This management's discussion and analysis ("MD&A") of the financial condition
and results of operations of MedMen Enterprises Inc. ("MedMen Enterprises ",
"MedMen" or the "Company") is for the three months ended September 25, 2021 . The
following discussion should be read in conjunction with, and is qualified in its
entirety by, the unaudited condensed consolidated financial statements and the
accompanying notes presented in Item 1 of this Form 10-Q and those discussed in
Item 15 of the Company's Annual Report on Form 10 (the "Form 10") filed with the
SEC on September 24, 2021 . Except for historical information, the discussion in
this section contains forward-looking statements that involve risks and
uncertainties. Future results could differ materially from those discussed below
for many reasons, including the risks described in "Disclosure Regarding
Forward-Looking Statements," Item 1A-"Risk Factors" and elsewhere in this Form
10-Q.
We are a smaller reporting company, as defined in Rule 12b-2 of the Exchange
Act. Accordingly, we have omitted certain information called for by this Item as
permitted by applicable scaled disclosure rules.
Basis of Presentation
All references to “$” and “dollars” refer to
Fiscal Period
The Company's fiscal year is a 52/53-week year ending on the last Saturday in June. In a 52-week fiscal year, each of the Company's quarterly periods will comprise 13 weeks. The additional week in a 53-week fiscal year is added to the fourth quarter, making such quarter consist of 14 weeks. The Company's first 53-week fiscal year will occur in fiscal year 2024. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company's fiscal years ended in June and the associated quarters, months and periods of those fiscal years. For the current interim period, the three months endedSeptember 25, 2021 andSeptember 26, 2020 refer to the 13 weeks ended
therein. Selected Financial Data The following table sets forth the Company's selected consolidated financial data for the periods, and as of the dates, indicated. The Condensed Consolidated Statements of Operations data for the three months endedSeptember 25, 2021 andSeptember 26, 2020 have been derived from the unaudited interim Condensed Consolidated Financial Statements of the Company and its subsidiaries, which are included in Item 1 of this Quarterly Report on Form 10-Q ("Form 10-Q"). The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Conditions and Results of Operations" ("MD&A") and the unaudited interim Condensed Consolidated Financial Statements and related notes presented in Item 1 of this Form 10-Q. The Company's unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance withU.S. Generally Accepted Accounting Principles ("GAAP") and on a going concern basis that contemplates continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business. Three Months Ended September 25, September 26, ($ in Millions) 2021 2020 (unaudited) (unaudited) Revenue $ 39.8 $ 35.1 Gross Profit $ 17.5 $ 16.4 (Loss) Income from Operations $ (29.0 ) $ 6.0 Total Other Expense $ 5.5 $ 20.3 Net Loss from Continuing Operations $ (54.2 ) $ (26.6 ) Net Loss from Discontinued Operations $ (6.4 ) $ (6.2 ) Net Loss $ (60.6 ) $ (32.8 ) Net Loss Attributable to Non-Controlling Interest $ (5.3 ) $ (10.9 ) Net Loss Attributable to Shareholders of MedMen Enterprises Inc. $
(55.3) $ (21.9)
Adjusted Net Loss from Continuing Operations (Non-GAAP) $ (59.8 ) $ (35.5 ) EBITDA from Continuing Operations (Non-GAAP) $ (9.1 ) $ 4.3 Adjusted EBITDA from Continuing Operations (Non-GAAP) $
(14.6 ) $ (12.6 )
32
Quarterly Highlights
Modification and extension of the convertible facility
OnApril 23, 2019 , the Company secured a senior secured convertible credit facility (the "Convertible Facility") to provide up to$250,000,000 in gross proceeds, arranged byGotham Green Partners ("GGP"). The Convertible Facility has been accessed to date through issuances to the lenders of convertible senior secured notes ("GGP Notes", or the "Notes") co-issued by the Company andMM Can USA, Inc. ("MM CAN" or "MedMen Corp. "). As ofSeptember 25, 2021 , the Company has drawn down on a total of$165,000,000 on the Convertible Facility. The principal amount of the Convertible Facility has been and is anticipated to be used for ongoing operations, capital expenditures and other corporate purposes. OnAugust 17, 2021 , the Company announced that Tilray, Inc. ("Tilray") acquired a majority of the outstanding GGP Notes. Under the terms of the transaction, a newly formed limited partnership (the "SPV") established by Tilray and other strategic investors acquired an aggregate principal amount of approximately$165,800,000 of the Notes and warrants issued in connection with the Convertible Facility, all of which were originally issued byMedMen and held by GGP, representing 75% of the outstanding Notes and 65% of the outstanding warrants under the Convertible Facility. Specifically, Tilray's interest in the SPV represents rights to 68% of the Notes and related warrants held by the SPV, which are convertible into, and exercisable for, approximately 21% of the outstanding Class B Subordinate Voting Shares ofMedMen upon closing of the transaction. Tilray's ability to convert the Notes and exercise the warrants is dependent uponU.S. federal legalization of cannabis or Tilray's waiver of such requirement as well as any additional regulatory approvals. Tilray also has the right to appoint two non-voting observers of the Company's Board of Directors. In connection with the sale of the Notes, the Company amended and restated the Convertible Facility (the "Sixth Amendment") to, among other things, extend the maturity date toAugust 17, 2028 , eliminate any cash interest obligations, and instead provide for payment-in-kind interest, eliminate certain repricing provisions, and eliminate and revise certain restrictive covenants. The amendments are intended to provideMedMen the flexibility to execute on its growth priorities and explore additional strategic opportunities. In connection with the Sixth Amendment, accrued payment-in-kind interest on the Notes will be convertible at price equal to the higher of: (a) trailing 30-day volume weighted average price ("VWAP") of the Company's Subordinate Voting Shares or (b) the lowest discounted price available pursuant to the pricing policies of the Canadian Securities Exchange ("CSE"). The Notes may not be prepaid until the federal legalization of marijuana. The Notes, as amended, provide the holders with a top-up right to acquire additional Subordinate Voting Shares and a pre-emptive right with respect to future financings of the Company, subject to certain exceptions, upon the issuance byMedMen of certain equity or equity-linked securities. No changes have been made to the conversion and exercise prices of the Notes or related Warrants. In connection with the Sixth Amendment, GGP can nominate an individual to serve on the Company's Board of Directors so long as GGP's diluted ownership percentage is at least 10%. Refer to "Note 11 - Senior Secured Convertible Credit Facility" of the unaudited interim condensed consolidated financial statements in Item 1 for further information.
