424B3 1 mmen_424b3.htm 424B3 mmen_424b3.htm

Filed Pursuant to Rule 424(b)(3)

Registration No. 333-253980

 

MEDMEN ENTERPRISES INC.

 

344,138,422 Class B Subordinate Voting Shares

 

This prospectus relates the offer and sale or other disposition from time to time of up to an aggregate of 344,138,422 Class B Subordinate Voting Shares (the “Subordinate Voting Shares”) of MedMen Enterprises Inc. by the selling shareholders named in this prospectus, (together with their respective donees, transferees or other successors in interest, referred to as the “selling shareholders”), which consists of 87,411,067 Subordinate Voting Shares, 224,595,005 Subordinate Voting Shares issuable upon exercise of warrants, and 32,132,350 Subordinate Voting Shares issuable upon conversion of convertible notes (the “Resale Shares”).  Registration of the Resale Shares does not mean that the selling shareholders will actually offer or sell any of these shares.

 

We will not receive any proceeds from the sale or other disposition of the Resale Shares offered by the selling shareholders. We will, however, receive the exercise price of any warrants exercised for cash. To the extent that we receive cash upon exercise of any warrants, we expect to use that cash for working capital and general corporate purposes.

 

The selling shareholders or their transferees may, from time to time, sell, transfer or otherwise dispose of any or all of their Subordinate Voting Shares or interests in Subordinate Voting Shares on any stock exchange, market or trading facility on which the shares are traded or in private transactions.  These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices. For additional information, you should refer to the section entitled “Plan of Distribution” of this prospectus. We are paying all expenses of registration incurred in connection with this offering, except any underwriting discounts and commissions incurred by the selling stockholders.

    

Our Subordinate Voting Shares trade on the Canadian Securities Exchange (“CSE”) under the symbol “MMEN”.  The closing sales price of our Subordinate Voting Shares on the CSE on March 22, 2021 was C$0.45 per share.  Our Subordinate Voting Shares also trade on the OTCQX under the symbol “MMNFF.” The last reported sales price of our Subordinate Voting Shares on the OTCQX on March 22, 2021 was $0.36 per share.

 

We are an “emerging growth company”, as defined under the federal securities laws and, as such, we may continue to elect to comply with certain reduced public company reporting requirements in future reports. Certain implications of being an “emerging growth company” are described on page 3 of this prospectus.

 

Investing in our Subordinate Voting Shares involves a high degree of risk. You should refer to the discussion of risk factors, beginning on page 10 of this prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

This prospectus is dated March 26, 2021

   

 

 

 

 

Table of Contents

 

 

 

Page

 

ABOUT THIS PROSPECTUS

 

 

1

 

PROSPECTUS SUMMARY

 

 

2

 

OVERVIEW

 

 

2

 

THE OFFERING

 

 

4

 

FORWARD-LOOKING INFORMATION

 

 

6

 

RISK FACTORS

 

 

10

 

USE OF PROCEEDS

 

 

26

 

DIVIDEND POLICY

 

 

26

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

26

 

BUSINESS

 

 

77

 

PROPERTIES

 

 

109

 

LEGAL PROCEEDINGS

 

 

110

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

 

111

 

EXECUTIVE COMPENSATION

 

 

117

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

 

121

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

 

123

 

SELLING SHAREHOLDERS

 

 

125

 

MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

 

 

125

 

DESCRIPTION OF CAPITAL STOCK

 

 

130

 

PLAN OF DISTRIBUTION

 

 

136

 

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF OUR SUBORDINATE VOTING SHARES

 

 

 137

 

CANADIAN TAX CONSIDERATIONS

 

 

141

 

LEGAL MATTERS

 

 

143

 

EXPERTS

 

 

143

 

WHERE YOU CAN FIND MORE INFORMATION

 

 

144

 

FINANCIAL STATEMENTS

 

F-1

 

   

 

i

 

 

 

ABOUT THIS PROSPECTUS

 

As permitted under the rules of the Securities and Exchange Commission, or the SEC, this prospectus includes important business information about MedMen Enterprises Inc. that is also contained in documents that we file with the SEC. A prospectus supplement may also add, update or change information included in this prospectus. Any statement contained in this prospectus will be deemed to be modified or superseded for purposes of this prospectus to the extent that a statement contained in such prospectus supplement modifies or supersedes such statement. Any statement so modified will be deemed to constitute a part of this prospectus only as so modified, and any statement so superseded will be deemed not to constitute a part of this prospectus. You should rely only on the information contained in this prospectus, any applicable prospectus supplement or any related free writing prospectus. You may obtain copies of these documents, without charge, from the website maintained by the SEC at www.sec.gov, as well as other sources.  See “Where You Can Find More Information.”

  

Before you invest in our securities, you should read carefully the registration statement (including the exhibits thereto) of which this prospectus forms a part, this prospectus, any prospectus supplement, or any accompanying prospectus supplement. You should rely only on the information contained in this prospectus. Neither we nor the selling shareholders have authorized anyone to provide you with additional or different information from that contained in this prospectus. We and the selling shareholders take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. You should assume that the information contained in this prospectus is accurate only as of any date on the front cover of this prospectus regardless of the time of delivery of this prospectus, or any applicable prospectus supplement, or any sale of a security. Our business, financial condition, results of operations and prospects may have changed since those dates.

 

The Resale Shares are being offered to sell, and offered to buy only in jurisdictions where offers and sales are permitted. We have not taken any action to permit a public offering of our Subordinate Voting Shares or the possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. This prospectus is not an offer to sell securities, and it is not soliciting an offer to buy securities, in any jurisdiction where the offer or sale is not permitted. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

 

References herein to “MedMen Enterprises”, “MedMen” or the “Company”, “we”, “us” or “our” refer to MedMen Enterprises Inc. and its subsidiaries.

 

In this prospectus, currency amounts are stated in U.S. dollars (“$”), unless specified otherwise. All references to C$ are to Canadian dollars.

   

 

 
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PROSPECTUS SUMMARY

 

This summary highlights information contained throughout this prospectus. This summary does not contain all of the information that should be considered before investing in our securities. Investors should read the entire prospectus carefully, including the more detailed information regarding our business, the risks of purchasing our securities discussed in this prospectus. Investors should read the entire prospectus carefully. See “Risk Factors” beginning on page 10 of this prospectus.

  

OVERVIEW

 

General 

 

MedMen is a cannabis retailer based in the U.S. with flagship locations in Los Angeles, Las Vegas, Chicago, and New York. MedMen offers a robust selection of high-quality products, including MedMen-owned brands [statemade], LuxLyte, and MedMen Red through its premium retail stores and proprietary delivery service, as well as curbside and in-store pick up.

 

The Company currently operates 24 store locations across California (11), Florida (4), Nevada (3), Illinois (1), New York (4) and Arizona (1), which are classified as discontinued operations as the Company is seeking to sell the operations in Arizona. The Company’s retail stores are located in strategic locations across key cities and neighborhoods in each of its markets. The Company has plans to open additional retail stores over the next twelve months in the following cities:

 

 

·   

Emeryville, CA

 

·   

San Francisco, CA

 

·   

Chicago, IL

 

·  

Boston, MA

 

·  

Newton, MA

 

·  

Miami, FL

 

·

Jacksonville, FL

 

·

Orlando, FL

 

· 

Deerfield Beach, FL

 

 

 

The Company expects to continue strengthening its pipeline of stores through acquisitions, partnerships and applications for new licenses, with a focus on recreational states such as California, Nevada and Illinois and medical states such as Florida.

 

The Company previously announced its intention to sell its assets in Arizona in order to focus on other markets that the Company believes may have greater potential for near-term profitability. The Company is currently in discussions with various parties and expects to discontinue all Arizona-related operations by the end of fiscal year 2021.

 

In addition to e xpanding its physical store network in markets across the U.S., the Company plans to continue scaling its digital platform. The Company launched statewide same-day delivery in California on August 19, 2019. The Company launched delivery in Nevada on September 16, 2019. See “Business - 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, on July 3, 2019. The program currently is offered in all of the Company’s stores in Arizona, Nevada, Florida and California and has more than 425,000 members. See “Business - Retail Operations - Loyalty Program” for further information about the Company’s loyalty program.

  

 

 
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MedMen currently operates five cultivation and production facilities across Nevada, California, New York, Florida and Arizona. Given the regulatory environment and lack of robust wholesale market in Florida and New York, the Company expects to continue cultivation and production activities in these markets. In California and Nevada, the Company is in discussions for the potential sale of its cultivation and production facilities so that the Company can focus on its retail operations. The Company has not entered into any definitive agreements at this time. The Company currently intends to sub-lease the California and Nevada facilities to a third party that would acquire and/or take over the operations for the cultivation and production facilities. As a result, the Company would no longer operate cultivation and production facilities in California and Nevada. The Company also operates a cultivation and production facility in Arizona. Although no definitive agreements have been entered into, the Company is currently in discussions to sell the operation, and as such has classified its Arizona business as discontinued operations. As part of the discontinuation of Arizona operations, the Company will not have a cultivation and production facility in Arizona.

 

In New York and Florida, the cultivation and production facilities are or will be 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. See “Description of the Business - Cultivation and Production Operations” for further information about the Company’s cultivation and production operations.

 

The Company currently holds licenses within California, Nevada, Florida, Arizona, Illinois, New York and Massachusetts. The Company views Nevada, California, New York, Illinois, Florida and Massachusetts as providing ongoing opportunities for growth due to their market depth, current 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 “Business - Management Services” for further information about the Company’s management services.

  

The Company is operated by an executive team that has significant experience in the cannabis industry and other analogous industries such as retail, technology, consumer packaged goods, alcohol and apparel. The Company had approximately 830 employees as of December 26, 2020 across its operating jurisdictions. See “Business - Employees” for further information about the Company’s employees.

 

MedMen Enterprises USA has 41 wholly owned (either directly or indirectly) material subsidiaries. Such subsidiaries were incorporated or otherwise organized under the laws of California, Nevada, Delaware, New York, Florida, Arizona, Illinois and Massachusetts. See “Business - Corporate Structure”.

  

Emerging Growth Company

 

We are an ‘‘emerging growth company’’ within the meaning of the federal securities laws. For as long as we are an emerging growth company, we will not be required to comply with the requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, the reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and the exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We intend to take advantage of these reporting exemptions until we are no longer an emerging growth company.

 

Smaller Reporting Company

 

We are a “smaller reporting company” and will remain a smaller reporting company while either (i) the market value of our stock held by non-affiliates was less than $250 million as of the last business day of our most recently completed second fiscal quarter or (ii) our annual revenue was less than $100 million during our most recently completed fiscal year and the market value of our stock held by non-affiliates was less than $700 million as of the last business day of our most recently completed second fiscal quarter. We intend to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies, such as reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements. For so long as we remain a smaller reporting company, we are permitted and intend to rely on exemptions from certain disclosure and other requirements that are applicable to other public companies that are not smaller reporting companies.

 

 

 
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Corporate Information

 

MedMen Enterprises Inc. was incorporated in the Province of British Columbia under the Business Corporations Act (British Columbia).

 

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”). 

 

 

 

THE OFFERING

 

 

 

Class B Subordinate Voting Shares outstanding prior to this offering (as of March 18, 2021):

 

622,466,231 shares

 

 

 

Class B Subordinate Voting Shares offered for sale by the selling shareholders:

 

344,138,422 shares (1)

 

 

 

Class B Subordinate Voting Shares to be outstanding after this offering:

 

879,193,586 shares (1)

 

 

 

Use of Proceeds

 

We will not receive any proceeds from the sale or other disposition of the 344,138,422 Subordinate Voting Shares by the selling shareholders under this prospectus. We will, however, receive up to $62.8 million in the aggregate from the selling shareholders if they exercise, for cash, unexercised warrants to acquire 224,595,005 Subordinate Voting Shares. To the extent that we receive cash upon exercise of any warrants, we expect to use that cash for working capital and general corporate purposes.

 

 

 

Risk Factors:

 

See the section entitled “Risk Factors” beginning on page 10 and other information included in this prospectus for a discussion of factors you should consider before making an investment decision.

 

 

 

CSE symbol:

 

MMEN

________

 

 

(1) Includes (a) 224,595,005 Subordinate Voting Shares issuable upon the exercise of warrants (including warrants exercisable for Redeemable Shares of MM CAN that can be redeemed and exchanged for Subordinate Voting Shares) held by the selling shareholders and (b) 32,132,350 Subordinate Voting Shares issuable upon the conversion of convertible notes held by the selling shareholders.  Assumes no other shares are issued by the Company or exercised or converted under other warrants, options or notes for Subordinate Voting Shares.

 

 
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Table of Contents

 

 

Unless otherwise indicated, all information in this prospectus relating to the number of shares of our Subordinate Voting Shares outstanding is based on  622,466,231 Subordinate Voting Shares outstanding as of March 18, 2021 and does not include:

 

 

 

 

·

12,855,137 Subordinate Voting Shares issuable upon the exercise of options with a weighted-average exercise price of C$1.63 per share;

 

 

 

 

·

23,472,305 Subordinate Voting Shares issuable from time to time upon the settlement of Restricted Stock Units (“RSUs”);

 

 

 

 

·

406,283,821 Subordinate Voting Shares issuable upon the exercise of warrants with a weighted average exercise price of $0.61;

 

 

 

 

·

1,075,025,610 Subordinate Voting Shares issuable upon conversion of the aggregate principal amount, and if applicable, accrued interest, of convertible notes with a weighted average conversion price of $0.23 per share;

 

 

 

 

·

725,017 Subordinate Voting Shares issuable upon redemption of Redeemable Units of MM Enterprises USA, LLC (“MedMen LLC “);

 

 

 

 

·

19,323,878 Subordinate Voting Shares issuable upon redemption of Redeemable Units, which are issuable upon conversion of LTIP Units. See “MedMen LLC LTIP Units” under the Section “Description of Capital Stock

 

 

 

 

·

105,458,559 Subordinate Voting Shares issuable upon redemption of Class B Redeemable Shares of MM CAN USA, Inc. (“Redeemable Shares”);

 

 

 

 

·

149,179,797 Subordinate Voting Shares issuable upon redemption of Redeemable Shares of MM CAN, which are issuable upon exercise of warrants with a weighted average conversion price of $0.24 per share; and

 

 

 

 

·

200,000,000 additional Subordinate Voting Shares reserved for future issuance under our 2018 Stock and Incentive Plan.

 

 

 

Unless otherwise indicated, all information in this prospectus reflects or assumes no exercise or termination of options or warrants, vesting of RSUs, no conversion of any convertible notes, and no redemption of Redeemable Units or Redeemable Shares outstanding as of March 18, 2021.

 

  

 
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FORWARD-LOOKING INFORMATION

 

This registration statement includes “forward-looking information” and “forward-looking statements” within the meaning of Canadian securities laws and United States securities laws (collectively, “forward-looking information”). All information, other than statements of historical facts, included in this registration statement that addresses activities, events or developments that the Company expects or anticipates will or may occur in the future is forward-looking information. Forward-looking information is often identified by the words “may”, “would”, “could”, “should”, “will”, “intend”, “plan”, “anticipate”, “believe”, “estimate”, “expect” or similar expressions and includes, among others, information and statements regarding:    

 

 

·

the business, revenue, results and future activities of, and developments related to, the Company after the date of this MD&A, including as a result of the impact of COVID-19, and planned reductions of operating expenses,

 

 

 

 

·

future business strategy, competitive strengths, goals, future expansion and growth of the Company’s business and operations,

 

 

 

 

·

the successful implementation of cost reduction strategies and plans, expectations and any targets for such strategies and plans, including expected additional improvements in reduction of Corporate SG&A (Non-GAAP) in upcoming quarters,

 

 

 

 

·

whether any proposed transactions will be completed on the current terms and contemplated timing,

 

 

 

 

·

expectations for the effects of any such proposed transactions, including the potential number and location of dispensaries or licenses to be acquired or disposed of,

 

 

 

 

·

the ability of the Company to successfully achieve its business objectives as a result of completing such proposed acquisitions or dispositions,

 

 

 

 

·

the contemplated use of proceeds remaining from previously completed capital raising activities,

 

 

 

 

·

the application for additional licenses and the grant of licenses or renewals of existing licenses for which the Company has applied or expects to apply,

 

 

 

 

·

the rollout of new dispensaries, including as to the number of planned dispensaries to be opened in the future and the timing and location in respect of the same, and related forecasts,

 

 

 

 

·

the expansion into additional markets,

 

 

 

 

·

expectations as to the development and distribution of the Company’s brands and products,

 

 

 

 

·

new revenue streams,

 

 

 

 

·

the impact of the Company’s digital and online strategy,

 

 

 

 

·

the implementation or expansion of the Company’s in-store and curbside pickup services,

 

 

 

 

·

the ability of the Company to successfully execute its strategic plans,

 

 

 

 

·

any changes to the business or operations as a result of any potential future legalization of adult-use and/or medical cannabis under U.S. federal law,

 

 

 

 

·

expectations of market size and growth in the United States and the states in which the Company operates or contemplates future operations and the effect that such growth will have on the Company’s financial performance,

 

 

 

 

·

statements that imply or suggest that returns may be experienced by investors or the level thereof,

 

 

 

 

·

expectations for other economic, business, regulatory and/or competitive factors related to the Company or the cannabis industry generally, and

 

 

 

 

·

other events or conditions that may occur in the future.

  

Readers are cautioned that forward-looking information and statements are not based on historical facts but instead are based on assumptions, estimates, analysis and opinions of management of the Company at the time they were provided or made in light of its experience and its perception of trends, current conditions and expected developments, as well as other factors that management believes to be relevant and reasonable in the circumstances, and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, as applicable, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information and statements.

 

 
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Forward-looking information and statements are not a guarantee of future performance and are based upon estimates and assumptions of management at the date the statements are made including among other things estimates and assumptions about:

 

 

·

the impact of epidemic diseases, such as the recent outbreak of the COVID-19 illness,

 

 

 

 

·

contemplated dispositions being completed on the current terms and current contemplated timeline,

 

 

 

 

·

development costs remaining consistent with budgets,

 

 

 

 

·

the ability to raise sufficient capital to advance the business of the Company and to fund planned operating and capital expenditures and acquisitions,

 

 

 

 

·

the ability to manage anticipated and unanticipated costs,

 

 

 

 

·

achieving the anticipated results of the Company’s strategic plans,

 

 

 

 

·

increasing gross margins, including relative to increases in revenue,

 

 

 

 

·

the amount of savings, if any, expected from cost-cutting measures and divestitures of non-core assets,

 

 

 

 

·

favorable equity and debt capital markets,

 

 

 

 

·

the availability of future funding under the Company’s equity and debt finance facilities,

 

 

 

 

·

stability in financial and capital markets,

 

 

 

 

·

the ability to sustain negative operating cash flows until profitability is achieved,

 

 

 

 

·

the ability to satisfy operational and financial covenants under the Company’s existing debt obligations,

 

 

 

 

·

favorable operating and economic conditions,

 

 

 

 

·

political and regulatory stability,

 

 

 

 

·

obtaining and maintaining all required licenses and permits,

 

 

 

 

·

receipt of governmental approvals and permits,

 

 

 

 

·

sustained labor stability,

 

 

 

 

·

favorable production levels and sustainable costs from the Company’s operations,

 

 

 

 

·

consistent or increasing pricing of various cannabis products,

 

 

 

 

·

the ability of the Company to negotiate favorable pricing for the cannabis products supplied to it,

 

 

 

 

·

the level of demand for cannabis products, including the Company’s and third-party products sold by the Company,

 

 

 

 

·

the continuing availability of third-party service providers, products and other inputs for the Company’s operations, and

 

 

 

 

·

the Company’s ability to conduct operations in a safe, efficient and effective manner.

  

 
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While the Company considers these estimates and assumptions to be reasonable, the estimates and assumptions are inherently subject to significant business, social, economic, political, regulatory, public health, competitive and other risks and uncertainties, contingencies and other factors that could cause actual performance, achievements, actions, events, results or conditions to be materially different from those projected in the forward-looking information and statements. Many estimates and assumptions are based on factors and events that are not within the control of the Company and there is no assurance they will prove to be correct. Risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, as applicable, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information and statements include, among others:

 

 

·

uncertain and changing U.S. regulatory landscape and enforcement related to cannabis, including political risks,

 

 

 

 

·

risks and uncertainties related to the recent outbreak of COVID-19 and the impact it may have on the global economy and retail sector, particularly the cannabis retail sector in the states in which the Company operates, and on regulation of the Company’s activities in the states in which it operates, particularly if there is any resurgence of the pandemic in the future,

 

 

 

 

·

the inability to raise necessary or desired funds,

 

 

 

 

·

recurring losses from operations and a net working capital deficiency that raises substantial doubt about the Company’s  ability to continue as a going concern,

 

 

 

 

·

the inability to satisfy operational and financial covenants under the Company’s existing debt obligations and other ongoing obligations as they become payable,

 

 

 

 

·

funds being raised on terms that are not favorable to the Company, to the ability to operate the Company’s

 

 

 

 

·

business or to existing shareholders, including as a result of the anti-dilution protections that have been provided under the terms of the company’s credit facilities,

 

 

 

 

·

the inability to consummate the proposed dispositions and the inability to obtain required regulatory approvals and third-party consents and the satisfaction of other conditions to the consummation of the proposed dispositions on the proposed terms and schedule,

 

 

 

 

·

the potential adverse impacts of the announcement or consummation of the proposed dispositions on relationships, including with regulatory bodies, employees, suppliers, customers and competitors,

 

 

 

 

·

the diversion of management time on the proposed dispositions,

 

 

 

 

·

risks related to future acquisitions or dispositions, resulting in unanticipated liabilities,

 

 

 

 

·

reliance on the expertise and judgment of senior management of the Company,

 

 

 

 

·

adverse changes in public opinion and perception of the cannabis industry,

 

 

 

 

·

risks relating to anti-money laundering laws and regulation,

 

 

 

 

·

risks of new and changing governmental and environmental regulation,

 

 

 

 

·

risk of costly litigation (both financially and to the brand and reputation of the Company and relationships with third parties),

 

 

 

 

·

risks related to contracts with and the inability to satisfy obligations to third-party service providers,

 

 

 

 

·

risks related to the unenforceability of contracts,

 

 

 

 

·

the limited operating history of the Company,

 

 

 

 

·

risks inherent in an agricultural business,

 

 

 

 

·

risks related to proprietary intellectual property and potential infringement by third parties,

 

 

 

 

·

risks relating to financing activities including leverage,

 

 

 

 

·

the inability to effectively manage growth,

 

 

 

 

·

errors in financial statements and other reports,

 

 

 

 

·

costs associated with the Company being a publicly-traded company, including given the loss of foreign private issuer status under U.S. securities laws,

 

 

 

 

·

the dilutive impact of raising additional financing through equity or convertible debt given the decline in the Company’s share price,

 

 

 

 

·

increasing competition in the industry,

 

 

 

 

·

increases in energy costs,

 

 

 

 

·

risks associated with cannabis products manufactured for human consumption, including potential product recalls,

 

 

 

 

·

inputs, suppliers and skilled labor being unavailable or available only at uneconomic costs,

 

 

 

 

·

breaches of and unauthorized access to the Company’s systems and related cybersecurity risks,

 

 

 

 

·

constraints on marketing cannabis products,

 

 

 

 

·

fraudulent activity by employees, contractors and consultants,

 

 

 

 

·

tax and insurance related risks, including any changes in cannabis or cultivation tax rates,

 

 

 

 

·

risks related to the economy generally,

 

 

 

 

·

conflicts of interest of management and directors,

 

 

 

 

·

failure of management and directors to meet their duties to the Company, including through fraud or breaches of their fiduciary duties,

 

 

 

 

·

risks relating to certain remedies being limited and the difficulty of enforcement of judgments and effect service outside of Canada,

 

 

 

 

·

sales by existing shareholders negatively impacting market prices,

 

 

 

 

·

the limited market for securities of the Company, and

 

 

 

 

·

limited research and data relating to cannabis.

