MMNFF Medmen Enterprises, Inc. - 10-K

ITEM 1A.

RISK FACTORS

RISK FACTORS

Summary of Risks Associated with the Business

The Company’s business is subject to a number of risks and uncertainties of which you should be aware before making a decision to invest in the Subordinate Voting Shares. This summary does not address all of the risks that the Company faces. Additional discussion of the risks summarized in this risk factor summary; and other risks the Company faces, can be found below under the heading “Risk Factors” and should be carefully considered, together with other information in this Form 10-K and other filings with the SEC, before making a decision to invest in the Subordinate Voting Shares. These risks include, among others, the following:

Regulatory Risks Associated with the Business

Cannabis continues to be a Controlled Substance under the United States Federal Controlled Substances Act (the “ CSA ”) and the operations of the Company may be deemed to be criminal in nature and/or subject the Company to substantial civil penalties.

The Rohrabacher-Farr Amendment may not be Renewed Potentially Resulting in Enforcement Activities by the U.S. Department of Justice (the “ DOJ ”) Against Entities in the Cannabis Industry.

The Company’s business is highly regulated and dependent in large part on the ability to obtain or renew government permits and licenses for the current and contemplated operations, of which there can be no assurance.

Public opinion and perception may significantly influence government policy and regulation of the cannabis industry, which could have a material adverse effect on the business, results of operations and prospects.

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

The Company is subject to risk of civil asset forfeiture.

In the event that any of the Company’s operations in the United States were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime.

There remains doubt and uncertainty that the Company will be able to legally enforce contracts it enters into.

Failure to comply with applicable environmental laws, regulations and permitting requirements may result in enforcement actions against us, and civil or criminal fines or penalties.

Since Section 280E of the Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking in controlled substances, the Company will be precluded from claiming certain deductions otherwise available to non-marijuana businesses and, as a result, an otherwise profitable business may in fact operate at a loss after taking into account its income tax expenses.

If the Company were to experience a bankruptcy, there is no guarantee that U.S. federal bankruptcy protections would be available to its United States operations, which would materially adversely affect the prospects and on the rights of its lenders and securityholders.

The emerging growth company status allows the Company certain exemptions from various reporting requirements.

Risks Related to Macro-Economic Conditions

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

The operations and financial condition could be adversely impacted by a material downturn in global financial conditions and by a rise in interest rates in the event the Company is required to seek additional debt financing.

Risks Related to Financial and Business Matters

The historical audited financial statements were prepared on a going concern basis.

The Company will require additional financing to achieve its business objectives.

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

The Company has incurred substantial indebtedness and may not be able to refinance, extend or repay this indebtedness on a timely basis or at all.

The Company has identified a material weakness in its internal control over financial reporting and may identify additional material weaknesses in the future that may cause them to fail to meet its reporting obligations or result in material misstatements of its financial statements. If the Company fails to remediate any material weaknesses or to establish and maintain effective control over financial reporting, the Company’s ability to accurately and timely report its financial results could be adversely affected.

MedMen is a holding company and essentially all of its assets are the capital stock of its material subsidiaries.

Adverse publicity reports or other media attention regarding the safety, efficacy and quality of marijuana in general, or associating the consumption of adult-use and medical marijuana with illness or other negative effects or events, could have such a material adverse effect on the Company’s results of operations.

The Company may be subject to various product liability claims, including, among others, that the marijuana product caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances.

If one of the Company’s brands were subject to product recalls, the image of that brand and MedMen could be harmed.

The Company is subject to those risks inherent in an agricultural business.

The Company’s business is dependent on suppliers and skilled labor.

The Company faces intense competition from other companies and increasing legalization of cannabis and rapid growth and consolidation in the cannabis industry may further intensify competition.

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

Certain remedies may be limited.

Future material acquisitions or dispositions or strategic transactions.

Risks associated with pending transactions.

Risks associated with failure to manage growth effectively.

Risks Related to Intellectual Property and Information Technology

The Company may have limited intellectual property protection.

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

Additional Risks Related to Legal and Regulatory Matters

The Company has been and may in the future be subject to investigations, civil claims, lawsuits and other proceedings.

United States Tax Classification of the Company.

Risks Associated with the Securities of the Company

Heightened scrutiny by securities regulatory authorities in the United States and Canada may impact investors’ ability to transact in the Company’s securities.

Potential voting control by certain shareholders may limit your ability to influence the outcome of director elections and other matters requiring shareholder approval.

The Company’s capital structure may cause unpredictability.

Future sales of Subordinate Voting Shares in the public market, or the perception that such sales may occur, could adversely affect the prevailing market price of the Subordinate Voting Shares.

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

Risk Factors

The risks and uncertainties described below could materially and adversely affect the business, financial condition and results of operations and could cause actual results to differ materially from the Company’ expectations. The risk factors described below include the considerable risks associated with the current economic environment and the related potential adverse effects on the financial condition and results of operations. You should read these risk factors in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes for the fiscal year ended June 25, 2022. There also may be other factors that the Company cannot anticipate or that are not described in this report generally because management does not currently perceive them to be material. Those factors could cause results to differ materially from management’s expectations.

REGULATORY RISKS ASSOCIATED WITH THE BUSINESS

Cannabis continues to be a Controlled Substance under the United States Federal Controlled Substances Act and the operations of the Company may be deemed to be criminal in nature and/or subject the Company to substantial civil penalties.

MedMen both directly and indirectly engages in the medical and adult-use marijuana industry in the United States where local state law permits such activities. Investors are cautioned that in the United States, cannabis is largely regulated at the state level. Currently, in the United States, 37 states, the District of Columbia, Puerto Rico, Guam, the Northern Mariana Islands and the U.S. Virgin Islands have legalized medical cannabis, and 19 states, in addition to the District of Columbia, the Commonwealth of the Northern Mariana Islands, and Guam, have legalized cannabis for recreational purposes or “adult-use”. Notwithstanding the permissive regulatory environment of cannabis at the state level, cannabis continues to be categorized as a controlled substance under the CSA and as such, cultivation, distribution, sale and possession of cannabis violates federal law in the United States. The inconsistency between federal and state laws and regulations is a major risk factor.

At this time it is uncertain what policies the current President or Attorney General will take regarding the enforcement of federal cannabis laws. Although, the Attorney General has indicated he would deprioritize enforcement of low-level cannabis crimes such as possession, it is not yet known whether the Department of Justice under President Biden and Attorney General Garland will re-adopt the United States Department of Justice Memorandum drafted by former Deputy Attorney General James Michael Cole in 2013 (the “ Cole Memo ”), which offered guidance to federal enforcement agencies as to how to prioritize civil enforcement, criminal investigations and prosecutions regarding marijuana in all states. Due to the fact the leadership of the DOJ has changed and has not therefore introduced policies regarding the enforcement of the federal cannabis laws, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.

Federal law pre-empts state law in these circumstances, so that the federal government can assert criminal violations of federal law despite state law. The level of prosecutions of state-legal cannabis operations is entirely unknown, and neither the current administration nor the DOJ has articulated a policy regarding state legal cannabis. If the Department of Justice policy were to be to aggressively pursue financiers or equity owners of cannabis-related business, and United States Attorneys followed such Department of Justice policies through pursuing prosecutions, then the Company could face (i) seizure of its cash and other assets used to support or derived from its cannabis subsidiaries; and (ii) the arrest of its employees, directors, officers, managers and investors, who could face charges of ancillary criminal violations of the CSA for aiding and abetting and conspiring to violate the CSA by virtue of providing financial support to state-licensed or permitted cultivators, processors, distributors, and/or retailers of cannabis. Additionally, as has recently been affirmed by U.S. Customs and Border Protection, employees, directors, officers, managers and investors of MedMen who are not U.S. citizens face the risk of being barred from entry into the United States for life.

If the administration and Attorney General do not adopt a policy incorporating some or all of the policies articulated in the Cole Memo, then the Department of Justice or an aggressive federal prosecutor could allege that the Company and its Board and, potentially its shareholders, “aided and abetted” violations of federal law by providing finances and services to its operating subsidiaries. Under these circumstances, it is possible that a federal prosecutor could seek to seize its assets, and to recover the “illicit profits” previously distributed to shareholders resulting from any of the foregoing financing or services. In these circumstances, the Company’s operations would cease, MedMen shareholders may lose their entire investment and directors, officers and/or MedMen shareholders may be left to defend any criminal charges against them at their own expense and, if convicted, be sent to federal prison.

Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on MedMen, including its reputation and ability to conduct business, its holding (directly or indirectly) of medical and adult-use cannabis licenses in the United States, the listing of its securities on the CSE or other applicable exchanges, the capital, financial position, operating results, profitability or liquidity or the market price of the listed securities.

Overall, an investor’s contribution to and involvement in MedMen’s activities may result in federal civil and/or criminal prosecution, including forfeiture of his, her or its entire investment.

The Rohrabacher-Farr Amendment may not be Renewed Potentially Resulting in DOJ Enforcement Activities Against Entities in the Cannabis Industry.

The Rohrabacher-Farr Amendment prohibits the DOJ from spending funds appropriated by Congress to enforce the tenets of the CSA against the medical cannabis industry in states which have legalized such activity. On March 15, 2021, the amendment was renewed through the signing of the fiscal year 2022 omnibus spending bill and is effective through September 30, 2022. There can be no assurance that the federal government will not seek to prosecute cases involving medical cannabis businesses that are otherwise compliant with state law. Such potential proceedings could involve significant restrictions being imposed upon the Company or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Company, even if such proceedings were concluded successfully in favor of the Company.

The Company’s business is highly regulated and dependent in large part on the ability to obtain or renew government permits and licenses for our current and contemplated operations, of which there can be no assurance.

The Company’s business is subject to a variety of laws, regulations and guidelines relating to the cultivation, manufacture, management, transportation, storage, sale and disposal of marijuana, including laws and regulations relating to health and safety, the conduct of operations and the protection of the environment. Achievement of the business objectives are contingent, in part, upon compliance with applicable regulatory requirements and obtaining all requisite regulatory approvals. Changes to such laws, regulations and guidelines due to matters beyond control may cause material adverse effects to the business operations.

The Company is required to obtain or renew government permits and licenses for the current and contemplated operations. Obtaining, amending or renewing the necessary governmental permits and licenses can be a time-consuming process potentially involving numerous regulatory agencies, involving public hearings and costly undertakings on the Company’s part. The duration and success of the efforts to obtain, amend and renew permits and licenses are contingent upon many variables not within the Company’s control, including the interpretation of applicable requirements implemented by the relevant permitting or licensing authority and planning and zoning requirements with respect to its locations. The Company may not be able to obtain, amend or renew permits or licenses that are necessary to its operations. In August 2020, the Company received a notice from the City of Pasadena that a determination was made that there had been a material change in ownership and/or management of MedMen such that the initial application was no longer valid, resulting in losing the right to proceed through the cannabis permitting process in Pasadena. In response, the Company filed a lawsuit challenging the city’s determination. Any unexpected delays or costs associated with the permitting and licensing process could impede the ongoing or proposed operations. To the extent necessary permits or licenses are not obtained, amended or renewed, or are subsequently suspended or revoked, the Company may be curtailed or prohibited from proceeding with its ongoing operations or planned development and commercialization activities. Such curtailment or prohibition may result in a material adverse effect on the business, financial condition, results of operations or prospects.

While compliance controls have been developed to mitigate the risk of any material violations of any license or certificate the Company holds, there is no assurance that the licenses or certificates will be renewed by each applicable regulatory authority in the future in a timely manner. Any unexpected delays or costs associated with the licensing renewal process for any of the licenses or certificates held by MedMen could impede the ongoing or planned operations and have a material adverse effect on the business, financial condition, results of operations or prospects.

The Company may become involved in a number of government or agency proceedings, investigations and audits. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm the reputation, require the Company to take, or refrain from taking, actions that could harm its operations or require it to pay substantial amounts of funds, harming its financial condition. There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources or have a material adverse impact on the business, financial condition, results of operations or prospects.

Public opinion and perception may significantly influence government policy and regulation of the cannabis industry, which could have a material adverse effect on the business, results of operations and prospects.

Government policy changes or public opinion may also result in a significant influence over the regulation of the cannabis industry in the United States, Canada or elsewhere. Public opinion and support for medical and adult-use marijuana has traditionally been inconsistent and varies from jurisdiction to jurisdiction. While public opinion and support appears to be rising for legalizing medical and adult-use marijuana, it remains a controversial issue subject to differing opinions surrounding the level of legalization (for example, medical marijuana as opposed to legalization in general). Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of marijuana in general, or associating the consumption of adult-use and medical marijuana with illness or other negative effects or events, could have a material adverse effect on the business, results of operations or prospects. There is no assurance that such adverse publicity reports or other media attention will not arise. A negative shift in the public’s perception of cannabis, including vaping or other forms of cannabis administration, in the United States, Canada or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize medical and/or adult-use cannabis, thereby limiting the number of new state jurisdictions into which the Company could expand and perception of negative health effects from the use of vaporizers to consume cannabis could result in state and local prohibitions on the sale of vaping products for an indefinite period of time. Any inability to fully implement the Company’s expansion strategy may have a material adverse effect on its business, results of operations or prospects. Among other things, such a shift could also cause states that have already legalized medical and/or adult-use cannabis to reevaluate the extent of, and introduce new restrictions on, the permitted activities and permitted cannabis products within their jurisdictions, which may have a material adverse effect on the Company’s business, results of operations or prospects. Recent medical alerts by the Centers for Disease Control and Prevention (the “ CDC ”) and state health agencies on vaping related illness and other issues directly related to cannabis consumption could potentially create an inability to fully implement the expansion strategy or could restrict the products which the Company sells at our existing operations, which may have a material adverse effect on the business, results of operations or prospects.

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

The success of the Company’s business strategy depends on the legality of the cannabis industry. The political environment surrounding the cannabis industry in general can be volatile and the regulatory framework remains in flux. Currently, in the United States, 37 states, the District of Columbia, Puerto Rico, Guam, the Northern Mariana Islands and the U.S. Virgin Islands have legalized medical cannabis, and 19 states, in addition to the District of Columbia, the Commonwealth of the Northern Mariana Islands, and Guam, have legalized cannabis for recreational purposes or “adult-use”, including the states in which MedMen operates; however, the risk remains that a shift in the regulatory or political realm could occur and have a drastic impact on the industry as a whole, adversely impacting the business, results of operations, financial condition or prospects.

Delays in enactment of new state or federal regulations could restrict the ability to reach strategic growth targets and lower return on investor capital. The Company’s strategic growth strategy is reliant upon certain federal and state regulations being enacted to facilitate the legalization of medical and adult-use cannabis. If such regulations are not enacted, or enacted but subsequently repealed or amended, or enacted with prolonged phase-in periods, its growth targets, and thus, the effect on the return of investor capital, could be detrimental. The Company is unable to predict with certainty when and how the outcome of these complex regulatory and legislative proceedings will affect its business and growth.

Further, there is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. If the federal government begins to enforce federal laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing applicable state laws are repealed or curtailed, the business, results of operations, financial condition and prospects would be materially adversely affected. It is also important to note that local and city ordinances may strictly limit and/or restrict the sale of cannabis in a manner that will make it extremely difficult or impossible to transact business that is necessary for the continued operation of the cannabis industry. Federal actions against individuals or entities engaged in the cannabis industry or a repeal of applicable cannabis related legislation could adversely affect us and the business, results of operations, financial condition and prospects.

