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, DebtDebt 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.
