | | | | | | | | | |
| December 24,
2022 | | June 25,
2022 |
| Carrying Amounts of the Assets Included in Discontinued Operations: | | | |
| | | |
| Cash and Cash Equivalents | $ | 540,828 | | | $ | 1,124,076 | |
| Restricted Cash | 5,280 | | | 5,280 | |
| Accounts Receivable and Prepaid Expenses | 22,019 | | | 334,621 | |
| Inventory | 4,483,051 | | | 6,866,833 | |
| | | |
TOTAL CURRENT ASSETS (1) | | | |
| | | |
| Property and Equipment, Net | 9,569,610 | | | 41,273,597 | |
| Operating Lease Right-of-Use Assets | 19,111,359 | | | 31,543,058 | |
| Intangible Assets, Net | 10,582,559 | | | 40,799,146 | |
| Other Assets | 458,383 | | | 1,181,795 | |
| TOTAL ASSETS OF THE DISPOSAL GROUP CLASSIFIED AS HELD FOR SALE | 44,773,089 | | | 123,128,406 | |
| | | |
| Carrying Amounts of the Liabilities Included in Discontinued Operations: | | | |
| | | |
| Accounts Payable and Accrued Liabilities | $ | 979,864 | | | $ | 6,295,745 | |
| Income Taxes Payable | 389,677 | | | 1,671,380 | |
| Other Current Liabilities | (5,641) | | | 89,069 | |
| Current Portion of Operating Lease Liabilities | 2,812,765 | | | 4,209,512 | |
| Current Portion of Finance Lease Liabilities | — | | | 174,000 | |
| | | |
TOTAL CURRENT LIABILITIES (1) | | | |
| | | |
| Operating Lease Liabilities, Net of Current Portion | 18,398,345 | | | 56,410,071 | |
| Deferred Tax Liabilities | 5,977,580 | | | 6,097,597 | |
| Notes Payable | — | | | 11,100,000 | |
| | | |
TOTAL NON-CURRENT LIABILITIES (1) | | | |
| | | |
| TOTAL LIABILITIES OF THE DISPOSAL GROUP CLASSIFIED AS HELD FOR SALE | $ | 28,552,590 | | | $ | 86,047,374 | |
On August 22 2022, MME Florida LLC and its parent, MM Enterprises USA, LLC, a wholly-owned subsidiary of the Company closed on the Asset Purchase Agreement (the “Agreement”) with Green Sentry Holdings, LLC, (“Buyer”) for the sale of the Company’s Florida-based assets, including its license, dispensaries, inventory and cultivation operations, and assumption of certain liabilities. The final sales price was $67,000,000, which was comprised of $63,000,000 in cash and $4,000,000 in liabilities to be assumed by the Buyer. The Buyer made a cash payment of $40,000,000 at closing, a cash payment of $11,500,000 on September 15, 2022 and is required to make one additional installment payment of $11,500,000 on or before March 15, 2023. The Company used $31,599,999 of the cash proceeds to repay the Senior Secured Term Loan Facility, and the Company received net cash proceeds of $19,558,947. Accordingly, the Company recognized a gain on sale of assets of $31,719,833, which is included in Net Income from Discontinued Operations for the six months ended December 24, 2022. 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 Condensed Consolidated Statement of Operation.
The Company has evaluated subsequent events through the date these Condensed Consolidated Financial Statements were issued and has concluded that no subsequent events have occurred that would require recognition in the Condensed Consolidated Financial Statements or disclosure in the Notes to the Condensed Consolidated Financial Statements.