The Company is aware that multiple states are considering special taxes or fees on businesses in the cannabis industry. It is a potential yet unknown risk at this time that other states are in the process of reviewing such additional fees and taxation. This could have a material adverse effect upon the business, results of operations, financial condition or prospects. Currently, the Company has a large outstanding tax liability. For further information see, see “ Note 22 – Provision For Income Taxes and Deferred Income Taxes ” to the Consolidated Financial Statements located in Item 8 of this Report.

The commercial medical and adult-use cannabis industry is in its infancy and the Company anticipates that such regulations will be subject to change as the jurisdictions in which it conducts business matures. The Company has in place a detailed compliance program headed by the SVP of Legal who oversees, maintains, and implements the compliance program and personnel. In addition to its robust legal and compliance departments, the Company also has local regulatory/compliance counsel engaged in every jurisdiction (state and local) in which it operates. Such counsel regularly provides legal advice regarding compliance with state and local laws and regulation and the legal and compliance exposures under United States federal law. The Company’s compliance program emphasizes security and inventory control to ensure strict monitoring of cannabis and inventory from delivery by a licensed distributor to sale or disposal. Additionally, the Company has created comprehensive standard operating procedures that include detailed descriptions and instructions for receiving shipments of inventory, inventory tracking, recordkeeping and record retention practices related to inventory, as well as procedures for performing inventory reconciliation and ensuring the accuracy of inventory tracking and recordkeeping. The Company will continue to monitor compliance on an ongoing basis in accordance with its compliance program, standard operating procedures, and any changes to regulation in the cannabis industry.

Overall, the medical and adult-use cannabis industry is subject to significant regulatory change at the local, state and federal levels. The inability to respond to the changing regulatory landscape may cause the Company to not be successful in capturing significant market share and could otherwise harm the business, results of operations, financial condition or prospects.

The Company is subject to risk of civil asset forfeiture.

Because the cannabis industry remains illegal under U.S. federal law, any property owned by participants in the cannabis industry which are either used in the course of conducting such business, or are the proceeds of such business, could be subject to seizure by law enforcement and subsequent civil asset forfeiture. Even if the owner of the property were never charged with a crime, the property in question could still be seized and subject to an administrative proceeding by which, with minimal due process, it could be subject to forfeiture.

In the event that any of the Company’s operations in the United States were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime.

The Company is subject to a variety of laws and regulations domestically and in the United States that involve money laundering, financial recordkeeping and proceeds of crime, including the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), Sections 1956 and 1957 of U.S.C. Title 18 (the Money Laundering Control Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended and the rules and regulations thereunder, the Criminal Code (Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada.

Banks often refuse to provide banking services to businesses involved in the cannabis industry due to the present state of the laws and regulations governing financial institutions in the United States. The lack of banking and financial services presents unique and significant challenges to businesses in the marijuana industry. The potential lack of a secure place in which to deposit and store cash, the inability to pay creditors through the issuance of checks and the inability to secure traditional forms of operational financing, such as lines of credit, are some of the many challenges presented by the unavailability of traditional banking and financial services.

In February 2014, the Department of the Treasury Financial Crimes Enforcement Network (“ FinCEN ”) issued a memo (the “ FinCEN Memo ”) providing instructions to banks seeking to provide services to cannabis-related businesses. The FinCEN Memo states that in some circumstances, it is permissible for banks to provide services to cannabis-related businesses without risking prosecution for violation of federal money laundering laws. It refers to supplementary guidance that former Deputy Attorney General James M. Cole issued to federal prosecutors relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the CSA. While the FinCEN Memo has not been rescinded by the Department of Justice at this time, it remains unclear whether the current administration will follow its guidelines. Overall, the Department of Justice continues to have the right and power to prosecute crimes committed by banks and financial institutions, such as money laundering and violations of the Bank Secrecy Act, that occur in any state, including in states that have legalized the applicable conduct and the DOJ’s current enforcement priorities could change for any number of reasons, including a change in the opinions of the President of the United States or the United States Attorney General. A change in the DOJ’s enforcement priorities could result in the DOJ prosecuting banks and financial institutions for crimes that previously were not prosecuted.

In the event that any of the Company’s operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations in the United States were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability to declare or pay dividends or effect other distributions. Furthermore, while there are no current intentions to declare or pay dividends on the Subordinate Voting Shares in the foreseeable future, in the event that a determination was made that proceeds from operations (or any future operations or investments in the United States) could reasonably be shown to constitute proceeds of crime, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.

There remains doubt and uncertainty that the Company will be able to legally enforce contracts it enters into.

It is a fundamental principle of law that a contract will not be enforced if it involves a violation of law or public policy. Because cannabis remains illegal at a federal level, judges in multiple U.S. states have on a number of occasions refused to enforce contracts, including for the repayment of money when the loan was used in connection with activities that violate federal law, even if there is no violation of state law. There remains doubt and uncertainty that the Company will be able to legally enforce contracts it enters into, if necessary. The Company cannot be assured that it will have a remedy for breach of contract, which could have a material adverse effect on its business, revenues, operating results, financial condition and prospects.

Failure to comply with applicable environmental laws, regulations and permitting requirements may result in enforcement actions against us, and civil or criminal fines or penalties.

The Company’s operations are subject to environmental regulation in the various jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors (or the equivalent thereof) and employees. The Company cannot provide any assurance that future changes in environmental regulation, if any, will not adversely affect its operations.

Government approvals and permits are currently, and may in the future, be required in connection with the Company’s operations. To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from its current or proposed production, manufacturing or sale of cannabis or cannabis products or from proceeding with the development of its operations as currently proposed.

Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions against us, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. The Company may be required to compensate those suffering loss or damage by reason of its operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.

Amendments to current laws, regulations and permits governing the production, manufacturing or sale of cannabis or cannabis products, or more stringent implementation thereof, could have a material adverse impact on the business and cause increases in expenses, capital expenditures or production or manufacturing costs or reduction in levels of production, manufacturing or sale or require abandonment or delays in development.

Since Section 280E of the Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking in controlled substances, the Company will be precluded from claiming certain deductions otherwise available to non-marijuana businesses and, as a result, an otherwise profitable business may in fact operate at a loss after taking into account its income tax expenses.

Section 280E of the United States Internal Revenue Code, as amended (the “ Code ”), prohibits businesses from deducting certain expenses associated with trafficking in controlled substances (within the meaning of Schedule I and II of the CSA). The United States Internal Revenue Service (the “ IRS ”) has invoked Section 280E in tax audits against various cannabis businesses in the U.S. that are licensed under applicable state laws. Although the IRS issued a clarification allowing the deduction of certain expenses, the scope of such items is interpreted very narrowly, and the bulk of operating costs and general administrative costs are not permitted to be deducted. While there are currently several pending cases before various administrative and federal courts challenging these restrictions, there is no guarantee that these courts will issue an interpretation of Section 280E favorable to cannabis businesses.

Overall, under Section 280E of the Code, normal business expenses incurred in the business of selling marijuana and its derivatives are not deductible in calculating income tax liability. Therefore, the Company will be precluded from claiming certain deductions otherwise available to non-marijuana businesses and, as a result, an otherwise profitable business may in fact operate at a loss after taking into account its income tax expenses. There is no certainty that the impact that Section 280E has on the Company’s margins will ever be reduced.

If the Company was to experience a bankruptcy, there is no guarantee that U.S. federal bankruptcy protections would be available to its United States operations, which would materially adversely affect its prospects and on the rights of its lenders and securityholders.

Because the use of cannabis is illegal under federal law, many courts have denied cannabis businesses bankruptcy protections, thus making it very difficult for lenders to recoup their investments in the cannabis industry in the event of a bankruptcy. If the Company was to experience a bankruptcy, there is no guarantee that U.S. federal bankruptcy protections would be available to its United States operations, which could have a material adverse effect on the business, capital, financial condition and prospects and on the rights of its lenders and securityholders.

The Company’s emerging growth company status allows it certain exemptions from various reporting requirements.

The Company is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “ JOBS Act ”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. The Company has elected to use this exemption from new or revised accounting standards and, therefore, it will not be subject to the same new or revised accounting standards as other public companies.

For as long as it continues to be an emerging growth company, the Company intends to take advantage of certain other exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in the periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. The Company cannot predict if investors will find the Subordinate Voting Shares less attractive because it will rely on these exemptions. If some investors find the Subordinate Voting Shares less attractive as a result, then there may be a less active trading market for the Subordinate Voting Shares and the Company’s stock price may be more volatile.

The Company will remain an emerging growth company until the earliest of (i) the last day of the year in which total annual gross revenue is $1.07 billion or more; (ii) the last day of the year following the fifth anniversary of the first sale of the common equity securities pursuant to an effective registration under the Securities Act of 1933, as amended (the “ Securities Act ”), expected to be December 31, 2024; (iii) the date on which the Company has issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which the Company is deemed to be a large accelerated filer under the rules of the SEC.

RISKS RELATED TO MACRO-ECONOMIC CONDITIONS

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

The COVID-19 pandemic has adversely impacted commercial and economic activity and contributed to significant volatility in the equity and debt markets in the U.S. The impact of the outbreak continues to develop and many jurisdictions, including the State of California and local municipalities, have instituted quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues. Individual businesses and industries are also implementing similar precautionary measures. Those measures, as well as the general uncertainty surrounding the dangers and effects of COVID-19, have created significant disruption in supply chains and economic activity. New strains of the virus have been identified originating in the U.S. and elsewhere. These new strains may have different transmission, morbidity and mortality rates than the original virus, and the COVID-19 vaccines developed to date may not be effective to provide immunization against new strains of the virus. While the Company has continuously sought to assess the potential impact of the pandemic on its financial condition and operating results, any assessment is subject to extreme uncertainty as to probability, severity and duration. The continued spread of the virus globally could result in a protracted world-wide economic downturn, the effects of which could last for some period after the pandemic is controlled and/or abated and the business, financial condition, results of operations and cash flows could be materially adversely affected. The impact of COVID-19 could have the effect of heightening many of the other risk factors described herein.

Despite being deemed as an essential retailer in its core markets, the Company experienced a negative impact on sales in certain markets as a result of shelter-at-home orders, social distancing efforts, restrictions on the maximum allowable number of people within a retail establishment, and declining tourism. Revenue for the year ended June 25, 2022 decreased 7% compared to revenue for the year ended June 26, 2021 primarily as a result of these factors. The overall impact of the COVID-19 pandemic affected the Company’s operations for the majority of the current fiscal year compared to the latter four months of the prior fiscal year. The Company experienced decreased sales in certain locations within California due to reduced foot traffic as a result of business and occupancy restrictions and a slowdown in tourism, resulting in retail revenue in California for the year ended June 25, 2022 to decrease $21.6 million compared to the year ended June 26, 2021.

The Company has implemented certain safety measures to ensure the safety of its customers and associates, which may have the effect of discouraging shopping or limiting the occupancy of its stores. For the majority of the fiscal year ended June 26, 2021, the Company maintained modified store operations based on Centers for Disease Control and Prevention guidelines and local ordinances which limit in-store traffic for certain locations and consequently increased focus on direct-to-consumer delivery, including curbside pickup. These measures, and any additional measures that have been and may continue to be taken in response to the COVID-19 pandemic, have substantially decreased, and may continue to decrease, the number of customers that visit MedMen stores which has had, and will likely continue to have, a material adverse effect on the business, financial condition and results of operations.

The COVID-19 pandemic has continued to increase economic uncertainty and has led to disruption and volatility in the global capital markets, which could increase the cost of and accessibility to capital. Given that the COVID-19 pandemic has caused a significant economic slowdown, it appears increasingly likely that it could cause a global recession, which could be of an unknown duration. A global recession would have a significant impact on ongoing operations and cash flows. There has been a recent spike in the number of reported COVID-19 cases, including new variant and strains, in many states where a substantial portion of the Company’s business and operations are located.

The Company is unable to currently quantify the economic effect, if any, of this increase on the Company’s results of operations.

The ultimate magnitude of COVID-19, including the extent of its overall impact on the financial and operational results cannot be reasonably estimated at this time; however, the Company has experienced declines in sales. The overall impact will depend on the length of time that the pandemic continues, the extent to which it affects the ability to raise capital, and the effect of governmental regulations imposed in response to the pandemic, as well as uncertainty regarding all of the foregoing.

The Company’s operations and financial condition could be adversely impacted by a material downturn or recession in global financial conditions.

Global and U.S. financial conditions have historically experienced extreme volatility. Economic shocks may be precipitated by a number of causes, including a rise in the price of oil, geopolitical instability and natural disasters. U.S. GDP growth has been reported as negative for the last two completed calendar quarters in 2022, which has traditionally been interpreted to signal a recession for the U.S. economy. Therefore, recessionary risks are more pronounced in the current economic environment. Any sudden or rapid destabilization of global or U.S. economic conditions could impact the ability to obtain equity or debt financing in the future on terms favorable to the Company. Additionally, any such occurrence could cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. Further, in such an event, the operations and financial condition could be adversely impacted.

Furthermore, general market, political and economic conditions, including, for example, inflation, interest and currency exchange rates, structural changes in the cannabis industry, supply and demand for commodities, political developments, legislative or regulatory changes, social or labor unrest and stock market trends will affect the operating environment and its operating costs and profit margins and the price of its securities. Any negative events in the global economy could have a material adverse effect on the business, financial condition, results of operations or prospects.

RISKS RELATED TO FINANCIAL AND BUSINESS MATTERS

The historical audited financial statements were prepared on a going concern basis.

The audited financial statements for the fiscal year ended June 25, 2022 and June 26, 2021were prepared on a going concern basis under which an entity is considered to be able to realize its assets and satisfy its liabilities in the ordinary course of business. Generally, the primary sources of capital resources are comprised of cash and cash equivalents and the issuance of equity and debt securities. The Company continuously monitors its capital structure and, based on changes in operations and economic conditions, may adjust the structure by issuing new shares or new debt as necessary. Management does not believe that current cash on hand will be sufficient to fund projected operating requirements. This raises substantial doubt about the Company’s ability to continue as a going concern. In addition, the report of the independent registered public accounting firm in the audited financial statements for each of the two years ended June 25, 2022 and June 26, 2021 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. The ability to continue to implement the Company’s business strategy is dependent on obtaining additional financing, the ability to successfully settle liabilities and achieving and maintaining profitable operations. While the Company has been successful in securing both equity and debt financing from the public and private capital markets to date \in Canada, the United States and internationally, there are no guarantees that the Company will be able to continue to secure any such public or private equity or debt financing in the future on terms acceptable to the Company, if at all, or be able to achieve profitability. This going concern opinion could materially limit the ability to raise additional funds through the issuance of equity or debt securities or otherwise. If the Company cannot continue as a going concern, investors may lose their entire investment in the Company’s securities. Until the Company can generate significant cash flows, management expects to satisfy future cash needs through debt or equity financing; however, there can be no assurance that such capital will be available, or if available, that it will be on terms acceptable to the Company.

The Company has previously experienced negative cash flow from operating activities.

The Company does not have a history of profitability. The Company has previously experienced negative cash flow from operating activities and cannot provide assurance that it will achieve sufficient revenues to maintain profitability or positive cash flow from operating activities. The inability to maintain profitability or positive cash flow from operating activities could have a material adverse effect on the business, financial condition and results of operations. As such, the Company has immediate prospect of generating profit from its intended operations. The Company is therefore subject to many of the risks common to high growth enterprises, including under-capitalization, cash shortages, limitations with respect to personnel, financial, and other resources and lack of earnings. In addition, the Company is currently incurring expenditures related to its operating activities that have generated negative operating cash flows. The Company cannot provide any assurance that it will generate sufficient revenues in the near future, and it may continue to incur negative operating cash flows for the foreseeable future. The Company cannot provide assurance that we will be successful in achieving a return on shareholders’ investment.

