MILC Millennium Sustainable Ventures Corporation (CE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 – GENERAL INFORMATION

Nature of Operations

Millennium Sustainable Ventures Corp., formerly known as Millennium Investment & Acquisition Co. Inc., formerly known as Millennium India Acquisition Company, Inc. (“MILC”, “we”, “our”, the “Company”) is currently focused on the “Triple Bottom Line” and a commitment to Profit, Planet and People and is currently focused on two business segments:

Greenhouse Cultivation of Cannabis

Millennium Cannabis LLC (“MillCann”), our wholly owned subsidiary, is focused on a sustainable approach to cannabis cultivation through Controlled Environmental Agriculture (“CEA”) in the form of greenhouses. MillCann is currently focused on securing cannabis licensing for a 550,000 square foot greenhouse facility in Michigan that is leased from a subsidiary of Power REIT (NYSE AMEX: PW and PW.PRA). David Lesser is Chairman and CEO of Power REIT and also Chairman and CEO of MILC. MILC’s affiliation with Power REIT can provide efficient access to capital allowing MillCann to become a sustainable high-quality, low-cost producer of cannabis.

On September 9, 2021, a wholly owned subsidiary of MillCann, Marengo Cannabis LLC (“MC”) entered into a 20-year lease (the “MarCann Lease) with a subsidiary of Power REIT for approximately 12 acres that includes a 556,416 square foot state-of-the-art greenhouse cultivation facility which is located in Marengo County, Michigan (the “MC Property”). As part of the MarCann Lease, the lessor has agreed to fund the rehabilitation and upgrading of the existing improvements.

We believe that once operational, this would be the largest cannabis cultivation facility in Michigan and one of the largest greenhouse cannabis cultivation facilities in the United States. We believe that given the scale of the project combined with the fact that it is a greenhouse will position MC, to compete very as a low-cost producer of high-quality cannabis. This is especially important as prices for cannabis in most markets have significantly compressed recently.

As previously disclosed, cannabis licensing is delayed based on a lack of cooperation from Marengo Township where the property is located. As part of securing cannabis licenses from the Michigan Cannabis Regulatory Agency (“CRA”), a Certificate of Occupancy (“CO”) must be submitted where applicable. Pursuant to the Marengo Township zoning map, the Property is zoned Agricultural and was given a Marijuana Overlay, which according to the Marengo Township Ordinance does not change the underlying zoning. As such, the Property does not require a CO and the CRA agreed in writing to accept a simple two sentence letter (the “CO Letter”) as an alternative to providing a CO. PW Marengo pursued the agreed upon CO Letter from Marengo Township which was initially unwilling to cooperate which ultimately led to the initiation of two litigations against Marengo Township.

After commencement of the litigation process, we ultimately secured the CO Letter from the Marengo Township Supervisor confirming that the property does not need a CO. The CO Letter is in the form that the CRA previously agreed to accept. Based on the receipt of the CO Letter, the CRA licensing process moved forward and on August 9, 2022, CRA performed a pre-licensure inspection and identified that no deficiencies existed. In addition to the CRA approval we received, we are required to secure the approval of the Michigan Bureau of Fire Services (“BFS”). Unfortunately, after receiving the CRA pre-approval for the property, the attorney for the Township sent an email to the CRA indicating the facility was not in compliance with the Township requirements. We continue to try to work with the Township to establish a path forward but will continue to pursue a parallel track in litigation including a court ordered mediation process. Despite having to withdraw the application to the CRA, we have been able to continue the process with the BFS. The process was fairly involved and required justifying the level of the hazards as reasonable for operation. On November 4, 2022, we received an approval of our plans from BFS which is subject to a final physical inspection which will take place once we are finalizing the license.

On October 24, 2022, PW Marengo submitted an application to the Marengo Township Construction Board of Appeals (“CBA”) as another potential path towards the resolution of the dispute. The CBA is currently scheduled for November 21, 2022.

In May 2021, MillCann made a loan to Walsenburg Cannabis, LLC (“WC”) including a Framework Agreement whereby upon certain conditions, the loan would convert into a majority ownership position in WC under certain circumstances. During 2021 and 2022, WC harvested and sold crops but, unfortunately, the project was delayed and overbudget which caused financial strains. In addition, pricing in the Colorado cannabis market compressed dramatically in 2021 and has not recovered. Based on poor performance and in an effort to conserve resources, MillCann determined to stop funding additional operating losses at the Colorado cultivation facility in June, 2022 and the facility ceased operations. MILC is currently evaluating alternatives for capital recovery and also might consider resuming operations in the future based on the market environment. MILC has written off $1,505,898 as a bad debt expense based on uncertainty around recovery of its investment.