OnAugust 17, 2021 , the Company entered into subscription agreements with various investors led bySerruya Private Equity Inc. ("SPE") to purchase0,000,000 of units (each, a "Unit") of the Company at a purchase price of$0.24 per Unit (the "Private Placement") wherein certain investors associated with SPE agreed to backstop the Private Placement (the "Backstop Commitment"). Each Unit consisted of one Class B Subordinate Voting Share and one-quarter share purchase warrant. Each warrant permits the holder to purchase one Subordinate Voting Share at an exercise price of$0.288 per share for a period of five years from the date of issuance. The Company issued a total of 416,666,640 Subordinate Voting Shares and 104,166,660 warrants for gross proceeds of$100,000,000 . The proceeds from the Private Placement will allowMedMen to expand its operations in key markets such asCalifornia ,Florida ,Illinois andMassachusetts and identify and accelerate further growth opportunities acrossthe United States . Each Unit issued to certain funds associated with SPE consisted of one Class B Subordinate Voting Share and one-quarter of one share purchase warrant, plus a proportionate interest in a short-term warrant (the "Short-Term Warrant") which expires onDecember 31, 2021 . At the option of the holders and upon payment of$30,000,000 , the Short-Term Warrant entitles the holders to acquire (i) an aggregate of 125,000,000 Units at an exercise price of$0.24 per Unit, or (ii)$30,000,000 principal amount of notes at par, convertible into 125,000,000 Subordinate Voting Shares at a conversion price of$0.24 per share under the terms of the Convertible Facility. The Company will use any proceeds, less fees and expenses, from exercise of the Short-Term Warrant to pay down the existing senior secured term loan withHankey Capital if any indebtedness is then outstanding. In consideration for the Backstop Commitment, the Company paid a fee of$2,500,000 in the aggregate to such parties in the form of 10,416,666 Class B Subordinate Voting Shares at a deemed price of$0.24 per share. In connection with the equity financing, the Company granted SPE the right to designate one individual to be nominated to serve as a director of the Company. 33 Unsecured Promissory Note OnJuly 29, 2021 , the Company entered into a short-term unsecured promissory note in the amount of$5,000,000 with various investors led by SPE wherein the note bears interest at a rate of 6.0% per annum payable quarterly in arrears with a maturity date ofAugust 18, 2021 . OnAugust 17, 2021 , the Company settled the promissory note by the issuance of 20,833,333 Units, consisting of 20,833,333 Subordinate Voting Shares and 5,208,333 warrants based on an issue price of$0.24 and the relative portion of the Short-Term Warrant, issued as part of the Private Placement.
Convertible unsecured facility
OnSeptember 16, 2020 , the Company entered into an unsecured convertible debenture facility (the "Unsecured Convertible Facility") for total available proceeds of$10,000,000 callable in tranches of$1,000,000 each. The debentures 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. OnJune 28, 2021 , the remaining balance of the Unsecured Convertible Facility of$2,500,000 was automatically converted into 16,014,664 ClassB Subordinate Voting Shares in the amount of$2,007,620 . In addition, 8,807,605 of the outstanding warrants under the Unsecured Convertible Facility were exercised at varying prices for a net exercise price of$1,622,377 . As ofSeptember 25, 2021 , the outstanding balance of the Unsecured Convertible Facility was nil. Assets Held for Sale
During the fiscal first quarter of 2022, the Company was in negotiations to sublease (the "Sublease") its cultivation and production facilities inDesert Hot Springs, California andSparks, Nevada (the "Facilities") and to enter into a management agreement (the "Management Agreement") with the proposed sublessee to operate the Facilities. The Sublease and Management Agreement was subject to the approval of the Facilities' landlord. OnSeptember 30, 2021 , the landlord approved the Sublease which effectuated the Management Agreement and the Company determined that as of the effective date of the Management Agreement, the Company would no longer have a controlling financial interest in the Facilities. Accordingly, as ofSeptember 25, 2021 , the assets and liabilities related to the Facilities were classified as held for sale in the Condensed Consolidated Balance Sheet as ofSeptember 25, 2021 . Refer to "Note 4 - Assets Held for sale" of the unaudited interim condensed consolidated financial statements in Item 1 for further information. Management Changes OnJuly 15, 2021 , the Company permanently appointedTom Lynch as Chief Executive Officer.Mr. Lynch has served as the interim Chief Executive Officer since
March 2020 .
As part of the Private Placement on
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 desirable retail
footprint is attributable to its market expansion strategy, which has been a
engine of revenue growth. The Company exercises its discretion by focusing on
invest in retail stores that can generate increased revenue in the short term to
the Company.
? Retail growth.
like
increase sales, the Company expects to leverage its retail presence to develop
a robust distribution model.
? Deployment of the direct-to-consumer channel. MedMen Delivery is available in
The Company benefited from increased traction with in-store pickup as well as
delivery service, curbside pickup and loyalty rewards program.
? COVID-19[FEMALEIn[FEMININEDans
global pandemic. COVID-19 continues to spread throughout the
countries across the world, as well as the duration and ultimate magnitude of
COVID-19, including the extent of its overall impact on our finances and
operational results, cannot be reasonably estimated at this time. All
the impact will depend on the duration of the pandemic, the
to what extent this affects our ability to raise capital, and the effect of
government regulations imposed in response to the pandemic as well as
uncertainty regarding all of the above. At the moment it is not clear how
as long as these measures remain in place, what additional measures could
imposed, or when our operations are restored to existing levels
before the COVID-19 pandemic. The Company continues to implement and evaluate
actions to strengthen its financial position and support the continuity of its
business and operations.
34
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 liberalization of cannabis laws, popular
support for cannabis legalization, and balanced supply and demand in states.
Refer to the "Management's Discussion and Analysis of Financial Conditions and
Results of Operations" contained in Item 7 of the Company's Form 10.
Components of the results of operations
Revenue For the three months endedSeptember 25, 2021 , the Company derived the majority of its revenue from direct sales to customers in its retail stores. Approximately 60% of revenue was generated from operations inCalifornia , with the remaining 40% from operations inArizona ,Nevada ,Illinois andFlorida . 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, packaging and other supplies, fees for services and processing, and allocated overhead, such as allocations of rent, administrative salaries, utilities and related costs. Cannabis costs are affected by various state regulations that limit the sourcing and procurement of cannabis product, which may create fluctuations in gross profit over comparative periods as the regulatory environment changes. Gross margin measures gross profit as a percentage of revenue. Expenses General and administrative expenses represent costs incurred inMedMen's corporate offices, primarily related to personnel costs, including salaries, incentive compensation, benefits, share-based compensation and professional service costs, including legal and accounting. Sales and marketing expenses consist of selling costs to support customer relationships and to deliver product to retail stores. It also includes an investment in marketing and brand activities and the corporate infrastructure required to support the ongoing business. Depreciation and amortization expenses represent the portion of the Company's definite-lived property, plant and equipment and intangible assets that is being used up during the reporting period. Changes in fair value of contingent consideration expense represent the realized gain or loss upon the settlement of contingent liabilities related to the Company's business acquisitions and the unrealized gain or loss on the changes in fair value of such outstanding liabilities upon remeasurement at each reporting period. Impairment expense represents the permanent reduction of an assets carrying value down to fair value and may include inventory, property, plant, and equipment, intangible assets, goodwill and other assets. Other operating income and expenses consist of the gain on disposal of assets from assets held for sale and discontinued operations, restructuring fees or reorganization expenses, gain or loss on settlement of accounts payable, and gain on lease terminations.
