MM ENTERPRISES USA, LLC

Transcription

1 UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2018 AND 2017 (Expressed in United States Dollars)

2 Index to Unaudited Interim Condensed Consolidated Financial Statements Page(s) UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: Unaudited Interim Condensed Consolidated Statements of Financial Position... 1 Unaudited Interim Condensed Consolidated Statements of Operations... 2 Unaudited Interim Condensed Consolidated Statements of Changes in Members Equity (Deficit)... 3 Unaudited Interim Condensed Consolidated Statements of Cash Flows

3 Unaudited Interim Condensed Consolidated Statements of Financial Position ASSETS March 31, 2018 (Unaudited) June 30, 2017 (Audited) Current Assets: Cash and Cash Equivalents $ 12,213,458 $ 5,720,026 Restricted Cash 2,662,203 2,190,067 Note Receivable - Related Party 2,000,000 Current Portion of Prepaid Rent - Related Party Note 14 1,433,750 1,850,000 Prepaid Expenses 5,251, ,652 Inventory Note 3 5,913, ,277 Other Current Assets 545, ,962 Due from Related Party Note 14 21,966,435 2,198,688 Total Current Assets 51,986,655 13,602,672 Prepaid Rent - Related Party, Net of Current Portion Note 14 3,579,762 4,726,012 Property and Equipment, Net Note 4 64,939,554 10,325,293 Intangible Assets, Net Note 6 45,400,604 24,626,508 Goodwill Note 7 8,514,761 6,164,161 Other Assets 4,184, ,756 TOTAL ASSETS $ 178,605,832 $ 60,431,402 LIABILITIES AND MEMBERS EQUITY LIABILITIES: Current Liabilities: Accounts Payable and Accrued Liabilities Note 8 $ 13,725,700 $ 1,659,550 Other Current Liabilities 245, ,755 Current Portion of Notes Payable Note 9 49,788,306 6,597,806 Due to Related Party Note 14 22,481,802 5,482,817 Total Current Liabilities 86,240,846 14,177,928 Notes Payable, Net of Current Portion Note 9 17,214,761 12,673,609 TOTAL LIABILITIES 103,455,607 26,851,537 MEMBERS EQUITY Note 10 75,150,225 33,579,865 TOTAL LIABILITIES AND MEMBERS EQUITY $ 178,605,832 $ 60,431,402 Nature of Operations (Note 1) Commitments and Contingencies (Note 13) Subsequent Events (Note 17) Approved and authorized for issue on behalf of the Members on May 30, 2018: Adam Bierman Chief Executive Officer James Parker Chief Financial Officer The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements - 1 -

4 Unaudited Interim Condensed Consolidated Statements of Operations Three Months Ended March 31, Nine Months Ended March 31, (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue $ 7,223,565 $ 911,182 $ 10,585,777 $ 1,220,684 Cost of Goods Sold 3,926, ,247 6,592, ,247 Gross Profit 3,297, ,935 3,993, ,437 Expenses: General and Administrative Note 11 16,166,752 4,953,636 29,264,995 8,432,342 Sales and Marketing 1,246,740 75,573 1,541, ,502 Depreciation and Amortization 1,394,892 15,153 2,699,001 39,722 Total Expenses 18,808,384 5,044,362 33,505,437 8,729,566 Loss from Operations (15,510,898) (4,585,427) (29,512,259 ) (7,961,129) Other Expense: Interest Expense 912,372 36,728 1,919,830 96,499 Total Other Expense 912,372 36,728 1,919,830 96,499 Loss Before Provision for Income Taxes (16,423,270) (4,622,155) (31,432,089 ) (8,057,628) Provision for Income Taxes Note , ,233 NET LOSS $ (17,011,625) $ (4,622,155) $ (32,296,322 ) $ (8,057,628) The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements - 2 -

5 Unaudited Interim Condensed Consolidated Statements of Changes in Members Equity (Deficit) For the Nine Months Ended March 31, 2018 and 2017 Class A Units Class B Units Class C Units Class D Units Class P Units Members Equity (Deficit) Total Balance, July 1, 2016 $ $ 2,077,581 $ 2,750,000 $ $ 189,825 $ (8,187,411) $ (3,170,005) Net Loss (8,057,628) (8,057,628) Issuance of Class C Units 1,086,431 1,086,431 Issuance of Class D Units 6,150,000 6,150,000 Conversion of Debt into Class D Units 4,829,031 4,829,031 Issuance of Class P Units, Non Cash Compensation 446, ,295 Contributions from Members 24,357,751 24,357,751 Balance, March 31, 2017 $ $ 2,077,581 $ 3,836,431 $ 10,979,031 $ 636,120 $ 8,112,712 $ 25,641,875 Class A Units Class B Units Class C Units Class D Units Class P Units Members Equity (Deficit) Total Balance, July 1, 2017 $ $ 2,077,581 $ 3,836,431 $ 10,979,031 $ 1,792,247 $ 14,894,575 $ 33,579,865 Net Loss (32,296,322) (32,296,322) Issuance of Class D Units 9,850,000 9,850,000 Issuance of Class P Units, Non Cash Compensation 539, ,916 Contributions from Members 21,904,035 21,904,035 MM Enterprises USA, LLC Formation and Rollup 1 69,357,813 (3,836,431) (20,829,031) (2,332,163) (36,798,610) 5,561,579 Non-Brokered Private Placement 23,007,125 13,004,027 36,011,152 Balance, March 31, 2018 $ 23,007,126 $ 84,439,421 $ $ $ $ (32,296,322) $ 75,150,225 The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements - 3 -