  

 
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Readers are cautioned that the foregoing lists are not exhaustive of all factors, estimates and assumptions that may apply to or impact the Company’s results. Although the Company has attempted to identify important factors that could cause actual results to differ materially from the forward-looking information and statements contained in this this registration statement, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such forward-looking information and statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such information and statements. Accordingly, readers should not place undue reliance on forward-looking information and statements. The forward-looking information and statements contained herein are presented to assist readers in understanding the Company’s expected financial and operating performance and the Company’s plans and objectives and may not be appropriate for other purposes. The forward-looking information and statements contained in this registration statement represents the Company’s views and expectations as of the date of this prospectus unless otherwise indicated. The Company anticipates that subsequent events and developments may cause its views and expectations to change. However, while the Company may elect to update such forward-looking information and statements at a future time, it has no current intention of and assumes no obligation for doing so, except to the extent required by applicable law.

 

Readers should read this registration statement and the documents that the Company references herein and has filed with the Securities and Exchange Commission at www.sec.gov completely and with the understanding that the Company’s actual future results may be materially different from what it expects.

 

For further discussion of these and other factors see “Risk Factors” in this prospectus. This prospectus and all other written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in or referred to in this section.

 

 
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RISK FACTORS

 

The risks and uncertainties described below could materially and adversely affect our business, financial condition and results of operations and could cause actual results to differ materially from our expectations. The risk factors described below include the considerable risks associated with the current economic environment and the related potential adverse effects on our 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 our Consolidated Financial Statements and related notes for the fiscal year ended June 27, 2020. There also may be other factors that we cannot anticipate or that are not described in this report generally because we do not currently perceive them to be material. Those factors could cause results to differ materially from our expectations.

 

RISKS ASSOCIATED WITH THE BUSINESS OF THE COMPANY

 

Since cannabis continues to be a Controlled Substance under the United States Federal Controlled Substances Act (the “CSA”), there can be no assurance that 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. To MedMen’s knowledge, there are to date a total of 33 states, and the District of Columbia, that have now legalized cannabis in some form, including the states in which MedMen operates. 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.

 

The recent change in Presidential administration will result in a change of leadership including the appointment of a new Attorney General of the United States of America.  At this time it is uncertain what policies the new President or Attorney General will take regarding the enforcement of federal cannabis laws.  Under the prior administration, federal prosecutors were 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, but there were no such prosecutions. Due to the fact the leadership of the Department of Justice is changing 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 the current administration and Department of Justice has not articulated a policy regarding state legal cannabis. It is unclear what position the new Attorney General, once confirmed by the United States Senate, will take. 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 MedMen 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 new 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 MedMen and the MedMen 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 the assets of MedMen, and to recover the “illicit profits” previously distributed to shareholders resulting from any of the foregoing financing or services. In these circumstances, MedMen’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.

 

 
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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, its capital, financial position, operating results, profitability or liquidity or the market price of its 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 Company’s business is highly regulated and dependent in large part on the ability to obtain or renew government permits and licenses for its current and contemplated operations, of which there can be no assurance.

 

MedMen’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 MedMen’s 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 the control of MedMen may cause material adverse effects to MedMen.

 

MedMen is required to obtain or renew government permits and licenses for its 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 MedMen’s part. The duration and success of MedMen’s efforts to obtain, amend and renew permits and licenses are contingent upon many variables not within its control, including the interpretation of applicable requirements implemented by the relevant permitting or licensing authority. MedMen 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 of MedMen. To the extent necessary permits or licenses are not obtained, amended or renewed, or are subsequently suspended or revoked, MedMen 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 MedMen’s business, financial condition, results of operations or prospects.

 

While MedMen’s compliance controls have been developed to mitigate the risk of any material violations of any license or certificate it holds arising, there is no assurance that MedMen’s 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 of MedMen and have a material adverse effect on MedMen’s business, financial condition, results of operations or prospects.

 

MedMen 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 MedMen’s reputation, require MedMen to take, or refrain from taking, actions that could harm its operations or require MedMen 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 MedMen’s business, financial condition, results of operations or prospects.

 

 
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Public Opinion and Perception

 

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 MedMen’s 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 MedMen 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 MedMen’s expansion strategy may have a material adverse effect on MedMen’s 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 Company’s expansion strategy or could restrict the products which the Company sells at its existing operations, which may have a material adverse effect on the Company’s business, results of operations or prospects.

 

Adverse legal, regulatory or political changes could have a material adverse effect on the Company’s current and planned operations.

 

The success of the business strategy of MedMen 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. To MedMen’s knowledge, there are to date a total of 47 states, and the District of Columbia, Puerto Rico, the U.S. Virgin Islands and Guam that have legalized cannabis in some form, 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 MedMen’s business, results of operations, financial condition or prospects.

 

Delays in enactment of new state or federal regulations could restrict the ability of MedMen to reach strategic growth targets and lower return on investor capital. The strategic growth strategy of MedMen 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, the growth targets of MedMen, and thus, the effect on the return of investor capital, could be detrimental. MedMen 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, MedMen’s 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 MedMen and its business, results of operations, financial condition and prospects.

 

 
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MedMen 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 MedMen’s business, results of operations, financial condition or prospects.

 

The commercial medical and adult-use cannabis industry is in its infancy and MedMen anticipates that such regulations will be subject to change as the jurisdictions in which MedMen does business matures. MedMen has in place a detailed compliance program headed by its SVP of Legal who oversees, maintains, and implements the compliance program and personnel. In addition to MedMen’s robust legal and compliance departments, MedMen also has local regulatory/compliance counsel engaged in every jurisdiction (state and local) in which it operates. Such counsel regularly provides legal advice to MedMen regarding compliance with state and local laws and regulation and MedMen’s legal and compliance exposures under United States federal law. MedMen’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, MedMen 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. MedMen 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 of MedMen to respond to the changing regulatory landscape may cause it to not be successful in capturing significant market share and could otherwise harm its business, results of operations, financial condition or prospects.

 

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 MedMen’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.

 

MedMen 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.

 

 
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In February 2014, 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 Department of Justice’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 Department of Justice’s enforcement priorities could result in the Department of Justice prosecuting banks and financial institutions for crimes that previously were not prosecuted.

 

In the event that any of MedMen’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 of MedMen to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. 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 MedMen’s proceeds from operations (or any future operations or investments in the United States) could reasonably be shown to constitute proceeds of crime, MedMen 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 MedMen 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 MedMen will be able to legally enforce contracts it enters into if necessary. MedMen cannot be assured that it will have a remedy for breach of contract, which could have a material adverse effect on MedMen’s business, revenues, operating results, financial condition and prospects.

 

Failure to comply with applicable environmental laws, regulations and permitting requirements may result in enforcement actions thereunder.

 

MedMen’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. There is no assurance that future changes in environmental regulation, if any, will not adversely affect MedMen’s operations.

 

Government approvals and permits are currently, and may in the future, be required in connection with MedMen’s operations. To the extent such approvals are required and not obtained, MedMen may be curtailed or prohibited from its current or proposed production, manufacturing or sale of marijuana or marijuana 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 thereunder, 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. MedMen 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.

  

 
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Amendments to current laws, regulations and permits governing the production, manufacturing or sale of marijuana or marijuana products, or more stringent implementation thereof, could have a material adverse impact on MedMen 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 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 Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking controlled substances (within the meaning of Schedule I and II of the CSA). 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 MedMen were to experience a bankruptcy, there is no guarantee that U.S. federal bankruptcy protections would be available to MedMen’s United States operations, which would materially adversely affect prospects of MedMen and on the rights of lenders to and securityholders of MedMen.

 

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 MedMen were to experience a bankruptcy, there is no guarantee that U.S. federal bankruptcy protections would be available to MedMen’s United States operations, which could have a material adverse effect on the business, capital, financial condition and prospects of MedMen and on the rights of lenders to and securityholders of MedMen.

 

The audited financial statements of MedMen have been prepared on a going concern basis.

 

The audited financial statements of MedMen for the fiscal year ended June 27, 2020 have been 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. MedMen’s primary sources of capital resources are anticipated to be comprised of cash and cash equivalents and the issuance of equity and debt securities. MedMen will continuously monitor 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. MedMen’s ability to continue as a going concern in the near-term is expected to be dependent on obtaining additional financing to settle its liabilities. In the long-term, MedMen’s ability to continue as a going concern is expected to be dependent on achieving and maintaining profitable operations. While MedMen has been successful in securing both equity and debt financing from the public and private capital markets to date as applicable in Canada, the United States and internationally, there are no guarantees that MedMen will be able to secure any such public or private equity or debt financing in the future on terms acceptable to MedMen, if at all, or be able to achieve profitability. This could in turn have a material adverse effect on MedMen’s business, financial condition, results of operations, cash flows or prospects.

 

As a high growth enterprise, MedMen does not have a history of profitability. As such, MedMen has no immediate prospect of generating profit from its intended operations. MedMen 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. There is no assurance that the Company will generate sufficient revenues in the near future, and it may continue to incur negative operating cash flows for the foreseeable future. There is no assurance that MedMen will be successful in achieving a return on shareholders’ investment.

 

 
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MedMen will require additional financing to achieve its business objectives.

 

The continued development of the Company 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 current business objectives. There can be no assurance that additional capital or other types of financing will be available if needed or that, if available, will be on terms acceptable to the Company. If additional funds are raised by offering equity securities or convertible debt, existing MedMen Shareholders could suffer significant dilution. Any debt financing secured in the future could involve the granting of security against assets of the Company and also contain restrictive covenants relating to capital raising activities and other financial and operational matters, which may make it more difficult for the Company to obtain additional capital and to pursue business opportunities, including potential acquisitions. The Company has completed the sale and leaseback of certain properties and is contemplating completing the same in respect of additional properties. The reduction in the Company’s real estate assets could cause securing any additional debt financing to be more difficult or on less favorable terms to the Company, 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 the Company believes that it will be able to obtain the necessary funding as in the past, there can be no assurance of the success of these plans.

 

MedMen’s operations and financial condition could be adversely impacted by a material downturn in global financial conditions.

 

Following the onset of the credit crisis in 2008, global financial conditions were characterized by extreme volatility and several major financial institutions either went into bankruptcy or were rescued by governmental authorities. While global financial conditions subsequently stabilized, there remains considerable risk in the system given the extraordinary measures adopted by government authorities to achieve that stability. Global financial conditions could suddenly and rapidly destabilize in response to future economic shocks, as government authorities may have limited resources to respond to future crises.

 

Future economic shocks may be precipitated by a number of causes, including a rise in the price of oil, geopolitical instability and natural disasters. Any sudden or rapid destabilization of global economic conditions could impact MedMen’s ability to obtain equity or debt financing in the future on terms favorable to MedMen. 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, MedMen’s 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 MedMen’s 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 MedMen’s business, financial condition, results of operations or prospects.

 

The global COVID-19 pandemic has and will continue to have an adverse effect on our results of operations.

 

The novel strain of coronavirus, COVID-19, is believed to have been first identified in China in late 2019 and has spread globally. The rapid spread has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders and shutdowns. These measures may continue to impact all or portions of our workforce, operations, investors, suppliers and customers. We have taken steps to manage the effect of the pandemic on our corporate business and on the assets we manage, which has included: (i) suspending any unnecessary capital improvements; (ii) furloughing any non-essential employees; and (iii) having constant communications with lenders to receive additional facilities and suspend compliance with certain financial covenants.

 

 
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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. For the fiscal fourth quarter of 2020, system-wide retail revenue was $27.4 million across the Company’s operations in California, Nevada, New York, Illinois and Florida, representing a 40% decrease, or $18.0 million, over the fiscal third quarter of 2020 of $45.4 million. The decrease in system-wide revenue was driven primarily by decreased sales as a result of COVID-19. In particular, certain retail locations in California and Nevada experienced a slowdown in sales during the fiscal fourth quarter of 2020 due to shelter-at-home orders, reduced store hours and reduced tourism.  During the three months ended June 27, 2020, the Company temporarily closed all three of its locations in Nevada for eight weeks due to a state-level mandate post-COVID-19. All three locations were open as of June 27, 2020. Furthermore, during the year ended June 27, 2020, the Company recognized impairments of long-lived assets and other assets totaling $239.5 million due to changes in anticipated revenue projections as a result of recent economic and market conditions related to the COVID-19 pandemic and current regulatory environment. On March 27, 2020, the CARES Act was signed into law. Other markets, such as Illinois, Florida and New York, have not been as 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.

 

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 during the year ended June 27, 2020.

 

While the Company continues to execute on its efforts to improve store profitability, reduce selling, general and administrative expense and delay capital-intensive projects, the Company is reassessing the timing of these cash flow milestones due to the potential impact of COVID-19 on its turnaround plan. To date, 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 our 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 our stores which has had, and will likely continue to have, a material adverse effect on our business, financial condition and results of operations.

 

In recent weeks, the COVID-19 pandemic has also significantly increased 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 our ongoing operations and cash flows. There has been a recent spike in the number of reported COVID-19 cases 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 our 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 continues, 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.

 

 
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The Company’s existing credit facilities impose significant restrictive provisions on MedMen’s current and planned operations.

 

MedMen and MedMen Corp. have significant outstanding indebtedness further to which the assets of the Company and its subsidiaries as well as the ownership interests of certain subsidiaries of the Company, have been pledged as security for the obligations thereunder. In addition, the terms and conditions of the Company’s credit facilities contain restrictive covenants that limit the Company’s 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 the Company’s 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 the Company’s systems and resources. The Company’s 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 the Company’s 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 Company’s existing credit facilities, any of which would have a material adverse effect on the Company’s business, capital, financial condition, results of operations, cash flows and prospects.

 

The Company has 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 the Company is unable to raise sufficient capital to repay these obligations at maturity and is otherwise unable to extend the maturity dates or refinance these obligations, the Company would be in default. The Company cannot provide any assurances that it 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 it will be able to extend the maturity dates or otherwise refinance these obligations. 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 the Company would have a material adverse effect on the Company’s business, capital, financial condition and prospects, and the Company would likely be forced to seek bankruptcy protection.

 

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, MedMen’s cash flows and ability to complete current or desirable future opportunities are dependent on the earnings of its 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 MedMen’s 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 Company’s results of operations.

 

MedMen 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 of MedMen. 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.

 

 
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MedMen 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, MedMen 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, MedMen 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 MedMen could result in increased costs, could adversely affect MedMen’s reputation with its clients and consumers generally, and could have a material adverse effect on the business, results of operations, financial condition or prospects of MedMen. There can be no assurances that MedMen 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 MedMen’s potential products or otherwise have a material adverse effect on the business, results of operations, financial condition or prospects of MedMen.

 

 If one of MedMen’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 MedMen sells will not be the subject of a product recall, regulatory action or lawsuit. Although MedMen 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 MedMen’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.

 

MedMen 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 MedMen’s products.

 

Adult-use and medical marijuana growing operations consume considerable energy, making MedMen potentially vulnerable to rising energy costs. Rising or volatile energy costs may adversely impact the business, results of operations, financial condition or prospects of MedMen.

 

 
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Dependence on Suppliers and Skilled Labor.

 

The ability of MedMen to compete and grow will be dependent on it having access, at a reasonable cost and in a timely manner, to skilled labor, equipment, parts and components. No assurances can be given that MedMen 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 MedMen’s capital expenditure plans may be significantly greater than anticipated by MedMen’s management, and may be greater than funds available to MedMen, in which circumstance MedMen 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 of MedMen.

 

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 Company’s business, including securities, employment, regulatory, intellectual property, commercial, real estate and other matters. In this regard, in late January 2019, Mr. Parker, the Company’s former Chief Financial Officer, filed a complaint against the LLC in the Superior Court of California, County of Los Angeles, seeking damages for claims relating to his employment. The Company is currently defending against this lawsuit, which seeks damages for wrongful termination, breach of contract, and breach of implied covenant of good faith and fair dealing. Mr. Parker’s employment agreement provided for the payment of severance in the event of termination without cause. The Company disputes the claims set forth in Mr. Parker’s lawsuit. See the Statement of Executive Compensation of the Company available under the Company’s profile on SEDAR at www.sedar.com for a summary of certain terms of Mr. Parker’s employment agreement. 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 the Company 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 it 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 Company’s 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 the Company, such a decision could adversely affect the Company’s 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 Company’s brand.

 

MedMen faces intense competition from other companies.

 

MedMen faces intense competition from other companies, some of which have longer operating histories and more financial resources and experience than MedMen. MedMen also expects to face additional competition from new entrants. To become and remain competitive, MedMen will require research and development, marketing, sales and support. MedMen 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 of MedMen. Increased competition could materially and adversely affect the business, financial condition, results of operations or prospects of MedMen.

 

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 of MedMen to secure long-term profitability and success through the sustainable and profitable operation of its business. There may be unknown additional regulatory fees and taxes that may be assessed in the future.

  

 
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Intellectual property risks.

 

MedMen has certain proprietary intellectual property, including but not limited to brands, trademarks, trade names, patents and proprietary processes. MedMen 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 MedMen 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 MedMen’s proprietary information and adopt it in a competitive manner. Any loss of intellectual property protection may have a material adverse effect on MedMen’s 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, MedMen’s 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, MedMen can provide no 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 marks.

 

MedMen is substantially reliant on the continued services of its management.

 

The success of MedMen is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management. While employment agreements or management agreements are customarily used as a primary method of retaining the services of key employees, these agreements cannot assure the continued services of such employees. Any loss of the services of such individuals could have a material adverse effect on MedMen’s business, operating results, financial condition or prospects.

 

MedMen is exposed to the risk that its employees, independent contractors and consultants may engage in fraudulent or other illegal activity.

 

MedMen 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 MedMen to identify and deter misconduct by its employees and other third parties, and the precautions taken by MedMen to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting MedMen 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 MedMen, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on MedMen’s 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 MedMen’s operations, any of which could have a material adverse effect on MedMen’s business, financial condition, results of operations or prospects.

 

The failure of MedMen’s information systems or the effect of any cyber-attacks may adversely impact MedMen’s reputation and results of operations.

 

MedMen’s operations depend, in part, on how well it 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. MedMen’s 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 MedMen’s reputation and results of operations.

 

 
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MedMen has not experienced any material losses to date relating to cyber-attacks or other information security breaches, but there can be no assurance that MedMen will not incur such losses in the future. MedMen’s 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, MedMen 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, MedMen collects and stores personal information about its customers and is 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 MedMen’s business, financial condition, results of operations and prospects.

 

Risk associated with acquisitions.

 

As part of MedMen’s overall business strategy, MedMen has in the past and intends to continue to pursue select strategic acquisitions. The Company currently does not have any pending acquisitions. The success of any such acquisitions depends, in part, on the ability of MedMen to realize the anticipated benefits and synergies from integrating the applicable acquired entities or assets into the businesses of MedMen’s past and future acquisitions may expose it to potential risks, including risks associated with: (i) the integration of new operations, services and personnel; (ii) unknown or undisclosed liabilities; (iii) the diversion of resources from MedMen’s existing businesses; (iv) potential inability to generate sufficient revenue to offset new costs; (v) the expenses of acquisitions; and (vi) the potential loss of or harm to relationships with both employees and consultants and existing customers, vendors, suppliers, contractors and other applicable parties resulting from its integration of new businesses. In addition, any proposed acquisitions may be subject to regulatory approval.

 

While MedMen intends to conduct reasonable due diligence in connection with such strategic acquisitions, there are risks inherent in any acquisition. Specifically, there could be unknown or undisclosed risks or liabilities of such entities or assets for which MedMen is not sufficiently indemnified. Any such unknown or undisclosed risks or liabilities could materially and adversely affect MedMen’s financial performance and results of operations. MedMen could encounter additional transaction and integration related costs or other factors such as the failure to realize all of the benefits from the acquisition. All of these factors could cause dilution to MedMen’s revenue per share or decrease or delay the anticipated accretive effect of the acquisition and cause a decrease in the market price of the Subordinate Voting Shares and other listed securities of MedMen.

 

MedMen may not be able to successfully integrate and combine the operations, personnel and technology infrastructure of any such strategic acquisition with its existing operations. If integration is not managed successfully by MedMen’s management, MedMen may experience interruptions in its business activities, deterioration in its employee, customer or other relationships, increased costs of integration and harm to its reputation, all of which could have a material adverse effect on MedMen’s business, prospects, financial condition, results of operations and cash flows.

 

MedMen may be subject to growth-related risks including capacity constraints and pressure on its internal systems and controls.

 

The ability of MedMen to manage growth effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and manage its employee base. The inability of MedMen to deal with this growth may have a material adverse effect on MedMen’s business, financial condition, results of operations or prospects.

  

 
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Effective internal controls, including financial reporting and disclosure controls and procedures, are necessary for MedMen to provide reliable financial reports, to effectively reduce the risk of fraud and to operate successfully as a public company. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm MedMen’s results of operations or cause it to fail to meet its reporting obligations. If MedMen or its auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in MedMen’s consolidated financial statements and materially adversely affect the trading price of the Subordinate Voting Shares and of other listed securities of MedMen.

 

Situations may arise in connection with potential acquisitions or opportunities where the other interests of interested directors and officers conflict with or diverge from the Company’s interests.

 

Certain of the Company’s directors and officers are, and may continue to be, or may become, involved in other business ventures through their direct and indirect participation in, among other things, corporations, partnerships and joint ventures, that are or may become competitors of the products and services the Company provides or intends to provide. Situations may arise in connection with potential acquisitions or opportunities where the other interests of these directors and officers conflict with or diverge from the Company’s interests. In accordance with applicable corporate law, directors who have a material interest in a contract or transaction or a proposed contract or transaction with the Company that is material to the Company are required, subject to certain exceptions, to disclose that interest and generally abstain from voting on any resolution to approve the transaction. In addition, the directors and officers are required to act honestly and in good faith with a view to the Company’s best interests. However, in conflict of interest situations, the Company’s directors and officers may owe the same duty to another company and will need to balance their competing interests with their duties to the Company. Circumstances (including with respect to future corporate opportunities) may arise that may be resolved in a manner that is unfavorable to the Company.