Income Taxes
MedMen is subject to income taxes in the jurisdictions in which it operates and, consequently, income tax expense is a function of the allocation of taxable income by jurisdiction and the various activities that impact the timing of taxable events. As the Company operates in the legal cannabis industry, the Company is subject to the limits of Internal Revenue Code ("IRC") Section 280E under which the Company is only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E and a higher effective tax rate than most industries. However, the state ofCalifornia does not conform to IRC Section 280E and, accordingly, the Company deducts all operating expenses on its California Franchise Tax Returns. 35 Three Months EndedSeptember 25, 2021 Compared to Three Months EndedSeptember 26, 2020 Three Months Ended September 25, September 26, ($ in Millions) 2021 2020 $ Change % Change (unaudited) (unaudited) Revenue $ 39.8 $ 35.1$ 4.7 13 % Cost of Goods Sold 22.3 18.7 3.6 19 % Gross Profit 17.5 16.4 1.1 7 % Expenses:
General and Administrative 36.5 30.2 6.3 21 % Sales and Marketing 0.7 0.2 0.5 250 % Depreciation and Amortization 7.0 8.0 (1.0 ) (13 %) Realized and Unrealized Changes in Fair Value of Contingent Consideration - 0.3 (0.3 ) (100 %) Impairment Expense 0.4 0.8 (0.4 ) (50 %) Other Operating Expense (Income) 1.9 (29.1 ) 31.0 (107 %) Total Expenses 46.5 10.4 36.1 347 % (Loss) Income from Operations (29.0 )
6.0 (35.0 ) (583 %) Other Expense (Income): Interest Expense 10.0 8.8 1.2 14 % Amortization of Debt Discount and Loan Origination Fees 7.8 1.7 6.1 359 % Change in Fair Value of Derivatives (2.1 ) (0.3 ) (1.8 ) 600 % (Gain) Loss on Extinguishment of Debt (10.2 )
10.1 (20.3 ) (201 %) Total Other Expense 5.5 20.3 (14.8 ) (73 %) Loss from Continuing Operations Before Provision for Income Taxes (34.5 ) (14.3 ) (20.2 ) 141 % Provision for Income Tax Expense (19.7 ) (12.3 ) (7.4 ) 60 % Net Loss from Continuing Operations (54.2 ) (26.6 ) (27.6 ) 104 % Net Loss from Discontinued Operations, Net of Taxes (6.4 ) (6.2 ) (0.2 ) 3 % Net Loss (60.6 ) (32.8 ) (27.8 ) 845 % Net Loss Attributable to Non-Controlling Interest (5.3 ) (10.9 ) 5.6 (51 %) Net Loss Attributable to Shareholders of MedMen Enterprises Inc. $ (55.3 ) $
(21.9)
Adjusted Net Loss from Continuing Operations (Non-GAAP) $ (59.8 ) $ (35.5 )$ (24.3 ) 68 % EBITDA from Continuing Operations (Non-GAAP) $ (9.1 ) $ 4.3$ (13.4 ) (312 %) Adjusted EBITDA from Continuing Operations (Non-GAAP) $ (14.6 ) $ (12.6 )$ (2.0 ) 16 % Revenue
Revenue for the three months endedSeptember 25, 2021 was$39.8 million , an increase of$4.7 million , or 13%, compared to revenue of$35.1 million for the three months endedSeptember 26, 2020 . For the three months endedSeptember 25, 2021 ,MedMen had 27 active retail locations in the states ofCalifornia ,New York ,Nevada ,Arizona ,Illinois andFlorida , of which four were located within the state ofNew York were classified as discontinued operations, compared to 26 active retail locations in the same period in the prior year. For the fiscal first quarter of 2022, five retail locations in the state ofFlorida have remained temporarily closed in order to redirect inventory from itsEustis cultivation facility to its highest performing stores. As ofSeptember 25, 2021 , the Company had 23 active retail locations related to continuing operations. Subsequent toSeptember 25, 2021 , the Company reopened itsTallahassee, Florida location.
The increase in revenue was primarily related to the Company's initiatives as it recovers from the COVID-19 impact on business and occupancy restrictions. During the three months endedSeptember 25, 2021 , the Company continued to elevate its product offering, revamp its pricing and assortment strategy, and focus on driving retail traffic. Specifically inCalifornia , where retail revenue increased$3.9 million during the current period compared to the fiscal first quarter of 2021, the Company saw increased engagement through its customer relationship strategy and focused on marketing and advertising initiatives as COVID-19 restrictions began to lift. In addition, retail revenue inArizona increased$1.4 million compared to the three months endedSeptember 26, 2020 as a result of the Company's focus on driving retail traffic after the state-wide transition to adult-use during the spring of calendar year 2021. Previously modified store operations based onCenters for Disease Control and Prevention guidelines and local ordinances, which limit in-store traffic for certain locations, began to operate at a less restrictive scale since the fiscal fourth quarter of 2021 as COVID-19 related restrictions began to lift, resulting in increased tourism and normalizing retail traffic levels. As the Company's key markets continue to recover from the pandemic,MedMen expects to continue utilizing their tailored marketing initiatives and revised assortment to drive and serve retail traffic at a much higher volume and rate. 36
Cost of goods sold and gross profit
Cost of goods sold for the three months endedSeptember 25 , 2021was$22.3 million , an increase of$3.6 million , or 19%, compared with$18.7 million of cost of goods sold for the three months endedSeptember 26, 2020 . Gross profit for the three months endedSeptember 25, 2021 was$17.5 million , representing a gross margin of 44%, compared with gross profit of$16.4 million , representing a gross margin of 47%, for the three months endedSeptember 26, 2020 . The decrease in gross margin is primarily due to increased promotional activity during the fiscal first quarter of 2022. In addition, during the three months endedSeptember 25, 2021 , the Company recognized an inventory write-down of approximately$860,000 at one of its cultivation and production facilities. For the three months endedSeptember 25, 2021 , the Company had 27 active retail locations in the states ofCalifornia ,New York ,Nevada ,Arizona ,Illinois andFlorida , of which four were located within the state ofNew York were classified as discontinued operations, compared to 26 active retail locations for the comparative prior period.MedMen operated five cultivation and production facilities in the states ofNevada ,California ,New York ,Florida andArizona during the three months endedSeptember 25, 2021 , of which one facility located inNew York was classified as discontinued operations, compared to six cultivation facilities for the three months endedSeptember 26, 2020 .MedMen expects margins to improve in the coming periods as the Company continues to test its retail pricing strategy and improve operating efficiencies at its cultivation and production facilities. Subsequent to the fiscal first quarter of 2022, the Company entered into a strategic partnership for its cultivation and production facilities inCalifornia andNevada where the Company had incurred significant fixed costs, wherein licensed operations will be carried on under management agreements while also supplying product for the Company's private label inCalifornia andNevada . Total Expenses Total expenses for the three months endedSeptember 25, 2021 were$46.5 million , an increase of$36.1 million , or 347%, compared to