In June, 2021, MillCann committed to invest in a 9.35-acre property in Vinita, OK which has 40,000 square feet of greenhouse and related space and approximately 100,000 square foot outdoor growing area. During 2021, VC harvested and processed its first crops and sales began in the first quarter of 2022. MillCann invested in VC through a preferred equity interest that is structured to receive a full return of invested capital plus a 12.5% preferred return after which MillCann has an 82.0% ownership stake. The remaining subordinated ownership is held by former members of the management team of VC. The price for wholesale cannabis in the Oklahoma market has compressed dramatically from historical prices which has had a negative impact on project performance. At the end of September, 2022, in an effort to conserve resources, MillCann determined to stop funding additional operating losses at the Vinita cultivation facility and the facility ceased operations. MILC has taken a write off of its investment as a bad debt expense based on uncertainty around recovery of its investment during Q3 2022.

Activated Carbon

Millennium HI Carbon, LLC (“MHC”) is a wholly owned subsidiary that acquired an activated carbon plant in Hawaii (the “Hawaii Plant”) that was intended to produce a very high-grade form of Activated Carbon for the production of ultracapacitors which are an advanced electrical storage device. During the first half of 2019, MHC concluded that the Hawaii Plant was not capable of producing consistent results and has made efforts to minimize overhead and cash drain while it seeks a strategic alternative for the Hawaii Plant. Effective December 31, 2021, MILC determined to write off $2,765,000, the remaining value of the HI asset for accounting purposes given that the plant is dormant and there is uncertainty around a business plan for this asset. MILC considers this asset held for sale. We have entered into a Purchase Agreement that was scheduled to close by September 30, 2022 with a sales price of $3 million. The scheduled closing has been extended and the purchase price was increased to $3.2 million. There can be no assurance as to when or if this transaction will close.

MillCarbon is a wholly owned subsidiary that has developed a novel method for the sustainable production of biochar and activated carbon and has constructed a proof-of-concept pilot-scale plant in Kentucky. This project has proven that it can produce either biochar and/or activated carbon from a waste stream generated by bourbon distilleries (“Stillage”). The bourbon industry in Kentucky generates in excess of 1 Billion gallons of Stillage annually which represents a significant disposal and environmental problem. We believe our technology represents a sustainable approach to relative to traditional methods which include mining coal for the production of Activated Carbon which has a very high carbon footprint. The plant has now completed over 230 batches that have produced Activated Carbon, Biochar, and Horticultural Vinegar. MillCarbon believes it has proven itself at the pilot scale level and is evaluating scaling up the plant to process approximately 10 million gallons per year by making incremental investments. The experience with the expanded plant would allow us to evaluate the construction of a large-scale plant based on the technology it has developed. We also believe this process can be replicated to address disposal issues from other carbon dense waste streams.

On October 1, 2021, MILC filed an application with FINRA for approval to change its name to Millennium Sustainable Ventures Corp and received approval for the name change as disclosed in a Form 8-K and Press Release issued on February 16, 2022. We believe the name change better reflects our focus on sustainable Controlled Environment Agriculture (CEA) cultivation in greenhouses and the sustainable production of activated carbon. MILC, with a focus on the “Triple Bottom Line” and a commitment to Profit, Planet and People is focused on sustainable business practices.

During 2020, MILC announced that it was seeking to de-register as an Investment Company that is regulated under Investment Company Act of 1940 (the “1940 Act”). As previously announced, MILC has completed the liquidation of its sole investment in securities - its investment in SMC and plans to invest the proceeds in operating businesses. On October 14, 2020, shareholders approved a proposal to change the nature of the Company’s business from a registered investment company under the 1940 Act to a holding company that focuses primarily on owning and operating businesses (collectively, the “Deregistration Proposal”). On March 1, 2021, as amended on May 11, 2021, December 9, 2021 and January 21, 2022, the Company filed an application pursuant Section 8(f) of the Investment Company Act of 1940 for an Order Declaring that MILC has Ceased to be an Investment Company (the “Deregistration Order”). On February 2, 2022, the SEC issued a notice that it was commencing the 25-day public review period in response to MILC’s application. On February 28, 2022, MILC received the Deregistration Order declaring that is has ceased to be an Investment Company. Consequently, the financial statements presented herein are presented in accordance with the reporting requirements under the Securities Exchange Act of 1934, as amended.