 

Certain remedies may be limited.

 

MedMen’s governing documents may provide that the liability of MedMen Board and its officers is eliminated to the fullest extent permitted under the laws of the Province of British Columbia. Thus, MedMen and the MedMen Shareholders may be prevented from recovering damages for alleged errors or omissions made by the members of MedMen Board and its officers. MedMen’s governing documents may also provide that MedMen will, to the fullest extent permitted by law, indemnify members of the MedMen Board and its officers for certain liabilities incurred by them by virtue of their acts on behalf of MedMen.

 

The directors and officers of MedMen reside outside of Canada. Some or all of the assets of such persons may be located outside of Canada. Therefore, it may not be possible for investors to collect or to enforce judgments obtained in Canadian courts predicated upon the civil liability provisions of applicable Canadian securities laws against such persons. Moreover, it may not be possible for investors to effect service of process within Canada upon such persons.

 

United States Tax Classification of the Company

 

The Company, which is and will continue to be a Canadian corporation as of the date of this prospectus, 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 is expected 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 its financial condition and results of operations.

 

 
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We have identified material weaknesses in our internal control over financial reporting and may identify additional material weaknesses in the future that may cause us to fail to meet our reporting obligations or result in material misstatements of our financial statements. If we fail to remediate any material weaknesses or if we fail to establish and maintain effective control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected.

 

Our 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.

 

During the year ended June 27, 2020, the Company’s independent auditors identified a material weakness in the Company’s internal control over financial reporting relating to its assessment of goodwill and long-lived asset for impairment. In connection with the SEC’s review of this Form 10, we determined that we had a material weakness in our internal control over financial reporting relating to the appropriate review of the presentation and disclosure of non-routine transactions, including impairments of goodwill and long-lived assets, changes in the fair value of contingent consideration and restructuring expenses. To address these material weaknesses, we have instituted a number of accounting processes and procedures, which includes i) formal, documented process to identify, assess and calculate impairment on goodwill and long-lived assets, and ii) the preparation of presentation and disclosure requirement checklists to be reviewed by management for all new transactions and accounting standards.

 

To remediate the material weakness related to the assessment of goodwill and long-lived asset for impairment, the Company has implemented the new control procedures for the fiscal year beginning June 28, 2020, however, this internal control weakness will not be considered fully remediated until the new control procedures operate for a sufficient period of time and management has concluded that these controls are operating effectively. To remediate the material weakness related to the financial statement presentation of non-routine transactions, the Company has  implemented additional controls around the review of financial statement presentation and disclosure for such transactions, including the preparation and review of a quarterly disclosure checklist. The Company is actively engaged in the implementation of its remediation efforts to address this internal control weakness. Accordingly, the material weakness will not be considered fully remediated until the new control procedures are implemented for a sufficient period of time and management has concluded that these controls are operating effectively. The actions we have taken are subject to continued review, supported by confirmation and testing by management. While we have implemented a plan to remediate the material weaknesses, we cannot assure you that we will be able to remediate this weakness, which could impair our ability to accurately and timely report our financial position, results of operations or cash flows.

 

Our failure to remediate the material weaknesses identified above or the identification of additional material weaknesses in the future, could adversely affect our ability to report financial information, including our filing of quarterly or annual reports with the SEC on a timely and accurate basis. Moreover, our failure to remediate the material weaknesses identified above or the identification of additional material weaknesses could prohibit us from producing timely and accurate financial statements, which may adversely affect the market price of our shares and we may be unable to maintain compliance with exchange listing requirements.

 

RISKS ASSOCIATED WITH THE SECURITIES OF THE COMPANY

 

Voting control by Gotham Green Partners, LLC and other shareholders may limit your ability to influence the outcome of director elections and other matters requiring shareholder approval.

 

As of December 31, 2020, Gotham Green Partners, LLC (“GGP”) beneficially owned approximately 21.1% of the Company's Subordinate Voting Shares. Furthermore, pursuant to the GGP Facility, GGP has the right to nominate a majority of the Company’s Board of Directors while the aggregate principal amount outstanding under the Notes is more than $25.0 million, and, while the Notes are outstanding, the lenders will be entitled to the collective rights to appoint a representative to attend all meetings of the Board of Directors in a non-voting observer capacity. Plus, the Company may not hire or terminate any “C-level” employee without GGP’s prior written consent.  This concentration of control may adversely affect the trading price for the Subordinate Voting Shares because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, some or all of our significant stockholders, if they were to act together, would be able to control our 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 our assets. In addition, GGP’s interests may not align with our interests as a company or the interests of our other shareholders. Accordingly, GGP could cause us to enter into transactions or agreements of which our shareholders would not approve or make decisions with which our 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 our other shareholders and may prevent our shareholders from realizing a premium over the current market price for their shares of common stock. Furthermore, our significant shareholders may also have interests that differ from yours and may vote their Subordinate Voting Shares in a way with which you disagree and which may be adverse to your interests.

 

 
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Unpredictability caused by MedMen’s capital structure.

 

Given the other unique features of the capital structure of MedMen, 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, MedMen 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.

 

Additional issuance of securities may result in dilution.

 

MedMen may issue additional securities in the future, which may dilute a MedMen shareholder’s holdings in MedMen. MedMen’s articles permit the issuance of an unlimited number of Subordinate Voting Shares, and MedMen shareholders will have no pre-emptive 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. MedMen 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 MedMen 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 in the Company.

 

 The market price of the Company’s Subordinate Voting Shares is volatile and subject to wide fluctuations.

 

The market price of the Subordinate Voting Shares has been and may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond MedMen’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 MedMen’s 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 MedMen operates, acquisitions, dispositions, strategic partnerships, joint ventures, capital commitments or other material public announcements by MedMen or its competitors or government and regulatory authorities, operating and share price performance of the companies that investors deem comparable to MedMen, addition or departure of MedMen’s 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, including the September Warrants and the December Warrants, may decline even if MedMen’s 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, MedMen’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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USE OF PROCEEDS

 

We will not receive any proceeds from the sale or other disposition of the Subordinated Voting Shares offered by the selling shareholders. We will, however, receive the exercise price of any warrants exercised for cash. To the extent that we receive cash upon exercise of any warrants, we expect to use that cash for working capital and general corporate purposes.

  

 DIVIDEND POLICY

 

The Company has not declared distributions on Subordinate Voting Shares in the past. The Company currently intends to reinvest all future earnings to finance the development and growth of its business. As a result, the Company does not intend to pay dividends on Subordinate Voting Shares in the foreseeable future. Any future determination to pay distributions will be at the discretion of the Board and will depend on the financial condition, business environment, operating results, capital requirements, any contractual restrictions on the payment of distributions and any other factors that the Board deems relevant. The Company is not bound or limited in any way to pay dividends in the event that the Board determines that a dividend is in the best interest of its shareholders.

  

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 note that are included elsewhere in this prospectus.  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,” Risk Factors” and elsewhere in this prospectus.

 

You should read this discussion in conjunction with the consolidated financial statements and the related notes contained in this prospectus.

 

Basis of Presentation

 

All references to “$” and “dollars” refer to U.S. dollars. References to C$ refer to Canadian dollars. Certain totals, subtotals and percentages throughout this MD&A may not reconcile due to rounding.

 

Fiscal Period

 

The Company’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 2024. The three months ended December 26, 2020 and December 28, 2019 refer to the 13 weeks ended therein, and the six months ended December 26, 2020 and December 28, 2019 refer to the 26 weeks ended therein. The Company’s fiscal years ended June 27, 2020 and June 29, 2019 included 52 weeks.

 

Selected Financial Data

 

The following table sets forth the Company’s selected consolidated financial data for the periods, and as of the dates, indicated. The Condensed Consolidated Statements of Operations data for the three and six months ended December 26, 2020 and December 28, 2019 have been derived from the unaudited interim Condensed Consolidated Financial Statements of the Company and its subsidiaries, which are included with this prospectus. The Consolidated Statements of Operations data for the fiscal years ended June 27, 2020 and June 29, 2019 have been derived from the audited Consolidated Financial Statements of the Company and its subsidiaries, which are also included with this prospectus.

 

 
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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 unaudited interim Condensed Consolidated Financial Statements and the audited Consolidated Financial Statements and related notes included in this prospectus. The Company’s unaudited interim Condensed Consolidated Financial Statements and audited Consolidated Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and on a going concern basis that contemplates continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 26,

 

 

December 28,

 

 

December 26,

 

 

December 28,

 

($ in Millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$ 33.8

 

 

$ 44.1

 

 

$ 69.4

 

 

$ 83.7

 

Gross Profit

 

$ 17.9

 

 

$ 12.8

 

 

$ 34.8

 

 

$ 32.2

 

Loss from Operations

 

$ (26.4 )

 

$ (68.7 )

 

$ (34.5 )

 

$ (120.2 )

Total Other Expense

 

$ 19.7

 

 

$ 2.4

 

 

$ 31.4

 

 

$ 28.2

 

Net Loss from Continuing Operations

 

$ (70.1 )

 

$ (56.4 )

 

$ (100.2 )

 

$ (116.1 )

Net Loss from Discontinued Operations

 

$ 1.2

 

 

$ (36.8 )

 

$ (1.5 )

 

$ (39.9 )

Net Loss

 

$ (68.9 )

 

$ (93.2 )

 

$ (101.7 )

 

$ (156.0 )

Net Loss Attributable to Non-Controlling Interest

 

$ (19.2 )

 

$ (52.0 )

 

$ 30.1

 

 

$ (90.6 )

Net Loss Attributable to Shareholders of MedMen Enterprises Inc.

 

$ (49.7 )

 

$ (41.3 )

 

$ (71.6 )

 

$ (65.5 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Net Loss from Continuing Operations (Non-GAAP)

 

$ (63.1 )

 

$ (36.8 )

 

$ (105.0 )

 

$ (69.8 )

EBITDA from Continuing Operations (Non-GAAP)

 

$ (19.5 )

 

$ (53.4 )

 

$ (16.1 )

 

$ (109.8 )

Adjusted EBITDA from Continuing Operations (Non-GAAP)

 

$ (11.8 )

 

$ (33.4 )

 

$ (23.5 )

 

$ (66.1 )

 

 

 

Three Months Ended 

 

 

 Year Ended

 

 

 

June 27,

 

 

June 29,

 

 

June 27,

 

 

June 29,

 

($ in Millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$ 27.4

 

 

$ 35.9

 

 

$ 157.1

 

 

$ 119.9

 

Gross Profit

 

$ 11.0

 

 

$ 16.1

 

 

$ 58.1

 

 

$ 55.5

 

Loss from Operations

 

$ (284.8 )

 

$ (67.9 )

 

$ (447.4 )

 

$ (250.0 )

Total Other Expense

 

$ 13.8

 

 

$ 5.7

 

 

$ 67.9

 

 

$ 13.0

 

Net Loss from Continuing Operations

 

$ (231.2 )

 

$ (61.2 )

 

$ (475.7 )

 

$ (256.7 )

Net Loss from Discontinued Operations

 

$ (1.4 )

 

$ 0.2

 

 

$ (50.8 )

 

$ (1.3 )

Net Loss

 

$ (232.5 )

 

$ (60.9 )

 

$ (526.5 )

 

$ (257.9 )

Net Loss Attributable to Non-Controlling Interest

 

$ (135.3 )

 

$ (58.7 )

 

$ (279.3 )

 

$ (188.8 )

Net Loss Attributable to Shareholders of MedMen Enterprises Inc.

 

$ (97.3 )

 

$ (2.2 )

 

$ (247.3 )

 

$ (69.1 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Net Loss from Continuing Operations (Non-GAAP)

 

$ (37.9 )

 

$ (48.7 )

 

$ (217.1 )

 

$ (208.3 )

EBITDA from Continuing Operations (Non-GAAP)

 

$ (267.6 )

 

$ (52.0 )

 

$ (423.2 )

 

$ (219.6 )

Adjusted EBITDA from Continuing Operations (Non-GAAP)

 

$ (23.3 )

 

$ (37.7 )

 

$ (115.9 )

 

$ (169.7 )

  

 
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Fiscal Year-End and Quarterly Highlights

 

Continued Strategic Partnership with Gotham Green Partners

 

On April 23, 2019, the Company secured a senior secured convertible credit facility (the “GGP Facility”) to provide up to $250.0 million in gross proceeds, arranged by Gotham Green Partners, LLC (“GGP”). The GGP Facility has been accessed through issuances to the lenders of convertible senior secured notes (“GGP Notes”) co-issued by the Company and MM Can USA, Inc. (“MM CAN” or “MedMen Corp.”). During the fiscal year ended June 27, 2020, the Company completed the First Amendment of the GGP Facility on August 12, 2019, the Second Amendment on October 29, 2019 and the Third Amendment on March 27, 2020. Refer to “Note 18 - Senior Secured Convertible Credit Facility” of the audited Consolidated Financial Statements for the years ended June 27, 2020 and June 29, 2019. During the three months ended September 26, 2020, the Company amended and restated the GGP Facility on July 2, 2020. Refer to “Note 13 - Senior Secured Convertible Credit Facility” of the unaudited interim condensed consolidated financial statements for the three months ended September 26, 2020 and September 28, 2019 originally filed with the SEC on December 7, 2020, and as subsequently amended. As of December 26, 2020, the Company has drawn down on a total of $155,000,000 on the GGP Facility.

 

On July 12, 2019, the Company had drawn down $25,000,000 through Tranche 2 of the GGP Facility. In connection with the funding of Tranche 2, 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.

 

On November 27, 2019, the Company had drawn down $10,000,000 through Tranche 3 of the GGP Facility. In connection with the funding of Tranche 2, 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.

 

On March 27, 2020, the Company had drawn down $12,500,000 through Tranche 4 of the GGP Facility. In connection with the funding of Tranche 4, the Company issued 48,076,923 warrants to the lenders at an exercise price of $0.26 per share.

 

On April 24, 2020, the Company closed on an incremental advance in the amount of $2,500,000 under the GGP Facility at a conversion price of $0.26 per share. In connection with the incremental advance, the Company issued 9,615,385 warrants with an exercise price of $0.26 per share. In addition, 540,128 Existing Warrants were cancelled and replaced with 6,490,385 warrants with an exercise price of $0.26 per share.

 

On September 14, 2020, the Company had drawn down $5,000,000 through Tranche IA-2 of the GGP Facility. In connection with the funding of Tranche IA-2, the Company issued 25,000,000 warrants to the lenders at 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.

 

 
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On September 16, 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 per share. The value of the effect of the down round feature on convertible notes and warrants was determined to be $21,672,272 and $4,883,467, respectively. 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 September 28, 2020, the down round feature on the convertible notes and warrants in connection with Tranche 4, Incremental Advances, and certain amendment fees was triggered wherein the exercise price was adjusted to $0.15 per share. The value of the effect of the down round feature on convertible notes and warrants was determined to be $11,072,498 and $1,840,487, respectively. 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.

 

For information about further amendments to the GGP Facility, see “Business – Recent Developments” and Note 25. Subsequent Events in the Notes to the Interim Condensed Consolidated Financial Statement for the three and six months ended December 26, 2020 and December 28, 2019.

 

2018 Secured Term Loan

 

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 (“Hankey”) and with an affiliate of Stable Road Capital. On January 14, 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. 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. The principal amount of the 2018 Term Loan has been and is anticipated to be used for acquisitions, capital expenditures and other corporate purposes.

  

On January 14, 2020, the Company executed an amendment to the 2018 Term Loan 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. MedMen Corp., a subsidiary of the Company, cancelled the existing warrants issued to the lenders, being 16,211,284 warrants exercisable at $4.97 per share and 1,023,256 warrants exercisable at $4.73 per share, and issued to the lenders a total of 40,455,729 warrants with an exercise price of $0.60 per share that are exercisable until December 31, 2022. The newly issued warrants may be exercised at the election of their holders on a cashless basis.

 

On July 2, 2020, the Company further amended the 2018 Term Loan wherein the interest rate of 15.5% per annum will accrue monthly to the principal amount of the debt as a payment-in-kind effective March 1, 2020 through July 2, 2021 and thereafter until maturity on January 31, 2022, 7.75% interest per annum will be payable monthly in cash and 7.75% interest per annum will be paid-in-kind. Certain reporting and financial covenants were added and amended, and the minimum liquidity covenant was waived until September 30, 2020. The Company was permitted request an increase to the 2018 Term Loan through December 31, 2020 to be funded through incremental term loans. As consideration for the amendment, the Company cancelled 20,227,863 existing warrants exercisable at $0.60 per share held by the lenders of the 2018 Term Loan, and MM CAN issued 20,227,863 warrants at $0.34 per share that are exercisable until July 2, 2025.

 

On September 16, 2020, the Company executed an amendment to the 2018 Term Loan in which the funds available under the facility was increased by $12,000,000 through incremental term loans, of which $5,700,000 was fully committed by the lenders through October 31, 2020. The principal amount of the 2018 Term Loan, as amended, has been and is anticipated to be used for ongoing operations, capital expenditures and other corporate purposes. The additional funds accrue 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. The warrants issued in connection with the 2020 Term Loan 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 GGP Facility. As consideration for the amendment, the Company cancelled 20,227,863 existing warrants held by the lenders exercisable at $0.60 per share, and MM CAN issued 20,227,863 warrants exercisable at $0.34 per share until September 16, 2025.

  

 
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On September 16, 2020, the Company closed on an incremental term loan of $3,000,000 under the 2018 Term Loan. In connection with the incremental term loan, MM CAN issued 30,000,000 warrants with an exercise price of $0.20 per share exercisable until December 31, 2025. The newly issued warrants may be exercised at the election of the holders on a cashless basis.

 

On September 16, 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 per share. The value of the effect of the down round feature was determined to be $259,736 and recognized as an increase in additional paid-in capital.

 

On 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 $0.15 per share. The value of the effect of the down round feature was determined to be $145,744 and recognized as an increase in additional paid-in capital.

 

On October 30, 2020, the Company closed on an incremental term loan of $7,705,279 under the 2018 Term Loan. In connection with the incremental term loan, MM CAN issued 77,052,790 warrants with an exercise price of $0.20 per share until September 14, 2025. The newly issued warrants may be exercised at the election of their holders on a cashless basis. As of December 26, 2020, the Company has received total gross proceeds of $10,705,279 under the 2018 Term Loan.

 

For information about further amendments to the 2018 Term Loan, see “Business – Recent Developments” and Note 25. Subsequent Events in the Notes to the Interim Condensed Consolidated Financial Statement for the three and six months ended December 26, 2020 and December 28, 2019.

 

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 wherein the convertible debentures will 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 debentures provide for the automatic conversion into Subordinate Voting Shares in the event that the VWAP is 50% above the conversion price on the CSE for 45 consecutive trading days. The principal amounts funded under the Unsecured Convertible Facility has been and is anticipated to be used for ongoing operations, capital expenditures and other corporate purposes.

 

On September 16, 2020, the Company closed on an initial $1,000,000 under 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 the 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 for an equal number of Shares with an exercise price of $0.17 per 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 for an equal number of Shares 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 for an equal number of Shares with an exercise price of $0.18 per share. As of December 26, 2020, the Company has received total gross proceeds of $4,000,000 under the Unsecured Convertible Facility.

 

 
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Equity Financing Transactions

 

On July 10, 2019, the Company announced an equity commitment from its existing creditor, Gotham Green Partners, with participation from Wicklow Capital, in the amount of $30,000,000. As a result, the Company issued 14,634,147 Subordinate Voting Shares to the investors at a price equal to $2.37 per share.

 

On December 10, 2019, the Company executed a term sheet for a non-brokered private placement wherein Wicklow Capital participated in the offering. On January 14, 2020, the Company announced the closing of its previously announced approximately $20,000,000 non-brokered offering of Class B Subordinate Voting Shares (the “Equity Placement”). The Equity Placement was funded and closed in tranches, with the final closing occurring on January 13, 2020. As a result, 46,962,645 Class B Subordinate Voting Shares were issued in the Equity Placement at a price of $0.43 per Class B Subordinate Voting Share for gross proceeds of approximately $20,200,000. Participants in the Equity Placement included existing investor, Wicklow Capital, and certain insiders of the Company, being Adam Bierman, the former Chief Executive Officer and director of the Company, Andrew Modlin, a former President and director of the Company, and Christopher Ganan, a former director of the Company. Such insiders of the Company subscribed for and purchased an aggregate of 4,651,161 of such Class B Subordinate Voting Shares, for aggregate proceeds of $2,000,000, comprising approximately 10% of the total amount raised. Proceeds raised from the Equity Placement were used to finance working capital requirements.

 

At-the-Market Equity Financing Program

 

On April 10, 2019, the Company established an At-the-Market equity financing program (the “ATM Program”) with Canaccord Genuity Corp. (“Canaccord”) pursuant to which the Company may, from time to time, sell Class B Subordinate Voting Shares at prevailing trading prices at the time of sale for aggregate gross proceeds of up to C$60,000,000. Since Class B Subordinate Voting Shares are distributed under the ATM Program at trading prices prevailing at the time of sale, prices may vary between purchasers and during the period of distribution. The Company has used and intends to use the net proceeds from the sale of Class B Subordinate Voting Shares under the ATM Program principally for general and administrative expenses, working capital needs and other general corporate purposes.

 

During the fiscal year ended June 27, 2020, the Company sold an aggregate of 9,789,300 Subordinate Voting Shares under the ATM Program for net proceeds of $12,400,000. During the six months ended December 26, 2020, the Company did not sell any Subordinate Voting Shares under the ATM Program.

 

Real Estate Sale and Leaseback Transactions

 

During the year ended June 27, 2020, the Company sold and subsequently leased back two properties to the Treehouse Real Estate Investment Trust (the “REIT”), resulting in total gross proceeds of $20,400,000. The Company has used and intends to use such net proceeds from the sale of properties with Stable Road Capital and the REIT to assist in funding the build-out of its national footprint. The Company has leased such properties sold at market rates for cannabis businesses under long-term leases.

 

All current real estate assets of the Company have been offered for sale to the REIT. It is expected that additional sale and leaseback transactions will occur between the REIT and the Company over the next twelve months. These additional potential transactions include real estate related to retail stores and cultivation and production facilities. Any such sale of properties remains subject to ongoing due diligence by the REIT, successful negotiation and execution of definitive documentation, final approval of the Company and the REIT board and the satisfaction of customary closing conditions. The REIT has a three-year right of first offer on additional MedMen-owned facilities and development projects. The Company expects to lease all properties sold at market rates for cannabis businesses under long-term leases.