total expenses of$10.4 million for the three months endedSeptember 26, 2020 , which represents 117% of revenue for the three months endedSeptember 25, 2021 , compared to 30% of revenue for the three months endedSeptember 26, 2020 . The increase in total expenses was attributable to the factors described below. General and administrative expenses for the three months endedSeptember 25, 2021 andSeptember 26, 2020 were$36.5 million and$30.2 million , respectively, an increase of$6.3 million , or 21%. Despite the Company's continued efforts to reduce company-wide selling, general and administrative expenses ("SG&A"), general and administrative expenses have increased primarily due to a$3.9 million increase in professional fees as a result of litigation costs associated with previous officers of the Company. Sales and marketing expenses for the three months endedSeptember 25, 2021 andSeptember 26, 2020 were$0.7 million and$0.2 million , respectively, an increase of$0.5 million , or 250%. The increase in sales and marketing expenses is primarily attributed to an increase in marketing and advertising of$0.3 million and an increase in customer relationship tools of$0.1 million for the three months endedSeptember 25, 2021 compared to the same period prior as a result of the Company's increased marketing initiatives to drive retail traffic as COVID-19 restrictions began to lift, tourism increased, and certain states moved towards regulatory approval of recreational marijuana. Depreciation and amortization for the three months endedSeptember 25, 2021 andSeptember 26, 2020 was$7.0 million and$8.0 million , respectively, a decrease of$1.0 million , or 13%. The decrease is attributable to the reduction in capital expenditures through a delay in capital-intensive projects as part of the Company's turnaround plan and as a result of the COVID-19 pandemic, resulting in a decrease in property, plant and equipment and intangible assets.
The realized and unrealized changes in the fair value of the contingent consideration remained generally constant for the three months ended.
Impairment expense for the three months endedSeptember 25, 2021 andSeptember 26, 2020 was$0.4 million and$0.8 million , respectively, a decrease of$0.4 million , or 50%. During the comparative prior period, the Company recognized impairment related to aCalifornia dispensary license upon classification as assets held for sale. During the current period, the Company recognized an impairment on an intellectual property asset in the amount of$0.4 million . Other operating expense (income) for the three months endedSeptember 25, 2021 was$1.9 million , a decrease of$31.0 million , or 107% from other operating income of$29.1 million for the three months endedSeptember 26, 2020 . During the comparative prior period, the Company recognized a gain on lease terminations of$16.6 million and a gain on disposal of assets of held for sale of$12.4 million , compared to nil in the current period. OnJuly 2, 2020 , the Company amended its lease terms with the REIT wherein a portion of the total currently monthly base rent will be deferred for the 36-month period fromJuly 1, 2020 andJuly 1, 2023 . OnAugust 10, 2020 , the Company transferred operations and control ofMME Evanston Retail, LLC and recorded a$12.4 million gain on disposal of assets held for sale upon deconsolidation. 37 Total Other Expense
Total other expense for the three months endedSeptember 25, 2021 was$5.5 million , a decrease of$14.8 million , or 73%, compared to total other expense of$20.3 million for the three months endedSeptember 26, 2020 . The decrease in total other expense was primarily attributable to the loss on extinguishment of debt of$10.1 million in the comparative prior period, compared to the net gain on extinguishment of debt of$10.2 million in the current period as a result of the$12.4 million gain on extinguishment of debt related to the Sixth Amendment, offset by the$2.2 million loss on extinguishment of debt related to the settlement of the unsecured promissory note in connection with the Private
Placement. Provision for Income Taxes The provision for income tax expense for the three months endedSeptember 25, 2021 was$19.7 million , an increase of$7.4 million , or 60% compared to the provision for income tax expense of$12.3 million for the three months endedSeptember 26, 2020 , 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 endedSeptember 25, 2021 . Net Loss Net loss from continuing operations for the three months endedSeptember 25, 2021 was$54.2 million , an increase of$27.6 million , or 104%, compared to a net loss from continuing operations of$26.6 million for the three months endedSeptember 26, 2020 . The increase in net loss from continuing operations was mainly attributable to the decrease of$31.0 million in other operating expense (income) as a result of gains recognized for transactions during the fiscal first quarter of 2021. In addition, general and administrative expenses increased by$6.3 million during the three months endedSeptember 25, 2021 as a result of higher legal and professional fees related to ongoing litigation. This was offset by a$20.3 million decrease in (gain) loss on extinguishment of debt due to the gain of$12.4 million recognized in connection with the Sixth Amendment of the Convertible Facility offset by a loss of$2.2 million related to the settlement of the unsecured promissory note during the fiscal first quarter of 2022. Net loss attributable to non-controlling interest for the three monthsSeptember 25, 2021 was$5.3 million , resulting in net loss of$55.3 million attributable to the shareholders ofMedMen Enterprises Inc. compared to$21.9 million for the three months endedSeptember 26, 2020 . 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 defined
in the "Management's Discussion and Analysis of Financial Conditions and Results
of Operations" included in the Company's Form 10.
Non-GAAP financial 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.
38
These non-GAAP financial measures exclude certain material non-cash items and
certain other adjustments the Company believes are not reflective of its ongoing
operations and performance. These non-GAAP financial measures are not intended
to represent and should not be considered as alternatives to net income,
operating income or any other performance measures derived in accordance with
GAAP as measures of operating performance or operating cash flows or as measures
of liquidity. These non-GAAP financial measures have important limitations as
analytical tools and should not be considered in isolation or as a substitute
for any standardized measure under GAAP. For example, certain of these non-GAAP
financial measures:
? exclude certain tax payments which may reduce the cash available to the Company;
? do not reflect any cash investment expenditure requirement for the assets
depreciated and amortized that may have to be replaced in the future;
? do not reflect changes or cash flow requirements for working capital requirements; and
? do not reflect interest expense or cash flow requirements necessary to
service interest or principal payments on debt.