2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements.

In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of September 30, 2022, and the results of operations and cash flows for the periods presented. The results of operations for the nine months ended September 30, 2022, are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes included in our latest Annual Report on Form 10-K file with the SEC on March 15, 2022.

Principles of Consolidation

The accompanying consolidated financial statements of MILC include the accounts of the Company and its wholly owned subsidiaries as follows:

All intercompany balances have been eliminated in consolidation.

Walsenburg Cannabis LLC (“WC”) WC was previously accounted for as consolidated in the financial statements of MILC as a variable interest entity (“VIE”). MillCann had issued capital to WC in the form of a convertible loan for its business operations as MILC was in the process of obtaining regulatory approvals for holding cannabis licenses in Colorado. Upon receiving regulatory approval, it was contemplated that the loan would convert into a majority preferred equity interest in WC that would receive a full return of invested capital plus a 12.5% preferred return, after which MillCann would have an 83.5% ownership stake. Given the poor performance at the cultivation facility and MILC’s withdrawal of its application for approval for cannabis licensing in Colorado, WC is no longer considered a VIE as of June 30, 2022, and was deconsolidated. As previously disclosed, MillCann has not received its return of capital and preferred return, has stopped funding additional funds to WC and has taken a bad debt expense of $1,505,898 in Q2 2022, in order to write off the loan.

Loss per Common Share

Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. In periods where the Company has a net loss, such as below, the computation of diluted net loss per share does not include dilutive common stock equivalents in the weighted average shares outstanding as their effect would be anti-dilutive.

The following table sets forth the computation of basic loss per share:

Property, Plant and Equipment

Property, plant and equipment is stated at cost. The costs of additions and betterments are capitalized and expenditures for repairs and maintenance are expensed in the period incurred. When items of property, plant and equipment are sold or retired, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is included in income. The Company capitalizes property and leased equipment where the terms of the lease result in the transfer to the Company of substantially all of the benefits and risks of ownership of the equipment.

Depreciation of property and equipment is provided utilizing the straight-line method over the estimated useful lives of the respective assets as follows:

 SCHEDULE OF PROPERTY PLANT AND EQUIPMENT ESTIMATED USEFUL LIVES

Leasehold improvements are amortized over the shorter of the remaining term of the lease or the useful life of the improvement utilizing the straight-line method.

Depreciation expense for the nine months ended September 30, 2022, and 2021 was $21,489 and $1,956, respectively. Depreciation expense for the nine months ended September 30, 202 and 2021 for discontinued operations is $0 and $363, respectively.

The Company reviews long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate their carrying amount may not be recoverable in accordance with FASB ASC Topic 360, Impairment or Disposal of Long-Lived Assets. Recoverability of long-lived assets is measured by comparing the carrying amount of the asset or asset group to the undiscounted cash flows that the asset or asset group is expected to generate. If the undiscounted cash flows of such assets are less than the carrying amount, the impairment to be recognized is measured by the amount by which the carrying amount, if any, exceeds its fair value. For the nine months ended September 30, 2022 and 2021, MILC incurred an impairment charge in VinCann LLC of $53,556 and Millennium Produce of $202,087 related to the write off of property, plant and equipment for discontinued operations.

Revenue Recognition

The Company recognizes revenue in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 606, Revenue from Contract with Customers, as amended by subsequently issued Accounting Standards Updates. This revenue standard requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to in exchange for those goods or services. The recognition of revenue is determined by performing the following consecutive steps:

Revenue from the direct sale of cannabis to customers for a fixed price is recognized when the Company transfers control of the good to the customer.

Liquidity and Going Concern

The Company’s objectives when managing its capital are to ensure that there are adequate capital resources to safeguard the Company’s ability to continue operating and maintain adequate levels of funding to support its ongoing operations and development such that it can continue to provide returns to shareholders.