 

Overall, the purpose of the sale and leaseback transactions is to allow MedMen to raise cash equal to the excess of the sale price of the applicable property over any debt tied to the applicable property, repay any such debt and reduce interest expense related to any such debt. In the longer term, removing real property from MedMen’s Consolidated Balance Sheets is intended to free up capital for uses that MedMen believes will result in a greater return on capital for its investors. It will also transfer the risk and opportunity of fluctuating real estate prices from MedMen to the purchasers of the applicable properties.

 

 
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Landlord Support for Company Turnaround

 

The Company currently has lease arrangements with affiliates of 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.

 

Sale of Investments

 

On October 17, 2019, the Company entered into a securities transfer agreement to sell a portion of its interest in Old Pal LLC. The interests sold consisted of 86.80 Class B Units, or 6.9% of the outstanding units, at a price per unit of $57,060, resulting in an aggregate sale price of approximately $5,000,000.

 

In November 2019, the Company completed the sale of all of its interests in LCR Manager, LLC, the manager of the general partner of the REIT resulting in net proceeds of $12,500,000.

 

Amended Business Acquisitions

 

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 $15,000,000 to $13,000,000 and the maturity date was extended to April 8, 2020. On April 8, 2020, the Company entered into an 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.

 

On November 12, 2019, the Company entered into an agreement to amend a potential $15,000,000 cash earn out due in December 2020 for a previously announced acquisition to $10.0 million in Class B Subordinate Voting Shares due in December 2019. In conjunction with the amendment to settle the contingent consideration, the Company issued 10,691,455 Subordinate Voting Shares in full settlement.

 

Termination of Merger Agreement with PharmaCann

 

On October 8, 2019, MedMen and PharmaCann, LLC announced the mutual agreement to terminate their business combination (“Termination of Merger”). As part of the agreement to terminate, the Company and PharmaCann agreed to accept a transfer of assets in exchange for repayment of the existing line of credit to PharmaCann (the “Line of Credit”), which totaled approximately $21,000,000, including accrued interest. The assets transferred were 100% of the membership interests (“Transfer of Interest”) in three entities holding the following assets:

 

 

·

MME Evanston Retail, LLC, which holds a retail location in Evanston, Illinois and related licenses, and a retail license for Greater Chicago, Illinois;

 

 

 

 

·

PharmaCann Virginia, LLC, which holds a license for a vertically-integrated facility in Staunton, Virginia; and

 

 

 

 

·

PC 16280 East Twombly LLC, which holds an operational cultivation and production facility in Hillcrest, Illinois and related licenses.

  

 
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Each delivery of the Transfer of Interest, after successful regulatory approval, if any, will relieve one-third of the line of credit and any accrued interest due from PharmaCann. On December 2, 2019, the Company closed on its acquisition of PharmaCann’s Evanston, Illinois location and the associated additional retail license for Greater Chicago. The Company began operating the store in Evanston on December 3, 2019. During the year ended June 27, 2020, the Company also sold its rights to acquire the cultivation and manufacturing license in Hillcrest, Illinois and the related facility for a total gross proceeds of $17.0 million. Subsequent to the Termination of Merger, the Transfer of Interests related to the license in Staunton, Virginia was completed. In June 2020, the Virginia Board of Pharmacy rescinded the conditional license and the Company has filed a notice of appeal, subject to customary appellate court procedures.

 

Business Acquisitions

 

MattnJeremy, Inc., d/b/a One Love Beach Club

 

On September 3, 2019, the Company completed the acquisition of MattnJeremy, Inc., d/b/a One Love Beach Club (“One Love”), a licensed medical and recreational cannabis dispensary located in Long Beach, California. The assets consist primarily of the state of California issued dispensary license and customer relationships. The Company acquired all of the issued and outstanding shares of One Love for aggregate consideration of $12,708,000 which is comprised of $1,000,000 in cash at closing, $1,000,000 deferred payment to be paid six months after closing, $1,000,000 deferred payment to be paid one year after closing and the issuance of 5,112,263 Subordinate Voting Shares with an aggregate value of $9,833,000 at closing.

 

MME Evanston Retail, LLC

 

In connection with the Termination of Merger with PharmaCann, on December 2, 2019, the Company received 100% of the membership interests in MME Evanston Retail, LLC (“Evanston”), which includes a retail location in Evanston, Illinois and related licenses, and a retail license in Greater Chicago, Illinois. The Company acquired all of the issued and outstanding shares of Evanston for aggregate consideration of $6,930,557. 

 

Assets Held for Sale

  

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 (the “Evanston Sale Agreement”), which owns the retail store located in Evanston, Illinois, for total consideration of $20,000,000 of which $10,000,000 was received at closing. On November 17, 2020, the Company received $8,000,000 cash (“Closing Cash Payment”) of the total sales price. On October 1, 2020, three months following the Closing Date, $2,000,000 in the form of a secured promissory note was payable 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 GGP Facility. Transfer of the cannabis license is pending regulatory approval.  On August 10, 2020, the Company transferred governance and control of MME Evanston Retail, LLC. All assets and liabilities related to Evanston as of December 26, 2020 are excluded from the Company’s Condensed Consolidated Balance Sheets and all profits or losses from the Evanston operations subsequent to August 10, 2020 are excluded from the Company’s Condensed Consolidated Statements of Operations.

 

During the six months ended December 26, 2020, the Company received net proceeds of approximately $620,000 for the sale of a cannabis retail license located in Seaside, California for a total sales price of $1,500,000, of which the remaining cash consideration is to be received from escrow and $750,000 is to be paid in equal installments over twelve months through a promissory note. The Company transferred all outstanding membership interests in PHSL, LLC (“Seaside”) in October 2020. All assets and liabilities related to Seaside are excluded from the Company’s Condensed Consolidated Balance Sheets as of December 26, 2020 and all profits or losses from the Seaside location subsequent to October 9, 2020 are excluded from the Company’s Condensed Consolidated Statements of Operations.

 

 
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In December 2020, the Company entered into a purchase agreement to sell a non-operational cannabis license in California for a total consideration of $3,750,000 of which $3,500,000 will be received in cash and $250,000 will be received in equity consideration. Accordingly, the assets and liabilities related to this subsidiary were classified as held for sale in the Condensed Consolidated Balance Sheets as of December 26, 2020. As of December 26, 2020, the contemplated sale is pending customary closing conditions.

 

Discontinued Operations

 

On November 15, 2019, the Company announced its plan to sell its operations in the state of Arizona. As a result, assets and liabilities allocable to the operations within the state of Arizona were classified as held for sale. In addition, revenue and expenses, gains or losses relating to the discontinuation of Arizona operations were classified as discontinued operations and were eliminated from profit or loss from the Company’s continuing operations for all periods presented. Discontinued operations are presented separately from continuing operations in the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows.

 

On November 5, 2020, the Company sold and transferred 100% of the outstanding membership interests in Kannaboost Technology Inc. and CSI Solutions LLC (collectively referred to as “Level Up”) for a total sales price of $25,150,000, of which the Company has not received any cash proceeds as of December 26, 2020. Refer to “Note 24 - Discontinued Operations” of the unaudited interim condensed consolidated financial statements for the three and six months ended December 26, 2020 and December 28, 2019 for further information. All assets and liabilities related to Level Up as of December 26, 2020 are excluded from the Company’s Condensed Consolidated Balance Sheets and all profits or losses from Level Up have been excluded from net loss from discontinued operations.

 

Management Changes and Shareholder Meeting Results

 

On November 11, 2020, the Company held an annual general meeting of shareholders at which the number of Board of Directors (the “Board”) of the Company was set to seven, subject to permitted increases. Benjamin Rose, Niki Christoff, Mel Elias, Al Harrington, Tom Lynch, Errol Schweizer and Cameron Smith were elected as members of the Board of Directors of the Company until the next annual general meeting of shareholders.

 

On December 3, 2020, the Company named Tracy McCourt to the Company’s new role of Chief Revenue Officer who will lead the omni-channel marketing strategy as well as the Company’s buying, merchandising and business intelligence efforts.

 

On December 16, 2020, the Company announced that Benjamin Rose resigned as Chairman of the Board of Directors and as a Board member. Tom Lynch, the Company’s Chief Executive Officer, was elected as Chairman of the Board of Directors.

 

On December 18, 2020, the Company announced that Zeeshan Hyder resigned as Chief Financial Officer and Reece Fulgham, managing director at SierraConstellation Partners, was appointed to the role of Chief Financial Officer.

 

Cancellation of Super Voting Shares

 

On December 24, 2020, the Company announced the cancellation of 815,295 Class A Super Voting Shares which had been held by Andrew Modlin and granted via proxy to Benjamin Rose since December 2019. Effective as of December 10, 2020, the Company has only one class of outstanding shares, the Class B Subordinate Voting Shares as a result of the share cancellation.

 

Adoption of New Accounting Pronouncements Effective June 30, 2019

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASC 842”), which replaces ASC 840, “Leases” and related interpretations. The standard introduces a single lessee accounting model and requires lessees to recognize assets and liabilities for all leases with a term exceeding twelve months, unless the underlying asset is insignificant. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. The Company adopted the standard on June 30, 2019 using the modified retrospective method, which provides lessees a method for recording existing leases at adoption with no restatement of prior comparative periods.

  

 
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The Company’s adoption of ASC 842 resulted in higher current and non-current assets and liabilities, the replacement of rent expense previously recorded in cost of goods sold and general and administrative expense with depreciation expense, and increased finance costs related to the accretion and interest expense of the lease liabilities. The new standard does not change the amount of cash transferred between the lessor and lessees but impacts the presentation of the Company’s operating and financing cash flows.

 

Factors Affecting Performance

 

Company management believes that the nascent cannabis industry represents an extraordinary opportunity in which the Company’s performance and success depend on a number of factors:

 

Market Expansion. The Company’s success in achieving a desirable retail footprint is attributable to its market expansion strategy, which was a key driver of revenue growth. The Company exercises discretion in focusing on investing in retail locations that can deliver near term increased earnings to the Company.

 

 

Retail Growth. MedMen stores are located in premium locations in markets such as New York, California, Nevada, Illinois and Florida. As it continues to increase sales, the Company expects to leverage its retail footprint to develop a robust distribution model.

 

 

Direct-to-Consumer Channel Rollout. MedMen Delivery is available in California. The Company benefited from increased traction with in-store pickup as well as delivery service, curbside pickup and loyalty rewards program.

 

 

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. The Company’s business depends on the uninterrupted operation of its stores and facilities. 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. 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 our stores. 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 our stores which has had, and will likely continue to have a material adverse effect on our business, financial condition and results of operations. The ultimate magnitude of COVID-19, including the extent of its overall impact on our 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 continues, 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. At this time, it is unclear how long these measures may remain in place, what additional measures maybe imposed, or when our operations will be restored to the levels that existed prior to the COVID-19 pandemic.

 

 
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Trends

 

MedMen is subject to various trends that could have a material impact on the Company, its financial performance and condition, and its future outlook. A deviation from expectations for these trends could cause actual results to differ materially from those expressed or implied in forward-looking information included in this MD&A and the Company’s financial statements. These trends include, but are not limited to, the following:

 

·

Liberalization of Cannabis Laws. The Company is reliant on the existing legal and regulatory administration as to the sale and consumption of cannabis in the states in which the Company operates not being repealed or overturned and on the current approach to enforcement of federal laws by the federal government. The Company is also reliant on the continuation of the trend toward increased liberalization of cannabis laws throughout the United States, including the adoption of medical cannabis regulations in states without cannabis programs and the conversion of medical cannabis laws to recreational cannabis laws in states with medical cannabis programs. Although the Company is focused on California, New York, Nevada, Arizona, Illinois and Florida, this trend provides MedMen with new opportunities to deploy capital and expand geographically. The opportunity for geographic expansion is important because some jurisdictions with existing cannabis programs limit the number of retail locations that can be owned by a single entity.

 

 

·

Popular Support for Cannabis Legalization. The Company is reliant on the continuation of the trend toward increased popular support and acceptance of cannabis legalization. This trend could change if there is new research conducted that challenges the health benefits of cannabis or that calls into question its safety or efficacy or significant product recalls or broad-based deleterious health effects. This trend could also be influenced by a shift in the political climate, or by a decision of the United States government to enforce federal laws that make cannabis illegal. Such a change in popular support could undermine the trend toward cannabis legalization and possibly lead states with existing cannabis programs to roll them back, either of which would negatively impact the Company’s growth plans.

 

 

·

Balanced Supply and Demand in States. The Company is reliant on the maintenance of a balance between supply and demand in the various states in which it operates cannabis retail stores. Federal law 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, 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 products. A substantial increase in retail licenses offered by state authorities in any given state could result in increased competition and exert downward pressure on the retail pricing. If cultivation and production in a state fails to match demand, there could be insufficient supply of product in a state to meet demand, causing retail revenue in that state to fall or stagnate, including due to retail locations closing while supply is increased.

 

 
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Components of Results of Operations

 

Revenue

 

The Company derived the majority of its revenue from direct sales to customers in its retail stores. For the three and six months ended December 26, 2020 and the fiscal year ended June 27, 2020, approximately 60% and 70% of revenue, respectively, was generated from operations in California, with the remaining 40% and 30%, respectively, from operations in New York, Nevada, Illinois and Florida. Revenue through retail stores is recognized upon delivery of the goods to the customer and when collection is reasonably assured, net of an estimated allowance for sales returns. 

 

Cost of Goods Sold and Gross Profit

 

Gross profit is revenue less cost of goods sold. Cost of goods sold includes the costs directly attributable to product sales and includes amounts paid for finished goods, such as flower, edibles and concentrates, as well as packaging and other supplies, fees for services and processing, and also includes allocated overhead, which includes allocations of rent, administrative salaries, utilities and related costs. Cannabis costs are affected by various state regulations that limit the sourcing and procurement of cannabis product, which may create fluctuations in gross profit over comparative periods as the regulatory environment changes. Gross margin measures gross profit as a percentage of revenue.

  

Expenses

 

General and administrative expenses represent costs incurred in MedMen’s corporate offices, primarily related to personnel costs, including salaries, incentive compensation, benefits, share-based compensation and other professional service costs, including legal and accounting. Sales and marketing expenses consist of third-party listing fees, billboards, marketing collateral and other similar selling related expenses. It also includes an investment in marketing and brand activities and the corporate infrastructure required to support the ongoing business.

 

Income Taxes

 

MedMen is subject to income taxes in the jurisdictions in which it operates and, consequently, income tax expense is a function of the allocation of taxable income by jurisdiction and the various activities that impact the timing of taxable events. As the Company operates in the cannabis industry, the Company is subject to the limits of Internal Revenue Code (“IRC”) Section 280E under which the Company is only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E and a higher effective tax rate than most industries. However, the state of California does not conform to IRC Section 280E and, accordingly, the Company deducts all operating expenses on its California Franchise Tax Returns.

  

 
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Results of Operations

 

Three Months Ended December 26, 2020 Compared to Three Months Ended December 28, 2019 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

December 26,

 

 

December 28,

 

 

$

 

 

%

 

($ in Millions)

 

2020

 

 

2019

 

 

Change

 

 

Change

 

 

 

(unaudited)

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$ 33.8

 

 

$ 44.1

 

 

$ (10.3 )

 

 

(23 )%

Cost of Goods Sold

 

 

15.8

 

 

 

31.2

 

 

 

(15.4 )

 

 

(49 )%

Gross Profit

 

 

18.0

 

 

 

12.9

 

 

 

5.1

 

 

 

40 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and Administrative

 

 

33.6

 

 

 

60.3

 

 

 

(26.7 )

 

 

(44 )%

Sales and Marketing

 

 

0.2

 

 

 

3.6

 

 

 

(3.4 )

 

 

(94 )%

Depreciation and Amortization

 

 

9.7

 

 

 

6.6

 

 

 

3.1

 

 

 

47 %

Realized and Unrealized Loss on Changes in Fair Value of Contingent Consideration

 

 

0.1

 

 

 

5.2

 

 

 

(5.1 )

 

 

(98 )%

Other Operating Expense

 

 

0.8

 

 

 

5.7

 

 

 

(4.9 )

 

 

(86 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Expenses

 

 

44.4

 

 

 

81.4

 

 

 

(37.0 )

 

 

(45 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from Operations

 

 

(26.4 )

 

 

(68.5 )

 

 

42.1

 

 

 

(61 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Expense (Income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

10.2

 

 

 

8.1

 

 

 

2.1

 

 

 

26 %

Interest Income

 

 

(0.5 )

 

 

(0.3 )

 

 

(0.2 )

 

 

67 %

Amortization of Debt Discount and Loan Origination Fees

 

 

6.9

 

 

 

1.8

 

 

 

5.1

 

 

 

283 %

Change in Fair Value of Derivatives

 

 

0.2

 

 

 

(2.9 )

 

 

3.1

 

 

 

(107 )%

Realized and Unrealized Loss (Gain) on Investments and Assets Held for Sale

 

 

2.0

 

 

 

(5.0 )

 

 

7.0

 

 

 

(140 )%

Loss on Extinguishment of Debt

 

 

0.9

 

 

 

0.7

 

 

 

0.2

 

 

 

29 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Other Expense

 

 

19.7

 

 

 

2.4

 

 

 

17.3

 

 

 

721 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from Continuing Operations Before Provision for Income Taxes

 

 

(46.1 )

 

 

(70.9 )

 

 

24.8

 

 

 

(35 )%

Provision for Income Tax (Expense) Benefit

 

 

(24.0 )

 

 

14.6

 

 

 

(38.6 )

 

 

(264 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss from Continuing Operations

 

 

(70.1 )

 

 

(56.3 )

 

 

(13.8 )

 

 

25 %

Net Loss from Discontinued Operations, Net of Taxes

 

 

1.2

 

 

 

(36.8 )

 

 

38.0

 

 

 

(103 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

 

(68.9 )

 

 

(93.1 )

 

 

24.2

 

 

 

(26 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss Attributable to Non-Controlling Interest

 

 

(19.2 )

 

 

(52.0 )

 

 

32.8

 

 

 

(63 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss Attributable to Shareholders of MedMen Enterprises Inc.

 

$ (49.7 )

 

$ (41.1 )

 

$ (8.6 )

 

 

21 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Net Loss from Continuing Operations (Non-GAAP)

 

$ (63.1 )

 

$ (36.8 )

 

$ (26.3 )

 

 

71 %

EBITDA from Continuing Operations (Non-GAAP)

 

$ (19.5 )

 

$ (53.4 )

 

$ 33.9

 

 

 

(63 )%

Adjusted EBITDA from Continuing Operations (Non-GAAP)

 

$ (11.8 )

 

$ (33.4 )

 

$ 21.6

 

 

 

(65 )%

 

 
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Table of Contents

 

Revenue

 

Revenue for the three months ended December 26, 2020 was $33.8 million, a decrease of $10.3 million, or 23%, compared to revenue of $44.1 million for the three months ended December 28, 2019. The decrease in revenue was primarily due to the impact of COVID-19 in overall retail traffic and tourism as further discussed below. During the three months ended December 26, 2020, MedMen had 24 active retail locations in the states of California, New York, Nevada, Arizona, Illinois and Florida, of which one retail location located within the state of Arizona was classified as discontinued operations, compared to 32 active retail locations for the comparative prior period. During the fiscal second quarter of 2021, five retail locations in the state of Florida remained temporarily closed in order to redirect inventory from its Eustis facility to its highest performing stores and thus excluded from the number of active retail locations as of December 26, 2020. Also during the fiscal second quarter of 2021, the Company completed the sale of two retail stores in Arizona (Scottsdale and Tempe) as a result of the Company’s plan to divest non-core assets. As of December 26, 2020, the Company had 23 active retail locations related to continuing operations, a decrease of 6 active retail locations, compared to 29 active retail locations related to continuing operations for the comparative prior period.

 

The decrease in revenue was primarily related to the impact of the COVID-19 pandemic as well as the number of active retail locations related to continuing operations. The Company experienced decreased sales in certain locations within California and Nevada due to reduced foot traffic as a result of shelter-at-home orders, declining tourism, and social distancing restrictions within a retail establishment. Retail revenue for the three months ended December 26, 2020 in California and Nevada decreased $12.6 million and $2.8 million, respectively, compared to the three months ended December 28, 2019. In Illinois, Florida and New York, revenues have not been significantly impacted by COVID-19 and in some cases, retail locations in those markets have increased sales during the three months ended December 26, 2020. During the three months ended December 26, 2020, the Company continues to enhance its retail experience through better product assortment, customer service and purchasing options with an emphasis on curbside pickup and delivery in response to the COVID-19 pandemic. During the fiscal second quarter of 2021, the Company has 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. MedMen expects to continue offering a variety of purchasing options for its customers to navigate through the COVID-19 pandemic, which is expected to increase revenues in the coming periods.

 

 
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Cost of Goods Sold and Gross Profit 

 

Cost of goods sold for the three months ended December 26, 2020 was $15.8 million, a decrease of $15.4 million, or 49%, compared with $31.2 million of cost of goods sold for the three months ended December 28, 2019. Gross profit for the three months ended December 26, 2020 was $18.0 million, representing a gross margin of 53%, compared with gross profit of $12.9 million, representing a gross margin of 29%, for the three months ended December 28, 2019. The increase in gross margin is primarily due to the Company’s retail optimization efforts in which improvements in the Company’s product sourcing and favorable changes to pricing and payment terms in key vendor agreements resulted in improved margins for the fiscal second quarter of 2021. In addition, the Company’s shrink-to-grow plan in Florida continues to drive results in which improving plant yield and quality has resulted in an increase in average revenue per box.

 

For the three months ended December 26, 2020, the Company had 24 active retail locations in the states of California, New York, Nevada, Arizona, Illinois and Florida, of which one located within the state of Arizona was classified as discontinued operations, compared to 32 active retail locations for the comparative prior period. For the three months ended December 26, 2020, MedMen operated five cultivation and production facilities compared to six cultivation facilities for the three months ended December 28, 2019. During the fiscal second quarter of 2021, the Company completed the sale of one facility in Arizona (Tempe) as a result of the Company’s plan to divest non-core assets. As of the fiscal second quarter of 2021, the Company continues to evaluate strategic partnerships for its cultivation and production facilities in California and Nevada. During the fiscal fourth quarter of 2020, five retail locations in Florida were temporarily closed in order to shift supply levels from its Eustis facility to the Company’s highest-performing stores in Florida which remain closed as of December 26, 2020. MedMen expects margins to improve in the coming periods as the Company restructures certain operations and divests licenses in non-core markets. 

 

Total Expenses

 

Total expenses for the three months ended December 26, 2020 were $44.4 million, a decrease of $37.0 million, or 45%, compared to total expenses of $81.4 million for the three months ended December 28, 2019, which represents 131% of revenue for the three months ended December 26, 2020, compared to 185% of revenue for the three months ended December 28, 2019. The decrease in total expenses was attributable to the factors described below.