6 Unaudited Interim Condensed Consolidated Statements of Cash Flows For the Nine Months Ended March 31, 2018 and 2017 Nine Months Ended March 31, (Unaudited) (Unaudited) CASH FLOW FROM OPERATING ACTIVITIES: Net Loss $ (32,296,322) $ (8,057,628) Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: Depreciation and Amortization 3,270,312 39,722 Unit-Based Compensation 539, ,295 Changes in Operating Assets and Liabilities: Note Receivable - Related Party (2,000,000) Prepaid Rent - Related Party 1,562,500 Prepaid Expenses and Other Current Assets (4,384,243) (900,772) Inventory (5,682,675) (201,669) Due from Related Party (19,767,747) (2,235,895) Other Assets (3,197,740) (91,586) Accounts Payable and Accrued Liabilities 12,066,150 (614,103) Other Current Liabilities (192,717) 109,815 Due to Related Party 16,998,985 1,138,850 NET CASH USED IN OPERATING ACTIVITIES (33,083,581) (10,366,971) CASH FLOW FROM INVESTING ACTIVITIES: Purchases of Property and Equipment (39,502,379) (5,197,159) Purchase of Management Agreement from CC-DTHC Facilities Management, LLC (2,000,000) Purchase of Intangible Assets (1,890) (15,015) Purchase of Businesses: San Diego Health and Wellness Center, LLC (11,600,000) Just Quality, Inc. (10,000,000) Bloomfield Industries, Inc., Net of Cash Acquired (25,704,204) DogHat, Inc. and The Compassion Network LLC, Net of Cash Acquired (5,736,315) Restricted Cash (472,136) (2,000,000) NET CASH USED IN INVESTING ACTIVITIES (63,576,405) (38,652,693) CASH FLOW FROM FINANCING ACTIVITIES: Capital Contributions from Members 21,904,035 24,357,751 MM Enterprises USA, LLC Formation and Rollup 5,561,579 Proceeds from Issuance of Notes Payable 35,352,487 22,983,039 Principal Repayments of Notes Payable (5,525,835) (4,410,000) Non-Brokered Private Placement 36,011,152 Cash Received from Issuance of Class C Units 1,086,431 Cash Received from Issuance of Class D Units 9,850,000 6,150,000 NET CASH PROVIDED BY FINANCING ACTIVITIES 103,153,418 50,167,221 INCREASE IN CASH AND CASH EQUIVALENTS 6,493,432 1,147,557 Cash and Cash Equivalents, Beginning of Period 5,720,026 1,749,487 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,213,458 $ 2,897,044 CASH PAID DURING PERIOD FOR: Interest $ 1,425,032 $ 96,499 OTHER NON-CASH INVESTING AND FINANCING ACTIVITIES: Conversion of Convertible Notes into Equity $ $ 4,829,031 Issuance of Note Payable Related to Purchase of Management Agreement from CC-DTHC Facilities Management, LLC $ 2,000,000 $ Issuance of Notes Payable Related to Purchase of Property and Equipment $ 15,905,000 $ The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements - 4 -