Other companies in the cannabis industry may calculate these metrics differently from the Company, which limits their usefulness as benchmarks.
Retail Performance Within the cannabis industry,MedMen is uniquely focused on the retail component of the value chain. For the fiscal first quarter of 2022, the Company is providing detail with respect to earnings before interest, taxes, depreciation and amortization ("EBITDA") attributable to the Company's national retail operations to show how it is leveraging its retail footprint and strategically investing in the future. The table below highlights the Company's national Retail Adjusted EBITDA Margin (Non-GAAP), which excludes corporate marketing expenses, distribution expenses, inventory adjustments, and local cannabis and excise taxes. Entity-wide Adjusted EBITDA (Non-GAAP) is presented in Item 2 "Reconciliations of Non-GAAP Financial Measures". Fiscal Quarter Ended September 25, June 26, ($ in Millions) 2021 2021 $ Change % Change Gross Profit $ 17.5$ 19.7 $ (2.2 ) (11 %) Gross Margin Rate 44 % 47 % (3 )% (6 %) Cultivation & Wholesale Revenue (1.3 ) (1.3 ) - - Cultivation & Wholesale Cost of Goods Sold (4.0 ) (3.9 ) (0.1 ) 3 % Non-Retail Gross Margin (2.7 ) (2.6 ) (0.1 ) 4 % Retail Gross Margin (Non-GAAP) $ 20.2$ 22.3 $ (2.1 ) (9 %) Retail Gross Margin Rate (Non-GAAP) 52 % 55 % (2 )% (4 %) Fiscal Quarter Ended September 25, June 26, ($ in Millions) 2021 2021 $ Change % Change Net Loss $ (60.6 )$ (46.2 ) $ (14.4 ) 31 % Net Loss from Discontinued Operations, Net of Taxes 6.4 4.8 1.6 33 % Provision for Income Tax Expense (Benefit) 19.7 (0.3 ) 20.0 (6,667 %) Other Expense 5.5 20.0 (14.5 ) (73 %) Excluded Items (1) 2.2 1.8 0.4 22 % Loss from Operations Before Excluded Items (26.7 ) (19.9 ) (6.8 ) 34 % Non-Retail Gross Margin (2.7 ) (2.6 ) (0.1 ) 4 %
Non-Retail Operating Expenses (2) (30.7 ) (26.2 ) (4.5 ) 17 % Non-Retail EBITDA Margin (33.4 ) (28.8 ) (4.6 ) 16 % Retail Adjusted EBITDA Margin (Non-GAAP) $ 6.7$ 8.9 $ (2.2 ) (25 %) Retail Adjusted EBITDA Margin Rate (Non-GAAP) 17 % 22 % (4 )% (20 %)
(1) Adjusted items for net loss for fiscal quarters ended
and
respectively, and other operating expenses of
respectively.
(2) Non-commercial operating expenses consist of the following elements:
39
Fiscal Quarter Ended
September 25, June 26,
($ in Millions) 2021 2021 $ Change % Change
Cultivation & Wholesale $ 0.9$ 1.4 $ (0.5 ) (36 %) Corporate SG&A 18.9 16.8 2.1 13 % Depreciation & Amortization 7.0 6.1 0.9 15 % Other (3) 3.9 1.9 2.0 105 % Non-Retail Operating Expenses 30.7 26.2 4.5 17 % Direct Store Operating Expenses 13.5 13.4
0.1 1 % Excluded Items (1) 2.3 1.8 0.5 28 % Total Expenses $ 46.5$ 41.4 $ 5.1 12 %
(3) Other non-commercial operating expenses excluded from Retail Adjusted EBITDA
Margin (Non-GAAP) for closed fiscal quarters
26, 2021 consist mainly of transaction costs and restructuring costs of
$1.6 million and$1.0 million , respectively, as commonly excluded from Adjusted EBITDA from Continuing Operations (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 endedSeptember 25, 2021 , Non-Retail Cost of Goods Sold related to cultivation and wholesale operations was$4.0 million due to unallocated overages from increased production burn rate. Non-Retail Operating Expenses include ongoing costs related to the Company's cultivation and wholesale operations, corporate spending, and depreciation and amortization. Non-Retail EBITDA Margin reflects the gross margins of the Company's cultivation and wholesale operations excluding any related operating expenses. To determine the Company's four-wall margins, certain costs that do not directly support the Company's retail function are excluded from Retail Adjusted EBITDA Margin (Non-GAAP). For the fiscal first quarter of 2022, retail revenue was$38.5 million across the Company's continuing operations inCalifornia ,Nevada ,Arizona ,Illinois andFlorida . This represents a 5% decrease, or$2.2 million , over the fiscal fourth quarter of 2021 of$40.7 million . The decrease in retail revenue from continuing operations was primarily driven by a decrease of$0.9 million inFlorida ,$0.7 million inNevada , and$0.5 million inCalifornia . While there were multiple reasons for the decrease in retail revenue, we believe the primary factors were heightened restrictions due to the Delta variant of COVID-19 and increased competition in certain markets. Retail Gross Margin Rate (Non-GAAP), which is Retail Gross Margin (Non-GAAP) divided by Retail Revenue (Non-GAAP), for the fiscal first quarter of 2022 was 52% compared to the fiscal fourth quarter of 2021 of 55%. Retail Gross Margin (Non-GAAP) is Retail Revenue (Non-GAAP) less the related Retail Cost of Goods Sold (Non-GAAP). The Company had an aggregate Retail Adjusted EBITDA Margin Rate (Non-GAAP), which is Retail Adjusted EBITDA Margin (Non-GAAP) divided by Retail Revenue (Non-GAAP), of 17% for the fiscal first quarter of 2022 which represents a decrease compared to the 22% realized in the fiscal fourth quarter of 2021 primarily due to an inventory adjustment of$0.9 million and increased promotional activity. Direct store operating expenses include, but are not limited to, rent, utilities, payroll and payroll related expenses, employee benefits, security, local taxes and distribution expenses, which increased$0.1 million , or 1%, compared to the fiscal fourth quarter of 2021. Corporate SG&A Corporate-level general and administrative expenses across various functions including Marketing, Legal, Retail Corporate, Technology, Accounting and Finance, Human Resources and Security (collectively referred to as "Corporate SG&A") are combined to account for a significant proportion of the Company's total general and administrative expenses. Corporate SG&A also includes pre-opening expenses related to general and administrative expenses incurred by the Company at non-operational retail locations, which such expenses would be classified as direct store operating expenses following its opening. 40 Fiscal Quarter Ended September 25, June 26, ($ in Millions) 2021 2021 $ Change % Change
General and Administrative $ 36.5$ 32.9
$ 3.6 11 % Sales and Marketing 0.7 0.6 0.1 17 % Consolidated SG&A 37.2 33.5 3.7 11 %
Direct Store Operating Expenses 13.5 13.4
0.1 1 % Cultivation & Wholesale 0.9 1.4 (0.5 ) (36 %) Other (1) 3.9 1.9 2.0 105 % Less: Non-Corporate SG&A 18.3 16.7 1.6 10 % Corporate SG&A as a Component of Adjusted EBITDA from Continuing Operations (Non-GAAP) $ 18.9$ 16.8 $ 2.1 13 %
(1) Other non-corporate SG&A costs for the closed fiscal quarters
of
of
Adjusted EBITDA (Non-GAAP). For the fiscal first quarter of 2022, Adjusted EBITDA from Continuing Operations (Non-GAAP) includes Corporate SG&A (Non-GAAP) of$18.9 million , representing an increase of$2.1 million , or 13%, from the$16.8 million that Corporate SG&A (Non-GAAP) contributed to Adjusted EBITDA Loss from Continuing Operations (Non-GAAP) in the fiscal fourth quarter of 2021. The increase was related to higher legal and professional fees primarily due to ongoing litigation.