ASU 205-40 – Presentation of Financial Statements – Going Concern requires management to evaluate an entity’s ability to continue as a going concern within one year after the date the financial statements are available for issuance. Specifically, management is required to evaluate whether the presence of adverse conditions or events, when considered individually and in the aggregate, raise substantial doubt about an entity’s ability to continue as a going concern. Substantial doubt exists when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are available for issuance.

As of September 30, 2022, the Company had an accumulated deficit of $64,581,541 and negative working capital of $4,158,778. Additionally, the Company had recurring losses and negative cashflow from operations. These adverse conditions raise substantial doubt regarding the Company’s ability to continue as a going concern. In order to support the Company’s ongoing operations, the Company entered into a credit facility with an affiliate of David H. Lesser, our Chairman and CEO which is payable in full on December 31, 2022. As of September 30, 2022, the Company has borrowed $1,925,060 pursuant to this facility.

Although the Company believes its cash available as of September 30, 2022, potential tax refunds from withholding taxes in India related to the sales of securities, and the potential for the sale of its Hawaii asset may be sufficient to fund operations and commitments for twelve months from the date of the filing of this Quarterly Report on Form 10-Q, however, management has concluded the uncertainty raises substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Fair Value

Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company measures its financial assets and liabilities in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considering counterparty credit risk.

The carrying amounts of the Company’s financial instruments, including cash, deposits, and accounts payable approximate fair value because of their relatively short-term maturities.

Indemnification

Under MILC’s organizational structure and per the Company’s organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to MILC. In addition, in the normal course of business, MILC enters into contracts with its vendors and others that provide for general indemnifications. MILC’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against MILC. However, based on experience, MILC expects that risk of loss to be remote.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Inventory

Costs incurred during the growing and cultivation process are capitalized as incurred to the extent that cost is less than net realizable value. These costs include materials, labor and overhead used in the growing and cultivation processes. The Company capitalizes pre-harvest costs.

Finished goods inventory is initially valued at cost and subsequently at the lower of cost and net realizable value. Net realizable value is determined as the estimated selling price in the ordinary course of business less the estimated costs of completion, disposal and transportation for inventories in process. The Company periodically reviews its inventory and identifies that which is excess, slow moving or poor product quality by considering factors such as inventory levels and forecasted sales demand. Any identified excess, slow moving and poor-quality inventory is written down to its net realizable value through a charge to cost of goods sold. During Q2 2022, we wrote off all inventory at WC and during Q3 2022 we wrote off all inventory at VC and Millennium Produce. As of September 30, 2022, MILC has $114,991 of raw materials inventory at MC. For the nine months ended September 30, 2022 and 2021, $534,958 and $0, respectively were expensed through cost of goods sold related to impairment of inventory for discontinued operations.

Leases

The Company accounts for leases as required by ASC Topic 842. The guidance requires companies to recognize leased assets and liabilities on the balance sheet and to disclose key information regarding leasing arrangements. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. We determine if an arrangement is a lease at inception. As of Q3 2022, the company has eliminated the accounting treatment for the leases for VC and Millennium Produce which are in default.

Accounting for Discontinued Operations

We regularly review underperforming assets to determine if a sale or disposal might be a better way to monetize the assets. When an asset group is considered for sale or disposal, we review the transaction to determine if or when the entity qualifies as a discontinued operation in accordance with the criteria of FASB ASC Topic 205-20 “Discontinued Operations.” The FASB has issued authoritative guidance that raises the threshold for disposals to qualify as discontinued operations. Under this guidance, a discontinued operation is (1) a component of an entity or group of components that have been disposed of or are classified as held for sale and represent a strategic shift that has or will have a major effect on an entity’s operations and financial results, or (2) an acquired business that is classified as held for sale on the acquisition date.

As of September 30, 2022, the following are considered discontinued operations and will be reported separately for the nine months ended September 30, 2022 and 2021:

On April 1, 2022, MILC announced that it was expanding its sustainable greenhouse cultivation activities by establishing its first food related operations. Capitalization of Millennium Produce was established from a $3 million non-recourse loan with a fixed interest rate of 1.5% and a four-year term from the firm that was retained to handle the sale and distribution of the tomato crop. The loan is secured by Furniture, Fixtures, and Equipment, which was purchased by Millennium Produce with an indicated value of $150,000, as well as crops. The environment for tomato cultivation has been challenging with supply chain problems and costs increasing but tomato prices staying relatively low. Millennium Produce successfully grew a significant crop of tomatoes and generated revenue during Q3 2022 but does not anticipate any further revenues during Q4 2022. In September 2022 the crop was terminated, the loan was placed into default and Millennium Produce ceased operations.