7 1. NATURE OF OPERATIONS MM Enterprises USA, LLC, a Delaware limited liability company ( MM Enterprises or the Company ), formerly known as The MedMen Group of Companies, was formed on January 9, 2018 and is based in Culver City, California. The head office and principal address of the Company is Jefferson Boulevard, Culver City, California The Company s registered and records office address is 1209 Orange Street, Wilmington, Delaware On January 29, 2018, pursuant to a Formation and Contribution Agreement (the Agreement ), a roll-up transaction was consummated whereby the assets and liabilities of The MedMen Group of Companies were transferred into MM Enterprises. In return, the vendors of the businesses of The MedMen Group of Companies received 217,184,382 MM Enterprises Class B units. The Agreement was entered into by and among MM Enterprises Manager, LLC, the sole manager of MM Enterprises; MMMG LLC ( MMMG ); MedMen Opportunity Fund, LP ( Fund I ); MedMen Opportunity Fund II, LP ( Fund II ); The MedMen of Nevada 2 LLC ( MMNV2 ); DHSM Investors, LLC ( DHS Owner ); and Bloomfield Partners Utica, LLC ( Utica Owner ) See Note 10 - Members Equity - (a) Formation and Contribution - MM Enterprises USA, LLC for further information. MM Enterprises includes the following wholly-owned subsidiaries: MMOF BH, LLC; MMOF Downtown Collective, LLC; Project Compassion Venture, LLC; MMOF PD, LLC; MMOF SD, LLC; MMOF RE SD, LLC; MMOF SM, LLC; MMOF Venice, LLC; MMOF Venice Collective, LLC; MMOF Venice Parking Lot, LLC; MME RE AK, LLC; MMOF Vegas, LLC; MMOF Vegas 2, LLC; MMOF RE Vegas 2, LLC; MMOF Fremont, LLC; Project Mustang Development, LLC; MMNV2 Holdings I, LLC; MMNV2 Holdings II, LLC; MMNV2 Holdings III, LLC; MMNV2 Holdings IV, LLC; MMNV2 Holdings V, LLC; NVGN RE Holdings, LLC; Manlin DHS Development, LLC; Desert Hot Springs Green Horizon, Inc.; The MedMen of Nevada 2, LLC; and The MedMen of Nevada - Owner, LLC Through MM Enterprises, the Company provides management services to licensed cannabis operators in the areas of cultivation, extraction and production, and retail operations. Through MMOF BH, LLC, the Company operates a dispensary located at 110 South Robertson, Los Angeles, California Through MMOF Downtown Collective, LLC, the Company operates a dispensary located in Downtown Los Angeles at 735 South Broadway, Los Angeles, California Through Project Compassion Venture, LLC, the Company has under development a cultivation and production facility in Utica, New York, and operates four dispensaries in the state of New York located at 52 South Union Road, Suite 102, Buffalo, New York 14221; 2001 Marcus Avenue, Suite W75, Lake Success, New York 11042; 1304 Buckley Road, Suite 106, Salina, New York 13212; and 433 Fifth Avenue, New York, New York Through MMOF PD, LLC, the Company plans to operate a dispensary in Palm Desert, California. Through MMOF SD, LLC, the Company operates a dispensary located at 5125 Convoy Street, Suite 211, San Diego, California Through MMOF RE SD, LLC, the Company owns the building located at 5125 Convoy Street, San Diego, California Through MMOF SM, LLC., the Company plans to operate a dispensary in Santa Monica, California

8 1. NATURE OF OPERATIONS (Continued) Through MMOF Venice, LLC and MMOF Venice Collective, LLC, the Company operates a dispensary located at 410 Lincoln Boulevard, Venice, California Through MMOF Venice Parking Lot, LLC, the Company owns a parking lot located at 416 South Lincoln Boulevard, Los Angeles, California Through MME RE AK, LLC, the Company owns the building located at Abbot Kinney, Venice, California Through MMOF Vegas, LLC, the Company operates a dispensary located at 4235 Arctic Spring Avenue, Las Vegas, Nevada Through MMOF Vegas 2, LLC, the Company plans to operate a second dispensary in Las Vegas, Nevada. Through MMOF RE Vegas 2, LLC, the Company owns the building located at Highland Drive, Las Vegas, Nevada Through MMOF Fremont, LLC, the Company plans to operate a third dispensary in Las Vegas, Nevada. Through Project Mustang Development, LLC and The MedMen of Nevada 2, LLC, the Company operates a cultivation and production facility in northern Nevada. Through NVGN RE Holdings, LLC, the Company owns a warehouse in northern Nevada located at 140 Inventors Place, Sparks, Nevada 89441, in which it has under development a genetics and research and development facility. The Company plans to develop proprietary cannabis strains and cannabis-related products in the facility. Through Desert Hot Springs Green Horizon, Inc. and Manlin DHS Development, LLC, the Company has under development a cultivation and production facility in Desert Hot Springs, California. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Preparation The unaudited interim condensed consolidated financial statements of the Company have been prepared in accordance with International Accounting Standards 34, Interim Financial Reporting ( IAS 34 ), using accounting policies consistent with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and interpretations of the IFRS Interpretations Committee ( IFRIC ). The unaudited interim condensed consolidated financial statements do not include all of the information required for full annual financial statements. The accounting policies and critical estimates applied by the Company in these unaudited interim condensed consolidated financial statements are the same as those applied in the Company s audited combined financial statements as of and for the year ended June 30, These unaudited interim condensed consolidated financial statements were approved and authorized for issue by the Board of Directors of the Company on May 30, (b) Basis of Measurement These unaudited interim condensed consolidated financial statements have been prepared on the going concern basis, under the historical cost convention