 

General and administrative expenses for the three months ended December 26, 2020 and December 28, 2019 were $33.6 million and $60.3 million, respectively, a decrease of $26.7 million, or 44%. General and administrative expenses have decreased primarily due to the Company’s efforts to reduce company-wide selling, general and administrative expenses (“SG&A”). Key drivers of the decrease in general and administrative expenses include overall corporate cost savings, strategic headcount reductions across various departments, and elimination of non-core functions and overhead in several departments, resulting in a decrease in payroll and payroll related expenses of $14.0 million, a decrease in share-based compensation expense of $0.9 million, and a decrease in professional fees of $1.5 million. In addition, licenses, fees and taxes decreased $4.1 million from the comparative prior period due to the decrease in the number of active retail locations and facilities for the three months ended December 26, 2020.

 

Sales and marketing expenses for the three months ended December 26, 2020 and December 28, 2019 were $0.2 million and $3.6 million, respectively, a decrease of $3.4 million, or 94%. The decrease in sales and marketing expenses is primarily attributed to the reduction in marketing and sales related spending compared to the same period in the prior year as part of the Company’s corporate cost reduction initiatives. During the three months ended December 26, 2020, the Company continued to redefine its marketing initiatives and focus on strategies that provide higher returns on customer connection. For the fiscal second quarter of 2021, sales and marketing initiatives focused on the Company’s loyalty customers through the Buds Loyalty program which personalizes shopping recommendations and gives priority product access through local initiatives that relatively are low in cost and more based on human capital, compared to a traditional and digital paid media marketing campaign of $2.3 million during the three months ended December 28, 2019.

 

Depreciation and amortization for the three months ended December 26, 2020 and December 28, 2019 was $9.7 million and $6.6 million, respectively, an increase of $3.1 million, or 47%. The increase was primarily related to $6.0 million of intellectual property that the Company began amortizing in the fiscal third quarter of 2020 in which the Company also recognized additional amortization during the three months ended December 26, 2020.

 

 
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Realized and unrealized changes in fair value of contingent consideration for the three months ended December 26, 2020 and December 28, 2019 was $0.1 million and $5.2 million, respectively, a decrease of $5.1 million, or 98%. The contingent consideration is related to an acquisition of a California dispensary license during the fiscal first quarter of 2020 wherein the liability is remeasured at each reporting period. The lock-up period expired during the fiscal second quarter of 2021 related to the contingent consideration of the acquired California dispensary.

 

Other operating expenses for the three months ended December 26, 2020 and December 28, 2019 was $0.8 million and $5.7 million, respectively, a decrease of $4.9 million, or 86%. Other expenses include loss on disposal of assets, restructuring fees, loss on settlement of accounts payable, and gain on lease terminations. The decrease was primarily attributable to the $5.3 million of restructuring fees recognized during the three months ended December 26, 2019 versus $0.6 million during the current period.

 

Total Other Expense

 

Total other expense for the three months ended December 26, 2020 was $19.7 million, an increase of $17.3 million compared to total other expense of $2.4 million, or 721%, for the three months ended December 28, 2019. The increase in total other expense was primarily attributable to the Company’s higher debt balance as of December 26, 2020 which increased $25.0 million compared to December 28, 2019 as a result of the 2020 Term Loan and the Unsecured Convertible Facility as well as issuances from the GGP Facility. Accordingly, amortization of debt discount and loan origination fees of $6.9 million for the three months ended December 26, 2020 increased by $5.1 million compared to $1.8 million for the three months ended December 28, 2019 and interest expense of $10.2 million for the three months ended December 26, 2020 increased by $2.1 million compared to $8.1 million for the three months ended December 28, 2019. In addition, the Company recognized a gain on assets held for sale of $5.0 million in the prior period versus a loss of $2.0 million in the current period. During the three months ended December 28, 2019, $2.9 million of other income was recognized for change in fair value of derivatives compared to other expense of $0.2 million for the three months ended December 26, 2020.

 

Provision for Income Taxes

 

The provision for income tax expense for the three months ended December 26, 2020 was $24.0 million compared to the provision for income tax benefit of $14.6 million for the three months ended December 28, 2019, primarily due to the Company reporting increased expenses subject to IRC Section 280E relative to pre-tax book loss. The Company incurred a large amount of expenses that were not deductible due to IRC Section 280E limitations which resulted in income tax expense being incurred while there were pre-tax losses for the three months ended December 26, 2020.

 

Net Loss

 

Net loss from continuing operations for the three months ended December 26, 2020 was $70.1 million, an increase of $13.8 million, or 25%, compared to a net loss from continuing operations of $56.3 million for the three months ended December 28, 2019. The increase in net loss from continuing operations was mainly attributable to the change in the Company’s income tax provision as discussed above, offset by the Company’s continued focus on cost efficiency within the corporate structure which includes strategic headcount reductions, elimination of non-core functions and overhead in several departments, renegotiation of ancillary cost to the business, as well as modifying sales and marketing strategies for the changing customer base. Net loss attributable to non-controlling interest for the three months ended December 26, 2020 was $19.2 million, resulting in net loss of $49.7 million attributable to the shareholders of MedMen Enterprises Inc. compared to $41.1 million for the three months ended December 28, 2019.

 

 
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Six Months Ended December 26, 2020 Compared to Six Months Ended December 28, 2019

 

Six Months Ended

December 26,

December 28,

 

$

 

 

%

($ in Millions)

2020

2019

Change

Change

Revenue

$

69.4

$

83.7

$

(14.3

)

(17

%)

Cost of Goods Sold

34.6

51.5

(16.9

)

(33

%)

Gross Profit

34.8

32.2

2.6

8

%

Expenses:

General and Administrative

65.3

114.4

(49.1

)

(43

%)

Sales and Marketing

0.4

9.4

(9.0

)

(96

%)

Depreciation and Amortization

18.3

16.1

2.2

14

%

Realized and Unrealized Loss on Changes in Fair Value of Contingent Consideration

0.4

7.5

(7.1

)

(95

%)

Impairment Expense

0.8

-

0.8

100

%

Other Operating Expense (Income)

(15.9

)

5.0

(20.9

)

(418

%)

Total Expenses

69.3

152.4

(83.1

)

(55

%)

Loss from Operations

(34.5

)

(120.2

)

85.7

(71

%)

Other Expense (Income):

Interest Expense

21.4

16.3

5.1

31

%

Interest Income

(0.5

)

(0.6

)

0.1

(17

%)

Amortization of Debt Discount and Loan Origination Fees

10.1

4.9

5.2

106

%

Change in Fair Value of Derivatives

(0.1

)

(8.0

)

7.9

(99

%)

Realized and Unrealized Gain on Investments and Assets Held for Sale

(10.5

)

(16.5

)

6.0

(36

%)

Loss on Extinguishment of Debt

11.1

32.2

(21.1

)

(66

%)

Total Other Expense

31.5

28.3

3.2

11

%

Loss from Continuing Operations Before Provision for Income Taxes

(66.0

)

(148.5

)

82.5

(56

%)

Provision for Income Tax (Expense) Benefit

(34.3

)

32.3

(66.6

)

(206

%)

Net Loss from Continuing Operations

(100.3

)

(116.2

)

15.9

(14

%)

Net Loss from Discontinued Operations, Net of Taxes

(1.5

)

(39.9

)

38.4

(96

%)

Net Loss

(101.8

)

(156.1

)

54.3

(35

%)

Net Loss Attributable to Non-Controlling Interest

(30.1

)

(90.6

)

60.5

(67

%)

Net Loss Attributable to Shareholders of MedMen Enterprises Inc.

$

(71.7

)

$

(65.5

)

$

(6.2

)

9

%

Adjusted Net Loss from Continuing Operations (Non-GAAP)

$

(105.0

)

$

(69.8

)

$

(35.2

)

50

%

EBITDA from Continuing Operations (Non-GAAP)

$

(16.1

)

$

(109.8

)

$

93.7

(85

%)

Adjusted EBITDA from Continuing Operations (Non-GAAP)

$

(23.5

)

$

(66.1

)

$

42.6

(64

%)

 

 
42

Table of Contents

 

Revenue

 

Revenue for the six months ended December 26, 2020 was $69.4 million, a decrease of $14.3 million, or 17%, compared to revenue of $83.7 million for the six months ended December 28, 2019. The decrease in revenue was driven by the impact of COVID-19 during the six months ended December 26, 2020. Retail revenue for the six months ended December 26, 2020 in California and Nevada decreased $21.9 million and $4.7 million, respectively, compared to the six months ended December 28, 2019 offset by increased retail sales in Illinois, Florida and New York during the six months ended December 26, 2020. During the six months ended December 26, 2020, the Company modified its retail operations in select markets to include curbside pickup and delivery in response to the COVID-19 pandemic. MedMen expects to continue offering a variety of purchasing options for its customers to navigate through the COVID-19 pandemic, which is expected to increase revenues in the coming periods. Further, overall decreased sales was also related to temporary closures and the divestiture of certain retail locations as part of the Company’s turnaround plan implemented in November 2019. For the six months ended December 26, 2020, MedMen had 24 active retail locations in the states of California, New York, Nevada, Arizona, Illinois and Florida, of which one retail location within the state of Arizona was classified as discontinued operations, compared to 32 active retail locations with three located within the state of Arizona classified as discontinued operations for the comparative prior period. Since December 28, 2019, the Company opened their Coral Shores location and temporarily closed five retail locations in the state of Florida to redirect inventory from its Eustis facility to its highest performing stores. The Company also divested four retail locations in California, Illinois, and Arizona since December 28, 2019 to raise non-dilutive financing through the sale of non-core assets. As of December 26, 2020, the Company had 23 active retail locations related to continuing operations.

 

Cost of Goods Sold and Gross Profit

 

Cost of goods sold for the six months ended December 26, 2020 was $34.6 million, a decrease of $16.9 million, or 33%, compared with $51.5 million of cost of goods sold for the six months ended December 28, 2019. The decrease in cost of goods sold is primarily driven by the decrease in active retail locations and cultivation and manufacturing facilities. For the six months ended December 26, 2020, the Company had 24 active retail locations in the states of California, New York, Nevada, Arizona, Illinois and Florida, of which one located within the state of Arizona was classified as discontinued operations, compared to 32 active retail locations for the comparative prior period. Gross profit for the six months ended December 26, 2020 was $34.8 million, representing a gross margin of 50%, compared with gross profit of $32.2 million, representing a gross margin of 38%, for the six months ended December 28, 2019. The increase in gross margin is primarily due to the Company’s focus on retail profitability and improvements in its supply chain and cultivation facilities. During the six months ended December 26, 2020, the Company strategically closed five retail locations in Florida to provide better and consistent supply for its patients. While these dispensaries remain temporarily closed as of December 26, 2020, the Company saw improved plant yields and quality driving improved margins. For the six months ended December 26, 2020, MedMen operated five cultivation and production facilities compared to six cultivation facilities in the comparative prior period. In November 2020, the Company completed the sale of one facility in Arizona (Tempe) as a result of the Company’s plan to divest non-core assets. During the six months ended December 26, 2020, the Company also reduced the cash burn associated with cultivation and manufacturing operations in California and Nevada and continues to evaluate strategic partnerships for these facilities. MedMen expects margins to improve in the coming periods as the Company restructures certain operations and divests licenses in non-core markets.

 

Total Expenses

 

Total expenses for the six months ended December 26, 2020 were $69.3 million, a decrease of $83.1 million, or 55%, compared to total expenses of $152.4 million for the six months ended December 28, 2019, which represents 100% of revenue for the six months ended December 26, 2020, compared to 182% of revenue for the six months ended December 28, 2019. The decrease in total expenses was attributable to the factors described below.

 

General and administrative expenses for the six months ended December 26, 2020 and December 28, 2019 were $65.3 million and $114.4 million, respectively, a decrease of $49.1 million, or 43%. General and administrative expenses have decreased primarily due to the Company’s focus on right-sizing its corporate infrastructure by reducing company-wide SG&A while improving efficiency. Key drivers of the decrease in general and administrative expenses include overall corporate cost savings, strategic headcount reductions across various departments, and elimination of non-core functions and overhead in several departments. The decrease of $49.1 million compared to the six months ended December 28, 2019 was related to a decrease in payroll and payroll related expenses of $24.9 million, a decrease in share-based compensation expense of $6.3 million, a decrease in professional fees of $3.2 million, a decrease in licenses, fees and taxes of $3.2 million.

 

 
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Table of Contents

 

Sales and marketing expenses for the six months ended December 26, 2020 and December 28, 2019 were $0.4 million and $9.4 million, respectively, a decrease of $9.0 million, or 96%. The decrease in sales and marketing expenses is primarily attributed to the reduction in marketing and sales related spending due to the implementation of the Company’s cost-cutting strategy. In the fiscal second quarter of 2021, the Company continues to be extremely disciplined on budget allocation to marketing and has redefined its marketing initiatives to target its changing customer base. The Company shifted its approach from third-party listing services to integration efforts with its point-of-sale systems to increase awareness in local customers and improve the customer experience while providing higher returns. Traditional and digital paid media marketing campaign of $6.3 million in the comparative prior period was reduced to $0.1 million during the six months ended December 26, 2020.

 

Depreciation and amortization for the six months ended December 26, 2020 and December 28, 2019 was $18.3 million and $16.1 million, respectively, an increase of $2.2 million, or 14%. The increase was primarily related to $6.0 million of intellectual property that the Company began amortizing in the fiscal third quarter of 2020, resulting in amortization expense of $0.8 million during the six months ended December 26, 2020 versus nil in the comparative prior period.

 

Realized and unrealized changes in fair value of contingent consideration for the six months ended December 26, 2020 and December 28, 2019 was $0.4 million and $7.5 million, respectively, a decrease of $7.1 million, or 95%. The contingent consideration is related to an acquisition of a California dispensary license during the fiscal first quarter of 2020 wherein the expiration of the lock-up period occurred during the fiscal second quarter of 2021.

 

Impairment expense for the six months ended December 26, 2020 and December 28, 2019 was $0.8 million and nil, respectively, an increase of $0.8 million, or 100%. The increase relates to the impairment of a California dispensary license transferred to assets held for sale during the fiscal first quarter of 2021 in which the asset was measured at the lower of its carrying amount or FVLCTS upon classification

 

Other operating expense (income) for the six months ended December 26, 2020 and December 28, 2019 was $(15.9) million and $5.0 million, respectively, a decrease of $20.9 million, or 418%. Other expenses include loss on disposal of assets, restructuring fees, loss on settlement of accounts payable, and gain on lease terminations. The change was primarily attributable to the $16.3 million gain related to the lease deferral with the REIT during the fiscal first quarter of 2021 as the decrease in present value of lease payments was greater than the remaining net asset balance of finance lease assets. The Company also recognized a $2.9 million gain on lease terminations in Florida and Illinois during the six months ended December 26, 2020. In addition, restructuring fees totaled $1.2 million for the six months ended December 26, 2020, a decrease of $4.5 million compared to $5.6 million in the comparative prior period.

 

Total Other Expense

 

Total other expense for the six months ended December 26, 2020 was $31.5 million, an increase of $3.2 million compared to total other expense of $28.3 million, or 11%, for the six months ended December 28, 2019. The increase in total other expense was primarily attributable to a loss on extinguishment of debt of $32.2 million related to the First Amendment of the GGP Facility during the six months ended December 28, 2019 compared to a loss on extinguishment of debt of $11.1 million during the current period primarily related to the July 2, 2020 amendment of the GGP Facility, resulting in a $21.1 million decrease in loss on extinguishment of debt. This was offset by a $7.9 million decrease in the changes in fair value of derivatives which are based on the closing price of the Company’s warrants related to bought deals traded on the Canadian Securities Exchange under the ticker symbol “MMEN.WT” which have stabilized during the six months ended December 26, 2020, compared to the same period prior. In addition, interest expense of $21.4 million for the six months ended December 26, 2020 increased by $5.1 million compared to $16.3 million for the six months ended December 28, 2019 as a result of the Company’s higher debt balance. Similarly, amortization of debt discount of $10.1 million for the six months ended December 26, 2020 increased by $5.2 million compared to $4.9 million for the comparative prior period. During the current period, proceeds from issuances of the GGP Facility were $5.5 million and proceeds from issuances of notes payable, including the 2020 Term Loan and the Unsecured Convertible Facility, totaled $14.8 million.

 

Provision for Income Taxes

 

The provision for income tax expense for the six months ended December 26, 2020 was $34.3 million compared to the provision for income tax benefit of $32.3 million for the six months ended December 28, 2019, primarily due to the Company reporting increased expenses subject to IRC Section 280E relative to pre-tax book loss. The Company incurred a large amount of expenses that were not deductible due to IRC Section 280E limitations which resulted in income tax expense being incurred while there were pre-tax losses for the six months ended December 26, 2020.

 

 
44

Table of Contents

 

Net Loss

 

Net loss from continuing operations for the six months ended December 26, 2020 was $100.3 million, a decrease of $15.9 million, or 14%, compared to a net loss from continuing operations of $116.2 million for the six months ended December 28, 2019. The decrease in net loss from continuing operations was mainly attributable to the decrease in general and administrative expenses and sales and marketing expenses as a direct result of the Company’s turnaround plan which includes efforts to optimize SG&A and right-size the Company’s corporate infrastructure. In addition to the decrease loss on extinguishment of debt, the Company recognized a $16.3 million gain related to the REIT lease deferral during the fiscal first quarter of 2021. This was offset by the increase in provision for income taxes as discussed above. Net loss attributable to non-controlling interest for the six months ended December 26, 2020 was $30.1 million, resulting in net loss of $71.7 million attributable to the shareholders of MedMen Enterprises Inc. compared to $65.5 million for the six months ended December 28, 2019.

 

Year Ended June 27, 2020 Compared to Year Ended June 29, 2019

 

 

 

Year Ended

 

 

 

 

 

 

 

June 27,

 

 

June 29,

 

 

$

 

 

%

 

($ in Millions)

 

2020

 

 

2019

 

 

Change

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$ 157.1

 

 

$ 119.9

 

 

$ 37.2

 

 

 

31 %

Cost of Goods Sold

 

 

99.0

 

 

 

64.5

 

 

 

34.5

 

 

 

53 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

58.1

 

 

 

55.4

 

 

 

2.7

 

 

 

5 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and Administrative

 

 

200.3

 

 

 

239.3

 

 

 

(39.0 )

 

 

(16 )%

Sales and Marketing

 

 

10.6

 

 

 

27.5

 

 

 

(16.9 )

 

 

(61 )%

Depreciation and Amortization

 

 

40.0

 

 

 

22.1

 

 

 

17.9

 

 

 

81 %

Realized and Unrealized Gain on Changes in Fair Value of Contingent Consideration

 

 

9.0

 

 

 

-

 

 

 

9.0

 

 

-

%

Impairment Expense

 

 

239.5

 

 

 

-

 

 

 

239.5

 

 

-

%

Loss on Disposals of Assets, Restructuring Fees and Other Expense

 

 

6.2

 

 

 

16.5

 

 

 

(10.3 )

 

 

(62 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Expenses

 

 

505.6

 

 

 

305.4

 

 

 

200.2

 

 

 

66 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from Operations

 

 

(447.5 )

 

 

(250.0 )

 

 

(197.5 )

 

 

79 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Expense (Income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

40.4

 

 

 

12.4

 

 

 

28.0

 

 

 

226 %

Interest Income

 

 

(0.8 )

 

 

(0.7 )

 

 

(0.1 )

 

 

14 %

Amortization of Debt Discount and Loan Origination Fees

 

 

9.1

 

 

 

8.3

 

 

 

0.8

 

 

 

10 %

Change in Fair Value of Derivatives

 

 

(8.8 )

 

 

(3.9 )

 

 

(4.9 )

 

 

126 %

Realized and Unrealized Gain on Investments, Assets Held for Sale and Other Assets

 

 

(16.4 )

 

 

(4.3 )

 

 

(12.1 )

 

 

281 %

Loss on Extinguishment of Debt

 

 

44.4

 

 

 

1.2

 

 

 

43.2

 

 

 

3,600 %

Total Other Expense

 

 

67.9

 

 

 

13.0

 

 

 

54.9

 

 

 

422 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from Continuing Operations Before Provision for Income Taxes

 

 

(515.4 )

 

 

(263.0 )

 

 

(252.4 )

 

 

96 %

Provision for Income Tax (Expense) Benefit

 

 

39.6

 

 

 

6.4

 

 

 

33.2

 

 

 

(519 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss from Continuing Operations

 

 

(475.8 )

 

 

(256.6 )

 

 

(219.2 )

 

 

85 %

Net Loss from Discontinued Operations, Net of Taxes

 

 

(50.8 )

 

 

(1.3 )

 

 

(49.5 )

 

 

3,808 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

 

(526.6 )

 

 

(257.9 )

 

 

(268.7 )

 

 

104 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss Attributable to Non-Controlling Interest

 

 

(279.3 )

 

 

(188.8 )

 

 

(90.5 )

 

 

48 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss Attributable to Shareholders of MedMen Enterprises Inc.

 

$ (247.3 )

 

$ (69.1 )

 

$ (178.2 )

 

 

258 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Net Loss from Continuing Operations (Non-GAAP)

 

$ (217.1 )

 

$ (208.3 )

 

$ (8.8 )

 

 

4 %

EBITDA from Continuing Operations (Non-GAAP)

 

$ (423.2 )

 

$ (219.6 )

 

$ (203.6 )

 

 

93 %

Adjusted EBITDA from Continuing Operations (Non-GAAP)

 

$ (115.9 )

 

$ (169.7 )

 

$ 53.8

 

 

 

(32 )%

 

 
45

Table of Contents

 

Revenue

 

Revenue for the year ended June 27, 2020 was $157.1 million, an increase of $37.2 million, or 31%, compared to revenue of $119.9 million for the year ended June 29, 2019. The increase in revenue was driven by the acquisitions of dispensaries and the operationalization of related licenses in several states during 2018 through fiscal year ending June 27, 2020. More specifically, for the fiscal year ended June 27, 2020, MedMen had 26 active retail locations in the states of California, New York, Nevada, Arizona, Illinois and Florida, of which three were located within the state of Arizona and were classified as discontinued operations, compared to 23 active retail locations for the same period in the prior year, of which three were located within the state of Arizona and were classified as discontinued operations. In total, during the year ended June 27, 2020, the Company opened seven new retail locations in Florida and acquired two additional retail locations, one in California and one in Illinois - at one point totaling 32 active retail locations which resulted in revenues of $16.5 million for the current fiscal year. In particular, revenue from the state of Florida was $7.0 million from eight operational dispensaries for the year ended June 27, 2020 compared to a trivial amount from one dispensary opened on June 14, 2019 during the year ended June 29, 2019. As of June 27, 2020, the Company had 23 active retail locations related to continuing operations as a result of store closures in the third and fourth quarter of 2020. During the fiscal third quarter of 2020, the Company permanently closed its Seaside, California store location, which is classified as an asset held for sale in the Consolidated Balance Sheet as of June 27, 2020. During the fiscal fourth quarter of 2020, the Company temporarily closed five retail locations in the state of Florida to redirect inventory from its Eustis facility to its highest performing stores.