Reconciliations of Non-GAAP Financial Measures
The table below reconciles net loss to adjusted net loss from continuing operations (non-GAAP) for the periods indicated.
Three Months Ended
September 25, September 26,
($ in Millions) 2021 2020
Net Loss $ (60.6 ) $ (32.8 )
Less: Net Loss from Discontinued Operations, Net of Taxes 6.4 6.2 Add (Deduct) Impact of: Transaction Costs & Restructuring Costs 5.2 0.8 Share-Based Compensation 1.6 1.0 Other Non-Cash Operating Costs (1) (12.3 ) (18.7 ) Income Tax Effects (2)
(0.1 ) 8.0 Total Adjustments (5.6 ) (8.9 )
Adjusted net loss from continuing operations (non-GAAP) $ (59.8) $ (35.5)
41
The table below reconciles Adjusted Net Loss to EBITDA from Continuing
Operations (Non-GAAP) and Adjusted EBITDA from Continuing Operations (Non-GAAP)
for the periods indicated.
Three Months Ended
September 25, September 26,
($ in Millions) 2021 2020
Net Loss $ (60.6 ) $ (32.8 )
Less: Net Loss from Discontinued Operations, Net of Taxes 6.4 6.2 Add Impact of: Net Interest and Other Financing Costs 10.0 8.8 Provision for Income Taxes 19.7 12.3 Amortization and Depreciation 15.4 9.8 Total Adjustments 45.1 30.9 EBITDA from Continuing Operations (Non-GAAP) $ (9.1 ) $ 4.3 Add (Deduct) Impact of: Transaction Costs & Restructuring Costs 5.2 0.8 Share-Based Compensation 1.6 1.0 Other Non-Cash Operating Costs (1) (12.3 ) (18.7 ) Total Adjustments (5.5 ) (16.9 )
Adjusted EBITDA from continuing operations (non-GAAP) $ (14.6) $ (12.6)
(1) Other non-cash operating costs for the periods presented were as follows:
Three Months Ended
September 25, September 26,
2021 2020
Change in Fair Value of Derivative Liabilities $ (2.1 ) $ (0.3 )
Gain on Disposal of Assets Held For Sale - (12.4 )
Change in Fair Value of Contingent Consideration - 0.3
Gain on Lease Termination - (16.6 )
Gain/Loss on Extinguishment of Debt (10.2 ) 10.1
Gain from Disposal of Assets - (0.1 )
Impairment Expense 0.4 0.8
Other Non-Cash Operating Costs (0.4 ) (0.5 )
Total Other Non-Cash Operating Costs $ (12.3 ) $ (18.7 )
(2) Income tax effects to arrive at the adjusted net loss from continuing operations
(non-GAAP) relate to temporary tax differences in which future income
the tax benefit exists, such as changes in the fair value of investments, assets held
for sale and other assets, changes in the fair value of any consideration,
loss on disposal of assets and impairment charge. The income tax effect
is calculated using the federal legal rate of 21.0% and the legal rate
for the state in which the relevant asset is held or the transaction takes place,
most of which is inCalifornia with a statutory rate of 8.84%. Adjusted Net Loss from Continuing Operations (Non-GAAP) represents the profitability of the Company excluding unusual and infrequent expenditures and non-cash operating costs. The change in Adjusted Net Loss from Continuing Operations (Non-GAAP) was primarily due to the increase in general and administrative expense of$6.3 million as described above. In addition, amortization of debt discount increased$6.1 million in the fiscal first quarter of 2022 compared to the prior period due to increases in the Company's effective interest rate as a result of debt modifications and extinguishments. EBITDA from Continuing Operations (Non-GAAP) represents the Company's current operating profitability and ability to generate cash flow and includes significant non-cash operating costs. Net Loss is adjusted for interest and financing costs as a direct result of debt financings, income taxes, and amortization and depreciation expense to arrive at EBITDA from Continuing Operations (Non-GAAP). Considering these adjustments, the Company had EBITDA from Continuing Operations (Non-GAAP) of$(9.1) million for the three months endedSeptember 25, 2021 compared to$4.3 million for the comparative prior period. The change in EBITDA from Continuing Operations (Non-GAAP) was primarily due to other non-cash operating costs for disposal of assets held for sale, lease modifications, and extinguishments of debt as described above. For the three months endedSeptember 25, 2021 , Adjusted EBITDA from Continuing Operations (Non-GAAP) of$(14.6) million increased compared to$(12.6) million for the three months endedSeptember 26, 2020 , respectively. The increase is primarily due to an increase in general and administrative expenses affecting Net Loss. The financial performance of the Company is expected to improve as the Company has a clear path towards profitability, and coupled with its stabilized liquidity, is properly repositioned the Company for growth. Refer to Item 2 "Liquidity and Capital Resources"for further discussion of management's future outlook.
See Section 2 “Retail Performance” above for reconciliations to Retail Adjusted EBITDA.
42
Cash Flows
The following table summarizes the consolidated cash flows of the Company for the three months ended.