The Company will require additional financing to achieve its business objectives.

The continued development of the business will require additional financing. There is no guarantee that the Company will be able to achieve its business objectives. The Company intends to fund its business objectives by way of additional offerings of equity and/or debt financing. The failure to raise or procure such additional funds could result in the delay or indefinite postponement of the current business objectives. The Company cannot provide any assurance that additional capital or other types of financing will be available if needed or that, if available, will be on terms acceptable to us. If additional funds are raised by offering equity securities or convertible debt, existing shareholders could suffer significant dilution. Any debt financing secured in the future could involve the granting of security against the assets and also contain restrictive covenants relating to capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Although the Company is in discussions with lenders to amend its secured term loan, the Company currently remains in default with respect to the repayment of $97.8 million payable under the secured term loan that matured on July 31, 2022. The Company has completed the sale and leaseback of certain properties, as well as the sale of properties in Florida. The reduction in real estate assets could cause securing any additional debt financing to be more difficult or on less favorable terms to us, such as on higher interest rates, than as otherwise may have been expected. The Company will require additional financing to fund its operations until positive cash flow is achieved. Although management believes that we will be able to obtain the necessary funding as in the past, there can be no assurance of the success of these plans.

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

The Company has significant outstanding indebtedness further to which its assets and assets of its subsidiaries as well as the ownership interests of certain of its subsidiaries, have been pledged as security for the obligations thereunder. In addition, the terms and conditions of the credit facilities contain restrictive covenants that limit the ability to engage in activities that may be in the Company’s long-term best interest. In addition, the terms and conditions thereof contain financial, operational and reporting covenants, and compliance with the covenants by the Company may increase legal and financial costs, make certain activities, such as the payment of dividends or other distributions, more difficult or restricted, time-consuming or costly and increase demand on systems and resources. The failure to comply with any such covenants, which may be affected by events beyond the Company’s control, could result in an event of default which, if not cured or waived, could result in the acceleration of repayment of its debt or realization on the security granted or trigger cross-default or cross-acceleration provisions in any other agreements, including as between agreements pertaining to the existing credit facilities, any of which would have a material adverse effect on the business, capital, financial condition, results of operations, cash flows and prospects.

The Company has incurred substantial indebtedness and may not be able to refinance, extend or repay this indebtedness on a timely basis or at all.

The Company has a substantial amount of existing indebtedness. If it is unable to raise sufficient capital to repay these obligations at maturity and are otherwise unable to extend the maturity dates or refinance these obligations, the Company would be in default. The Company cannot provide any assurances that we will be able to raise the necessary amount of capital to repay these obligations, that any obligations that are convertible will be converted into equity or that the Company will be able to extend the maturity dates or otherwise refinance these obligations. As of June 25, 2022, the Company is in violation of minimum liquidity covenant of its term loans that require the Company to maintain $15.0 million of minimum cash. On July 31, 2022, the term loans of $97.8 million became due and the Company was unable to meet this financial obligation and pay the lender, which constitutes an event of default. The moneys owed under the Lender and Landlord Support Agreement which allowed us to defer $22.0 million of rent payment over three years beginning in 2020, will come due in July 2023. Upon a default, the lenders under such debt would have the right to exercise their rights and remedies to collect, which would include the ability to foreclose on the Company’s assets. Accordingly, a default by us that is not waived would have a material adverse effect on the business, capital, financial condition and prospects, and the Company would likely be forced to seek bankruptcy protection.

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

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.

In the course of preparing the financial statements for fiscal year 2022, management identified a material weakness determining that the Company’s financial record keeping process is deficient and that it does not have effective controls over the period-end reconciliation process. The Company plans to implement measures designed to improve our internal control over financial reporting to remediate material weakness, by standardizing the monthly reconciliation process for material accounts and balances with formalized procedures and accountability by process owners. The material weakness in the Company’s internal control over financial reporting will not be considered remediated until the remediated controls operate for a sufficient period of time and management has concluded that these controls are operating effectively.

If management is unable to further implement and maintain effective internal control over financial reporting or disclosure controls and procedures, the Company’s ability to record, process and report financial information accurately, and to prepare financial statements within required time periods could be adversely affected, which could subject it to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in the financial statements and adversely impact the stock price. If the Company is unable to assert that its internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of the financial reports, the market price of the shares could be adversely affected and the Company could become subject to litigation or investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

Furthermore, the Company cannot assure you that the measures it has taken to date, and actions it may take in the future, will be sufficient to remediate the control deficiencies that led to the material weakness in its internal control over financial reporting or that they will prevent or avoid potential future material weaknesses. The current controls and any new controls that management develops may become inadequate because of changes in conditions in the business. Further, weaknesses in the disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm the Company’s operating results or cause the Company to fail to meet its reporting obligations and may result in a restatement of the financial statements for prior periods.

MedMen is a holding company and essentially all of its assets are the capital stock of its material subsidiaries.

MedMen is a holding company and essentially all of its assets are the capital stock of its material subsidiaries. As a result, investors in MedMen are subject to the risks attributable to its subsidiaries. Consequently, the cash flows and ability to complete current or desirable future opportunities are dependent on the earnings of the Company’s subsidiaries. The ability of these entities to pay dividends and other distributions will depend on their operating results and will be subject to applicable laws and regulations which require that solvency and capital standards be maintained by such entities and contractual restrictions contained in the instruments governing their debt. In the event of a bankruptcy, liquidation or reorganization of any of its material subsidiaries, holders of indebtedness and trade creditors may be entitled to payment of their claims from the assets of those subsidiaries before MedMen.

Adverse publicity reports or other media attention regarding the safety, efficacy and quality of marijuana in general, or associating the consumption of adult-use and medical marijuana with illness or other negative effects or events, could have such a material adverse effect on the results of operations.

The Company believes the adult-use and medical marijuana industries are highly dependent upon consumer perception regarding the safety, efficacy and quality of the marijuana produced. Consumer perception can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of marijuana products. There can be no assurance that future scientific research or findings, regulatory investigations, litigation, media attention or other publicity will be favorable to the marijuana market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory investigations, litigation, media attention or other publicity that are perceived as less favorable than, or that question, earlier research reports, findings or other publicity could have a material adverse effect on the demand for adult- use or medical marijuana and on the business, results of operations, financial condition, cash flows or prospects. Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of marijuana in general, or associating the consumption of adult-use and medical marijuana with illness or other negative effects or events, could have such a material adverse effect. There is no assurance that such adverse publicity reports, findings or other media attention will not arise.

The Company may be subject to various product liability claims, including, among others, that the marijuana product caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances.

As a manufacturer and distributor of products designed to be ingested by humans, the Company faces an inherent risk of exposure to product liability claims, regulatory action and litigation if its products are alleged to have caused significant loss or injury. In addition, the manufacture and sale of marijuana involve the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of marijuana alone or in combination with other medications or substances could occur. As a manufacturer, distributor and retailer of adult-use and medical marijuana, or in its role as an investor in or service provider to an entity that is a manufacturer, distributor and/or retailer of adult-use or medical marijuana, the Company may be subject to various product liability claims, including, among others, that the marijuana product caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances. A product liability claim or regulatory action against the Company could result in increased costs, could adversely affect its reputation with its clients and consumers generally, and could have a material adverse effect on the business, results of operations, financial condition or prospects. There can be no assurances that the Company will be able to maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of the potential products or otherwise have a material adverse effect on the business, results of operations, financial condition or prospects.

If one of the Company’s brands were subject to product recalls, the image of that brand and MedMen could be harmed.

Cultivators, manufacturers, distributors and retailers of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labeling disclosure. Such recalls cause unexpected expenses of the recall and any legal proceedings that might arise in connection with the recall. This can cause loss of a significant amount of sales. In addition, a product recall may require significant management attention. There can be no assurance that any of the products that the Company sells will not be the subject of a product recall, regulatory action or lawsuit. Although the Company has detailed procedures in place for testing its products, there can be no assurance that any quality, potency or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action or lawsuits. Additionally, if one of the Company’s brands were subject to recall, the image of that brand and MedMen could be harmed. Additionally, product recalls can lead to increased scrutiny of operations by applicable regulatory agencies, requiring further management attention and potential legal fees and other expenses.

The Company is subject to those risks inherent in an agricultural business.

Adult-use and medical marijuana are agricultural products. There are risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Although the products are usually grown indoors under climate-controlled conditions, with conditions monitored, there can be no assurance that natural elements will not have a material adverse effect on the production of its products.

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

The Company’s business is dependent on suppliers and skilled labor.

The ability to compete and grow will be dependent on the Company having access, at a reasonable cost and in a timely manner, to skilled labor, equipment, parts and components. No assurances can be given that the Company will be successful in maintaining its required supply of skilled labor, equipment, parts and components. It is also possible that the final costs of the major equipment contemplated by the Company’s capital expenditure plans may be significantly greater than anticipated by management, and may be greater than funds available to the Company, in which circumstance management may curtail, or extend the timeframes for completing, its capital expenditure plans. This could have an adverse effect on the business, financial condition, results of operations or prospects.

The Company faces intense competition from other companies and increasing legalization of cannabis and rapid growth and consolidation in the cannabis industry may further intensify competition.

The cannabis industry is undergoing rapid growth and substantial change, and the legal landscape for medical and recreational cannabis is rapidly changing internationally. An increasing number of jurisdictions globally are passing legislation allowing for the production and distribution of medical and/or recreational cannabis in some form or another. Entry into the cannabis market by international competitors might lower the demand for the Company’s products.

The foregoing legalization and growth trends in the cannabis industry has resulted in an increase in competitors, consolidation and formation of strategic relationships. Such acquisitions or other consolidating transactions could harm us in a number of ways, including by losing strategic partners if they are acquired by or enter into relationships with a competitor, losing customers, revenue and market share, or forcing us to expend greater resources to meet new or additional competitive threats, all of which could harm operating results. As competitors enter the market and become increasingly sophisticated, competition in the cannabis industry may intensify and place downward pressure on retail prices for products and services, which could negatively impact profitability.

The Company also faces intense competition from other companies, some of which have longer operating histories and more financial resources and experience than MedMen. The Company also expects to face additional competition from new entrants. To become and remain competitive, the Company will require research and development, marketing, sales and support. The Company may not have sufficient resources to maintain research and development, marketing, sales and support efforts on a competitive basis which could materially and adversely affect the business, financial condition, results of operations or prospects. Increased competition could materially and adversely affect the business, financial condition, results of operations or prospects.

In addition, the pharmaceutical industry may attempt to dominate the marijuana industry through the development and distribution of synthetic products which emulate the effects and treatment of organic marijuana. If they are successful, the widespread popularity of such synthetic products could change the demand, volume and profitability of the marijuana industry. This could adversely affect the ability to secure long-term profitability and success through the sustainable and profitable operation of the business. There may be unknown additional regulatory fees and taxes that may be assessed in the future.

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

The Company is exposed to the risk that its employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent unauthorized conduct that violates: (i) government regulations; (ii) manufacturing standards; (iii) federal and provincial healthcare fraud and abuse laws and regulations; (iv) laws that require the true, complete and accurate reporting of financial information or data; or (v) contractual arrangements, including confidentiality requirements. It may not always be possible for us to identify and deter misconduct by its employees and other third parties, and the precautions the Company takes to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with applicable laws or regulations or contractual requirements. If any such actions are instituted against us, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on the business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of its operations, any of which could have a material adverse effect on the business, financial condition, results of operations or prospects.

Certain remedies may be limited.

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

Future material acquisitions or dispositions or strategic transactions.

Material acquisitions, dispositions and other strategic transactions involve a number of risks, including: (i) potential disruption of the ongoing business, (ii) distraction of management, (iii) the Company may become more financially leveraged, (iv) the anticipated benefits and cost savings of those transactions may not be realized fully or at all or may take longer to realize than expected, (v) increasing the scope and complexity the our operations, and (vi) loss or reduction of control over certain of assets. Additionally, the Company may issue additional equity interests in connection with such transactions, which would dilute a shareholder’s holdings in the Company.

Risks associated with pending transactions.

Pending transactions are subject to certain conditions, many of which are outside of the Company’s control and there can be no assurance that they will be completed, on a timely basis or at all. As a consequence, there is a risk that a proposed transaction will not close in a timely fashion or at all. In January 2022, the Company announced the termination of the investment agreement with Ascend Wellness Holdings, Inc. to sell a controlling interest in the Company’s operations in the state of New York. Subsequently, Ascend filed a complaint against the Company seeking specific performance of the investment agreement. Although the parties signed a non-binding term sheet to settle the lawsuit and move forward on the transaction, in August 2022, Ascend announced that it cancelled the transaction. If one or more proposed transactions is not completed for any reason, the ongoing business may be adversely affected and, without realizing any of the benefits of having completed such transactions, the Company will be subject to a number of risks, including, without limitation, (i) the Company may experience negative reactions from the financial markets, including negative impacts on its stock price, (ii) in the case of a proposed acquisition, the Company may need to find an alternative use for any capital earmarked for such proposed acquisitions, (iii) in the case of a proposed disposition, the Company will not receive the anticipated proceeds of such disposition and accordingly may not be able to execute on other business opportunities for which such proceeds have been earmarked, and (iv) matters relating to proposed transactions will require substantial commitments of time and resources by management which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to the Company.

If the Company is unable to attract and maintain qualified management and personnel, the business may be harmed.

To succeed, the Company must be able to attract and retain highly motivated and qualified management and personnel. Competition for skilled employees is intense and, if the Company is unable to attract and retain the personnel needed, the business may suffer. During recent years, the Company relied on SCP to provide executive officer and management support services and have had three Chief Executive Officers. In addition, several executive officers have resigned during the past year. A lack of continuity of management and personnel may make it difficult to implement the Company’s business strategy and turnaround and growth plan. Further, an inability to hire and retain highly qualified management and personnel could have a material adverse effect on the business, financial condition and results of operations.

RISKS RELATED TO INTELLECTUAL PROPERTY AND INFORMATION TECHNOLOGY

The Company may have limited intellectual property protection.

The Company possesses certain proprietary intellectual property, including but not limited to brands, trademarks, trade names, patents and proprietary processes. The Company relies on this intellectual property, know-how and other proprietary information, and require employees, consultants and suppliers to sign confidentiality agreements. However, these confidentiality agreements may be breached, and the Company may not have adequate remedies for such breaches. Third parties may independently develop substantially equivalent proprietary information without infringing upon any proprietary technology. Third parties may otherwise gain access to proprietary information and adopt it in a competitive manner. Any loss of intellectual property protection may have a material adverse effect on the business, results of operations or prospects.

As long as cannabis remains illegal under U.S. federal law as a Schedule I controlled substance pursuant to the CSA, the benefit of certain federal laws and protections which may be available to most businesses, such as federal trademark and patent protection regarding the intellectual property of a business, may not be available to MedMen. As a result, intellectual property may never be adequately or sufficiently protected against the use or misappropriation by third parties. In addition, since the regulatory framework of the cannabis industry is in a constant state of flux, the Company cannot provide assurance that it will ever obtain any protection of its intellectual property, whether on a federal, provincial, state or local level. While many states do offer the ability to protect trademarks independent of the federal government, patent protection is wholly unavailable on a state level, and state-registered trademarks provide a lower degree of protection than would federally-registered trademarks.