9 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (c) Functional Currency The Company and its affiliates functional currency, as determined by management, is the United States ( U.S. ) dollar. These unaudited interim condensed consolidated financial statements are presented in U.S. dollars. (d) Basis of Consolidation These unaudited interim condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Subsidiaries over which the Company has control are fully consolidated from the date control commences until the date control ceases. Control exists when the Company is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, potential voting rights that are currently exercisable are taken into account. All of the consolidated entities were under common control during the entirety of the periods for which their respective results of operations were included in the consolidated statements (i.e., from the date of their acquisition). All intercompany balances and transactions are eliminated on consolidation. The following are the Company s wholly-owned subsidiaries: Beverly Hills MMOF BH, LLC, a California limited liability company CYON Corporation, Inc., a California corporation.. BH Fund II Group, LLC, a California limited liability company Downtown Los Angeles MMOF Downtown Collective, LLC, a California limited liability company Advanced Patients Collective, a California corporation.. DT Fund II Group, LLC, a California limited liability company MMOF Downtown, LLC, a California limited liability company New York Project Compassion Venture, LLC, a Delaware limited liability company Project Compassion Capital, LLC, a Delaware limited liability company.. Project Compassion NY, LLC, a Delaware limited liability company - MedMen NY, Inc., a New York corporation MMOF NY Retail, LLC, a New York limited liability company Palm Desert MMOF PD, LLC, a California limited liability company MMOF Palm Desert, Inc., a California corporation San Diego MMOF SD, LLC, a California limited liability company MMOF San Diego Retail, Inc., a California corporation MMOF RE SD, LLC, a California limited liability company - 7 -

10 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (d) Basis of Consolidation (Continued) Santa Monica MMOF SM, LLC, a California limited liability company MMOF Santa Monica, Inc., a California corporation Venice MMOF Venice, LLC, a California limited liability company The Compassion Network, a California corporation MMOF Venice Collective, LLC, a California limited liability company MMOF Venice Parking Lot, LLC, a California limited liability company Abbott Kinney MMOF RE AK, LLC, a California limited liability company Las Vegas MMOF Vegas, LLC, a Nevada limited liability company MMOF Vegas Retail, Inc., a Nevada corporation MMOF RE Vegas, LLC, a Nevada limited liability company MMOF Vegas 2, LLC, a Nevada limited liability company MMOF Vegas Retail 2, Inc., a Nevada corporation MMOF RE Vegas 2, LLC, a Nevada limited liability company MMOF Fremont, LLC, a Nevada limited liability company MMOF Fremont Retail, Inc., a Nevada corporation MMOF RE Fremont, LLC, a Nevada limited liability company Project Mustang Project Mustang Development, LLC, a Nevada limited liability company The MedMen of Nevada 2, LLC, a Nevada limited liability company MMNV2 Holdings I, LLC, a Nevada limited liability company MMNV2 Holdings II, LLC, a Nevada limited liability company MMNV2 Holdings III, LLC, a Nevada limited liability company MMNV2 Holdings IV, LLC, a Nevada limited liability company MMNV2 Holdings V, LLC, a Nevada limited liability company Genetics Lab NVGN RE Holdings, LLC, a Nevada limited liability company Desert Hot Springs Manlin DHS Development, LLC, a Nevada limited liability company Desert Hot Springs Green Horizon, Inc., a California non-profit corporation (e) Cash and Cash Equivalents Cash and cash equivalents include cash deposits in financial institutions and other deposits that are readily convertible into cash

11 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (f) Restricted Cash Restricted cash balances are those which meet the definition of cash and cash equivalents but are not available for use by the Company. As of March 31, 2018 and June 30, 2017, restricted cash was $2,662,203 and $2,190,067, respectively, which is used to pay for lease costs and costs incurred related to building construction in Reno, Nevada. This account is managed by a contractor and the Company is required to maintain a certain minimum balance. (g) Inventory Inventory is valued at the lower of cost and net realizable value. Cost is determined using the weightedaverage method. Net realizable value is determined as the estimated selling price in the ordinary course of business less estimated costs to sell. Packaging and supplies are initially valued at cost. The Company reviews inventory for obsolete, redundant and slow-moving goods and any such inventory is writtendown to net realizable value. As of March 31, 2018 and June 30, 2017, the Company determined that no reserve was necessary. (h) Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation and impairment losses, if any. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset using the following terms and methods: Building Furniture and Fixtures Leasehold Improvements Manufacturing Equipment Construction in Progress 39 Years 7 Years 7 Years 7 Years Not Depreciated The assets residual values, useful lives and methods of depreciation are reviewed at each financial year-end and adjusted prospectively if appropriate. An item of equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is included in the Consolidated Statements of Operations in the year the asset is derecognized. (i) Intangible Assets Intangible assets are recorded at cost, less accumulated amortization and impairment losses, if any. Intangible assets acquired in a business combination are measured at fair value at the acquisition date. Amortization is recorded on a straight-line basis over their estimated useful lives, which do not exceed the contractual period, if any. 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 estimated useful lives, residual values, and amortization methods are reviewed at each year-end, and any changes in estimates are accounted for prospectively. As of March 31, 2018 and June 30, 2017, the Company did not recognize any impairment losses