Three Months Ended
September 25, September 26,
($ in Millions) 2021 2020 $ Change % Change
26 %Net Cash (Used in) Provided by Investing Activities (3.6 ) 9.7 (13.3 ) (137 %) Net Cash Provided by Financing Activities 93.2 8.6 84.6 984 % Net Increase in Cash and Cash Equivalents 66.6 0.1 66.5 66,500 % Cash Included in Assets Held for Sale (1) (0.3 ) - (0.3 ) 100 % Cash and Cash Equivalents, Beginning of Period 11.9 9.6 2.3 24 % Cash and Cash Equivalents, End of Period $ 78.2 $
9.7$ 68.5 706 %
Cash flow from operating activities
Net cash used in operating activities was$23.0 million for the three months endedSeptember 25, 2021 , an increase of$4.8 million , or 26%, compared to$18.2 million for the three months endedSeptember 26, 2020 . The decrease in cash used was primarily due changes in other non-cash operating costs that offset the increase in net loss as a result of the increase in general and administrative expenses of$6.3 million and the increase in accretion of debt discount of$6.1 million . Specifically, the Company did not recognize any gain on lease modifications or gain on disposal of assets held for sale in the current period compared to an aggregate gain of$28.3 million in the prior period. This was positively impacted by the gain on extinguishment of debt of$10.2 million and the gain on changes in fair value of derivative liabilities of$2.1 million for the three months endedSeptember 25, 2021 .
Cash flow from investing activities
Net cash used in investing activities was$3.6 million for the three months endedSeptember 25, 2021 , a decrease of$13.3 million , or 137%, compared to$9.7 million provided for the three months endedSeptember 26, 2020 . The decrease in net cash provided in investing activities was primarily due to the Company's strategic plan to divest non-core assets during the comparative prior period, resulting in$10.0 million received from proceeds from the sale of assets held for sale. Net cash was also impacted by an increase in purchases of property and equipment of$2.9 million as the Company reopened construction-in-progress during the fiscal first quarter of 2022.
Cash flow from financing activities
Net cash provided by financing activities was$93.2 million for the three months endedSeptember 25, 2021 , an increase of$84.6 million , or 984%, compared to$8.6 million for the three months endedSeptember 26, 2020 . The increase in change of net cash provided by financing activities was primarily due to the$95.0 million for the issuance of equity instruments for cash and the$5.0 million from the unsecured promissory note. The increase in debt and equity financings was offset by payments of stock issuance costs of$5.4 million in connection with such capital transactions. Financial Condition
The following table summarizes certain aspects of the Company’s financial position as of
September 25, June 26,
($ in Millions) 2021 2021 $ Change % Change
(unaudited) (audited)
Cash and Cash Equivalents $ 78.2$ 11.9
$ 66.3 557 % Total Current Assets $ 165.5$ 96.7 $ 68.8 71 % Total Assets $ 531.9$ 472.5 $ 59.4 13 %
Total Current Liabilities $ 345.2$ 288.6 $ 56.6 20 % Notes Payable, Net of Current Portion $ 199.1$ 258.4 $ (59.3 ) (23 %) Total Liabilities $ 732.9$ 726.1 $ 6.8 1 % Total Shareholders' Equity$ (201.0 ) $ (253.6
)$ 52.6 (21 %) Working Capital Deficit$ (179.7 ) $ (191.9 ) $ 12.2 (6 %) 43 As ofSeptember 25, 2021 , the Company had$78.2 million of cash and cash equivalents and$179.7 million of working capital deficit, compared to$11.9 million of cash and cash equivalents and$191.9 million of working capital deficit as ofJune 26, 2021 . The increase in cash and cash equivalents was primarily due the$100.0 million Private Placement during the fiscal first quarter of 2022 which helped stabilize liquidity and will allow the Company to prioritize new market opportunities and existing operations over near-term balance sheet management. In addition, onAugust 17, 2021 , the Company amended the Convertible Facility wherein the maturity date was extended toAugust 17, 2028 and any cash interest obligation was eliminated, instead providing for paid-in-kind interest. The$12.2 million decrease in working capital deficit was primarily related to an increase of$66.3 million in cash as described above and an increase of$4.5 million in assets held for sale related to the classification of the cultivation and production facilities inCalifornia andNevada to held for sale during the three months endedSeptember 25, 2021 . The increase in current liabilities was due to an increase of$28.4 million in derivative liabilities related to the top-up provision of the Convertible Facility and the Short-Term Warrant under the Private Placement recognized during the fiscal first quarter of 2022, an increase of$7.1 million in current notes payable primarily related to the existing senior secured term loan, an increase of$5.5 million in liabilities held for sale related to the cultivation and production facilities noted above and an increase of$19.0 million in income taxes payable, offset by a$4.5 million decrease in other current liabilities related to a decrease in acquisition payable as a result of settlements during the current period and a decrease in accrued interest payable as a result of the Sixth Amendment of
the Convertible Facility. The Company's working capital will be significantly impacted by continued growth in retail operations, the operationalization of existing licenses, and the continued stewardship of the Company's financial resources. The ability to fund working capital needs will also be dependent on the Company's ability to raise additional debt and equity financing.
Liquidity and capital resources
The primary need for liquidity is to fund working capital requirements of the business, including operationalizing existing licenses, capital expenditures, debt service and acquisitions. The primary source of liquidity has primarily been private and/or public financing and to a lesser extent by cash generated from sales. The ability to fund operations, to make planned capital expenditures, to execute on the growth/acquisition strategy, to make scheduled debt and rent payments and to repay or refinance indebtedness depends on the Company's future operating performance and cash flows, which are subject to prevailing economic conditions and financial, business and other factors, some of which are beyond its control. Liquidity risk is the risk that the Company will not be able to meet its financial obligations associated with financial liabilities. The Company manages liquidity risk through the management of its capital structure. The Company's approach to managing liquidity is to ensure that it will have sufficient liquidity to settle obligations and liabilities when due. As ofSeptember 25, 2021 , the Company had$78.2 million of cash and cash equivalents and$179.7 million of working capital deficit, compared to$11.9 million of cash and cash equivalents and$191.9 million of working capital deficit as ofJune 26, 2021 . For the three months endedSeptember 25, 2021 , the Company's monthly burn rate, which was calculated as cash spent per month in operating activities, was approximately$7.7 million compared to a monthly burn rate of approximately$6.1 million for the three months endedSeptember 26, 2020 . During the fiscal first quarter of 2022, the Company shifted its focus from a turnaround plan that took place during fiscal year 2021, which resulted in the divestiture of non-core assets and lease modifications, and turned to a growth plan with new capital to capitalize on further opportunities. As ofSeptember 25, 2021 , cash generated from ongoing operations may not be sufficient to fund operations and, in particular, to fund the Company's growth strategy in the short-term or long-term.
The restructuring of the Convertible Facility and the successful closing of the Private Placement with investors led by SPE during the fiscal first quarter of 2022 stabilized the Company's liquidity and properly positions the Company for growth to profitability. Management evaluated its financial condition as ofSeptember 25, 2021 in conjunction with recent transactions which free up capital subsequent to the current reporting period as discussed below.