 

Cost of Goods Sold and Gross Profit

 

Cost of goods sold for the fiscal year ended June 27, 2020 was $99.0 million, an increase of $34.5 million, or 53%, compared with $64.5 million of cost of goods sold for fiscal year ended June 29, 2019. The increase in cost of goods sold is primarily driven by the acquisitions of dispensaries and cultivation and manufacturing facilities and the operationalization of related licenses in several states during 2018 through fiscal year 2020, resulting in increased revenues as well as product, labor and overhead costs associated with the Company’s retail, cultivation and manufacturing expansion. For the fiscal year ended June 27, 2020, the Company had 26 active retail locations in the states of California, New York, Nevada, Arizona, Illinois and Florida, of which three were located within the state of Arizona and were classified as discontinued operations, compared to 23 active retail locations. At one point during the year ended June 27, 2020, the Company had 32 active retail locations as a result of new store openings in Florida and the acquisition of two operational dispensaries, resulting in cost of goods sold of $15.5 million for the current fiscal year. In particular, cost of goods sold from the state of Florida was $10.1 million for the year ended June 27, 2020 compared to $1.5 million for the year ended June 29, 2019 as a result of new store openings. Gross profit for the year ended June 27, 2020 was $58.1 million, representing a gross margin of 37%, compared with gross profit of $55.4 million, representing a gross margin of 46%, for the year ended June 29, 2019. The change in gross profit was attributable to cost of goods sold increasing at a higher rate than the increase in revenues, primarily due to ramping up the Company’s Florida operations during the year ended June 27, 2020. Gross profit in the state of Florida was $(3.1) million for the year ended June 27, 2020, representing a negative gross margin of 44%, was due to higher production costs as economies of scale were not yet realized in the Company's first full year of operations in Florida, a vertically-integrated state. Despite continuous improvements in Florida, a vertically integrated state, the Eustis cultivation facility is in the process of increasing its production levels to service its existing retail locations in Florida, and thus allow the reopening of the five locations temporarily closed, and additional retail locations in the future, with a total of 13 stores to be expected in Florida upon stabilization.

 

 
46

Table of Contents

 

For the fiscal years ended June 27, 2020 and June 29, 2019, MedMen operated six cultivation and production facilities in the states of Nevada, California, New York, Florida and Arizona, of which two were related to the operations within the state of Arizona that were classified as discontinued operations. Third-party wholesale revenue and cost of goods sold was not significant for the year ended June 27, 2020 and June 29, 2019 and is  classified as discontinued operations as it relates to the Company’s operations in the state of Arizona. Intercompany wholesale revenue and cost of goods are eliminated upon consolidation. During the fiscal fourth quarter of 2020, the Company began evaluating strategic partnerships for its cultivation and production facilities in California and Nevada so it can focus on retail operations. MedMen expects costs of goods sold to increase at a slower rate than the increase in revenue in the coming periods as the Company restructures certain operations and divests licenses in non-core markets.

 

Total Expenses

 

Total expenses for the fiscal year ended June 27, 2020 were $505.6 million, an increase of $200.2 million, or 66%, compared to total expenses of $305.4 million for the fiscal year ended June 29, 2019, which represents 322% of revenue for the fiscal year ended June 27, 2020, compared to 255% of revenue for the fiscal year ended June 29, 2019. The increase in total expenses was attributable to the factors described below.

 

General and administrative expenses for the year ended June 27, 2020 and June 29, 2019 were $200.3 million and $239.3 million, respectively, a decrease of $39.0 million, or 16%. General and administrative expenses have decreased primarily due to the Company’s efforts to reduce company-wide selling, general and administrative expenses (“SG&A”). See “Recent Developments” for further information on the reduction in SG&A. Key drivers of the decrease in general and administrative expenses include overall corporate cost savings, strategic headcount reductions across various departments, and elimination of non-core functions and overhead in several departments, resulting in a decrease in payroll and payroll related expenses of $25.9 million and a decrease in share-based compensation expense of $21.5 million. Such decreases were offset by an increase in rent expense of $9.8 million due to new leases entered into as part of the Company’s expansion in Florida.

 

Sales and marketing expenses for the year ended June 27, 2020 and June 29, 2019 were $10.6 million and $27.5 million, respectively, a decrease of $16.9 million, or 61%. The decrease in sales and marketing expenses is primarily attributed to the reduction in marketing and sales related spending compared to the same period in the prior year as part of the Company’s corporate cost reduction initiatives. Specifically, marketing spending on paid media decreased by $9.2 million, public relations decreased by $1.4 million, and online and print advertising decreased by $0.8 million. During fiscal year 2019, the Company launched The New Normal, a campaign that focused on normalizing cannabis and reinforcing the leadership position of MedMen to drive customer visits in all of the Company’s markets, that totaled over $5.0 million, compared to no marketing campaign of the same scale during fiscal year 2020.

 

Depreciation and amortization for the year ended June 27, 2020 and June 29, 2019 was $40.0 million and $22.1 million, respectively, an increase of $17.9 million, or 81%. The increase is attributed to the growth of the Company’s operations through acquisitions, as well as significant property and equipment acquired in recent periods as compared to the same period in the prior year. During the year ended June 27, 2020, total cash and non-cash additions to property and equipment was $102.3 million, resulting in an increase in depreciation expense of $12.5 million compared to year ended June 29, 2019. In addition, the increase in depreciation and amortization was also related to depreciation expense of $2.8 million recorded during the year ended June 27, 2020 for finance leases as a result of the Company’s adoption of ASC 842 on June 30, 2019.

 

 
47

Table of Contents

 

Unrealized changes fair value of contingent consideration of $9.0 million for the year ended June 27, 2020 was related to the acquisition on One Love Beach Club wherein additional shares are required to be paid upon the expiration of the lock-up which were initially measured at nil on the closing date. The liability is remeasured at each reporting period in which the Company recognized a loss on changes in fair value of contingent consideration of $9.0 million.

 

During the year ended June 27, 2020, the Company recognized impairments of long-lived assets and other assets totaling $239.5 million due to changes in anticipated revenue projections as a result of recent economic and market conditions related to the COVID-19 pandemic and current regulatory environment. At year-end, the Company recognized an impairment expense of $143.0 million on property and equipment, $39.0 million on intangible assets, $26.3 million on goodwill, $19.8 million on operating lease right-of-use assets, $5.9 million on other assets, and $5.6 million on assets held for sale. See “Critical Accounting Policies, Significant Judgments and Estimates and Recent Accounting Pronouncements” for further information on impairment expense. No impairment expense was recognized during the year ended June 29, 2019.

 

Loss on disposals, restructuring fees and other expenses decreased $10.3 million compared to the year ended June 29, 2019 primarily due to a decrease in loss from disposal of assets of $9.2 million as a result of a decrease in sales and leaseback transactions during the current year, and a decrease in restructuring fees of $1.1 million.

 

Total Other Expense

 

Total other expense for the fiscal year ended June 27, 2020 was $67.9 million, an increase of $54.9 million compared to total other expense of $13.0 million, or 422%, for the fiscal year ended June 29, 2019. The increase in total other expense was primarily attributable to a loss on extinguishment of debt of $42.5 million related to First and Third Amendment of the GGP Facility recognized during the current period. See “Note 18 - Senior Secured Convertible Credit Facility” in the audited Consolidated Financial Statements as of June 27, 2020 and June 29, 2019. Interest expense increased $28.0 million compared to the year ended June 29, 2019 as a result of the Company’s higher debt balance primarily due to the funding of additional tranches totaling $50.0 million under the GGP Facility and the related interest paid-in-kind. In addition, the increased interest expense was also related to the Company’s adoption of ASC 842 on June 30, 2019, resulting in interest expense related to capital leases of $6.3 million during the fiscal year ended June 27, 2020. Additionally, the increase in total other expense was also attributed to a write-off of assets of $9.0 million during the year ended June 27, 2020. This was offset by a $12.1 million increase in realized and unrealized gain on investments, assets held for sale and other assets which includes a gain of $16.4 million related to the assets acquired from the Termination of Merger with PharmaCann and sold during the fiscal year ended June 27, 2020.

 

Provision for Income Taxes

 

The provision for income tax benefit for the fiscal year ended June 27, 2020 was $39.6 million, an increase of $33.2 million, or 519% compared to the provision for income tax benefit of $6.4 million for the year ended June 29, 2019, primarily attributable to the reduction of the Company’s deferred tax liabilities through impairment of the underlying property, plant and equipment and intangible assets under U.S. GAAP. Deferred tax liabilities were $48.9 million and $84.6 million as of June 27, 2020 and June 29, 2019, respectively, representing a decrease of $35.6 million. During the year ended June 27, 2020, the Company recognized an impairment of $143.0 million on property and equipment and $39.0 million on intangible assets.

 

 
48

Table of Contents

 

Net Loss

 

Net loss from continuing operations for the year ended June 27, 2020 was $475.8 million, an increase of $219.2 million, or 85%, compared to a net loss from continuing operations of $256.6 million for the year ended June 29, 2019. The increase in net loss from continuing operations was mainly attributable to the impairment expense recognized during the fiscal fourth quarter of 2020 as described above, an increase in provision for income taxes as a result of such impairments, and an increase in interest expense given the Company’s higher debt balance. The loss on the extinguishment of debt related to amendments to credit facilities during the year ended June 27, 2020 was partially offset by gains on investments, assets held for sale and other assets. The increase in overall expenses were offset by a decrease in general and administrative expenses compared to the same period in the prior year as part of the Company’s efforts to reduce SG&A. Net loss attributable to non-controlling interest for the year ended June 27, 2020 was $279.3 million, resulting in net loss of $247.3 million attributable to the shareholders of MedMen Enterprises Inc. compared to $69.1 million for the year ended June 29, 2019.

 

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 Net Loss from Continuing Operations

 

Net Loss from Continuing Operations adjusted for transaction costs, restructuring costs, share-based compensation, 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, 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.

 

 
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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.

 

Retail Performance

 

Within the cannabis industry, MedMen is uniquely focused on the retail component of the value chain. For the fiscal quarters ended December 26, 2020 and June 27, 2020, the Company is providing detail with respect to earnings before interest, taxes, depreciation and amortization (“EBITDA”) attributable to the Company’s national retail operations to show how it is leveraging its retail footprint and strategically investing in the future. The table below highlights the Company’s national Retail Adjusted EBITDA Margin (Non-GAAP), which excludes corporate marketing expenses, distribution expenses, inventory adjustments, and local cannabis and excise taxes. Entity-wide Adjusted EBITDA (Non-GAAP) is presented in “Reconciliations of Non-GAAP Financial Measures”.

 

 
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Fiscal Quarter Ended December 26, 2020

 

 

 

Fiscal Quarter Ended

 

 

 

 

 

 

 

 

 

December 26,

 

 

September 26,

 

 

 $

 

 

 

 

 

 

2020

 

 

2020

 

 

Change

 

 

Change

 

Gross Profit

 

$ 18.0

 

 

$ 16.8

 

 

$ 1.2

 

 

 

7 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin Rate

 

 

53 %

 

 

47 %

 

 

6 %

 

 

13 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cultivation & Wholesale Revenue

 

 

-

 

 

 

(0.3 )

 

 

0.3

 

 

 

100 %

Cultivation & Wholesale Cost of Goods Sold

 

 

(1.2 )

 

 

(2.5 )

 

 

1.3

 

 

 

(52 )%

Non-Retail Gross Margin

 

 

(1.2 )

 

 

(2.2 )

 

 

1.0

 

 

 

(45 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Gross Margin (Non-GAAP)

 

$ 19.2

 

 

$ 19.0

 

 

$ 0.2

 

 

 

1 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Gross Margin Rate (Non-GAAP)

 

 

57 %

 

 

54 %

 

 

3 %

 

 

6 %

 

Fiscal Quarter Ended

December 26,

September 26,

$

%

2020

2020

Change

Change

Net Loss

$

(68.9

)

$

(32.8

)

$

(36.1

)

110

%

Net Loss from Discontinued Operations, Net of Taxes

(1.2

)

2.7

(3.9

)

(144

%)

Provision for Income Tax Expense

24.0

10.3

13.7

133

%

Other Expense

19.7

11.7

8.0

68

%

Excluded Items (1)

0.9

(15.6

)

16.5

(106

%)

Loss from Operations Before Excluded Items

$

(25.5

)

$

(23.7

)

$

(1.8

)

8

%

Non-Retail Gross Margin

(1.2

)

(2.2

)

1.0

(45

%)

Non-Retail Operating Expenses (2)

(30.1

)

(28.3

)

(1.8

)

6

%

Non-Retail EBITDA Margin

(31.3

)

(30.5

)

(0.8

)

3

%

Retail Adjusted EBITDA Margin (Non-GAAP)

$

5.8

$

6.8

$

(1.0

)

(15

%)

Retail Adjusted EBITDA Margin Rate (Non-GAAP)

17

%

19

%

(7%)

(36

%)

_______________________

(1)

Items adjusted from Net Loss for the fiscal quarters ended December 26, 2020 and September 26, 2020 include realized and unrealized loss on changes in fair value of contingent consideration of $0.1 million and $0.3 million, respectively, impairment expense of nil and $0.8 million, respectively, and loss (gain) on disposals of assets, restructuring fees and other expenses of $0.8 million and $(16.7) million, respectively. 

 

 

(2)

Non-retail operating expenses is comprised of the following items:

  

 
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Fiscal Quarter Ended

December 26,

September 26,

 

$

 

 

%

2020

2020

Change

Change

Cultivation & Wholesale

$

1.3

$

0.4

$

0.9

225

%

Corporate SG&A

15.3

16.2

(0.9

)

(6

%)

Depreciation & Amortization

9.7

8.6

1.1

13

%

Other (3)

3.8

3.1

0.7

23

%

Non-Retail Operating Expenses

30.1

28.3

1.8

6

%

Direct Store Operating Expenses (4)

13.4

12.2

1.2

10

%

Excluded Items (1)

0.9

(15.6

)

16.5

(106

%)

Total Expenses

$

44.4

$

24.9

$

19.5

78

%

 

(3) Other non-retail operating expenses excluded from Retail Adjusted EBITDA Margin (Non-GAAP) for the fiscal quarters ended December 26, 2020 and September 26, 2020 primarily consist of transaction costs and restructuring costs of $2.7 million and $2.7 million, respectively, and share-based compensation of $1.6 million and $1.0 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 current period, direct store operating expenses now includes local taxes of nil and $0.4 million for the fiscal quarters ended December 26, 2020 and September 26, 2020. Local taxes include cannabis sales and excise taxes imposed by municipalities in which the Company has active retail operations and vary by jurisdiction. Local taxes are not a cost required to directly operate the Company’s stores, but rather a byproduct of retail operations. In addition, distribution expenses of $1.4 million and $0.8 million and inventory adjustments of nil and $(1.8) million for the fiscal quarters ended December 26, 2020 and September 26, 2020, respectively, are also included in direct store operating expenses for the current reporting period. Distribution expenses relate to additional porter fees. Inventory adjustments consist of one-time write-offs related to unusual or infrequent events. Such expenses were presented as additional adjustments to arrive at Retail Adjusted EBITDA Margin (Non-GAAP) in prior periods and are now presented within retail operating expenses for a condensed presentation of Retail Adjusted EBITDA Margin (Non-GAAP).

 

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 December 26, 2020, Non-Retail Cost of Goods Sold related to cultivation and wholesale operations was $1.2 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).

 

 
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Table of Contents

 

For the fiscal second quarter of 2021, system-wide retail revenue was $33.8 million across the Company’s operations in California, Nevada, New York, Illinois and Florida. This represents a 4% decrease, or $1.5 million, over the fiscal first quarter of 2021 of $35.3 million. The decrease in system-wide revenue was driven primarily by decreased consumer spending during the fiscal second quarter of 2021 wherein certain states like California and Nevada were impacted by the rise of COVID-19 cases. In particular, California, which is the largest market in which the Company operates in, and Nevada enacted a second stay-at-home order during the fiscal second quarter of 2021. In addition, during the fiscal second quarter of 2021, the Company did not recognize any retail revenue from Evanston, Illinois which was deconsolidated during the prior quarter in which revenue was recognized through August 10, 2020. During the fiscal first quarter of 2021, the Company recorded $2.0 million revenue from Evanston. Adjusting for Evanston, the fiscal second quarter of 2021 retail revenue increased $0.5 million compared to the fiscal first quarter of 2021 due to increases in retail revenue from Florida and New York which were partially offset by decreases in retail revenue from California and Nevada.

 

Retail Gross Margin Rate (Non-GAAP), which is Retail Gross Margin (Non-GAAP) divided by Retail Revenue (Non-GAAP), for the fiscal second quarter of 2021 was 57%, compared to the fiscal first quarter of 2021 of 54% as a result of the Company’s continued focus on optimizing its retail model, including improvements in product sourcing and positive changes to key vendor arrangements. Retail Gross Margin (Non-GAAP) is Retail Revenue (Non-GAAP) less the related Retail Cost of Goods Sold (Non-GAAP). The Company had an aggregate Retail Adjusted EBITDA Margin Rate (Non-GAAP), which is Retail Adjusted EBITDA Margin (Non-GAAP) divided by Retail Revenue (Non-GAAP), of 17% for the fiscal second quarter of 2021 which represents a decrease compared to the 19% realized in the fiscal first quarter of 2021 primarily due to direct store operating expenses which include, but are not limited to, rent, utilities, payroll and payroll related expenses, employee benefits, and security. Direct store operating expenses increased $1.2 million, or 10%, compared to the fiscal first quarter of 2021, primarily driven by a one-time bad debt reserve of $1.0 million related to discontinued retail shelf fee program.

 

Fiscal Quarter Ended June 27, 2020

 

 

 

 Fiscal Quarter Ended

 

 

 

 

 

 

 

June 27,

 

 

March 28,

 

 

$

 

 

%

 

 

 

2020

 

 

2020

 

 

   Change  

 

 

  Change 

 

Gross Profit

 

$ 11.0

 

 

$ 14.8

 

 

$ (3.8 )

 

 

(26 )%

Gross Margin Rate

 

 

40 %

 

 

32 %

 

 

8 %

 

 

25 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cultivation & Wholesale Revenue

 

 

-

 

 

 

(0.5 )

 

 

0.5

 

 

 

(100 )%

Cultivation & Wholesale Cost of Goods Sold

 

 

(3.1 )

 

 

(7.1 )

 

 

4.0

 

 

 

(56 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Retail Gross Margin

 

 

(3.1 )

 

 

(6.6 )

 

 

3.5

 

 

 

(53 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Gross Margin (Non-GAAP)

 

$ 14.1

 

 

$ 21.4

 

 

$ (7.3 )

 

 

(34 )%

Retail Gross Margin Rate (Non-GAAP)

 

 

51 %

 

 

47 %

 

 

4 %

 

 

9 %

 

 
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Table of Contents

 

 

 

  Fiscal Quarter Ended

 

 

 

 

 

 

 

June 27,

 

 

March 28,

 

 

$

 

 

%

 

 

 

2020

 

 

2020

 

 

Change  

 

 

Change 

 

Net Loss

 

$ (232.5 )

 

$ (81.4 )

 

$ (151.1 )

 

 

186 %

Net Loss from Discontinued Operations, Net of Taxes

 

 

1.4

 

 

 

1.9

 

 

 

(0.5 )

 

 

(26 )%

Provision for Income Tax (Expense) Benefit

 

 

(67.4 )

 

 

15.5

 

 

 

(82.9 )

 

 

(535 )%

Other Expense

 

 

13.7

 

 

 

21.1

 

 

 

(7.4 )

 

 

(35 )%

Excluded Items (1)

 

 

239.8

 

 

 

2.9

 

 

 

236.9

 

 

 

8,169 %

Loss from Operations Before Excluded Items

 

 

(45.0 )

 

 

(40.0 )

 

 

(5.0 )

 

 

13 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Retail Gross Margin

 

 

(3.1 )

 

 

(6.6 )

 

 

3.5

 

 

 

(53 )%

Non-Retail Operating Expenses (2)

 

 

(42.3 )

 

 

(37.0 )

 

 

(5.3 )

 

 

14 %

Non-Retail EBITDA Margin

 

 

(45.4 )

 

 

(43.6 )

 

 

(1.8 )

 

 

4 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail Adjusted EBITDA Margin (Non-GAAP)

 

$ 0.4

 

 

$ 3.6

 

 

$ (3.2 )

 

 

(89 )%

Retail Adjusted EBITDA Margin Rate (Non-GAAP)

 

 

1 %

 

 

8 %

 

 

-7 %

 

 

(88 )%

________________________

(1) Items adjusted from Net Loss for the fiscal quarters ended June 27, 2020 and March 28, 2020 include realized and unrealized loss on changes in fair value of contingent consideration of $0.5 million and $1.0 million, respectively, impairment expense of $239.5 million and nil, respectively, and loss on disposals of assets, restructuring fees and other expenses of $(0.2) million and $1.9 million, respectively.

(2) Non-retail operating expenses is comprised of the following items:

 

 

 

 Fiscal Quarter Ended

 

 

 

 

 

 

 

 

 

June 27,

 

 

March 28,

 

 

$

 

 

%

 

 

 

2020

 

 

2020

 

 

Change  

 

 

Change 

 

Cultivation & Wholesale

 

$ 1.6

 

 

$ 1.9

 

 

$ (0.3 )

 

 

(16 )%

Corporate SG&A

 

 

19.9

 

 

 

22.1

 

 

 

(2.2 )

 

 

(10 )%

Depreciation & Amortization

 

 

15.9

 

 

 

8.0

 

 

 

7.9

 

 

 

99 %

Other (3)

 

 

4.9

 

 

 

5.0

 

 

 

(0.1 )

 

 

(2 )%

Non-Retail Operating Expenses

 

 

42.3

 

 

 

37.0

 

 

 

5.3

 

 

 

14 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Store Operating Expenses (4)

 

 

13.7

 

 

 

17.9

 

 

 

(4.2 )

 

 

(23 )%

Excluded Items (1)

 

 

239.8

 

 

 

2.9

 

 

 

236.9

 

 

 

8,169 %

Total Expenses

 

$ 295.8

 

 

$ 57.8

 

 

$ 238.0

 

 

 

412 %

 

(3) Other non-retail operating expenses excluded from Retail Adjusted EBITDA from Continuing Operations (Non-GAAP) for the fiscal quarters ended June 27, 2020 and March 28, 2020 primarily consist of transaction costs and restructuring costs of $5.7 million and $3.7 million, respectively, and share-based compensation of $(0.4) million and $1.8 million, respectively, as commonly excluded from Adjusted EBITDA (Non-GAAP). Refer to “Reconciliations of Non-GAAP Financial Measures” below.