VinCann LLC (“VC”) was previously accounted for as consolidated in the financial statements of MILC. MillCann invested in VC in the form of a preferred equity interest that would receive a full return of invested capital plus a 12.5% preferred return, after which MillCann would have an 82.0% ownership stake. As of September 30, 2022, MillCann has stopped funding VC and has taken a charge of $57,625 during Q3 2022 to write-off of its investment and is accounting for VC as a discontinued operation.

Assets and Liabilities Held for Sale

Our Company classifies long-lived assets or disposal groups to be sold as held for sale in the period in which all of the following criteria are met: (1) management, having the authority to approve the action, commits to a plan to sell the asset or disposal group; (2) the asset or disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets or disposal groups; (3) an active program to locate a buyer and other actions required to complete the plan to sell the asset or disposal group have been initiated; (4) the sale of the asset or disposal group is probable, and transfer of the asset or disposal group is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the asset or disposal group beyond one year; (5) the asset or disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

We initially measure a long-lived asset or disposal group that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held-for-sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset or disposal group until the date of sale. We assess the fair value of a long-lived asset or disposal group less any costs to sell each reporting period it remains classified as held for sale and report any subsequent changes as an adjustment to the carrying value of the asset or disposal group, as long as the new carrying value does not exceed the carrying value of the asset at the time it was initially classified as held for sale.

Upon determining that a long-lived asset or disposal group meets the criteria to be classified as held for sale, the Company ceases depreciation and reports long-lived assets and/or the assets and liabilities of the disposal group, if material, in the line items assets held for sale and liabilities held for sale, respectively, in our consolidated balance sheet. Refer to Note 7.

Reclassification

Certain prior period amounts have been reclassified to conform to current period presentation in order to reflect the discontinued operations of VC and Millennium Produce. None of these reclassifications had an impact on reported financial position or cash flows for any of the periods presented.

Variable Interest Entities

The Company consolidates all variable interest entities in which it holds a variable interest and is the primary beneficiary of the entity. Generally, a variable interest entity (“VIE”) is a legal entity with one or more of the following characteristics: (a) the total at risk equity investment is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties; (b) as a group the holders of the equity investment at risk lack any one of the following characteristics: (i) the power, through voting or similar rights, to direct the activities of the entity that most significantly impact its economic performance, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) some equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The primary beneficiary of a VIE is required to consolidate the VIE and is the entity that has (a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (b) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

In determining whether it is the primary beneficiary of a VIE, the Company considers qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party has the power to direct such activities; the amount and characteristics of Company’s interests and other involvements in the VIE; the obligation or likelihood for the Company or other investors to provide financial support to the VIE; and the similarity with and significance to the business activities of Company and the other investors. Significant judgments related to these determinations include estimates about the current and future fair values and performance of these VIEs and general market conditions.

As of September 30, 2022, MILC does not have any entities that are considered a VIE.

Impact of New Accounting Standards

The Company has evaluated all recent accounting pronouncements and believes either they are not applicable or that none of them will have a significant effect on the Company’s financial statements

3. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost, net of accumulated depreciation and impairment and is comprised of the following:

As of September 30, 2022, the Company’s Property, Plant and Equipment consisted of Activated Carbon production machinery and equipment at the MillCarbon pilot plant in Kentucky and machinery and equipment, furniture and fixtures and office equipment at MC. Property, plant and equipment as of September 30, 2022 included the HI asset that was never commercially operational and therefore did not incur a depreciation expense. Effective December 31, 2021, MILC determined to write off $2,765,000, the remaining value of the HI asset for accounting purposes given that the plant is dormant and there is uncertainty around a business plan for this asset. Depreciation expense for the nine months ended September 30, 2022, and 2021 was $21,489 and $1,956, respectively. Depreciation expense for the nine months ended September 30, 2022 and 2021 for discontinued operations is $0 and $363, respectively. VinCann LLC wrote off $53,556 and Millennium Produce wrote off $202,087 in PPE related to discontinued operations.