12 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (i) Intangible Assets (Continued) Marijuana dispensary licenses are measured at fair value at the time of acquisition and are amortized on a straight-line basis over a period of 15 years. Customer relationships are measured at fair value at the time of acquisition and are amortized on a straight-line basis over a period of 5 years. Management agreements are measured at fair value at the time of acquisition and are amortized on a straight-line basis over a period of 30 years. (j) Goodwill Goodwill represents the excess of the purchase price paid for the acquisition of an entity over the fair value of the net tangible and intangible assets acquired. Goodwill is allocated to the cash generating unit ( CGU ) or CGUs which are expected to benefit from the synergies of the combination. The Company has determined that the goodwill associated with all acquisitions belong to the medical cannabis segment. Goodwill that has an indefinite useful life is not subject to amortization and is tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is determined for goodwill by assessing if the carrying value of a CGU, including the allocated goodwill, exceeds its recoverable amount determined as the greater of the estimated fair value less costs to sell and the value in use. Impairment losses recognized in respect of a CGU are first allocated to the carrying value of goodwill and any excess is allocated to the carrying amount of assets in the CGU. Any goodwill impairment loss is recognized in the Consolidated Statement of Operations in the period in which the impairment is identified. Impairment losses on goodwill are not subsequently reversed. The Company s most recent goodwill impairment test during the second quarter did not result in the recognition of any impairment losses. (k) Leased Assets A lease of property and equipment is classified as a capital lease if it transfers substantially all the risks and rewards incidental to ownership to the Company. A lease of property and equipment is classified as an operating lease whenever the terms of the lease do not transfer substantially all of the risks and rewards of ownership to the lessee. Lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which the economic benefits are consumed. (l) Income Taxes Income tax expense consisting of current and deferred tax expense is recognized in the Consolidated Statement of Operations. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year-end, adjusted for amendments to tax payable with regards to previous years

13 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (l) Income Taxes (Continued) Deferred tax assets and liabilities and the related deferred income tax expense or recovery are recognized for deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that substantive enactment occurs. A deferred tax asset is recognized to the extent that it is probable that future taxable income will be available against which the asset can be utilized. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. (m) Revenue Recognition Revenue is recognized at the fair value of consideration received or receivable. Revenue from the sale of goods is recognized when all the following conditions have been satisfied, which are generally met once the products are shipped to customers: The Company has transferred the significant risks and rewards of ownership of the goods to the purchaser; The Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; The amount of revenue can be measured reliably; It is probable that the economic benefits associated with the transaction will flow to the entity; and The costs incurred or to be incurred in respect of the transaction can be measured reliably. The Company recognizes revenue from consulting services on a straight-line basis over the term of third party consulting agreements as services are provided. For the three months ended March 31, 2018 and 2017, amounts recorded as revenue are net of allowances, discounts and rebates of $30,338 and $0 respectively. For the nine months ended March 31, 2018 and 2017, amounts recorded as revenue are net of allowances, discounts and rebates of $67,221 and $8,675, respectively. (n) Research and Development Research and development costs are expensed as incurred. For the three months ended March 31, 2018 and 2017, research and development costs totaled $368 and $0, respectively. For the nine months ended March 31, 2018 and 2017, research and development costs totaled $2,282 and $6,485, respectively. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable and the Company intends to and has sufficient resources to complete the development to use or sell the asset. To date, no development costs have been capitalized

14 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (o) Unit-Based Compensation The Company has a unit-based compensation plan. The Company measures equity settled unit-based payments based on their fair value at the grant date and recognizes compensation expense over the vesting period based on the Company s estimate of equity instruments that will eventually vest. For units granted to non-employees, the compensation expense is measured at the fair value of the goods and services received, except where the fair value cannot be estimated, in which case, it is measured at the fair value of the equity instruments granted. The fair value of unit-based compensation to nonemployees is periodically re-measured until counterparty performance is complete, and any change therein is recognized over the period and in the same manner as if the Company had paid cash instead of paying with or using equity instruments. (p) Financial Instruments A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument to another entity. Financial assets and financial liabilities are recognized in the Consolidated Statement of Financial Position at the time the Company becomes a party to the contractual provisions of the financial instrument. (i) Initial Measurement of Financial Assets and Financial Liabilities Financial assets and liabilities are recognized at fair value upon initial recognition plus any directly attributable transaction costs when not subsequently measured at fair value through profit or loss. (ii) Subsequent Measurement Measurement in subsequent periods is dependent on the classification of the financial instrument. The Company classifies its financial instruments in the following categories: at fair value through profit or loss, loans and receivables, held to maturity, available for sale, and other financial liabilities. Financial Assets (i) Loans Loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value and subsequently on an amortized cost basis using the effective interest method, less any impairment losses. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period, which are classified as non-current assets