(4) For the current period, direct store operating expenses now includes local taxes of $1.1 million and $1.9 million for the fiscal quarters ended June 27, 2020 and March 28, 2020. Local taxes include cannabis sales and excise taxes imposed by municipalities in which the Company has active retail operations and vary by jurisdiction. Local taxes are not a cost required to directly operate the Company’s stores, but rather a byproduct of retail operations. In addition, distribution expenses of $0.8 million and $0.9 million and inventory adjustments of $(0.6) million and $(1.9) million for the fiscal quarters ended June 27, 2020 and March 28, 2020, respectively, are also included in direct store operating expenses for the current reporting period. Distribution expenses relate to additional porter fees. Inventory adjustments consist of one-time write-offs related to unusual or infrequent events. Such expenses were presented as additional adjustments to arrive at Retail Adjusted EBITDA Margin (Non-GAAP) in prior periods and are now presented within retail operating expenses for a condensed presentation of Retail Adjusted EBITDA Margin (Non-GAAP).

 

 
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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 stores. Retail revenue is related to net sales from the Company’s stores. 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 27, 2020, non-retail cost of goods sold related to cultivation and wholesale operations was $3.1 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 EBITDA margin.

 

For the fiscal fourth quarter of 2020, system-wide retail revenue was $27.4 million across the Company’s operations in California, Nevada, New York, Illinois and Florida. This represents a 40% decrease, or $18.0 million, over the fiscal third quarter of 2020 of $45.4 million. The decrease in system-wide revenue was driven primarily by decreased sales as a result of COVID-19. In particular, certain retail locations in California and Nevada experienced a slowdown in sales during the fiscal fourth quarter of 2020 due to shelter-at-home orders and reduced tourism. The initiative of mobilizing curbside pickup and delivery during the fiscal quarter ended June 27, 2020 allowed more captured revenues and will continue to be a significant part of the Company’s future as consumer purchasing habits continue to evolve. During the fiscal fourth quarter of 2020, the Company temporarily closed five of its eight retail stores in Florida as a part of the Company’s efforts to optimize their current retail portfolio. The five locations were Sarasota, Orlando (International Drive), Tallahassee, Jacksonville and Key West. The Company will look to re-open the locations as additional supply is available through its Eustis cultivation and manufacturing facility as a result of upgrades and process improvements that are currently underway at the facility. Subsequent to June 27, 2020, the Company opened its Coral Shores location near Fort Lauderdale, Florida.

 

Retail Gross Margin Rate (Non-GAAP) for the fiscal fourth quarter of 2020 was 51%, compared to the fiscal third quarter of 2020 of 47% as a result of the factors described above. The Company had an aggregate Retail Adjusted EBITDA Margin Rate (Non-GAAP) of 1% for the fiscal fourth quarter of 2020 which represents a decrease compared to the 8% realized in the fiscal third quarter of 2020 primarily due to direct store operating expenses and other adjustments. Direct store operating expenses include, but are not limited to, rent, utilities, payroll and payroll related expenses, employee benefits, and security, which decreased $4.2 million, or 23%, compared to the fiscal third quarter of 2020. The change was primarily driven by a decrease in payroll expense and security fees as a result of the Company’s cost-rationalization plan to reduce retail-level operating expenses in addition to modifications to the Company’s retail operations during the COVID-19 pandemic. The decrease in direct store operating expenses of 23% was not commensurate with the decrease in revenues of 40% during the fiscal fourth quarter of 2020, resulting in an overall decrease in Retail Adjusted EBITDA Margin Rate (Non-GAAP) compared to the fiscal third quarter of 2020.

 

 
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Table of Contents

 

Corporate SG&A

 

Corporate-level general and administrative expenses across various functions including Marketing, Legal, Retail Corporate, Technology, Accounting and Finance, Human Resources and Security (collectively referred to as “Corporate SG&A”) are combined to account for a significant proportion of the Company’s total general and administrative expenses. Corporate SG&A now includes pre-opening expenses of $6.1 million and $5.9 million for the fiscal quarter ended December 26, 2020 and September 26, 2020, respectively, and $5.3 million and $4.7 million for the fiscal quarter ended June 27, 2020 and March 28, 2020, respectively, which were presented as non-Corporate SG&A in prior periods. Pre-opening expenses is excluded from Retail Adjusted EBITDA Margin (Non-GAAP) and thus more appropriately classified as Corporate SG&A.

 

Fiscal Quarter Ended December 26, 2020

 

 

 

Fiscal Quarter Ended

 

 

 

 

 

 

 

 

 

December 26,

 

 

September 26,

 

 

$

 

 

%

 

($ in Millions)

 

2020

 

 

2020

 

 

Change

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and Administrative

 

$ 33.6

 

 

$ 31.7

 

 

$ 1.9

 

 

 

6 %

Sales and Marketing

 

 

0.2

 

 

 

0.2

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated SG&A

 

 

33.8

 

 

 

31.9

 

 

 

1.9

 

 

 

6 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Store Operating Expenses (1)

 

 

13.4

 

 

 

12.2

 

 

 

1.2

 

 

 

10 %

Cultivation & Wholesale

 

 

1.3

 

 

 

0.4

 

 

 

0.9

 

 

 

225 %

Other (2)

 

 

3.8

 

 

 

3.1

 

 

 

0.7

 

 

 

23 %

Less: Non-Corporate SG&A

 

 

18.5

 

 

 

15.7

 

 

 

2.8

 

 

 

18 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate SG&A as a Component of Adjusted

EBITDA from Continuing Operations (Non-GAAP)

 

$ 15.3

 

 

$ 16.2

 

 

$ (0.9 )

 

 

(6 )%

________________________

(1) For the periods presented, direct store operating expenses now include local taxes of nil and $0.4 million, distribution expenses of $1.4 million and $0.8 million and inventory adjustments of nil and $(1.8) million for the fiscal quarters ended December 26, 2020 and September 26, 2020, respectively. Refer to “Retail Performance” and notes therein for further information. 

(2) Other non-Corporate SG&A for the fiscal quarters ended December 26, 2020 and September 26, 2020 primarily consist of transaction costs and restructuring costs of $2.7 million and $2.7 million, respectively, and share-based compensation of $1.6 million and $1.0 million, respectively, as commonly excluded from Adjusted EBITDA (Non-GAAP). Refer to “Retail Performance” and notes therein for further information.

 

For the fiscal second quarter of 2021, Corporate SG&A (Non-GAAP) contributed $15.3 million to Adjusted EBITDA from Continuing Operations (Non-GAAP), representing a decrease of $0.9 million, or 6%, from the $16.2 million that Corporate SG&A (Non-GAAP) contributed to Adjusted EBITDA Loss from Continuing Operations (Non-GAAP) in the fiscal first quarter of 2021. The largest driver of the improvement was the Company’s continual effort to right-size its corporate infrastructure as a result of the successful implementation of the Company’s cost-cutting plans.

 

 
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Table of Contents

 

Fiscal Quarter Ended June 27, 2020

 

 

 

 Fiscal Quarter Ended

 

 

 

 

 

 

 

June 27,

 

 

March 28,

 

 

 $ 

 

 

 % 

 

 ($ in Millions)

 

2020

 

 

2020

 

 

   Change  

 

 

  Change 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and Administrative

 

$ 39.9

 

 

$ 45.9

 

 

$ (6.0 )

 

 

(13 )%

Sales and Marketing

 

 

0.2

 

 

 

1.0

 

 

 

(0.8 )

 

 

(80 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated SG&A

 

 

40.1

 

 

 

46.9

 

 

 

(6.8 )

 

 

(14 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Store Operating Expenses (1)

 

 

13.7

 

 

 

17.9

 

 

 

(4.2 )

 

 

(23 )%

Cultivation & Wholesale

 

 

1.6

 

 

 

1.9

 

 

 

(0.3 )

 

 

(16 )%

Other (2)

 

 

4.9

 

 

 

5.0

 

 

 

(0.1 )

 

 

(2 )%

Less: Non-Corporate SG&A

 

 

20.2

 

 

 

24.8

 

 

 

(4.6 )

 

 

(19 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate SG&A as a Component of Adjusted EBITDA 

from Continuing Operations (Non-GAAP)

 

$ 19.9

 

 

$ 22.1

 

 

$ (2.2 )

 

 

(10 )%

________________________

(1) For the periods presented, direct store operating expenses now include local taxes of $1.1 million and $1.9 million distribution expenses of $0.8 million and $0.9 million and inventory adjustments of $(0.6) million and $(1.9) million for the fiscal quarters ended June 27, 2020 and March 28, 2020, respectively. See “Retail Performance” and notes therein for further information. 

(2) Other non-Corporate SG&A for the fiscal quarters ended June 27, 2020 and March 28, 2020 primarily consist of transaction costs and restructuring costs of $5.7 million and $3.7 million, respectively, and share-based compensation of $(0.4) million and $1.8 million, respectively, as commonly excluded from Adjusted EBITDA (Non-GAAP). See “Retail Performance” and notes therein for further information.

 

For the fiscal fourth quarter of 2020, Corporate SG&A (Non-GAAP) contributed $19.9 million to Adjusted EBITDA from Continuing Operations (Non-GAAP), representing a decrease of $2.2 million, or 10%, from the $22.1 million that Corporate SG&A (Non-GAAP) contributed to Adjusted EBITDA Loss from Continuing Operations (Non-GAAP) in the fiscal third quarter of 2020. The largest driver of the improvement was a reduction in headcount and marketing and technology related expenses as a result of the successful implementation of the Company’s cost-cutting plans announced on November 15, 2019. See below “Recent Developments”. As part of its efforts to optimize Corporate SG&A (Non-GAAP), marketing spend is now focused on consumer engagement through digital content, retail programming and retail partnerships that have an identifiable impact on store visits. Technology spend is now focused on driving revenue-generating activities, such as scaling MedMen’s curbside pickup and delivery platform. The Company expects additional improvements in reduction of Corporate SG&A (Non-GAAP) in the upcoming quarters.

 

 
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Table of Contents

 

Reconciliations of Non-GAAP Financial Measures

 

Three and Six Months Ended December 26, 2020 and December 28, 2019 

 

The table below reconciles Net Loss to Adjusted Net Loss from Continuing Operations (Non-GAAP) for the periods indicated.

 

Three Months Ended

Six Months Ended

December 26,

December 28,

December 26,

December 28,

($ in Millions)

2020

2019

2020

2019

Net Loss

$

(68.9

)

$

(93.1

)

$

(101.8

)

$

(156.1

)

Less: Net Loss from Discontinued Operations, Net of Taxes

(1.2

)

36.8

1.5

39.9

Add (Deduct) Impact of:

Transaction Costs & Restructuring Costs

2.7

17.8

5.4

18.9

Share-Based Compensation

1.6

2.6

2.6

9.0

Other Non-Cash Operating Costs (1)

3.4

(0.4

)

(15.4

)

15.8

Income Tax Effects (2)

(0.8

)

(0.4

)

2.7

2.6

Total Adjustments

6.9

19.6

(4.7

)

46.3

Adjusted Net Loss from Continuing Operations (Non-GAAP)

$

(63.1

)

$

(36.8

)

$

(105.0

)

$

(69.8

)

  

 
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Table of Contents

 

The table below reconciles Adjusted Net Loss to EBITDA from Continuing Operations (Non-GAAP) and Adjusted EBITDA from Continuing Operations (Non-GAAP) for the periods indicated.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 26,

 

 

December 28,

 

 

December 26,

 

 

December 28,

 

($ in Millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$ (68.9 )

 

$ (93.1 )

 

$ (101.8 )

 

$ (156.1 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net Loss from Discontinued Operations, Net of Taxes

 

 

(1.2 )

 

 

36.8

 

 

 

1.5

 

 

 

39.9

 

Add (Deduct) Impact of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest and Other Financing Costs

 

 

9.7

 

 

 

7.8

 

 

 

20.8

 

 

 

15.6

 

Provision for Income Taxes

 

 

24.0

 

 

 

(14.6 )

 

 

34.3

 

 

 

(32.3 )

Amortization and Depreciation

 

 

16.9

 

 

 

9.8

 

 

 

29.0

 

 

 

23.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Adjustments

 

 

50.6

 

 

 

3.0

 

 

 

84.1

 

 

 

6.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA from Continuing Operations (Non-GAAP)

 

$ (19.5 )

 

$ (53.4 )

 

$ (16.1 )

 

$ (109.8 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add (Deduct) Impact of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction Costs & Restructuring Costs

 

 

2.7

 

 

 

17.8

 

 

 

5.4

 

 

 

18.9

 

Share-Based Compensation

 

 

1.6

 

 

 

2.6

 

 

 

2.6

 

 

 

9.0

 

Other Non-Cash Operating Costs (1)

 

 

3.4

 

 

 

(0.4 )

 

 

(15.4 )

 

 

15.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Adjustments

 

 

7.7

 

 

 

20.0

 

 

 

(7.4 )

 

 

43.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA from Continuing Operations (Non-GAAP)

 

$ (11.8 )

 

$ (33.4 )

 

$ (23.5 )

 

$ (66.1 )

________________________

(1) Other non-cash operating costs for the periods presented were as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 26,

 

 

December 28,

 

 

December 26,

 

 

December 28,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Fair Value of Derivative Liabilities

 

$ 0.2

 

 

$ (2.9 )

 

$ (0.1 )

 

$ (8.0 )

Change in Fair Value of Investments

 

 

2.0

 

 

 

(5.0 )

 

 

(10.5 )

 

 

(16.5 )

Change in Fair Value of Contingent Consideration

 

 

0.1

 

 

 

5.2

 

 

 

0.4

 

 

 

7.5

 

Gain/Loss on Lease Modifications

 

 

(1.3 )

 

 

-

 

 

 

(17.9 )

 

 

(0.2 )

Gain/Loss on Extinguishment of Debt

 

 

0.9

 

 

 

0.7

 

 

 

11.1

 

 

 

32.2

 

Gain/Loss from Disposal of Assets

 

 

0.5

 

 

 

1.1

 

 

 

0.4

 

 

 

0.2

 

Impairment Expense

 

 

-

 

 

 

-

 

 

 

0.8

 

 

 

-

 

Other Non-Cash Operating Costs

 

 

0.9

 

 

 

0.6

 

 

 

0.4

 

 

 

0.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Other Non-Cash Operating Costs

 

$ 3.4

 

 

$ (0.4 )

 

$ (15.4 )

 

$ 15.8

 

 

(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, 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%.

 

 
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Table of Contents

 

Adjusted Net Loss from Continuing Operations (Non-GAAP) represents the profitability of the Company excluding unusual and infrequent expenditures and non-cash operating costs. The change in Adjusted Net Loss from Continuing Operations (Non-GAAP) was primarily due to reductions in SG&A as a direct result of successful implementation of the Company’s cost reduction initiatives as well as a decrease in transaction costs and restructuring costs as the Company scales back its expansion strategy and executes its turnaround plan. This was offset by an increase in the Company’s provision for income taxes driven by IRC Section 280E. Accordingly, Adjusted Net Loss from Continuing Operations (Non-GAAP) increased in the fiscal second quarter of 2021 compared to the prior period.

 

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 $(19.5) million and $(16.1) million for the three and six months ended December 26, 2020 improved compared to the comparative prior periods. The change in EBITDA from Continuing Operations (Non-GAAP) was primarily due to the Company’s continued focus on its cost-reduction initiatives. In addition, the Company recognized a loss on extinguishment of debt of $32.2 million during the six months ended December 28, 2019 compared to $11.1 million in the current period, offset by a $16.3 million gain on lease modifications on the deferral of lease payments with the REIT in the fiscal first quarter of 2021.

 

For the three and six months ended December 26, 2020, the Company saw an improvement in Adjusted EBITDA from Continuing Operations (Non-GAAP) of $(11.8) million and $(23.5) million, respectively, compared to $(33.4) million and $(66.1) million for the three and six months ended December 28, 2019, respectively. The improvement was primarily related to a decrease in transaction costs and restructuring costs as the Company executes its strategic plan during fiscal year 2021. The financial performance of the Company is expected to further improve as the Company continues to focus on its turnaround plan and cost-optimization efforts and once all newly active retail locations have acclimatized to the geographic market and are fully operational.

 

Years Ended June 27, 2020 and June 29, 2019

 

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 27,

 

 

June 29,

 

 

June 27,

 

 

June 29,

 

($ in Millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$ (232.5 )

 

$ (60.9 )

 

$ (526.5 )

 

$ (257.9 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net Loss from Discontinued Operations, Net of Taxes

 

 

1.4

 

 

 

(0.2 )

 

 

50.8

 

 

 

1.3

 

Add (Deduct) Impact of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction Costs & Restructuring Costs

 

 

5.7

 

 

 

6.7

 

 

 

28.2

 

 

 

15.7

 

Share-Based Compensation

 

 

(0.4 )

 

 

3.4

 

 

 

10.4

 

 

 

32.1

 

     Other Non-Cash Operating Costs(1)

 

 

238.9

 

 

 

4.2

 

 

 

268.8

 

 

 

2.0

 

     Income Tax Effects(2)

 

 

(51.0 )

 

 

(1.8 )

 

 

(48.7 )

 

 

(1.5 )

Total Adjustments

 

 

193.2

 

 

 

12.5

 

 

 

258.7

 

 

 

48.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Net Loss from Continuing Operations (Non-GAAP)

 

$ (37.9 )

 

$ (48.7 )

 

$ (217.1 )

 

$ (208.3 )

 

 
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Table of Contents

 

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 27,

 

 

June 29,

 

 

June 27,

 

 

June 29,

 

($ in Millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$ (232.5 )

 

$ (60.9 )

 

$ (526.5 )

 

$ (257.9 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net Loss from Discontinued Operations, Net of Taxes

 

 

1.4

 

 

 

(0.2 )

 

 

50.8

 

 

 

1.3

 

Add (Deduct) Impact of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest and Other Financing Costs

 

 

15.0

 

 

 

5.1

 

 

 

39.7

 

 

 

11.5

 

Provision for Income Taxes

 

 

(67.4 )

 

 

(12.4 )

 

 

(39.3 )

 

 

(6.4 )

Amortization and Depreciation

 

 

15.9

 

 

 

16.5

 

 

 

52.2

 

 

 

31.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Adjustments

 

 

(36.5 )

 

 

9.2

 

 

 

52.6

 

 

 

37.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA from Continuing Operations (Non-GAAP)

 

$ (267.6 )

 

$ (52.0 )

 

$ (423.2 )

 

$ (219.6 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add (Deduct) Impact of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction Costs & Restructuring Costs

 

 

5.7

 

 

 

6.7

 

 

 

28.2

 

 

 

15.7

 

Share-Based Compensation

 

 

(0.4 )

 

 

3.4

 

 

 

10.4

 

 

 

32.1

 

Other Non-Cash Operating Costs(1)

 

 

239.0

 

 

 

4.2

 

 

 

268.7

 

 

 

2.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Adjustments

 

 

244.3

 

 

 

14.3

 

 

 

307.3

 

 

 

49.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA from Continuing Operations (Non-GAAP)

 

$ (23.3 )

 

$ (37.7 )

 

$ (115.9 )

 

$ (169.7 )

______

(1) Other non-cash operating costs for the periods presented were as follows:

 

 
61

Table of Contents

 

 

 

 Three Months Ended

 

 

 Year Ended

 

 

 

June 27,

 

 

June 29,

 

 

June 27,

 

 

June 29,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Fair Value of Derivative Liabilities

 

 

(0.8 )

 

 

(1.6 )

 

 

(8.8 )

 

 

(3.9 )

Change in Fair Value of Investments

 

 

0.2

 

 

 

(2.0 )

 

 

(16.4 )

 

 

(4.3 )

Change in Fair Value of Contingent Consideration

 

 

0.5

 

 

 

-

 

 

 

7.5

 

 

 

-

 

Gain/Loss on Extinguishment of Debt

 

 

-

 

 

 

-

 

 

 

43.8

 

 

 

1.2

 

Gain/Loss from Disposal of Assets

 

 

(0.9 )

 

 

7.9

 

 

 

1.0

 

 

 

9.3

 

Impairment Expense

 

 

239.5

 

 

 

-

 

 

 

239.5

 

 

 

-

 

Other Non-Cash Operating Costs

 

 

0.4

 

 

 

(0.1 )

 

 

2.2

 

 

 

(0.3 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total Other Non-Cash Operating Costs

 

$ 238.9

 

 

$ 4.2

 

 

$ 268.8

 

 

$ 2.0

 

 

(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, 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%.

 

Despite reductions in SG&A due to implementation of the Company’s cost reduction initiatives, the change in Adjusted Net Loss from Continuing Operations was primarily due to other non-cash operating costs, such as impairment and gains and losses on disposal of assets. This is adjusted for interest and financing costs as a direct result of debt financings, income taxes related to the number of retail locations and cultivation and production facilities operated, and amortization and depreciation expense related to the Company’s retail stores, cultivation and production facilities. Considering these adjustments, the Company had EBITDA from Continuing Operations (Non-GAAP) of $(423.2) million for the year ended June 27, 2020 compared to $(219.6) million for the year ended June 29, 2019, noting EBITDA from Continuing Operations (Non-GAAP) includes significant non-cash operating costs incurred during fiscal year 2020.

 

For the fiscal year ended June 27, 2020, the Company saw an improvement in Adjusted EBITDA from Continuing Operations (Non-GAAP) of $(115.9) million compared to $(169.7) million for the year ended June 29, 2019. The Company utilizes equity compensation as a tool to attract and retain employees and compensate corporate governance which was a focus of the Company’s expansion strategy executed during the fiscal year ended June 29, 2019. Other non-cash operating costs, such as impairment and gains and losses on disposal of assets, are excluded from Adjusted EBITDA from Continuing Operations (Non-GAAP) to reflect earnings from regular operations. The financial performance of the Company is expected to improve as the Company continues to focus on its turnaround plan and cost-optimization efforts and once all newly active retail locations have acclimatized to the geographic market and are fully operational. See “Liquidity and Capital Resources” for further discussion of management’s future outlook and executed strategic plan.

 

Refer to “Liquidity and Capital Resources” for further discussion of management’s future outlook and executed strategic plan. Refer to “Retail Performance” above for reconciliations of Retail Adjusted EBITDA.