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

The Company’s operations depend, in part, on how well MedMen and its suppliers protect networks, equipment, information technology (“ IT ”) systems and software against damage from a number of threats, including, but not limited to, cable cuts, damage to physical plants, natural disasters, intentional damage and destruction, fire, power loss, hacking, computer viruses, vandalism and theft. The operations also depend on the timely maintenance, upgrade and replacement of networks, equipment, IT systems and software, as well as pre-emptive expenses to mitigate the risks of failures. Any of these and other events could result in information system failures, delays and/or increase in capital expenses. The failure of information systems or a component of information systems could, depending on the nature of any such failure, adversely impact the Company’s reputation and results of operations.

The Company has not experienced any material losses to date relating to cyber-attacks or other information security breaches, but there can be no assurance that the Company will not incur such losses in the future. The risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of controls, processes and practices designed to protect systems, computers, software, data and networks from attack, damage or unauthorized access is a priority. As cyber threats continue to evolve, the Company may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.

In addition, the Company collects and stores personal information about its customers and are responsible for protecting that information from privacy breaches. A privacy breach may occur through procedural or process failure, information technology malfunction, or deliberate unauthorized intrusions. Theft of data for competitive purposes, particularly customer lists and preferences, is an ongoing risk whether perpetrated via employee collusion or negligence or through deliberate cyber-attack. Any such theft or privacy breach would have a material adverse effect on the business, financial condition, results of operations and prospects.

ADDITIONAL RISKS RELATED TO LEGAL AND REGULATORY MATTERS

The Company has been and may in the future be subject to investigations, civil claims, lawsuits and other proceedings .

The Company may be subject to investigations (regulatory or otherwise), civil claims, lawsuits and other proceedings in the ordinary course of its business, across the various aspects of the business, including securities, employment, regulatory, intellectual property, commercial, real estate and other matters. The results of any legal proceedings to the which the Company is or may become subject cannot be predicted with certainty due to the uncertainty inherent in regulatory actions and litigation, the difficulty of predicting decisions of regulators, judges and juries and the possibility that decisions may be reversed on appeal. Defense and settlement costs of legal disputes can be substantial, even with claims that have no merit. There can be no assurance that any pending or future litigation, regulatory, agency or civil proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources.

The cannabis industry is a new industry, and MedMen is a fast growing and relatively new enterprise. It is therefore more difficult to predict the types of claims, proceedings and allegations and the quantum of costs related to such claims and proceedings and the direct and indirect effects of such allegations that the Company may face or experience. Management is committed to conducting business in an ethical and responsible manner, which the Company believes will reduce the risk of legal disputes and allegations. However, if the Company is subject to legal disputes or negative allegations, there can be no assurances that these matters will not have a material adverse effect on the business, financial condition, capital, results of operations, cash flows or prospects. Should any litigation, proceeding or audit in which the Company becomes involved be determined against it, such a decision could adversely affect the business, financial condition, capital, results of operations, cash flows or prospects and the market price for the Subordinate Voting Shares and other listed securities of the Company. Any such litigation, proceeding or audit may also create a negative perception of the brand.

United States Tax Classification of the Company.

The Company, which is a Canadian corporation, would be classified as a non-United States corporation under general rules of United States federal income taxation. Section 7874 of the Code, however, contains rules that can cause a non-United States corporation to be treated as a United States corporation for United States federal income tax purposes.

The Company intends to be treated as a United States corporation for United States federal income tax purposes under section 7874 of the Code and expect to be subject to United States federal income tax on its worldwide income. However, for Canadian tax purposes, the Company will be treated as a Canadian corporation (as defined in the Tax Act) for Canadian income tax purposes regardless of any application of section 7874 of the Code. As a result, the Company can be subject to taxation both in Canada and the United States which could have a material adverse effect on the financial condition and results of operations.

RISKS ASSOCIATED WITH THE SECURITIES OF THE COMPANY

Heightened scrutiny by securities regulatory authorities in the United States and Canada may impact investors’ ability to transact in the Company’s securities.

The Company’s operations in the United States cannabis market may become the subject of heightened scrutiny by regulators, stock exchanges, clearing agencies and other authorities in Canada. It has been reported by certain publications in Canada that the Canadian Depository for Securities Limited is considering a policy shift that would see its subsidiary, CDS Clearing and Depository Services Inc. (“ CDS ”), refuse to settle trades for cannabis issuers that have investments in the United States. CDS is Canada’s central securities depository, clearing and settlement hub settling trades in the Canadian equity, fixed income and money markets. CDS or its parent company has not issued any public statement with regard to these reports. On February 8, 2018, following discussions with the Canadian Securities Administrators and recognized Canadian securities exchanges, CDS signed the CDS Memorandum of Understanding (“ MOU ”) with The Aequitas NEO Exchange Inc., the CSE, the Toronto Stock Exchange, and the TSX Venture Exchange. The MOU outlines the parties’ understanding of Canada’s regulatory framework applicable to the rules and procedures and regulatory oversight of the exchanges and CDS as it relates to issuers with cannabis-related activities in the United States. The MOU confirms, with respect to the clearing of listed securities, that CDS relies on the exchanges to review the conduct of listed issuers. As a result, there currently is no CDS ban on the clearing of securities of issuers with cannabis -related activities in the United States. However, if CDS were to proceed in the manner suggested by these publications, and apply such a ban on the clearing of securities of the Company, it would have a material adverse effect on the ability of the Company’s shareholders to effect trades of shares through the facilities of a stock exchange in Canada, as a result of which such shares could become highly illiquid.

The Depositary Trust Company (“ DTC ”) is the primary depository for securities in the United States. Several major U.S. securities clearing companies that provide clearance, custody and settlement services in the United States terminated providing clearance services to issuers in the cannabis industry, including those that operate entirely outside the United States, in response to the Sessions Memo. As a result of these decisions, U.S. securityholders may experience difficulties depositing securities of cannabis companies in the DTC system or reselling their securities in open market transactions, including transactions facilitated through the CSE. Many larger U.S. broker-dealers own U.S. securities companies that self-clear transactions. However, some U.S. brokerages have adopted policies precluding their clients from trading securities of cannabis issuers.

Potential voting control and representation on the Company’s Board of Directors by significant shareholders may limit your ability to influence the outcome of director elections and other matters requiring shareholder approval.

On August 17, 2021, in connection with the Company’s Fourth Amended and Restated Securities Purchase Agreement (the “ Fourth Restatement ”), Superhero Acquisition, L.P. (“ Superhero LP ”), acquired from certain funds associated with Gotham Green Partners, LLC (“ GGP ”) an aggregate principal amount of approximately $165.8 million of the convertible notes and 135,266,664 warrants issued under the Convertible Facility. The general partner of Superhero LP is Superhero Acquisition Corp (“ Superhero GP ”). Tilray, Inc., a public company with Class 2 common stock listed on the Nasdaq Global Select Market, owns approximately two-thirds of the outstanding equity interests in Superhero GP and MOS Holdings Inc. (“ MOS ”), which is solely owned by Michael Serruya, holds approximately one-third of the outstanding equity interests in Superhero GP. Accordingly, for purposes of Rule 13d-3 under the Exchange Act of 1934, as amended (the “ Exchange Act ”), Tilray and MOS may be deemed the beneficial owners with respect to the securities held of record by Superhero LP and have shared voting and investment power with respect to such securities. As a result of the transfer of the notes and warrants from GGP to Superhero LP, Superhero LP, Superhero GP, Tilray and MOS, as of August 31, 2022, each beneficially owns approximately 43.8% of the Company’s Class B Subordinate Voting Shares and GGP beneficially owns for purposes of Rule 13d-3 under the Exchange Act approximately 19.1% of the Class B Subordinated Voting Shares, in each case assuming conversion of their respective notes and warrants. Tilray also owns an 68% interest as a limited partner in Superhero LP and S5 Holdings Inc. (“ S5 Holdings ”), which is owned by Michael Serruya, has an 8% interest as a limited partner in Superhero LP. Together with additional securities held directly by S5 Holdings, Michael Serruya beneficially owns approximately 44.8% of the Class B Subordinated Voting Shares. For further information about beneficial ownership of the Company’s securities, refer to Item 12. “ Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters .”

In connection with Fourth Restatement, the Company also entered into a Board Nomination Rights Agreement with S5 Holdings pursuant to which so long as S5 Holdings’ and its affiliates’ diluted ownership percentage of MedMen (including the proportionate equity ownership of securities held by Superhero LP) is at least 9%, S5 Holdings will be entitled to designate one individual to be nominated to serve as a director of the Company. S5 Holdings has initially designated Michael Serruya. The Company also entered into a Board Nomination Rights Agreement with GGP pursuant to which so long as GGP and certain associated investors’ diluted ownership percentage of MedMen is at least 10%, GGP will be entitled to designate one individual to be nominated to serve as a director of the Company. GGP has not yet designated a director. The Company also granted Tilray the right to appoint two non-voting observers to the Company’s board of directors.

This concentration of control, to the extent outstanding notes and warrants are converted and exercised, may adversely affect the trading price for the Class B Subordinate Voting Shares because investors often perceive disadvantages in owning stock in companies with potential controlling shareholders. Also, some or all of the Company’s significant shareholders, if they were to convert their notes and exercise their warrants and act together, would be able to control management and affairs and matters requiring shareholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of the Company’s assets. In addition, the interests of these shareholders may not align with the interests as a company or the interests of other shareholders. Accordingly, if these shareholders were to convert their notes and exercise the warrants, and subject to approval by the Board and requirements, if any, to obtain approval of a majority of the minority shareholders, they could cause us to enter into transactions or agreements of which the Company’s shareholders would not approve or make decisions with which shareholders would disagree. This concentration of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change of control would benefit other shareholders and may prevent shareholders from realizing a premium over the current market price for their shares. Furthermore, significant shareholders may also have interests that differ from yours and may vote their Class B Subordinate Voting Shares in a way with which you disagree and which may be adverse to your interests.

The Company’s capital structure may cause unpredictability.

Given the other unique features of the capital structure, including the existence of a significant amount of redeemable equity securities that have been issued by, and are issuable pursuant to the exercise, conversion or exchange of the applicable convertible securities of, certain subsidiaries of MedMen, such subsidiaries being MedMen Corp. and the LLC, which equity securities are redeemable from time to time for Subordinate Voting Shares or cash, in accordance with their terms, the Company is not able to predict whether this structure and control will result in a lower trading price for or greater fluctuations in the trading price of the Subordinate Voting Shares or will result in adverse publicity to MedMen or other adverse consequences.

Future sales of Subordinate Voting Shares in the public market, or the perception that such sales may occur, could adversely affect the prevailing market price of the Subordinate Voting Shares.

The Company may issue additional securities in the future, which may dilute shareholder’s holdings in MedMen. The articles permit the issuance of an unlimited number of Subordinate Voting Shares, and shareholders will have no preemptive rights in connection with such further issuance. The MedMen Board has discretion to determine the price and the terms of further issuances. Moreover, additional Subordinate Voting Shares will be issued by MedMen on the exercise, conversion or redemption of certain outstanding securities of MedMen, MedMen Corp. and the LLC in accordance with their terms. While the Company currently does not have any pending acquisitions, it may also issue Subordinate Voting Shares to finance future acquisitions. The Company cannot predict the size of future issuances of Subordinate Voting Shares or the effect that future issuances and sales of Subordinate Voting Shares will have on the market price of the Subordinate Voting Shares. Issuances of a substantial number of additional Subordinate Voting Shares, or the perception that such issuances could occur, may adversely affect prevailing market prices for the Subordinate Voting Shares. With any additional issuance of Subordinate Voting Shares, investors will suffer dilution to their voting power and the Company may experience dilution in its revenue per share.

Additionally, the subsidiaries of MedMen, such as MedMen Corp. and the LLC, may issue additional securities that may be redeemed into Subordinate Voting Shares of MedMen, including MedMen Corp Redeemable Shares, LLC Redeemable Units and LTIP Units to new or existing shareholders, members or securityholders, including in exchange for services performed or to be performed on behalf of such entities or to finance future acquisitions. Any such issuances could result in substantial dilution to the indirect equity interest of the holders of Subordinate Voting Shares.

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

The market price of the Subordinate Voting Shares has been or may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond the Company’s control. This volatility may affect the ability of holders of Subordinate Voting Shares or such other securities to sell their securities at an advantageous price. Market price fluctuations in the Subordinate Voting Shares or such other securities may be due to the operating results failing to meet expectations of securities analysts or investors in any period, downward revision in securities analysts’ estimates, adverse changes in general market conditions or competitive, regulatory or economic trends, adverse changes in the economic performance or market valuations of companies in the industry in which it operates, acquisitions, dispositions, strategic partnerships, joint ventures, capital commitments or other material public announcements by us or competitors or government and regulatory authorities, operating and share price performance of the companies that investors deem comparable to us, addition or departure of executive officers, directors and other key personnel, along with a variety of additional factors. These broad market fluctuations may adversely affect the market price of the Subordinate Voting Shares or such other securities.

Financial markets have at times historically experienced significant price and volume fluctuations that have particularly affected the market prices of equity and convertible securities of companies and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Subordinate Voting Shares and other listed securities of MedMen from time to time may decline even if the operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue or arise, the Company’s operations may be adversely impacted and the trading price of the Subordinate Voting Shares and such other securities may be materially adversely affected.

ITEM 7.

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

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and the accompanying notes presented in Item 8 of this Form 10-K. Except for historical information, the discussion in this section contains forward-looking statements that involve risks and uncertainties. Future results could differ materially from those discussed below for many reasons, including the risks described in “Disclosure Regarding Forward-Looking Statements,” “Item 1A—Risk Factors” and elsewhere in this Form 10-K.

We are a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act. Accordingly, we have omitted certain information called for by this Item 7 as permitted by applicable scaled disclosure rules.

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

The Company’s fiscal year is a 52/53-week year ending on the last Saturday in June. For the current reporting period, the fiscal quarter ended June 25, 2022 and June 26, 2021 refer to the 13 weeks ended therein and the fiscal years ended June 25, 2022 and June 26, 2021 refer to the 52 weeks ended therein.

Company Overview

MedMen is a cannabis retailer based in the U.S. offering a robust selection of high-quality products, including MedMen-owned brands, LuxLyte, and MedMen Red through its premium retail stores, proprietary delivery service, as well as curbside and in-store pick up. As of June 25, 2022, the Company operates 30 store locations across California (13), Florida (7), New York (4) Nevada (3), Illinois (1), Massachusetts (1) and Arizona (1).

Selected Financial Data

The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“ MD&A ”) and the Consolidated Financial Statements and the accompanying notes presented in Item 8 of this Form 10-K. The Company’s Consolidated Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“ GAAP ”) and on a going concern basis that contemplates continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business. The following table sets forth the Company’s selected consolidated financial data for the periods, and as of the dates, indicated:

Three Months Ended

Year Ended

June 25,

June 26,

June 25,

June 26,

($ in Millions)

Revenue

Gross Profit

Loss from Operations

Total Other Expense

Net Loss from Continuing Operations

Net Loss from Discontinued Operations, Net of Taxes

Net Loss

Net Loss Attributable to Non-Controlling Interest

Net Loss Attributable to Shareholders of MedMen Enterprises Inc.

Adjusted Gross Profit (Non-GAAP)

Adjusted Net Loss from Continuing Operations (Non-GAAP)

EBITDA from Continuing Operations (Non-GAAP)

Adjusted EBITDA from Continuing Operations (Non-GAAP)

Fiscal Year 2022 Highlights

New Retail Locations

On December 21, 2021, we announced the opening of our newest store location in Boston’s famed Fenway Park area. MedMen Fenway marks the Company’s entry into Massachusetts’ booming adult-use market. Fenway’s asset group cash flows have not performed as the-then management team expected. We will continue to monitor the performance of this store.