15 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (p) Financial Instruments (Continued) Financial Assets (Continued) (ii) Impairment of Financial Assets A financial asset not carried at Fair Value Through Profit or Loss ( FVTPL ) is reviewed at each reporting date to determine whether there is any indication of impairment. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. As of March 31, 2018 and June 30, 2017, the Company did not recognize any impairment losses. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the assets original effective interest rate. Losses are recognized in profit or loss with a corresponding reduction in the financial asset, or, in the case of amounts receivable, are reflected in an allowance account against receivables. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. (q) Significant Accounting Judgments, Estimates and Assumptions The preparation of the Company s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, and revenue 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. Significant judgments, estimates and assumptions that have the most significant effect on the amounts recognized in the consolidated financial statements are described below. (i) Estimated Useful Lives and Depreciation of Property and Equipment Depreciation of property and equipment is dependent upon estimates of useful lives which are determined through the exercise of judgment. 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. (ii) Estimated Useful Lives and Amortization of Intangible Assets Amortization of intangible assets is recorded on a straight-line basis over their estimated useful lives, which do not exceed the contractual period, if any. 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

16 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (q) Significant Accounting Judgments, Estimates and Assumptions (Continued) (iii) Business Combinations In a business combination, all identifiable assets, liabilities and contingent liabilities acquired are recorded at their fair values. One of the most significant estimates relates to the determination of the fair value of these assets and liabilities. Contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with International Standards on Auditing ( IAS ) 39, Financial Instruments: Recognition and Measurement, or IAS 37, Provisions, Contingent Liabilities and Contingent Assets, as appropriate, with the corresponding gain or loss being recognized in profit or loss. For any intangible asset identified, depending on the type of intangible asset and the complexity of determining its fair value, an independent valuation expert or management may develop the fair value, using appropriate valuation techniques, which are generally based on a forecast of the total expected future net cash flows. The evaluations are linked closely to the assumptions made by management regarding the future performance of the assets concerned and any changes in the discount rate applied. Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting for a business combination, they may be adjusted retrospectively in subsequent periods. However, the measurement period will last for one year from the acquisition date. (iv) Unit-Based Compensation The Company uses the Black-Scholes option pricing model to determine the fair value of members units granted. 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. (v) Goodwill Impairment Goodwill is tested for impairment annually during the second quarter and whenever events or changes in circumstances indicate that the carrying amount of goodwill has been impaired. In order to determine if the value of goodwill has been impaired, the cash-generating unit to which goodwill has been allocated must be valued using present value techniques. When applying this valuation technique, 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 assessed value of goodwill

17 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (q) Significant Accounting Judgments, Estimates and Assumptions (Continued) (vi) Deferred Tax Asset and Valuation Allowance Deferred tax assets, including those arising from tax loss carry-forwards, requires 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. (r) Recent Accounting Pronouncements The following IFRS standards have been recently issued by the IASB. The Company is assessing the impact of these new standards on future consolidated financial statements. Pronouncements that are not applicable or where it has been determined do not have a significant impact to the Company have been excluded herein. (i) IFRS 7, Financial instruments: Disclosure ( IFRS 7 ) IFRS 7 was amended to require additional disclosures on transition from IAS 39 to IFRS 9. IFRS 7 is effective on adoption of IFRS 9, which is effective for annual periods commencing on or after January 1, (ii) IFRS 9, Financial Instruments ( IFRS 9 ) In July 2014, the IASB issued the final version of IFRS 9, which reflects all phases of the financial instruments project and replaces IAS 39 and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. The Company does not expect significant impact on its consolidated financial statements from the adoption of this new standard. (iii) IFRS 15, Revenue from Contracts with Customers ( IFRS 15 ) The IASB replaced IAS 18, Revenue, in its entirety with IFRS 15. The standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. IFRS 15 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. The Company does not expect significant impact on its consolidated financial statements from the adoption of this new standard

18 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (r) Recent Accounting Pronouncements (Continued) 3. INVENTORY (iv) IFRS 16, Leases (IFRS 16 ) In January 2016, the IASB issued IFRS 16, which will replace IAS 17, Leases. This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than twelve months unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. The standard will be effective for annual periods beginning on or after January 1, 2019, with earlier application permitted for entities that apply IFRS 15 at or before the date of initial adoption of IFRS 16. The extent of the impact of adoption of the standard has not yet been determined. As of March 31, 2018 and June 30, 2017, inventories totaled $5,913,952 and $231,277, respectively, and is comprised primarily of cannabis and cannabis-related products. 4. PROPERTY AND EQUIPMENT As of March 31, 2018 and June 30, 2017, property and equipment consists of: March 31, 2018 June 30, 2017 Land and Building $ 36,521,901 $ Furniture and Fixtures 2,890, ,731 Leasehold Improvements 5,835,396 2,007,318 Manufacturing Equipment 4,917,928 2,796,595 Construction in Progress 16,716,094 5,795,607 Total Property and Equipment, Gross 66,881,630 11,074,251 Less: Accumulated Depreciation (1,942,076) (748,958) Property and Equipment, Net $ 64,939,554 $ 10,325,