4. INVENTORY

The Company’s inventories include the following:

During Q2 2022, we wrote off all inventory at WC and during Q3 2022 we wrote off all inventory at VC and Millennium Produce. As of September 30, 2022, MILC has $114,991 of raw materials inventory at MC. For the nine months ended September 30, 2022 and 2021, $534,958 and $0, respectively were expensed through cost of goods sold related to impairment of inventory for discontinued operations.

5. COMMITMENTS AND CONTINGENCIES

Operating Leases

A contract is or contains a lease if the contract conveys the right to control the use of identified property (an identified asset) for a period of time in exchange for consideration.

As of September 30, 2022, the Company, through subsidiaries, has entered into four operating leases:

The exercise of the lease renewal options is generally at the Company’s sole discretion. The Company is certain that there is no transfer of ownership at the end of the lease terms and considers these leases to be classified as operating leases and the costs are recognized on a straight-line basis over the lease terms.

Operating lease right-of-use assets are amortized over the length of the leases. The renewal options are not included in the calculation of its right-of-use assets and lease liabilities, as the Company does not believe that it is reasonably certain at this time that these renewal options will be exercised. Periodically, the Company assesses its lease to determine whether it is reasonably certain that these options and any renewal options could be reasonably expected to be exercised.

In general, the individual lease contracts do not provide information about the rate implicit in the lease. Because the Company is not able to determine the rate implicit in its lease, it instead generally uses its incremental borrowing rate to determine the present value of lease liability.

As of September 30, 2022, MillCann no longer has any finance leases for equipment which was used within the operations of cultivating cannabis at WC and VC which have been eliminated from our accounting.

As of September 30, 2022, the scheduled lease payments are as follows:

For the nine months ended September 30, 2022, and 2021, the operating lease costs were as follows:

Other Contingencies

MHC is currently subject to a lawsuit which involves ownership of a piece of equipment that MHC believes it acquired as part of its original acquisition of the property through the bankruptcy trustee. MHC prevailed in this lawsuit with the court ruling in MHC’s favor and awarding a portion of MHC’s legal fees to MHC. The plaintiff has filed an appeal which is pending. MHC currently does not believe it is likely that the appeal will overturn the ruling of the lower court. MHC also does not believe it has material exposure in the event the ruling at the lower court is not affirmed. MHC could, from time to time, be involved in additional litigation proceedings arising out of its normal course of business.

Millennium Produce is currently subject to a lawsuit related to a $3 million non-recourse loan as well as from a company which provided contract labor. Millennium Produce also has other accounts payable that it currently cannot satisfy. These obligations are the responsibility of Millenniem Produce and are non-recourse to the Company.

The COVID-19 outbreak in the United States has caused business disruptions through mandated and voluntary closings. Although temporary disruptions can be expected, significant uncertainty exists concerning the magnitude and duration of the COVID-19 pandemic’s impact on the Company’s customers, labor sources, supply chains, and demand for the Company’s services. The potential financial impact cannot be reasonably estimated at this time.

6. DISCONTINUED OPERATONS

VinCann LLC

In June, 2021, MillCann committed to invest in a 9.35-acre property in Vinita, OK which has 40,000 square feet of greenhouse and related space and approximately 100,000 square foot outdoor growing area. The price for wholesale cannabis in the Oklahoma market has compressed dramatically from historical prices which has had a negative impact on project performance. At the end of September, 2022, MillCann determined to stop funding additional operating losses at the Vinita cultivation facility and the facility ceased operations. MILC has taken a write off of its investment as a bad debt expense based on uncertainty around recovery of its investment during Q3 2022.

Millennium Produce of Nebraska LLC

On April 1, 2022, MILC announced that it was seeking to expand its sustainable greenhouse cultivation activities by establishing its first food related operations. Capitalization of Millennium Produce was established from a $3 million non-recourse loan with a fixed interest rate of 1.5% and a four-year term from the firm that was retained to handle the sale and distribution of the tomato crop. The loan is secured by Furniture, Fixtures, and Equipment, which was purchased by Millennium Produce with an indicated value of $150,000, as well as crops. The environment for tomato cultivation was challenging with supply chain problems and costs increasing but tomato prices staying relatively low. Millennium Produce successfully grew a significant crop of tomatoes and generated revenue during Q3 2022 but does not anticipate any further revenues during Q4 2022. In September 2022 the crop was terminated, the loan was placed into default and Millennium Produce ceased operations.