On March 7, 2022, we announced the opening of our newest store location on Union Street in San Francisco’s Cow Hollow neighborhood. MedMen Union Street marks the Company’s inaugural partnership with equity-licensed partner Mirage Medicinal, led by Malcolm Joshua Weitz. Weitz, a Mission District native and founder of Mirage Medicinal, will serve as CEO and part owner of the MedMen Union Street location.

In June 2022, we restructured the lease arrangements in two of our locations in California. The changes resulted in immaterial changes in the amortization of our ROU but is anticipated to generate $1,063,000 in lower cash rents over the term of the leases.

On July 31, 2022, we vacated our corporate headquarters office in Culver City, California and are currently in transition to relocating to satellite offices located adjacent to our retail stores. We anticipate completing our relocation during the fiscal first quarter of 2023.

Changes to Existing Facilities

During the fiscal second quarter of 2022, the Company effectuated four contractual agreements (collectively, the “ Management Agreement ”) with American Family of Brands, LLC (“AFB”), an unrelated third party, and no longer has a controlling financial interest in previously consolidated entities, Manlin DHS Development, LLC (“ DHS ”) and Project Mustang Development, LLC (“ Mustang ”), its cultivation facilities in California and Nevada, respectively, therefore these entities are no longer included in the Company’s financial statements. The deconsolidation did not have a material impact on the Company’s Financial Statements. As of June 25, 2022, activity and sales to MedMen of its private label branded products from its third party have been minimal as the operations of the Cultivation Facilities ramp up under the new operators. On September 30, 2021, the landlord of the California and Nevada Cultivation Facilities approved the third party to operate the leased facilities which effectuated the Management Agreement. The Management Agreement provides the third party an option to acquire all the assets used in the Cultivation Facilities, including the cannabis licenses and equipment, for $1.00 (the “ Purchase Option ”). The fee for the services under the Management Agreement is 100% and 30% of the California and Nevada Cultivation Facilities net revenue, respectively. The term of the Management Agreement remains in effect until the earlier of (a) the closing of any sale pursuant to the Purchase Option and (b) the expiration of the term, as applicable, of the master lease, at which time this Management Agreement shall automatically terminate without any further action of the parties. As of June 25, 2022, the Management Agreement remains in effect as neither termination condition has occurred, and the related cannabis licenses continue to be in our name.

On March 11, 2022, we completed the closure of our distribution facility in Los Angeles, California (“ Porter ”) as part of our strategic focus to reduce overhead costs and shift toward an asset-light operating model. Inventory purchases for cannabis products sold in our California stores are now drop-shipped directly by our suppliers to our stores.

Continued Strategic Partnership with Gotham Green Partners and Superhero

On April 23, 2019, the Company secured a senior secured convertible credit facility (the “ Convertible Facility ”) to provide up to $250,000,000 in gross proceeds, arranged by Gotham Green Partners (“ GGP ”). The Convertible Facility has been accessed to date through issuances to the lenders of convertible senior secured notes (“ Facility Notes ”) co-issued by the Company and MM Can USA, Inc. (“ MM CAN ” or “ MedMen Corp .”). Refer to “ Note 17 – Senior Secured Convertible Credit Facility ” of the Consolidated Financial Statements in Item 8 for further information. As of June 25, 2022, the Company has drawn down a total of $165,000,000 on the Convertible Facility, has accrued paid-in-kind interest of $72,000,000 and cannot draw more.

On August 17, 2021, the Company announced that Tilray, Inc. (“ Tilray ”) acquired a majority of the outstanding Facility Notes. Under the terms of the transaction, a newly formed limited partnership (the “ SPV ”) established by Tilray and other strategic investors acquired an aggregate principal amount of approximately $165,800,000 of the Notes and warrants issued in connection with the Convertible Facility, all of which were originally issued by MedMen and held by GGP, representing 75% of the outstanding Facility Notes and 65% of the outstanding warrants under the Convertible Facility. Specifically, Tilray’s interest in the SPV represents rights to 68% of the Facility Notes and related warrants held by Superhero. Tilray’s ability to convert the Facility Notes and exercise the warrants is dependent upon U.S. federal legalization of cannabis or Tilray’s waiver of such requirement as well as any additional regulatory approvals. Tilray also has the right to appoint two non-voting observers of the Company’s Board of Directors.

In connection with the sale of the Facility Notes, the Company amended and restated the Convertible Facility (the “ Sixth Amendment ”) to, among other things, extend the maturity date to August 17, 2028, eliminate any cash interest obligations, and instead provide for payment-in-kind interest, eliminate certain repricing provisions, and eliminate and revise certain restrictive covenants. The amendments are intended to provide MedMen the flexibility to execute on its growth priorities and explore additional strategic opportunities. In connection with the Sixth Amendment, accrued payment-in-kind interest on the Facility Notes will be convertible at price equal to the higher of: (a) trailing 30-day volume weighted average price (“ VWAP ”) of the Company’s Subordinate Voting Shares or (b) the lowest discounted price available pursuant to the pricing policies of the CSE. The Facility Notes may not be prepaid until the federal legalization of marijuana. The Facility Notes, as amended, provide the holders with a top-up right to acquire additional Subordinate Voting Shares and a pre-emptive right with respect to future financings of the Company, subject to certain exceptions, upon the issuance by MedMen of certain equity or equity-linked securities. No changes have been made to the conversion and exercise prices of the Facility Notes or related warrants. In connection with the Sixth Amendment, GGP can nominate an individual to serve on the Company’s Board of Directors so long as GGP’s diluted ownership percentage is at least 10%.

Backstopped Equity Investment

On August 17, 2021, the Company entered into subscription agreements with various investors led by Serruya Private Equity Inc. (“ SPE ”) to purchase $100,000,000 of units (each, a “ Unit ”) of the Company at a purchase price of $0.24 per Unit (the “ Private Placement ”) wherein certain investors associated with SPE agreed to backstop the Private Placement (the “ Backstop Commitment ”). Each Unit consisted of one Class B Subordinate Voting Share and one-quarter share purchase warrant. Each warrant permits the holder to purchase one Subordinate Voting Share at an exercise price of $0.288 per share for a period of five years from the date of issuance. The Company issued a total of 416,666,640 Subordinate Voting Shares and 104,166,660 warrants for gross proceeds of $100,000,000. The proceeds from the Private Placement allowed MedMen to expand its operations in key markets such as California, Illinois and Massachusetts and identify and accelerate further growth opportunities across the United States.

Each Unit issued to certain funds associated with SPE consisted of one Class B Subordinate Voting Share and one-quarter of one share purchase warrant, plus a proportionate interest in a short-term warrant (the “ Short-Term Warrant ”) which expired on December 31, 2021. At the option of the holders and upon payment of $30,000,000, the Short-Term Warrant entitled the holders to acquire (i) an aggregate of 125,000,000 Units at an exercise price of $0.24 per Unit, or (ii) $30,000,000 principal amount of notes at par, convertible into 125,000,000 Subordinate Voting Shares at a conversion price of $0.24 per share under the terms of the Convertible Facility. The Company will use any proceeds, less fees and expenses, from exercise of the Short-Term Warrant to pay down the existing senior secured term loan with Hankey Capital if any indebtedness is then outstanding.

In consideration for the Backstop Commitment, the Company paid a fee of $2,500,000 in the aggregate to such parties in the form of 10,416,666 Class B Subordinate Voting Shares at a deemed price of $0.24 per share. In connection with the equity financing, the Company granted S5 Holding the right to designate one individual to be nominated to serve as a director of the Company so long as S5 Holdings’ and its affiliates’ diluted ownership percentage is at least 9%.

Unsecured Promissory Note

On July 29, 2021, the Company entered into a short-term unsecured promissory note in the amount of $5,000,000 with various investors led by SPE wherein the note bears interest at a rate of 6.0% per annum payable quarterly in arrears with a maturity date of August 18, 2021. On August 17, 2021, the Company settled the promissory note by the issuance of 20,833,333 Units, consisting of 20,833,333 Subordinate Voting Shares and 5,208,333 warrants based on an issue price of $0.24 and the relative portion of the Short-Term Warrant, issued as part of the Private Placement with SPE.

Secured Term Loan Amendments

In October 2018, MedMen Corp. completed a $77,675,000 senior secured term loan (the “ 2018 Term Loan ”) with funds managed by Hankey Capital, LLC and with an affiliate of Stable Road Capital. On July 2, 2020, the 2018 Term Loan was amended wherein the entirety of the interest rate of 15.5% per annum was paid-in-kind effective March 1, 2020 through July 2, 2021. Thereafter through maturity, on January 31, 2022, one-half of the interest ( 7.75% per annum) payable monthly in cash and one-half of the interest (7.75% per annum) paid-in-kind. Refer to “ Note 16 – Notes Payable ” of the Consolidated Financial Statements in Item 8 for further information.

On September 16, 2020, the Company amended the 2018 Term Loan in which the funds available under the facility was increased by $12,000,000 available through incremental term loans (the “ 2020 Term Loan ”), of which $10,705,279 was drawn down as of fiscal year 2021. The 2020 Term Loan accrues interest at 18.0% per annum wherein 12.0% will be paid in cash monthly in arrears and 6.0% per annum accrues monthly as payment-in-kind.

On February 2, 2022, the Company executed an amendment (the “ Sixth Modification ”) in which the maturity date of the 2018 Term Loan and 2020 Term Loan (collectively, the “ Term Loans ”) was extended to July 31, 2022 and August 1, 2022, respectively. The Sixth Modification provides that the definitive documentation with respect to the conditional purchase of the Term Loans by Superhero Acquisition, L.P. must be entered within 45 days or the stated maturity date of the Term Loans become due. An additional 5.0% interest accrues following the maturity date and compounds monthly. The Sixth Modification also requires that the Company make a mandatory prepayment of at least $37,500,000 in the event the sale of certain assets. As a result of the Sixth Modification, the Company prepaid $20,000,000 on the Term Loans in cash and paid a fee of $1,000,000 in Class B Subordinate Voting Shares (“Shares”) with a deemed price of $0.1247 (C$0.1582) for a total of 8,021,593 Class B Subordinate Voting Shares.

Unsecured Convertible Facility

On September 16, 2020, the Company entered into an unsecured convertible debenture facility (the “ Unsecured Convertible Facility ”) for total available proceeds of $10,000,000 callable in tranches of $1,000,000 each. The debentures provided for the automatic conversion into Class B Subordinate Voting Shares in the event that the VWAP is 50% above the conversion price on the CSE for 45 consecutive trading days.

On June 28, 2021, the remaining balance of the Unsecured Convertible Facility of $2,500,000 was automatically converted into 16,014,664 Class B Subordinate Voting Shares in the amount of $2,007,620. In addition, 8,807,605 of the outstanding warrants under the Unsecured Convertible Facility were exercised at varying prices for gross proceeds of $1,622,377. As of June 25, 2022, the Unsecured Convertible Facility has been paid off and there are no outstanding balances.

Landlord Support for Company Turnaround

The Company currently has lease arrangements with affiliates of Treehouse Real Estate Investment Trust (the “ REIT ”), which include 14 retail and cultivation properties across the U.S. On July 3, 2020, the Company announced modifications to its existing lease arrangements with the REIT, in which the REIT agreed to defer a portion of total current monthly base rent for the 36-month period between July 1, 2020 and July 1, 2023. The total amount of all deferred rent accrues interest at 8.6% per annum during the deferral period. As consideration for the rent deferral, the Company issued 3,500,000 warrants to the REIT, each exercisable at $0.34 per share for a period of five years. As part of the agreement, the Company will pursue a partnership with a cannabis cultivation company for the Company’s Desert Hot Springs and Mustang facilities that are leased from the REIT in order to continue the Company’s focus on retail operations. As of June 25, 2022, the deferred rent cost is $24,600,000 and expects the total amount due and payable in a lumpsum on July 1, 2023.

In April 2022, management engaged the restructuring firm of Hilco Real Estate to solicit a permanent reduction of rent costs from other landlords and the REIT, emphasizing stores in which the lease cost is “too high” to sustain. From negotiations completed as of June 25, 2022, we have deferred and additional $360,000 to be due in 2023 and obtained rent reductions from other landlords of approximately $650,000 annually on average and $3,340,000 through the term of the lease or six years. We continue in negotiations with all landlords, including the REIT and will continue to pursue permanent reductions in lease costs.

Discontinued Operations

In February 2021, the Company entered into an investment agreement with Ascend Wellness Holdings (“ Ascend ”) to sell a controlling interest in MedMen NY, Inc. wherein the cash proceeds would be used to repay a portion of the Senior Secured Term Loan with Hankey Capital. In January 2022, the Company announced the termination of the investment agreement with Ascend and, subsequently, Ascend filed a complaint against the Company seeking specific performance of the investment agreement. Although the parties signed a non-binding term sheet to settle the lawsuit and move forward on the transaction, in August 2022, Ascend announced that it intended to terminate the transaction. Our plans for the sale of our New York operations have not changed and we will continue to market to other interested parties. All assets and liabilities and profit or loss allocable to the Company’s operations in the state of New York are classified as discontinued operations for all periods presented.

In February 2022, the Company entered into an agreement with Green Sentry Holdings, LLC (“ Buyer ”) for the sale of MME Florida, LLC, including its license, dispensaries, inventory and cultivation operations, and assumption of certain liabilities. In addition, the Company will license the tradename “MedMen” to the Buyer for use in Florida for a period of two years, subject to termination rights, for a quarterly revenue-based fee. Of the total sales price of $83,000,000, the cash purchase price is to be used to repay a portion of the Senior Secured Term Loan with Hankey Capital. All assets and liabilities and profit or loss allocable to the Company’s operations in the state of Florida are classified as discontinued operations for all periods presented.

On August 22, 2022, the Company announced the closing of the sale of its operations in the state of Florida at the final sales price of $67,000,000 which comprised of $63,000,000 in cash and $4,000,000 in liabilities to be assumed by the Buyer. Refer to “ Note 29 – Subsequent Events ” of the Consolidated Financial Statements in Item 8 for further information.

COVID-19 Pandemic

We continuously address the effects of the COVID-19 pandemic, a discussion of which is available in Item 1A “ Risk Factors ” of this Form 10-K. Our business and operating results for the year ended June 25, 2022, continue to be impacted by the COVID-19 pandemic. We experienced declines in traffic during key holidays, including the week of Thanksgiving and of Christmas, which typically drive volume as customers shop for the holidays. In January, we experienced a further decline in traffic in our stores, which we attribute to the fast-spreading Omicron variant present across all of our communities. Comparatively, we noted a sharp decline in sales in March and April which we believe was a result of the expiration of the Biden administration’s “stimulus checks” that occurred a year ago same period under American Rescue Act and no longer available in fiscal year 2022 or 2023. The overall impact on our business continues to depend on the length of time that the pandemic continues, the impact on consumer purchasing behavior, inflation, and the extent to which it affects our ability to raise capital, and the effect of governmental regulations imposed in response to the pandemic as well as uncertainty regarding all of the foregoing. The Company continues to implement and evaluate actions to strengthen its financial position and support the continuity of its business and operations.