19 4. PROPERTY AND EQUIPMENT (Continued) A reconciliation of the beginning and ending balances of property and equipment is as follows: Property and Equipment, Gross Accumulated Depreciation Property and Equipment, Net Balance as of July 1, 2017 $ 11,074,251 $ (748,958) $ 10,325,293 Additions 55,407,379 55,407,379 Business Acquisitions 400, ,000 Depreciation (1,193,118) (1,193,118) Balance as of March 31, 2018 $ 66,881,630 $ (1,942,076) $ 64,939,554 Depreciation expense of $848,458 and $15,153 was recorded for the three months ended March 31, 2018 and 2017, respectively, of which $381,026 and $0, respectively, is included in cost of goods sold. Depreciation expense of $1,193,118 and $39,722 was recorded for the nine months ended March 31, 2018 and 2017, respectively, of which $571,311 and $0, respectively, is included in cost of goods sold. 5. ACQUISITIONS AND MERGERS (a) Business Acquisitions (i) San Diego Health and Wellness Center, Inc. On February 16, 2018, the Company acquired all of the assets (except certain excluded assets) of San Diego Health and Wellness Center, Inc., dba Apothekare, a California non-profit mutual benefit corporation ( SD Health ) and the rights to operate and manage SD Health from SDHW Management, LLC, a California limited liability company ( SDHW Management ). The acquisition was accounted for in accordance with IFRS 3, Business Combinations ( IFRS 3 ). The assets consisted primarily of the city of San Diego issued dispensary license, customer relationships and fixed assets. The following table summarizes the consideration for the acquisition: Cash Paid $ 11,600,000 Total Consideration $ 11,600,

20 5. ACQUISITIONS AND MERGERS (Continued) (a) Business Acquisitions (Continued) (i) San Diego Health and Wellness Center, Inc. (Continued) The purchase price allocation for the acquisition, as set forth in the table below, reflects various fair value estimates and analyses which are subject to change within the measurement period. The primary areas of the purchase price allocation that are subject to change relate to the fair values of certain tangible assets, the valuation of intangible assets acquired, and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair value of the net assets acquired at the acquisition date during the measurement period. Measurement period adjustments that the Company determines to be material will be applied retrospectively to the period of acquisition in the Company s consolidated financial statements and, depending on the nature of the adjustments, other periods subsequent to the period of acquisition could also be affected. The Company expects to finalize the accounting for the acquisition by June 30, The following table summarizes the final accounting estimates of the acquisition with a purchase price of $11,600,000: Fixed Assets $ 200,000 Intangible Assets: Customer Relationships 2,545,300 Dispensary License 6,743,600 Total Identifiable Net Assets 9,488,900 Goodwill 2,111,100 Final Accounting Estimates of Net Assets Acquired $ 11,600,000 (ii) Just Quality, LLC On February 9, 2018, the Company acquired all of the assets of Just Quality, LLC, dba Panacea Cannabis, a Nevada limited liability company ( Just Quality ). The acquisition was accounted for as a business combination in accordance with IFRS 3. The assets consisted primarily of the state of Nevada issued dispensary license, customer relationships and fixed assets. The following table summarizes the consideration for the acquisition: Cash Paid $ 10,000,000 Total Consideration $ 10,000,

21 5. ACQUISITIONS AND MERGERS (Continued) (a) Business Acquisitions (Continued) (ii) Just Quality, LLC (Continued) The purchase price allocation for the acquisition, as set forth in the table below, reflects various preliminary fair value estimates and analyses which are subject to change within the measurement period as valuations are finalized. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the fair values of certain tangible assets, the valuation of intangible assets acquired, and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair value of the net assets acquired at the acquisition date during the measurement period. Measurement period adjustments that the Company determines to be material will be applied retrospectively to the period of acquisition in the Company s consolidated financial statements and, depending on the nature of the adjustments, other periods subsequent to the period of acquisition could also be affected. The Company expects to finalize the accounting for the acquisition by June 30, The following table summarizes the preliminary accounting estimates of the acquisition with a purchase price of $10,000,000: Fixed Assets $ 200,000 Intangible Assets: Customer Relationships 3,396,700 Dispensary License 6,163,800 Total Identifiable Net Assets 9,760,500 Goodwill 239,500 Preliminary Accounting Estimates of Net Assets Acquired $ 10,000,000 Acquisition costs of $440,619 were excluded from the consideration transferred and were recognized as an expense in the current period. (iii) LVMC, LLC On January 19, 2018, the Company entered into an Option and Asset Purchase Agreement (the Agreement ) to acquire all of the assets of LVMC, LLC, dba Cannacopia, a Nevada limited liability company ( LVMC ). The assets consist primarily of the state of Nevada issued dispensary license, customer relationships, inventory and fixed assets. Per the Agreement, the purchase will be $10,000,000 plus the cost of the inventory. The Company paid $1,000,000 for the exclusive right and sole option (the Option Consideration ) to purchase LVMC s assets. The term of the option is 90 days and the Company has the right to extend the option term for up to four successive periods of 30 days each and additional Option Consideration payments of $1,000,000 for each extension. If the acquisition does not close, the Option Consideration payments are refundable under the conditions specified in the Agreement. In April 2018, the Company extended the term of the option for 30 days and paid a $1,000,000 Option Consideration