Partnership with
OnOctober 1, 2021 , the Company announced thatLitHouse Farms , a subsidiary ofFoundry Works, Inc. ("Foundry"), will manage its cultivation and manufacturing operations at its facilities inDesert Hot Springs, California ("DHS") andSparks, Nevada ("Sparks"). Licensed operations at the facilities will be carried on under management agreements which include purchase options for nominal consideration, subject to regulatory approval. Concurrent with the transaction, Foundry entered into a sublease agreement for DHS worth approximately$3,200,000 per year beginning in its first year, increasing to approximately$4,600,000 per year in its sixth year, subject to 3% annual escalators thereafter throughMarch 2039 . Foundry also entered into a sublease agreement forSparks worth approximately$2,400,000 per year beginning in its first year, increasing to approximately$3,400,000 per year in its sixth year, subject to 3% annual escalators thereafter throughJanuary 2039 . The cash flow accretive partnership will help reduce the significant fixed costs associated with the facilities. Refer to "Note 4 - Assets Held for Sale" of the unaudited interim condensed consolidated financial statements in Item 1 for further information. 44
Off-balance sheet provisions
The Company does not have any significant undisclosed off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on its results of operations, financial condition, income or expenses, liquidity, capital expenditure or its capital resources that are important to investors.
Critical accounting policies, significant judgments and estimates and recent accounting pronouncements
There have been no changes in critical accounting policies, estimates and assumptions from the information provided in "Management's Discussion and Analysis of Financial Conditions and Results of Operations" included in the Form 10 for the fiscal year endedJune 26, 2021 that have a significant effect on the amounts recognized in the interim consolidated financial statements as of and for the fiscal quarter endedSeptember 25, 2021 . See "Note 2 - Summary of Significant Accounting Policies" in the unaudited interim condensed consolidated financial statements in Item 1 for recently adopted accounting standards. For more information on the Company's critical accounting estimates, refer to the annual MD&A for the fiscal year endedJune 26, 2021 . A detailed description of our critical accounting policies and recent accounting pronouncements are detailed in Item 8 of the 2021 Form 10.
Related party transactions
All related party balances due from or due to the Company as ofSeptember 25, 2021 andJune 26, 2021 did not have any formal contractual agreements regarding payment terms or interest. For amounts due from and to related parties, refer to "Note 19 - Related Party Transactions" of the Consolidated Financial Statements for the three months endedSeptember 25, 2021 in Item 1.Gotham Green Partners As discussed in Item 2 "Liquidity and Capital Resources" and Item 2 "Quarterly Highlights", the Company has engaged in a strategic partnership withGotham Green Partners , a related party. The arrangement is to provide financing to the Company in the form of a credit facility up to$250,000,000 accessed through issuances of convertible senior secured notes (the "Notes") co-issued by the Company andMM CAN USA, Inc. The Notes are convertible, at the option of the holder, into Subordinate Voting Shares at any time prior to the close of business on the last business day immediately preceding the maturity date ofApril 23, 2022 . In addition, upon issuance of any Notes, the lenders are issued share purchase warrants (the "Warrants") of the Company, each of which are exercisable to purchase one Subordinate Voting Share for 36 months from the date of issue. The Notes and the Warrants, and any Subordinate Voting Shares issuable as a result of a conversion of the Notes or exercise of the Warrants, will be subject to a four-month hold period from the date of issuance of such Notes or such Warrants, as applicable, in accordance with applicable Canadian securities laws. While the Notes are outstanding, the lenders will be entitled to the collective rights to appoint a representative to attend all meetings of the Board of Directors in a non-voting observer capacity.Wicklow Capital and GGP have the right to approve director nominees submitted by the Company. GGP can nominate one member to the Board of Directors so long as GGP has at least 10% of the Class B Subordinate Shares on fully-diluted basis. Upon the appointment to the Board, GGP ceases its right to have a non-voting observer seat. The convertible facility bears interest at a rate of LIBOR plus 6.0% per annum. All convertible notes will have a maturity date of 36 months from the maturity date, with a twelve-month extension feature available to the Company on certain conditions. As ofNovember 5, 2021 , the Company has drawn down on approximately$165,000,000 of the Convertible Facility. Refer to "Note 11 - Senior Secured Convertible Credit Facility" of the Consolidated Financial Statements for the three months endedSeptember 25, 2021 in Item 1. Tilray, Inc.
InAugust 2021 , Tilray, Inc. acquired the majority of the outstanding Notes and Warrants held by GGP in which a newly formed limited partnership established by Tilray and other strategic investors acquired 75% of the outstanding Notes and 65% of the outstanding warrants under the Convertible Facility. Specifically, Tilray's interest in the SPV represents rights to 68% of the Notes and related Warrants held by the SPV, which are convertible into, and exercisable for, approximately 21% of the outstanding Class B Subordinate Voting Shares ofMedMen . While the Notes are outstanding, Tilray will have the right to appoint two representatives to attend all meetings of the Board of Directors in a non-voting observer capacity.
InAugust 2021 , the Company executed an equity offering with various investors led bySerruya Private Equity, Inc. in which the Company issued 416,666,640 Subordinate Voting Shares and 104,166,660 warrants for gross proceeds of$100,000,000 . SPE can nominate one member to the Board of Directors so long as SPE has at least 9% of the Class B Subordinate Voting Shares on fully-diluted basis. In connection with the Private Placement, the Company appointedMichael Serruya , SPE's Managing Director, as a member of its board of directors.SierraConstellation Partners InMarch 2020 , the Company entered into restructuring plan and retained interim management and advisory firm,SierraConstellation Partners ("SCP"), to support the Company in the development and execution of its turnaround and restructuring plan. As part of the engagement,Tom Lynch , a Partner and Senior Managing Director at SCP, was appointed as Interim Chief Executive Officer, andTim Bossidy , a Director at SCP, was appointed as Interim Chief Operating Officer. InDecember 2020 ,Mr. Lynch was elected as Chairman of the Board and inJuly 2021 ,Mr. Lynch was permanently appointed as Chief Executive Officer. Also inDecember 2020 ,Reece Fulgham , a Managing Director at SCP, was appointed as Interim Chief Financial Officer. As ofSeptember 25, 2021 , the Company had paid$1,255,473 in fees to SCP for interim management and restructuring support during the current fiscal year. In addition, during the three months endedSeptember 25, 2021 ,Mr. Lynch andMr. Bossidy each received 214,030 stock options. To date, as ofSeptember 25, 2021 , the Company has granted 4,696,435 restricted stock units to its executive officerswho are directors at SCP. 45
Emerging Growth Company Status
The Company is an "emerging growth company" as defined in the Section 2(a) of the Exchange Act, as modified by the Jumpstart Our Business Start-ups Act of 2012, or the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Exchange Act for complying with new or revised accounting standards applicable to public companies. The Company has elected to take advantage of this extended transition period and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.
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