RESULTS OF OPERATIONS – FISCAL YEAR 2022 COMPARED TO FISCAL YEAR 2021

Our consolidated results, in millions, except for per share and percentage data, for the three months and year ended June 25, 2022, compared to three months and year ended June 26, 2021, are as follows:

Three Months Ended

Year Ended

June 25,

June 26,

June 25,

June 26,

($ in Millions)

$ Change

% Change

$ Change

% Change

Revenue

Cost of Goods Sold

Gross Profit

Expenses:

General and Administrative

Sales and Marketing

Depreciation and Amortization

Realized and Unrealized Changes in Fair Value of Contingent Consideration

Impairment Expense

Other Operating (Income) Expense

Total Operating Expenses

Loss from Operations

Other Expense (Income):

Interest Expense

Interest Income

Accretion of Debt Discount and Loan Origination Fees

Change in Fair Value of Derivatives

(Gain) Loss on Extinguishment of Debt

Total Non-Operating Expense

Loss from Continuing Operations Before Provision for Income Taxes

Provision for Income Tax Benefit (Expense)

Net Loss from Continuing Operations

Net Loss from Discontinued Operations, Net of Taxes

Net Loss

Net Loss Attributable to Non-Controlling Interest

Net Loss Attributable to Shareholders of MedMen Enterprises Inc.

Revenue

Revenue for the three months ended June 25, 2022 was $33.3 million, a decrease of $4.7 million, or 12%, compared to revenue of $38.0 million for the three months ended June 26, 2021. Revenue for the year ended June 25, 2022 was $140.8 million, an increase of $8.6 million, or 7%, compared to revenue of $132.2 million for the year ended June 26, 2021.

Revenue in various states in which we operate is as follows:

Three Months Ended

Year Ended

June 25,

June 26,

June 25,

June 26,

($ in Millions)

$Change

%Change

$Change

%Change

California

Nevada

Illinois

Arizona

Massachusetts

Consolidated Revenue

Discontinued Operations

Total Revenue

In fiscal year 2022, overall across all markets, for the periods presented, we saw positive implications on retail store traffic from the lifting of COVID-19 restrictions; however, traffic, the number of patients and customers that entered our store on a daily basis was significantly impacted by 1) periods of low domestic travel in the United States affecting our high tourism stores in Los Angeles and Las Vegas, 2) increases in infection rates and COVID cases from the various disease variants including Omicron, BA.4.6. and more recently BA.5., and 3) the expiration of the Biden administration’s “stimulus checks” that occurred a year ago same period under American Rescue Act and no longer available in fiscal year 2022.

In California, on year over year basis, revenue increased $5.7 million or 7% as we continue to elevate its product offering, revamp its pricing and assortment strategy, and focus on driving retail traffic with promotions and other customer discounts. On average across the thirteen stores in California, we saw increased engagement through continued focus on customer experience at point of sale, and to lesser degree in delivery sales, an area we believe can continue to improve. On a quarter over quarter basis, we continued to see steadily rising declines, which we believe is primarily due to increased competition from new market entrants. California issued 539 new retail licenses. While not all of these became operational, those who entered the market have generally competed on the basis of selling price. On a consecutive quarter basis, during the fiscal fourth quarter of 2022, we experienced the highest decline at $4.5 million or 18% over third quarter. In fourth quarter, we noted more days in the month in which traffic, conversion and average days sales were down compared to the previous week. We expect revenue in California may continue to decrease albeit at slower rates, until such time our re-branding and new marketing and communication practices go live in late first quarter of fiscal year 2023.

In Nevada, on a year over year basis, revenue remained relatively consistent with a slight decrease of 1%. We expected to be able to capitalize in the returned tourism to Nevada, primarily to the City of Las Vegas. On a fiscal year basis, we believe tourism increased 30% or more over the same period. However, we experienced increased competition by other nearby stores that have more funding to invest in product assortment, in-store events, and available marketing. We expect we will not be able to maximize our market share in Las Vegas until such time we increase product availability from our private label brands and have the cash to invest in more lifestyle events that are part of the Las Vegas culture.

In Arizona, on a year over year basis, revenue increased $5.8 million or 57%. This increase is primarily due to the Company’s focus on driving retail traffic after the state-wide transition to adult-use during the spring of calendar year 2021. Beginning in the fourth quarter of 2021, we benefited from steady inclines in revenue on a quarter over quarter basis. Our best revenue performance quarter in Arizona was our third quarter of fiscal year 2022. On a quarter over quarter basis, in fourth quarter, revenue decreased $200,000 or 5%. Arizona issued 26 new retail licenses which contributed to the fourth quarter decline as well as the loss of a significant customer of our cultivation facility which changed cultivation practices affecting the flow of product we manufactured and sourced to our owned stores. We expect revenue in Arizona will hold at the current trend until such time we incorporate new products from our cultivation facility to our retail store anticipated for second quarter of fiscal year 2023.

In Illinois, revenue for the fiscal year ended June 25, 2022 declined $4.7 million or 23%. We continue to face market pressure from additional licenses issued by surrounding municipalities totaling an additional 149 new retail licenses.

In Massachusetts, our store near Fenway Park opened December 2021. Due to the premium location of our store, we anticipated an increase in foot traffic starting in April 2022 corresponding with the beginning of major league baseball’s Red Sox season and spring weather in Boston. We in fact noted a steady increase in revenue to 27% in fourth quarter over third quarter. We continue to monitor the performance ability of this retail location in light of the substantial regulatory limitations including open and close hours of our store, and inability to remain open during and completion of baseball games. Both of these conditions may be unfavorable to our ability to increase current run rate revenue.

Cost of Goods Sold, Gross Profit, and Adjusted Gross Profit (NON-GAAP)

Cost of goods sold for the three months and year ended June 25, 2022 was $16.1 million and $71.1 million compared to $20.3 million and $71.5 million for the three months and year ended June 26, 2021. Gross profit for the fiscal fourth quarter of 2022 was $17.2 million, representing a gross margin of 52% as compared to $17.7 million, representing a gross margin of 47%, in the prior year. Gross profit for fiscal year 2022 was $69.7 million, representing a gross margin of 50%, as compared to $60.7 million, representing a gross margin of 46%, in the prior year. This increase resulted primarily from a one-time adjustment related to overstatement of accounts payable for $2.5 million that accumulated over several periods, and not material to any one of those periods, as follows:

Three Months Ended

Year Ended

June 25,

June 26,

June 25,

June 26,

($ in Millions)

Change

Change

Change

Change

Revenue

Cost of Goods Sold

Gross Profit

Gross Margin

Overstatement in Inventory Payable Amounts:

Adjusted Gross Profit (1) (Non-GAAP)

Adjusted Gross Margin (1) (Non-GAAP)

Adjusted Gross Profit (Non-GAAP) is our gross profit (adjusted to exclude a one-time inventory payable adjustment) and Adjusted Gross Margin (Non-GAAP) is our gross margin adjusted to exclude inventory payable adjustments) and are non-GAAP financial measures. See “ Use of Non-GAAP Measures ” below for additional discussion regarding these non-GAAP measures. The Company’s management believes that Adjusted Gross Profit and Adjusted Gross Margin are useful to our management to evaluate our business and operations, measure our performance, identify trends affecting our business, project our future performance, and make strategic decisions.

Operating Expenses

Operating expenses for the three months ended June 25, 2022 were $120.6 million, an increase of $84.5 million compared to $36.1 million for the three months ended June 26, 2021, and $238.6 million for the year ended June 25, 2022, an increase of $122.8 million compared to $115.8 million for the year ended June 26, 2021. The increase in total operating expenses was primarily impacted by impairment charges recognized in fiscal year 2022. In more detail changes in operating expenses were attributable to the factors described below.

General and administrative expenses for the three months and year ended June 25, 2022 were $19.1 million and $108.7 million, compared to $28.8 million and $109.1 million, a decrease of $9.7 million and $0.4 million, respectively, in the same prior year periods. The overall decrease in the three months period is primarily the results of even more intense costs savings management tactics across all categories of general and administrative expenses including completion of additional headcount reductions and lower spend on litigation matters. In addition, in April 2022, the Company closed its distribution facility in Los Angeles, California which reduced overhead costs. Management continues to focus in reducing company-wide selling, general and administrative expenses (“ SG&A ”). We expect general and administrative expense will continue to decrease in fiscal year 2023 as management believes the Company can achieve and become EBITDA neutral.

Sales and marketing expenses for the three months and year ended June 25, 2022 were $0.5 million and $3.2 million, compared to $0.5 million and $1.0 million for the three months and year ended June 26, 2021, an increase of nil and $2.2 million, respectively. In comparison to the prior year periods, the increase in sales and marketing expenses is primarily attributed to marketing initiatives to drive retail traffic as COVID-19 restrictions began to lift and tourism increased.

Depreciation and amortization for the three months and year ended June 25, 2022 was $6.3 million and $24.0 million, as compared to $5.0 million and $26.3 million in the prior year. The increase of $1.3 million from the prior fiscal quarter ended June 26, 2021 is attributable to the opening of store locations in Boston and San Francisco during fiscal year 2022. The decrease of $2.3 million compared to the prior year ended June 26, 2021 is attributable to the overall reduction in capital expenditures resulting from a delay in capital-intensive projects as part of the Company’s turnaround plan and the COVID-19 pandemic. We are currently evaluating the long - term benefits of continuing to pursue the build out of some of our locations not yet opened or constructed. We are in negotiations with the landlords of our unfinished locations in California, Illinois and Massachusetts in an effort to reach the best outcome for all parties including the communities that live and work near th ese unfinished locations possibly deterring from market values.

Impairment expense for the three months and year ended June 25, 2022 was $93.2 million and $101.8 million, as compared to nil and $2.4 million in the prior year. Impairment expense for fiscal year 2022 was related to the following:

June 25,

($ in Millions)

Impairment charges in fiscal year 2022 related to the following:

Abandoned equipment – Inactive location

Costs related to acquisitions no longer active

Write off related to closure of headquarters office, distribution center and other

Impairment of long-lived assets – California and Nevada

Impairment of goodwill - California

Fair value adjustment related to deconsolidation of cultivation facilities

Total impairment charges

Other operating expense (income) for the three months and year ended June 25, 2022 was $(2.1) million and $(2.4) million, as compared to $1.8 million and $(23.4) million for the three months and year ended June 26, 2021, respectively. For the year ended June 25, 2022, the change was primarily attributable to the $16.3 million gain related to the lease deferral with the REIT in the comparative prior period.

Non-Operating Expenses

Non-operating expense for the three months and year ended June 25, 2022 was $4.5 million and $6.5 million, respectively, compared to $17.7 million and $67.4 million in the prior year period. The decrease in non-operating expense was primarily driven by the recognition of a gain related to changes in the fair value of our derivative liability as a result of the Short-Term warrants recorded with a fair value of $21.2 million that expired unexercised. The decrease was also driven by the change in gain/loss on extinguishment debt as a result of the $12.4 million gain on extinguishment of debt related to the Sixth Amendment, offset by the $2.2 million loss on extinguishment of debt related to the settlement of the unsecured promissory note in connection with the Private Placement.

Provision for Income Taxes

The provision for income tax benefit for the three months and year ended June 25, 2022 was $21.5 million and $9.9 million, respectively, compared to the provision for income tax benefit of $0.3 million and an expense of $1.8 million for the three months and year ended June 26, 2021, primarily due to the Company’s operating results, related IRC Section 280E expenditures and interest due to the Internal Revenue Service. The Company has incurred a large amount of expenses that are not deductible due to IRC Section 280E limitations which resulted in income tax expense being incurred while there were pre-tax losses for the current period.

Net Loss

Net loss from continuing operations for the three months ended June 25, 2022 was $86.4 million, an increase of $50.6 million compared to $35.8 million for the three months ended June 26, 2021. For the fiscal fourth quarter of 2022, net loss was impacted by an increase in impairment charges during the current period, offset by the provision for income tax benefit.

Net loss from continuing operations for the year ended June 25, 2022 was $165.5 million, an increase of $41.2 million compared to $124.3 million for the year ended June 26, 2021. The increase for the current fiscal year as compared to the prior period was primarily due to the increase in impairment charges, offset by improvements in gross profits, the provision for income taxes, and the effects of non-operating activities during the comparative periods.

Non-GAAP Financial Measures

In addition to providing financial measurements based on GAAP, the Company provides additional financial metrics that are not prepared in accordance with GAAP. Management uses non-GAAP financial measures, in addition to GAAP financial measures, to understand and compare operating results across accounting periods, for financial and operational decision-making, for planning and forecasting purposes and to evaluate the Company’s financial performance. These non-GAAP financial measures (collectively, the “ non-GAAP financial measures ”) are:

Adjusted Gross Profit

Gross Profit adjusted for a one-time inventory payable adjustment.

Adjusted Gross Margin

Gross Margin, which is Gross Profit as a percentage of consolidated revenue, adjusted for a one-time inventory payable adjustment.

Adjusted Net Loss from Continuing Operations

Net Loss from Continuing Operations adjusted for transaction costs, restructuring costs, share-based compensation, impairment expense, and other non-cash operating costs. This non-GAAP measure represents the profitability of the Company excluding unusual and infrequent expenditures and non-cash operating costs.

EBITDA from Continuing Operations

Net Loss from Continuing Operations adjusted for interest and financing costs, income taxes, depreciation, and amortization. This non-GAAP measure represents the Company’s current operating profitability and ability to generate cash flow.

Adjusted EBITDA from Continuing Operations

EBITDA from Continuing Operations (Non-GAAP) adjusted for transaction costs, restructuring costs, share-based compensation, impairment expense, and other non-cash operating costs, such as changes in fair value of derivative liabilities and unrealized changes in fair value of investments. This non-GAAP measure represents the Company’s current operating profitability and ability to generate cash flow excluding non-recurring, irregular or one-time expenditures in order improve comparability.

Working Capital

Current assets less current liabilities. This non-GAAP measure represents operating liquidity available to the Company.

Corporate SG&A

Selling, general and administrative expenses related to the Company’s corporate functions. This non-GAAP measure represents scalable expenditures that are not directly correlated with the Company’s retail operations.

Retail Revenue

Consolidated revenue less non-retail revenue, such as cultivation and manufacturing revenue. This non-GAAP measure provides a standalone basis of the Company’s performance as a cannabis retailer in the U.S. considering the Company’s long-term viability is correlated with cash flows provided by or used in retail operations.

Retail Cost of Goods Sold

Consolidated cost of goods sold less non-retail cost of goods sold. This non-GAAP measure provides a standalone basis of the Company’s performance as a cannabis retailer in the U.S. considering the Company’s long-term viability is correlated with cash flows provided by or used in retail operations.

Retail Gross Margin

Retail Revenue (Non-GAAP) less the related Retail Cost of Goods Sold (Non-GAAP). Retail Gross Margin (Non-GAAP) is reconciled to consolidated gross margin as follows: consolidated revenue less non-retail revenue reduced by consolidated cost of goods sold less non-retail cost of goods sold. This non-GAAP measure provides a standalone basis of the Company’s performance as a cannabis retailer in the U.S. considering the Company’s long-term viability is correlated with cash flows provided by or used in retail operations.

Retail Gross Margin Rate

Retail Gross Margin (Non-GAAP) divided by Retail Revenue (Non-GAAP). Retail Gross Margin Rate (Non-GAAP) is reconciled to consolidated gross margin rate as follows: consolidated revenue less non-retail revenue reduced by consolidated cost of goods sold less non-retail cost of goods sold, divided by consolidated revenue less non-retail revenue. This non-GAAP measure provides a standalone basis of the Company’s performance as a cannabis retailer in the U.S. considering the Company’s long-term viability is correlated with cash flows provided by or used in retail operations.