22 5. ACQUISITIONS AND MERGERS (Continued) (b) Asset Acquisitions (i) Real Property (Building) In connection with the SD Health acquisition, on February 16, 2018, the Company acquired the building housing SD Health located at 5125 Convoy Street, San Diego, California from P2 Properties, LLC, a California limited liability company for $8,800,000. The following table summarizes the consideration for the acquisition: Cash Paid $ 8,800,000 Total Consideration $ 8,800,000 Acquisition costs of $761,851 were excluded from the consideration transferred and were recognized as an expense in the current period. (ii) Management Agreement On September 13, 2017, MMOF BH Collective, LLC ( MMBH ), a company controlled by MMMG LLC, entered into an Asset Purchase Agreement (the Agreement ) with CC-DTHC Facilities Management, LLC, a California limited liability company ( DTHC ), and its member, pursuant to the terms of which, MMBH acquired specific assets of DTHC. DTHC, through a management agreement dated September 11, 2017, manages CYON Corporation, Inc. ( CYON ), a California public benefit corporation, which operates a medical marijuana dispensary in Los Angeles, California. The purpose of this acquisition was to acquire the medical marijuana dispensary license of CYON through the management agreement. The acquisition was accounted for as an asset acquisition in accordance with IFRS 3, Business Combinations. The intent of the purchase was the acquisition and assignment of: All of DTHC and/or DTHC s member(s) rights under the management agreement with CYON referenced above, as well as any other operational rights and management authority in CYON. Any and all interests that DTHC and/or its member(s) have in CYON board rights. All intellectual property rights in CYON, including but not limited to social media controlled by DTHC or its member(s). All goodwill associated with DTHC, CYON and the purchased assets. MMBH did not acquire the assets or operations of CYON (i.e. inventories, operating assets, or employees), but rather, the ability to manage such assets under the management agreement

23 5. ACQUISITIONS AND MERGERS (Continued) (b) Asset Acquisitions (Continued) (ii) Management Agreement (Continued) The total purchase price was $4,000,000, which consisted of $2,000,000 in cash and a note payable in the amount of $2,000,000 (the Note ). Pursuant to the terms of the Agreement, the Note plus accrued interest would be paid upon the approval by the City of Los Angeles for a Measure M permit to operate a cannabis business as a medical marijuana dispensary. In the event the dispensary is not issued a permit, after exhausting all remedies available, the purchase price shall be reduced by $2,000,000. Management is confident the City of Los Angeles will grant the permit within a year. MMBH did not acquire any liabilities of DTHC prior to the Purchase Agreement date, but the Purchase Agreement provided for a purchase holdback up to twenty percent of the purchase price to offset any potential liabilities incurred by MMBH within twelve months of the closing date of the Purchase Agreement. No known liabilities have been incurred nor accounted for. In connection with the acquisition, $2,000,000 was paid in assignment and finder s fees, which were expensed as incurred. Under the terms of the management agreement, the Company shall be compensated for services as follows: (i) Management Fee equal to 25% of earnings before income taxes, depreciation and amortization; (ii) Design Fee equal to 1.5% of the total approved construction budget; and (iii) Construction Management Fee equal to 5.0% of the total approved construction budget. (iii) Real Property (Parking Lot) On September 1, 2017, the Company entered into an agreement (the Agreement ) to purchase certain real property in Los Angeles for a total purchase price of $3,250,000. The property includes an approximately 1,598 square foot one-story dormant motel building on an approximately 4,003 square foot lot, an approximately 2,000 square foot lot, and an approximately 2,001 square foot lot (collectively, the Property ), located at 416 South Lincoln Boulevard, Los Angeles, California The Company plans to develop the property into a parking lot for its Venice dispensary. In connection with the Agreement, the Company issued two secured promissory notes. The first secured promissory note was for $1,625,000 (the Note ). The Note has a maturity date of September 30, 2019 and bears interest at the rate of 7.90% per annum up to and including September 30, 2018, thereafter the Note bears interest at the rate of 8.30% per annum from and after October 1, Accrued interest is payable on a monthly basis. The second secured promissory note was for $400,000 (the Second Note ). The Second Note has a maturity date of September 30, 2019 and bears interest at the rate of 11.25% per annum