 

 
62

Table of Contents

 

Cash Flows

 

Six Months Ended December 26, 2020 and December 28, 2019 

 

Six Months Ended

December 26,

December 28,

 

$

 

 

%

($ in Millions)

2020

2019

Change

Change

Net Cash Used in Operating Activities

$

(29.7

)

$

(69.7

)

$

40.0

(57

%)

Net Cash Provided by (Used in) Investing Activities

15.4

(26.5

)

41.9

(158

%)

Net Cash Provided by Financing Activities

11.8

88.9

(77.1

)

(87

%)

Net Decrease in Cash and Cash Equivalents

(2.5

)

(7.3

)

4.8

(66

%)

Cash and Cash Equivalents, Beginning of Period

10.1

33.2

(23.1

)

(70

%)

Cash and Cash Equivalents, End of Period

$

7.5

$

26.0

$

(18.5

)

(71

%)

 

Cash Flow from Operating Activities

 

Net cash used in operating activities was $29.7 million for the six months ended December 26, 2020, a decrease of $40.0 million, or 57%, compared to $69.7 million for the six months ended December 28, 2019. The decrease in cash used was primarily due to results of the Company’s cost rationalization strategy implemented since November 2019. Specifically, general and administrative expenses as well as sales and marketing include corporate-level expenses across various functions including Marketing, Legal, Retail Corporate, Technology, Accounting and Finance, Human Resources and Security which are combined to account for a significant proportion of the Company’s total general and administrative and sales and marketing expenses, which decreased $49.1 million and $9.0 million, respectively, compared to the six months ended December 28, 2019. The decrease in cash used was coupled with gains recognized on certain modifications to lease agreements of $17.9 million, a deferred tax recovery in the amount of $13.5 million, a decrease in change of contingent consideration related to a previously acquired California license of $7.1 million as well as a decrease in loss on extinguishment of debt and settlement of accounts payable and accrued liabilities of $21.8 million during the six months ended December 26, 2020.

 

Cash Flow from Investing Activities

 

Net cash provided by investing activities was $15.4 million for the six months ended December 26, 2020, a decrease of $41.9 million, or 158%, compared to $26.5 million of cash used in the six months ended December 28, 2019. The decrease in net cash used in investing activities was primarily due the Company’s strategic plan to limit cash outlays and divest non-core assets as compared to the six months ended December 28, 2019. Net cash was positively impacted by a decrease in purchases of property and equipment of $46.8 million. In addition, the Company received proceeds from the sale of assets held for sale of $18.8 million during the six months ended December 26, 2020, an increase of $13.8 million, compared to $5.0 million in the same period prior, offset by a decrease of $21.8 million in proceeds from the sale of investments and property.

 

Cash Flow from Financing Activities

 

Net cash provided by financing activities was $11.8 million for the six months ended December 26, 2020, a decrease of $77.1 million, or 87%, compared to $88.9 million for the six months ended December 28, 2019. The decrease in change of net cash provided by financing activities was primarily due to a decrease of $52.6 million in the issuance of equity instruments for cash, and a decrease of $29.5 million in proceeds from the credit facility with Gotham Green Partners. The decrease in debt and equity financings was coupled with a decrease of $12.3 million in principal repayments on notes payable offset by an increase of $8.0 million in principal repayments of the GGP Facility during the six months ended December 26, 2020 compared to the same period in the prior year.

 

 
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Years Ended June 27, 2020 and June 29, 2019

 

 

 

 Year Ended

 

 

 

 

 

 

 

June 27,

 

 

June 29,

 

 

$

 

 

%

 

($ in Millions)

 

2020

 

 

2019

 

 

 Change

 

 

 Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash Used in Operating Activities

 

$ (110.1 )

 

$ (243.0 )

 

$ 132.9

 

 

 

(55 )%

Net Cash Used in Investing Activities

 

 

(19.4 )

 

 

(146.5 )

 

 

127.1

 

 

 

(87 )%

Net Cash Provided by Financing Activities

 

 

107.1

 

 

 

344.1

 

 

 

(237.0 )

 

 

(69 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Decrease in Cash and Cash Equivalents

 

 

(22.4 )

 

 

(45.4 )

 

 

23.0

 

 

 

(51 )%

Cash Included in Assets Held for Sale (1)

 

 

(0.7 )

 

 

(0.5 )

 

 

(0.2 )

 

 

40 %

Cash and Cash Equivalents, Beginning of Period

 

 

33.2

 

 

 

79.2

 

 

 

(46.0 )

 

 

(58 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents, End of Period

 

$ 10.1

 

 

$ 33.2

 

 

$ (23.1 )

 

 

(70 )%

 

Cash Flow from Operating Activities

 

Net cash used in operating activities was $110.1 million for the fiscal year ended June 27, 2020, a decrease of $132.9 million, or 55%, compared to $243.0 million for the year ended June 29, 2019. The decrease in cash used was primarily due to implementation of the Company’s cost rationalization strategy during the fiscal year ended June 27, 2020. Specifically, general and administrative expenses include corporate-level expenses across various functions including Marketing, Legal, Retail Corporate, Technology, Accounting and Finance, Human Resources and Security which are combined to account for a significant proportion of the Company’s total general and administrative expenses. Several retail locations were opened during the fiscal year ended June 29, 2019 and became fully operational during the fiscal year ended June 27, 2020, resulting in increased revenues as well as increased operating costs.

 

Cash Flow from Investing Activities

 

Net cash used in investing activities was $19.4 million for the fiscal year ended June 27, 2020, a decrease of $127.1 million, or 87%, compared to $146.5 million for the year ended June 29, 2019. The decrease in net cash used in investing activities was primarily due the Company’s strategic plan to limit cash outlays and divest non-core assets. Net cash was positively impacted by a decrease in purchases of property and equipment of $60.2 million, a decrease in purchases of investments of $8.8 million, and a decrease in business combinations and asset acquisitions of $45.4 million. In addition, the Company received proceeds from the sale of investments of $12.5 million and proceeds from the sale of assets held for sale and other assets of $21.9 million, offset by a decrease in proceeds from the sale of property of $14.8 million.

 

Cash Flow from Financing Activities

 

Net cash provided by financing activities was $107.1 million for the fiscal year ended June 27, 2020, a decrease of $237.0 million, or 69%, compared to $344.1 million for the year ended June 29, 2019. The decrease in change of net cash provided by financing activities was primarily due to a decrease of $66.0 million in the issuance of equity instruments for cash, a decrease of $152.4 million in proceeds from the issuance of notes payable, and a decrease of $50.0 million in proceeds from the credit facility with Gotham Green Partners. The decrease in debt and equity financings was offset by a decrease of $40.2 million in principal repayments on notes payable during the year ended June 27, 2020 compared to the same period in the prior year.

 

 
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Financial Condition

 

The following table summarizes certain aspects of the Company’s financial condition as of December 26, 2020 and June 27, 2020:

 

 

 

December 26,

 

 

June 27,

 

 

$

 

 

%

 

($ in Millions)

 

2020

 

 

2020

 

 

Change

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$ 7.5

 

 

$ 10.1

 

 

$ (2.6 )

 

 

(26 )%

Total Current Assets

 

$ 68.3

 

 

$ 84.0

 

 

$ (15.7 )

 

 

(19 )%

Total Assets

 

$ 503.6

 

 

$ 574.3

 

 

$ (70.7 )

 

 

(12 )%

Total Current Liabilities

 

$ 220.4

 

 

$ 189.2

 

 

$ 31.2

 

 

 

16 %

Notes Payable, Net of Current Portion

 

$ 337.3

 

 

$ 319.2

 

 

$ 18.1

 

 

 

6 %

Total Liabilities

 

$ 750.5

 

 

$ 751.2

 

 

$ (0.7 )

 

 

(0 )%

Total Shareholders' Equity

 

$ (246.9 )

 

$ (176.9 )

 

$ (70.0 )

 

 

40 %

Working Capital Deficit

 

$ (152.1 )

 

$ (105.2 )

 

$ (47.0 )

 

 

45 %

 

As of December 26, 2020, the Company had $7.5 million of cash and cash equivalents and $152.1 million of working capital deficit, compared to $10.1 million of cash and cash equivalents and $105.2 million of working capital deficit as of June 27, 2020. The reduction in cash and cash equivalents was associated with principal repayments of the GGP Facility of $8.0 million during the six-month period versus none in the prior year, which was offset by cash savings from execution of the Company’s financial restructuring and turnaround plan to defer approximately $32.0 million in cash commitments. On July 2, 2020, the Company amended the GGP Facility and 2018 Term Loan wherein all interest payable through June 2021 will be paid-in-kind. Further, on July 2, 2020, the Company also amended its lease terms with the REIT wherein a portion of the total current monthly base rent will be deferred for the 36-month period between July 1, 2020 and July 1, 2023.

 

The $47.0 million increase in working capital deficit was primarily related to a decrease of $13.0 million assets held for sale related to the Company’s divestiture of non-core assets during the six months ended December 26, 2020 and a decrease of $3.4 million in other current assets related to the outstanding portion of the consideration for the sale of retail locations in Evanston, Illinois and Seaside, California and a settlement in excise tax receivable. The net decrease in current assets was coupled with an increase of $47.7 million in income taxes payable offset by a decrease of $6.8 million in other current liabilities primarily due to decreases in accrued interest which was capitalized to non-current notes payable as paid-in-kind, a decrease of $6.3 million in liabilities held for sale, and a decrease of $4.9 million in the current portion of lease liabilities.

 

The Company’s working capital will be significantly impacted by continued growth in retail operations, operationalizing existing licenses, and the success of the Company’s cost-cutting measures. The ability to fund working capital needs will also be dependent on the Company’s ability to raise additional debt and equity financing.

 

The following table summarizes certain aspects of the Company’s financial condition as of June 27, 2020 and June 29, 2019:

 

 

 

June 27,

 

 

June 29,

 

 

  $

 

 

  %

 

($ in Millions)

 

2020

 

 

2019

 

 

Change

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$ 10.1

 

 

$ 33.2

 

 

$ (23.1 )

 

 

(70 )%

Total Current Assets

 

$ 84.0

 

 

$ 106.1

 

 

$ (22.1 )

 

 

(21 )%

Total Assets

 

$ 574.3

 

 

$ 687.5

 

 

$ (113.2 )

 

 

(16 )%

Total Current Liabilities

 

$ 189.2

 

 

$ 109.7

 

 

$ 79.5

 

 

 

72 %

Notes Payable, Net of Current Portion

 

$ 319.2

 

 

$ 237.6

 

 

$ 81.6

 

 

 

34 %

Total Liabilities

 

$ 751.2

 

 

$ 476.2

 

 

$ 275.0

 

 

 

58 %

Total Shareholders' Equity

 

$ (176.9 )

 

$ 211.3

 

 

$ (388.2 )

 

 

(184 )%

Working Capital Deficit

 

$ (105.2 )

 

$ (3.6 )

 

$ (101.6 )

 

 

2,822 %

 

 
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As of June 27, 2020, the Company had $10.1 million of cash and cash equivalents and $105.2 million of working capital deficit, compared to $33.2 million of cash and cash equivalents and $3.6 million of working capital deficit as of June 29, 2019. Reductions in cash and cash equivalents were primarily due to the Company’s investments in its retail expansion in which MedMen increased the number of active retail locations from 23 operating retail stores during the year ended June 29, 2019 up to 32 operating retail stores during the year ended June 27, 2020, of which three retail stores are located in the state of Arizona that were classified as discontinued operations, noting as of June 27, 2020, the Company had 26 active retail locations following recent permanent and temporary closures. The decrease in cash and cash equivalents was also associated with significant payments on lease liability, notes payable and costs associated with the issuances of debt. The foregoing uses of cash were partially offset by cash generated from the sale of assets and significant debt and equity financing during the fiscal year ended June 27, 2020.

 

The $101.6 million increase in working capital deficit was primarily related to an increase of $31.9 million in accounts payable and accrued liabilities, an increase of $24.9 million in income taxes payable, an increase of $15.0 million in liabilities held for sale related to discontinued operations and subsidiaries held for sale that do not meet the definition of discontinued operations, and an increase of $16.1 million in other current liabilities primarily due to increases in contingent consideration and accrued interest, offset by a decrease of $8.8 million in derivative liabilities due to changes in fair value, and a decrease of $5.8 million in the current portion of notes payable. The current portion of operating and finance lease liabilities in the net amount of $7.2 million is also included in the working capital deficit as a part of the Company’s adoption of ASC 842 on June 30, 2019 compared to nil as of June 29, 2019. The net increase in current liabilities was offset by an increase of $26.0 million in assets held for sale related to the Company’s divestiture of non-core assets in addition to a decrease of $23.1 million in cash and cash equivalents for the factors described above, a decrease of $9.2 million in prepaid expenses, and a decrease of $9.8 million in other current assets due to sale of investments during the fiscal year ended June 27, 2020.

 

The Company’s working capital will be significantly impacted by continued growth in retail operations, operationalizing existing licenses, and the success of the Company’s cost-cutting measures. The ability to fund working capital needs will also be dependent on the Company’s ability to raise additional debt and equity financing.

  

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.

 

Fiscal Year Ended June 27, 2020

 

As of June 27, 2020, the Company had $10.1 million of cash and cash equivalents and $105.2 million of working capital deficit, compared to $33.2 million of cash and cash equivalents and $3.6 million of working capital deficit as of June 29, 2019. For the fiscal year ended June 27, 2020, the Company’s monthly burn rate, which was calculated as cash spent per month in operating activities, was approximately $9.2 million compared to a monthly burn rate of approximately $20.3 million for the fiscal year ended June 29, 2019. Since its inception, the Company focused on an aggressive expansion strategy in the form of mergers, acquisitions, and management contracts with the understanding that such strategy may result in short-term operating losses and significant acquisition related debt and costs. During the fiscal year ending June 27, 2020, management executed on a strategic plan to limit significant cash outlays and reduce the overall cash burn. As of June 27, 2020, 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.

 

 
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Subsequent to June 27, 2020, management continued to execute on its financial restructuring and turnaround plan to support the expansion of the Company’s retail footprint. The strategic plan includes, but is not limited to, capital raised subsequent to year-end, restructuring plans that have already been put in place to reduce corporate-level expenses, amendments that have been agreed to with lenders and landlords to defer cash interest and rent payments, reduction in capital expenditures through a slow-down in new store buildouts, plans to divest non-core assets to raise non-dilutive capital, enhancements to its digital offering, including direct-to-consumer delivery and curbside pick-up in light of COVID-19 and a change in retail strategy to pass certain local taxes and payment processing fees to customers. Despite the continuously evolving capital market, the Company has indefinitely postponed buildouts and retail store expansions to reduce capital expenditures as needed. The Company has executed a successful initiative to defer rent and cash interest payments which will further reduce the Company’s overall cash outlay. In addition, the Company will continue to focus on the optimization of SG&A expenses. Management is in the process of leveraging the Company’s operating scale with a focus on high ROI initiatives through strategic opportunities that will allow the Company to maintain its leadership within the industry. Management is also exploring joint ventures on certain capital intensive projects that will bring in qualified partners to enable the Company to maintain their strong retail presence without having to deploy upfront capital. In addition, the Company is looking at new customer acquisition tools that will increase traffic and sales within existing stores and e-commerce platform as well as third-party technology and software to increase the returns on the Company’s existing tools. Further, the Company will continue to streamline operations and invest in core markets, with a focus on markets in which MedMen already has a leadership position in. The Company’s restructuring plan includes a market-based approach wherein strategic decisions vary by market considering regulatory and economic conditions, potential partnerships and synergies, and the Company’s position in that market. The Company continues to execute on its efforts to improve store profitability, reduce corporate SG&A and delay capital-intensive projects. Subsequent to June 27, 2020, management has executed strategic transactions to better position itself for long-term viability.

 

The Company has also raised additional funds from debt and equity financing subsequent to the fiscal year ended June 27, 2020 to mitigate any potential liquidity risk. The Company intends to continue raising capital by utilizing debt and equity financings on an as needed basis. Management evaluated its financial condition as of June 27, 2020 in conjunction with recent financings and transactions which provide capital subsequent to the fiscal year ended June 27, 2020 as discussed below.

 

Partnership with Gotham Green Partners

 

On July 2, 2020, the Company amended the GGP Facility wherein 100% of the cash interest due 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 GGP Facility will be paid-in-kind. The threshold for the minimum liquidity covenant has been 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. GGP has also agreed to the release of certain assets from its collateral pool in order to provide the Company with greater flexibility to generate proceeds through the sale of non-core assets. In connection with the amendments to the GGP Facility, the Company is now subject to certain additional covenants that are consistent with the Company’s turnaround plan. The Company is required to adhere to its turnaround plan for certain cash expenditures such as corporate expenses, capital expenditures and leases.

 

On September 14, 2020, the Company closed on an incremental advance in the amount of $5.0 million under the GGP Facility 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 16,875,000 warrants with an exercise price of $0.20 per share.

 

 
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Continued Support from Lenders of the Senior Secured Term Loan

 

On July 2, 2020, the Company amended terms under the Senior Secured Term loan wherein 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 will be paid-in-kind. The threshold for the minimum liquidity covenant has been 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 Senior Secured Term Loan, the Company is now subject to certain additional covenants which are consistent with those included as a part of the amendments to the GGP Facility as described above.

 

On September 16, 2020, the Company entered into further amendments wherein the potential size of the Senior Secured Term Loan was increased by $12.0 million, of which $5.7 million is fully committed by the lenders. On September 16, 2020, the Company closed on $3.0 million of the incremental notes which bears interest at a 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 the amendment, the Company issued 30,000,000 warrants with an exercise price of $0.34 per share. On September 30, 2020, the Company closed on the remaining $2.7 million and issued 27,000,000 warrants to the lenders.

 

Unsecured Convertible Facility

 

On September 16, 2020, the Company entered into a $10.0 million unsecured convertible debenture facility (“Unsecured Convertible Facility”) with certain institutional investors. Subject to certain conditions, the Company has the right to call additional tranches of $1.0 million each, no later than 20 trading days following the issuance of each tranche, including the initial tranche, up to a maximum of $10.0 million 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 $1.0 million.

 

Also on September 16, 2020, the Company closed on an initial $1.0 million under the Unsecured Convertible Facility at a conversion price of $0.17 per 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 an additional $1.0 million and issued 3,777,475 warrants with an exercise price of $0.17 per share. 

 

Treehouse Real Estate Investment Trust

 

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.

 

Sale of Assets

 

On July 2, 2020, the Company received $10,000,000 at the signing of definitive documents for the sale of one of its retail licenses outside of California. Management continues to seek buyers for divestiture of the Company’s other non-core assets, which include licenses and investments, to provide additional capital. Given the Company’s specialization in retail, management is revaluating its vertical integration strategy and identifying opportunities to realign the Company’s focus on the retail market. 

 

Interim Period Ended December  26, 2020

 

As of December 26, 2020, the Company had $7.5 million of cash and cash equivalents and $152.1 million of working capital deficit, compared to $10.1 million of cash and cash equivalents and $105.2 million of working capital deficit as of June 27, 2020. For the six months ended December 26, 2020, the Company’s monthly burn rate, which was calculated as cash spent per month in operating activities, was approximately $5.0 million compared to a monthly burn rate of approximately $11.6 million for the six months ended December 28, 2019. During fiscal year 2020, in November 2019, the Company shifted its focus from an aggressive expansion strategy to a revised growth strategy focused on achieving profitability. During the six months ended December 26, 2020, management continued their efforts of executing the Company’s strategic plan to limit significant cash outlays and reduce the overall cash burn. As of December 26, 2020, 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.

 

 
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Subsequent to December 26, 2020, management continued to execute on its financial restructuring and turnaround plan to support the expansion of the Company’s retail footprint. The strategic plan includes, but is not limited to, capital raised subsequent to year-end, modifying covenants for additional flexibility and restructuring plans that have already been put in place to reduce corporate-level expenses, reduction in capital expenditures through a slow-down in new store buildouts, plans to divest non-core assets to raise non-dilutive capital, enhancements to its digital offering, including direct-to-consumer delivery and curbside pick-up in light of COVID-19 and a change in retail strategy to pass certain local taxes and payment processing fees to customers. The Company has also revamped its procurement process to restructure new vendor contracts with better margins. The Company will continue to focus on the optimization of SG&A expenses, including reducing payroll spend at retail locations by implementing a dynamic staffing model, reducing banking and payment processing fees, and reducing security spend. Management is in the process of leveraging the Company’s operating scale with a focus on high ROI initiatives through strategic opportunities that will allow the Company to maintain its leadership within the industry. Management continues to explore joint ventures on certain capital-intensive projects that will bring in qualified partners to enable the Company to maintain their strong retail presence without having to deploy upfront capital. Further, the Company will continue to streamline operations and invest in core markets, with a focus on markets in which MedMen already has a leadership position in. The Company’s restructuring plan includes a market-based approach wherein strategic decisions vary by market considering regulatory and economic conditions, potential partnerships and synergies, and the Company’s position in that market. The Company continues to execute on its plan to achieve its growth and profitability goals. As the economic environment improves and the pandemic is better managed and controlled, the Company expects its improved assortment, customer experience and marketing initiatives to drive continued revenue growth.

 

The Company continues to explore avenues of raising additional funds from debt and equity financing subsequent to December 26, 2020 to mitigate any potential liquidity risk. The Company intends to continue raising capital by utilizing debt and equity financings on an as needed basis. Management evaluated its financial condition as of December 26, 2020 in conjunction with recent financings and transactions which provide capital subsequent to the three months ended December 26, 2020 as discussed below.

 

Continued Support from Gotham Green Partners

 

On January 11, 2021, the Company entered into a Third Amended and Restated Securities Purchase Agreement (the “Third Restatement”) to the GGP Facility wherein the minimum liquidity covenant was modified to extend the period during which it is waived from December 31, 2020 to June 30, 2021, to reset the minimum liquidity threshold to $7,500,000 effective on July 1, 2021 through December 31, 2021, and $15,000,000 thereafter, and to waive 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 addition, the conversion price of certain notes and the exercise price of certain warrants was adjusted as part of the Third Restatement. Refer to “Note 25 - Subsequent Events” of the unaudited interim condensed consolidated financial statements for the three and six months ended December 26, 2020.

 

Subsequent to December 26, 2020, the Company received an additional advance of $10,000,000 in the form of senior secured convertible notes with a conversion price of $0.16 per Subordinate Voting Share. In connection with the incremental advance, the Company issued 62,174,567 warrants exercisable for five years at a purchase price of $0.16 per Subordinate Voting Share.

 

Unsecured Convertible Facility

 

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.

 

 
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Private Placement

 

On February 16, 2021, the Company executed documents for the sale of 7,800,000 units at a purchase price of $0.37 per unit through a private placement for gross proceeds of $2,896,315. The units consist of 7,800,000 Subordinate Voting Shares and 7,800,000 warrants with an exercise price of $0.46 per Subordinate Voting Share for a period of five years.

 

Sale of Assets

 

The Company will receive an additional $2,000,000 related to the divestiture of the Evanston retail license located in Illinois on or before the three-month anniversary of November 16, 2020 (“Closing Date”) The $2,000,000 will be paid in the form of a secured promissory note in which interest will accrue at a rate of 2.0% interest rate per annum compounded annually and will mature as agreed upon between the Company and borrower. Management continues to seek buyers for divestiture of the Company’s other non-core assets, which include licenses and investments, to provide additional capital. Given the Company’s specialization in retail, management is revaluating its vertical integration strategy and identifying opportunities to realign the Company’s focus on the retail market.

  

Contractual Obligations

 

As of June 27, 2020 and June 29, 2019 and in the normal course of business, the Company has the following obligations to make future payments, representing contracts and other commitments that are known and committed. The Company had the following contractual obligations as of June 27, 2020:

 

 

 

June 26,

2021

 

 

 June 25, 2022