Retail Adjusted EBITDA Margin

Retail Gross Margin (Non-GAAP) less direct store operating expenses, including rent, payroll, security, insurance, office supplies and payment processing fees, local cannabis and excise taxes, distribution expenses, and inventory adjustments. This non-GAAP measure provides a standalone basis of the Company’s performance as a cannabis retailer in the U.S. considering the Company’s long-term viability is correlated with cash flows provided by or used in retail operations.

Retail Adjusted EBITDA Margin Rate

Retail Adjusted EBITDA Margin (Non-GAAP) divided by Retail Revenue (Non-GAAP), which is calculated as consolidated revenue less non-retail revenue. This non-GAAP measure provides a standalone basis of the Company’s performance as a cannabis retailer in the U.S. considering the Company’s long-term viability is correlated with cash flows provided by or used in retail operations.

In addition to providing financial measurements based on GAAP, the Company provides additional financial metrics that are not prepared in accordance with GAAP. Management uses non-GAAP financial measures, in addition to GAAP financial measures, to understand and compare operating results across accounting periods, for financial and operational decision-making, for planning and forecasting purposes and to evaluate the Company’s financial performance. Non-GAAP financial measures are financial measures that are not defined under GAAP. Management believes that these non-GAAP financial measures assess the Company’s ongoing business in a manner that allows for meaningful comparisons and analysis of trends in the business, as they facilitate comparing financial results across accounting periods and to those of peer companies. The Company uses these non-GAAP financial measures and believes they enhance an investors’ understanding of the Company’s financial and operating performance from period to period. Management also believes that these non-GAAP financial measures enable investors to evaluate the Company’s operating results and future prospects in the same manner as management.

In particular, the Company continues to make investments in its cannabis properties and management resources to better position the organization to achieve its strategic growth objectives which have resulted in outflows of economic resources. Accordingly, the Company uses these metrics to measure its core financial and operating performance for business planning purposes. In addition, the Company believes investors use both GAAP and non-GAAP measures to assess management’s past and future decisions associated with its priorities and allocation of capital, as well as to analyze how the business operates in, or responds to, swings in economic cycles or to other events that impact the cannabis industry. However, these measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies in the Company’s industry. Accordingly, these non-GAAP financial measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

These non-GAAP financial measures exclude certain material non-cash items and certain other adjustments the Company believes are not reflective of its ongoing operations and performance. These financial measures are not intended to represent and should not be considered as alternatives to net income, operating income or any other performance measures derived in accordance with GAAP as measures of operating performance or operating cash flows or as measures of liquidity. These non-GAAP financial measures have important limitations as analytical tools and should not be considered in isolation or as a substitute for any standardized measure under GAAP. For example, certain of these non-GAAP financial measures:

exclude certain tax payments that may reduce cash available to the Company;

do not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future;

do not reflect changes in, or cash requirements for, working capital needs; and

do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on debt.

Other companies in the cannabis industry may calculate these measures differently than the Company does, limiting their usefulness as comparative measures.

Reconciliations of Non-GAAP Financial Measures to GAAP Measures

Retail Performance

Within the cannabis industry, MedMen is uniquely focused on the retail component of the value chain. On a sequential quarter basis, the Company is providing detail with respect to earnings before interest, taxes, depreciation and amortization (“ EBITDA ”) attributable to the Company’s national retail operations to show how it is leveraging its retail footprint and strategically investing in the future. The table below highlights the Company’s national Retail Adjusted EBITDA Margin (Non-GAAP), which excludes corporate marketing expenses, distribution expenses, inventory adjustments, and local cannabis and excise taxes. Entity-wide Adjusted EBITDA (Non-GAAP) follows our retail performance financial measures.

Retail Gross Margin (Non-GAAP)

Fiscal Quarter Ended

June 25,

March 26,

$ Change

% Change

Gross Profit

Gross Margin Rate

Cultivation & Wholesale Revenue

Cultivation & Wholesale Cost of Goods Sold

Non-Retail Gross Margin

Retail Gross Margin (Non-GAAP)

Retail Gross Margin Rate (Non-GAAP)

Retail Adjusted EBITDA Margin (Non-GAAP)

Fiscal Quarter Ended

June 25,

March 26,

$ Change

% Change

Net Loss

Net Loss from Discontinued Operations, Net of Taxes

Provision for Income Tax Benefit

Other Expense (Income)

Excluded Items (1)

Loss from Operations Before Excluded Items

Non-Retail Gross Margin

Non-Retail Operating Expenses (2)

Non-Retail EBITDA Margin

Retail Adjusted EBITDA Margin (Non-GAAP)

Retail Adjusted EBITDA Margin Rate (Non-GAAP)

Items adjusted from Net Loss for the fiscal quarters ended June 25, 2022 and March 26, 2022 include impairment expense of $93.2 million and $8.2 million, respectively, other operating income of $2.1 million and $3.1 million, respectively, and a one-time adjustment related to inventory recorded in the fourth quarter.

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

Fiscal Quarter Ended

June 25,

March 26,

$ Change

% Change

Cultivation & Wholesale

Corporate SG&A

Depreciation & Amortization

Other (3)

Non-Retail Operating Expenses

Direct Store Operating Expenses (4)

Excluded Items (1)

Total Expenses

Other non-retail operating expenses excluded from Retail Adjusted EBITDA Margin (Non-GAAP) for the fiscal quarters ended June 25, 2022 and March 26, 2022 primarily consist of transaction costs and restructuring costs of $0.2 million and $2.4 million, respectively, and share-based compensation of $0.9 million and $1.6 million, respectively, as commonly excluded from Adjusted EBITDA from Continuing Operations (Non-GAAP). Refer to “ Reconciliations of Non-GAAP Financial Measures ” below.

For the fiscal quarters ended June 25, 2022 and March 26, 2022, direct store operating expenses include, but are not limited to, rent, utilities, payroll and payroll related expenses, employee benefits, security local cannabis and excise taxes, and distribution expenses, totaling $10.8 million and $11.8 million, respectively.

The non-GAAP retail performance measures demonstrate the Company’s four-wall margins which reflect the sales of the Company’s retail operations relative to the direct costs required to operate such dispensaries. Retail revenue is related to net sales from the Company’s stores, excluding non-retail revenue, such as cultivation and manufacturing revenue. Similarly, retail cost of goods sold and direct store operating expenses are directly related to the Company’s retail operations. Non-Retail Revenue includes revenue from third-party wholesale sales. Non-Retail Cost of Goods Sold includes costs directly related to third-party wholesale sales produced by the Company’s cultivation and production facilities, such as packaging, materials, payroll, rent, utilities, security, etc. While third-party sales were not significant for the fiscal quarter ended June 25, 2022, Non-Retail Cost of Goods Sold related to cultivation and wholesale operations was $1.1 million due to unallocated overages from increased production burn rate. Non-Retail Operating Expenses include ongoing costs related to the Company’s cultivation and wholesale operations, corporate spending, and depreciation and amortization. Non-Retail EBITDA Margin reflects the gross margins of the Company’s cultivation and wholesale operations excluding any related operating expenses. To determine the Company’s four-wall margins, certain costs that do not directly support the Company’s retail function are excluded from Retail Adjusted EBITDA Margin (Non-GAAP).

For the fiscal fourth quarter of 2022, retail revenue was $32.2 million across the Company’s continuing operations in California, Nevada, Arizona, Illinois and Massachusetts. This represents a 5% decrease, or $1.7 million, over the third quarter of 2022 of $33.9 million. While there were multiple reasons for the decrease in retail revenue on a sequential quarter basis, we believe the primary factors were uncertainties and the changes in spending patterns of patients and customers after restrictions related to the COVID-19 pandemic began lifting and increased competition in certain markets.

Retail Gross Margin Rate (Non-GAAP) for the fiscal fourth quarter of 2022 was 53% compared to the fiscal third quarter of 2022 of 50%. The Company had an aggregate Retail Adjusted EBITDA Margin Rate (Non-GAAP) of 12% for the fiscal fourth quarter of 2022 which represents a decrease compared to the 15% realized in the fiscal third quarter of 2022 primarily due to a one-time inventory adjustment recognized during the current period.

Corporate SG&A as a Component of Adjusted EBITDA from Continuing Operations (Non-GAAP)

Corporate-level general and administrative expenses across various functions including Marketing, Legal, Retail Corporate, Technology, Accounting and Finance, Human Resources and Security (collectively referred to as “ Corporate SG&A ”) are combined to account for a significant proportion of the Company’s total general and administrative expenses. Corporate SG&A also includes pre-opening expenses related to general and administrative expenses incurred by the Company at non-operational retail locations, which such expenses would be classified as direct store operating expenses following its opening.

Fiscal Quarter Ended

June 25,

March 26,

($ in Millions)

$ Change

% Change

General and Administrative

Sales and Marketing

Consolidated SG&A

Direct Store Operating Expenses

Cultivation & Wholesale

Other (1)

Less: Non-Corporate SG&A

Corporate SG&A as a Component of Adjusted EBITDA from Continuing Operations (Non-GAAP)

Other non-Corporate SG&A for the fiscal quarters ended June 25, 2022 and March 26, 2022 primarily consist of transaction costs and restructuring costs of $0.2 million and $2.4 million, respectively, and share-based compensation of $0.9 million and $1.6 million, respectively, as commonly excluded from Adjusted EBITDA (Non-GAAP). Refer to Item 7 “ Retail Performance ” and notes therein for further information.

For the fiscal fourth quarter of 2022, Adjusted EBITDA from Continuing Operations (Non-GAAP) includes Corporate SG&A (Non-GAAP) of $6.7 million, representing a decrease of $4.0 million, or 37%, from the $10.7 million that Corporate SG&A (Non-GAAP) contributed to Adjusted EBITDA Loss from Continuing Operations (Non-GAAP) in the fiscal third quarter of 2022. The decrease was primarily attributable to a decrease in pre-opening expenses and a decrease in professional fees compared to the consecutive prior quarter.

Adjusted Net Loss from Continuing Operations (Non-GAAP)

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

Three Months Ended

Year Ended

June 25,

June 26,

June 25,

June 26,

($ in Millions)

Net Loss

Less: Net Loss from Discontinued Operations, Net of Taxes

Add (Deduct) Impact of:

Transaction Costs & Restructuring Costs

Share-Based Compensation

Impairment Expense

Other Non-Cash Operating Costs (1)

Income Tax Effects (2)

Total Adjustments

Adjusted Net Loss from Continuing Operations (Non-GAAP)

Adjusted Net Loss from Continuing Operations (Non-GAAP) represents the profitability of the Company excluding unusual and infrequent expenditures and non-cash operating costs. The change in Adjusted Net Loss from Continuing Operations (Non-GAAP) for the three months ended June 25, 2022 compared June 26, 2021 was primarily due to the increase in provision for income taxes, offset by lower general and administrative expenses. The increase in Adjusted Net Loss from Continuing Operations (Non-GAAP) for the years ended June 25, 2022 compared June 26, 2021 was primarily due to higher provision for income taxes.

EBITDA and Adjusted EBITDA from Continuing Operations (Non-GAAP)

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

Three Months Ended

Year Ended

June 25,

June 26,

June 25,

June 26,

($ in Millions)

Net Loss

Less: Net Loss from Discontinued Operations, Net of Taxes

Add (Deduct) Impact of:

Net Interest and Other Financing Costs (3)

Provision for Income Taxes

Amortization and Depreciation

Total Adjustments

EBITDA from Continuing Operations (Non-GAAP)

Add (Deduct) Impact of:

Transaction Costs & Restructuring Costs

Share-Based Compensation

Impairment Expense

Other Non-Cash Operating Costs (1)

Total Adjustments

Adjusted EBITDA from Continuing Operations (Non-GAAP)

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

Three Months Ended

Year Ended

June 25,

June 26,

June 25,

June 26,

Change in Fair Value of Derivative Liabilities

Gain on Disposal of Assets Held for Sale

Change in Fair Value of Contingent Consideration

(Gain) Loss on Lease Termination

(Gain) Loss on Extinguishment of Debt

(Gain) Loss from Disposal of Assets

One-Time Inventory Adjustment

Other Non-Cash Operating Costs

Total Other Non-Cash Operating Costs

Income tax effects to arrive at Adjusted Net Loss from Continuing Operations (Non-GAAP) are related to temporary tax differences in which a future income tax benefit exists, such as changes in fair value of investments, assets held for sale and other assets, changes in fair value of contingent consideration, gain/loss from disposal of assets, and impairment expense. The income tax effect is calculated using the federal statutory rate of 21.0% and statutory rate for the state in which the related asset is held or the transaction occurs, most of which is in California with a statutory rate of 8.84%.

For the current period, net interest and other financing costs now include accretion of debt discount and loan origination fees of $(1.1) million and $10.7 million for the three months and year ended June 25, 2022, respectively. Prior year amounts of $9.5 million and $21.7 million for the three months and year ended June 26, 2021, respectively, have been reclassified for consistency with the current year presentation. Accretion of debt discount was previously excluded from the reconciliation of Net Loss to EBITDA from Continuing Operations (Non-GAAP) and Adjusted EBITDA from Continuing Operations (Non-GAAP).

EBITDA from Continuing Operations (Non-GAAP) represents the Company’s current operating profitability and ability to generate cash flow and includes significant non-cash operating costs. Net Loss is adjusted for interest and financing costs as a direct result of debt financings, income taxes, and amortization and depreciation expense to arrive at EBITDA from Continuing Operations (Non-GAAP). Considering these adjustments, the Company had EBITDA from Continuing Operations (Non-GAAP) of $(95.9) million and $(106.7) million for the three months and year ended June 25, 2022, respectively, compared $(11.2) million and $(41.3) million for the three months and year ended June 26, 2021, respectively. The change in EBITDA from Continuing Operations (Non-GAAP) was primarily due to the improvement in gross margin and lower operating costs at the cultivation facilities of California and Nevada as a result of the licensing and management agreement which includes lower rents.

For the three months and year ended June 25, 2022, Adjusted EBITDA from Continuing Operations (Non-GAAP) was $(0.9) million and $(26.3) million, respectively, compared to $(7.8) million and $(37.0) million for the three months and year ended June 26, 2021, respectively. The improvement is primarily due to changes in gross profit and general and administrative expenses. The financial performance of the Company is expected to further improve as the Company works towards profitability and coupled with significant deleveraging of its balance sheet, will reposition the Company for growth.

Refer to “Retail Performance” above for reconciliations of Retail Adjusted EBITDA.

Cash Flows

The following table summarizes the Company’s consolidated cash flows for the years ended June 25, 2022 and June 26, 2021:

Year Ended

June 25,

June 26,

($ in Millions)

$ Change

% Change

Net Cash Used in Operating Activities

Net Cash (Used in) Provided by Investing Activities

Net Cash Provided by Financing Activities

Net (Decrease) Increase in Cash and Cash Equivalents

Cash Included in Assets Held for Sale

Cash and Cash Equivalents, Beginning of Period

Cash and Cash Equivalents, End of Period

Cash Flow from Operating Activities

Net cash used in operating activities was $62.5 million for the fiscal year ended June 25, 2022, an increase of $3.1 million, or 5%, compared to $59.4 million for the fiscal year ended June 26, 2021. The increase was primarily driven by the increase in net loss from continuing operations as described in “ Results of Operations ” above.

Cash Flow from Investing Activities

Net cash used in investing activities was $10.9 million for the fiscal year ended June 25, 2022, an increase of $21.8 million, or 200%, compared to $10.9 million provided by investing activities for the year ended June 26, 2021. The prior period included $19.0 million received from proceeds from the sale of assets held for sale compared to none in the current year. In the current period, cash used in investing activities was related to construction for the opening or reopening of retail stores.

Cash Flow from Financing Activities

Net cash provided by financing activities was $72.9 million for the fiscal year ended June 25, 2022, an increase of $22.2 million, or 44%, compared to $50.7 million for the year ended June 26, 2021. The increase in change of net cash provided by financing activities was primarily due to the $95.0 million for the issuance of equity instruments for cash and the $5.0 million from the unsecured promissory note. The increase in debt and equity financings were offset by payments of stock issuance costs of $5.4 million in connection with such capital transactions and a prepayment of our term loans of $20.0 million. On January 31, 2022, the Company’s term loans became due and the Company entered into an agreement with the lender to extend the maturity date until July 31, 2022 with respect to the Senior Secured Term Loan Facility and August 1, 2022 with respect to the incremental term loans. Refer to “ Note 16 – Notes Payable ” of the Consolidated Financial Statements in Item 8 for further information. The prepayment was in consideration of the due date extension.

Financial Condition and Going Concern

As of June 25, 2022, the Company had cash and cash equivalents of $10.8 million and a working capital deficit of $164.9 million. The Company has incurred losses from continuing operations of $165.5 million and $124.3 million in fiscal year 2022 and 2021, respectively, used cash in continued operating activities of $18.9 million and anticipates that the Company will continue to incur losses until such time as revenues exceed operating costs and we are able to complete our restructuring plan. As of June 25, 2022, the Company is in violation of minimum liquidity covenant of these term loans. The term loans require the Company to maintain $15.0 million minimum cash. On July 31, 2022, these term loans of $97.8 million became due and we were unable to meet this financial obligation and pay the lender, which constitutes an event of default. The moneys owed under our Lender and Landlord Support Agreement which allowed us to defer $22.0 million of rent payment over three years beginning in 2020, will come due in July 2023. On August 22, 2022, the Company completed the sale of its Florida-based assets for $63.0 million and the assumption of certain liabilities that the Company valued at approximately $4.0 million, a reduction of $16.0 million from the originally announced sales price of $83.0 million. The purchase price was less than first negotiated due to factors that include changes in the market values of cannabis assets in Florida and the Company’s desire to close the transaction in a timely manner with a counterparty likely to achieve state regulatory approval. The buyer made a cash payment of $40.0 million at closing and is required to make two additional installment payments of $11.5 million each after the closing. The net proceeds to the Company at closing were $14.5 million, with a $25.0 million payment going to the Company’s secured senior lender. Proceeds of the transaction to the Company will be used to fund operations and pay interest to our secured senior lender while the term loans remain outstanding and in default. The conditions described above raise substantial doubt with respect to the Company’s ability to meet its obligations for at least one year from the issuance of these Consolidated Financial Statements, and therefore, to continue as a going concern.

The Company plans to continue to fund its operations through the implementation of its cost savings plan, and various strategic actions, including the successful negotiations of lower costs of occupancy with our master lease landlord and other landlords, divesture of non-core assets including but not limited to the current asset groups held for sale, New York, as well continuing its on-going revenue strategy of market expansion and retail revenue growth. We also need to obtain an extension or a refinancing of our debt-in-default with the unsecured senior lender. Our annual operating plan for fiscal year 2023 estimates we will be able to manage our ongoing operations. However, our cash needs are significant and not achievable with the current cash flow from operations. If the above strategic actions, for any reason, are inaccessible, it will have a significantly negative effect on the Company’s financial condition. Additionally, we expect to continue to manage the Company’s operating expenses and reduce its projected cash requirements through reduction of its expenses by delaying new store development, permanently or temporarily closing stores that are deemed to be performing below expectations, and/or implementing other restructuring activities. Furthermore, COVID-19 and the impact the global pandemic has had and will continue to have on the broader retail environment could also have a significant impact on the Company’s financial operations.

As of June 25, 2022, the accompanying Consolidated Financial Statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying Consolidated Financial Statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to our ability to continue as a going concern.

The following table summarizes certain aspects of the Company’s financial condition as of June 25, 2022 and June 26, 2021:

June 25,

June 26,

($ in Millions)

$ Change

% Change

Cash and Cash Equivalents

Total Current Assets

Total Assets

Total Current Liabilities

Debt, Net of Current Portion

Total Liabilities

Total Shareholders’ Equity

Working Capital Deficit

During the fiscal first quarter of 2022, the Company raised $100.0 million in the Private Placement which helped stabilize liquidity and allowed the Company to prioritize new market opportunities and existing operations over near-term balance sheet management. In addition, on August 17, 2021, the Company amended the Convertible Facility wherein the maturity date was extended to August 17, 2028 and any cash interest obligation were eliminated, instead providing for paid-in-kind interest.

The $5.9 million improvement in working capital deficit was primarily related to the $14.2 million in deferred rent costs becoming due in fiscal year 2023, offset by a decrease in the current portion of notes payable. The Company’s working capital will be significantly impacted by continued operations and growth in retail operations, the operationalization of existing licenses, and the continued stewardship of the Company’s financial resources. The ability to fund working capital needs will also be dependent on the Company’s ability to raise additional debt and equity financing and execute cost savings plans.

Liquidity and Capital Resources

The primary need for liquidity is to fund working capital requirements of the business, including operationalizing existing licenses, capital expenditures, debt service and acquisitions. The primary source of liquidity has primarily been private and/or public financing and to a lesser extent by cash generated from sales. The ability to fund operations, to make planned capital expenditures, to execute on the growth/acquisition strategy, to make scheduled debt and rent payments and to repay or refinance indebtedness depends on the Company’s future operating performance and cash flows, which are subject to prevailing economic conditions and financial, business and other factors, some of which are beyond its control. Liquidity risk is the risk that the Company will not be able to meet its financial obligations associated with financial liabilities. The Company manages liquidity risk through the management of its capital structure. The Company’s approach to managing liquidity is to ensure that it will have sufficient liquidity to settle obligations and liabilities when due.

Refer to the Fiscal Year 2022 Highlights in Item 7 “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” above.

Cash Burn Rate

For the fiscal year ended June 25, 2022, the Company’s monthly burn rate, which was calculated as cash spent per month in operating activities, was approximately $5.2 million compared to a monthly burn rate of approximately $5.0 million for the fiscal year ended June 26, 2021. During the fiscal first quarter of 2022, the Company shifted its focus from a turnaround plan that took place during fiscal year 2021, which resulted in a plan for divestiture of non-core assets and lease modifications and turned to a growth plan with new capital to capitalize on further opportunities.

The restructuring of the Convertible Facility and the successful closing of the Private Placement with investors led by SPE during the fiscal first quarter of 2022 stabilized the Company’s liquidity.

As of June 25, 2022, cash generated from ongoing operations may not be sufficient to fund operations and, in particular, to fund the Company’s growth strategy in the short term or long term.

Off-Balance Sheet Arrangements

The Company has no material undisclosed off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on its results of operations, financial condition, revenues or expenses, liquidity, capital expenditures or capital resources that are material to investors.

Critical Accounting Policies, Significant Judgments and Estimates and Recent Accounting Pronouncements

A detailed description of our critical accounting policies and recent accounting pronouncements are contained in Item 8 of this Form 10-K.

The Company makes judgments, estimates and assumptions about the future that affect the policies and reported amounts of assets and liabilities, and revenues and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the review affects both current and future periods.

The preparation of the Company’s annual Consolidated Financial Statements in conformity with GAAP requires management to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities at the dates of the financial statements and the reported amounts of total net revenue and expenses during the reporting period which are not readily apparent from other sources. These estimates and assumptions are based on current facts, historical experience and various other factors that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results the Company experiences may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.

Significant judgments, estimates and assumptions that have the most significant effect on the amounts recognized in the annual Consolidated Financial Statements are described below.

Depreciation of Property and Equipment

Depreciation of property and equipment is dependent upon estimates of useful lives which are determined through the terms and methods in accordance with GAAP. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions and the useful lives of assets.

Amortization of Intangible Assets

Amortization of intangible assets is dependent upon estimates of useful lives and residual values which are determined through the exercise of judgment. Intangible assets that have indefinite useful lives are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions.

Inventory Valuation

The Company periodically reviews physical inventory for excess, obsolete, and potentially impaired items and reserves. The Company reviews inventory for obsolete, redundant and slow-moving goods and any such inventory is written down to net realizable value. The reserve estimate for excess and obsolete inventory is dependent on expected future use.

Convertible Instruments and Derivative Liabilities

The identification of components embedded within financial instruments is based on interpretations of the substance of the contractual arrangement and therefore requires judgment from management. The separation of the components affects the initial recognition of the financial instruments at issuance and the subsequent recognition of interest on the liability component. Where the conversion option has a variable conversion rate, the conversion option is recognized as a derivative liability measured at fair value, with changes in fair value reported in the Consolidated Statements of Operations. The instrument is recognized as a financial liability and subsequently measured at amortized cost. The determination of the fair value of the liability is also based on a number of assumptions, including contractual future cash flows, discount rates and the presence of any derivative financial instruments.

Share-Based Compensation

The Company uses the Black-Scholes option-pricing model or the Monte-Carlo simulation model to determine the fair value of equity-based grants. In estimating fair value, management is required to make certain assumptions and estimates such as the expected life of units, volatility of the Company’s future share price, risk-free rates, future dividend yields and estimated forfeitures at the initial grant date. Changes in assumptions used to estimate fair value could result in materially different results.

Goodwill Impairment, Other Intangible Assets, Long-Lived Assets and Purchase Asset Valuations

Goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that the carrying value of goodwill has been impaired. In the impairment test, the Company measures the recoverability of goodwill by comparing a reporting unit’s carrying amount to the estimated fair value of the reporting unit. The carrying amount of each reporting unit is determined based upon the assignment of the Company’s assets and liabilities, including existing goodwill, to the identified reporting units. The Company relies on a number of factors, including historical results, business plans, forecasts and market data. Changes in the conditions for these judgments and estimates can significantly affect the recoverable amount.

Long-lived assets, including amortizable intangible assets, are tested annually for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. Once a triggering event has occurred, the impairment test employed is based on whether the intent is to hold the asset for continued use or to hold the asset for sale. The impairment test for assets held for use requires a comparison of cash flows expected to be generated over the useful life of an asset group to the carrying value of the asset group. An asset group is established by identifying the lowest level of cash flows generated by a group of assets that are largely independent of the cash flows of other assets and could include assets used across multiple businesses or segments. If the carrying value of an asset group exceeds the estimated undiscounted future cash flows, an impairment would be measured as the difference between the fair value of the group’s long-lived assets and the carrying value of the group’s long-lived assets. The impairment is only to the extent the carrying value of each asset is above its fair value. For assets held for sale, to the extent the carrying value is greater than the asset’s fair value less costs to sell, an impairment loss is recognized for the difference. Determining whether a long-lived asset is impaired requires various estimates and assumptions, including whether a triggering event has occurred, the identification of the asset groups, estimates of future cash flows and the discount rate used to determine fair values.

The estimates and assumptions used in management’s impairment analysis are based on current facts, historical experience and various other factors that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about its impairment analysis. The impairment estimates and assumptions bear the risk of change due to its inherent nature and subjectivity. The unanticipated effects of a longer or more severe COVID-19 outbreaks and decreases in consumer demand could reasonably expected to negatively affect the key assumptions and estimates.

Deferred Tax Assets

Deferred tax assets, including those arising from tax loss carryforwards, require management to assess the likelihood that the Company will generate sufficient taxable earnings in future periods in order to utilize recognized deferred tax assets. Assumptions about the generation of future taxable profits depend on management’s estimates of future cash flows. In addition, future changes in tax laws could limit the ability of the Company to obtain tax deductions in future periods. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company to realize the net deferred tax assets recorded at the reporting date could be impacted.

Income Taxes

Current tax assets and/or liabilities comprise those claims from, or obligations to, fiscal authorities relating to the current or prior reporting periods that are unpaid at the reporting date. Current tax is payable on taxable profit, which differs from profit or loss in the financial statements. Calculation of current tax is based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period.

Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax basis of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

Deferred tax assets are recognized to the extent that the Company believe that these assets are more likely than not to be realized. In making such a determination, all available positive and negative evidence are considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If it is determined that the Company would be able to realize deferred tax assets in the future in excess of their net recorded amount, an adjustment to the deferred tax asset valuation allowance is recorded, which would reduce the provision for income taxes

Uncertain tax positions are recorded in accordance with ASC Topic 740, “Income Taxes”, on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

Right-of-Use Assets and Lease Liabilities

Right-of-use assets are measured at cost, which is calculated as the amount of the initial measurement of lease liability plus any lease payments made at or before the commencement date, any initial direct costs and related restoration costs. The right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term or estimates of economic life. The Company’s lease liability is recognized net of lease incentives receivable. The lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be determined, the lessee’s incremental borrowing rate. The period over which the lease payments are discounted is the expected lease term, including renewal and termination options that the Company is reasonably certain to exercise. Refer to “Note 2 – Summary of Significant Accounting Policies” of the Consolidated Financial Statements in Item 8.

Assets Held for Sale and Discontinued Operations

Assets held for sale are measured at the lower of their carrying amount or fair value less cost to sell unless the asset held for sale meets the exceptions as denoted by ASC Topic 360, “Property, Plant, and Equipment” . Fair value is the amount obtainable from the sale of the asset in an arm’s length transaction, less the costs of disposal. A component of an entity is identified as operations and cash flows that can be clearly distinguished, operationally and financially, from the rest of the entity. A discontinued operation is a component of an entity that either has been disposed of, or is classified as held for sale.

Down Round Features

In July 2017, the FASB issued ASU 2017-11, “ Earnings Per Share (Topic 260) ” wherein the amendments change the classification of certain equity-linked financial instruments (or embedded features) with down round features. For freestanding equity-classified financial instruments, the amendments require entities that present earnings per share (“ EPS ”) in accordance with ASC Topic 260, “Earnings Per Share” to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. For freestanding equity-classified financial instruments, the value of the effect of the down round feature is measured as the difference in fair value of the financial instrument without the down round feature with a strike price corresponding to the stated strike price versus the reduced strike price upon the down round feature being triggered. The fair value is measured in accordance with the measurement guidance in ASC Topic 820, “ Fair Value Measurement” in which the Company utilizes the Black-Scholes pricing model. Convertible instruments with embedded conversion options that have down round features are subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). During the fiscal year ended June 26, 2021, a down round feature present in the Convertible Facility and the 2020 Term Loan was triggered. Refer to “Note 16 – Notes Payable” and “Note 17 – Senior Secured Convertible Credit Facility” of the Consolidated Financial Statements in Item 8.

Allocation of Interest to Discontinued Operations

Under ASC Subtopic 205-20 “ Presentation of Financial Statements - Discontinued Operations ”, interest on debt that is to be assumed by the buyer and interest on debt that is required to be repaid as a result of a disposal transaction is allocated to discontinued operations. The amount of interest expense reclassified to discontinued operations is directly related to the amount of debt that will be repaid with funds received from the sale of discontinued operations. Refer to “Note 28 – Discontinued Operations” of the Consolidated Financial Statements in Item 8. The Company elected not to reclassify other interest expenses which are not directly attributable to discontinued operations as permitted under ASC Subtopic 205-20.

Emerging Growth Company Status

The Company is an “emerging growth company” as defined in the Section 2(a) of the Exchange Act, as modified by the Jumpstart Our Business Start-ups Act of 2012, or the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Exchange Act for complying with new or revised accounting standards applicable to public companies. The Company has elected to take advantage of this extended transition period and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.