A breakdown of the discontinued operations is presented as follows:

Assets and liabilities of discontinued operations included the following:

7. ASSET HELD FOR SALE

We entered into an agreement in August, 2022 to sell our activated carbon plant in Hawaii. The Company has aggregated and classified the assets and liabilities of this business as held for sale in our Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021. The assets and liabilities of businesses held for sale were as follows:

8. LINE OF CREDIT – AFFILIATE

The Company has entered into a credit facility with an affiliate of David H. Lesser, our Chairman and CEO on March 16, 2022, which provides cash to fund the capital needs of the company with a quarterly variable interest rate as determined by the Special Committee – Related Party Transactions of 0% for 1Q2022, 5% for 2Q2022, 7% for 3Q2022 and 9% for 4Q2022. The credit facility carries a default rate of 16% if not paid in full by maturity date. The Company has the right to prepay amounts outstanding at any time prior to maturity of the Credit Facility without any prepayment penalty and the credit facility matures on December 31, 2022. As of September 30, 2022 and December 31, 2021, the amount drawn on the credit facility is $1,914,714 (total drawn is $1,925,060 net of $10,346 of capitalized debt costs which are being amortized over the life of the financing) and $0, respectively, with accrued interest related to the loan of $33,104 and $0, respectively

9. DEBT

On March 31, 2022, Millennium Produce secured a $3 million non-recourse loan with a fixed interest rate of 1.5% and a four-year term and fully amortizes over the life of the loan with monthly payments. The loan received a security interest in Furniture, Fixtures, and Equipment, as well as crops of Millennium Produce. As of September 30, 2022, Millennium Produce wound down operations and the balance of the loan was $2,498,849 (not including default interest and other costs). In October, 2022, the lender completely removed certain collateral based on its security interest. The Company does not believe it has exposure to this loan since it is non-recourse to the Company.

10. COMMON STOCK

The Company’s Certificate of Incorporation currently authorizes the issuance of 30,000,000 shares of common stock and 5,000 shares of preferred stock, each with a par value of $0.0001 per share. The total shares outstanding as of September 30, 2022, is 10,999,814.

In November 2013, the Company’s Board of Directors authorized a buyback of up to 800,000 shares of its common stock. Buybacks will be made from time to time based on the view of the Company of its trading price relative to its underlying value and subject to compliance with applicable legal requirements. No buybacks were made during the three months ended September 30, 2022.

11. EQUITY AND LONG-TERM COMPENSATION

Securities Authorized for Issuance Under Equity Compensation Plans

MILC’s 2021 Equity Incentive Plan (the “2021 Plan”) was adopted by the Board on October 10, 2021 and approved by the shareholders on December 8, 2021. It provides for the grant of the following awards: (i) Incentive Stock Options; (ii) Nonstatutory Stock Options; (iii) SARs; (iv) Restricted Stock Awards; (v) RSU Awards; (vi) Performance Awards; and (vii) Other Awards. The Plan’s purpose is to secure and retain the services of Employees, Directors and Consultants, to provide incentives for such persons to exert maximum efforts for the success of the Company and to provide a means by which such persons may be given an opportunity to benefit from increases in value of the common stock through the granting of awards.

Summary of Stock Based Compensation Activity – Options

On July 15, 2022, the Company granted non-qualified stock options (“options”) to acquire 247,500 shares of common stock at a price of $.50 to its CEO, independent Directors and a consultant. The term of each option is 10 years. The options vest over three years as follows: in a series of thirty-six (36) equal monthly installments measured from the Vesting Commencement Date on the same date of the month as the Vesting Commencement date.

The Company accounts for share-based payments using the fair value method. We recognize all share-based payments in our financial statements based on their grant date fair values and market closing price, calculated using the binomial option pricing model.

The following assumptions were made to estimate fair value:

The Company uses historical data to estimate dividend yield and volatility and the “simplified method” as described in the SEC Staff Accounting Bulletin #110 to determine the expected term of the option grants. The risk-free interest rate for the expected term of the options is based on the U.S. treasury yield curve on the grant date. The Company does not have historical data of forfeiture, and as a policy, has used an appropriate estimate of the forfeiture rate in calculating unrecognized share-based compensation expense. Compensation expenses may be adjusted if the actual forfeiture rate differs from this assumption.

The summary of stock-based compensation activity for the nine months ended September 30, 2022, with respect to the Trust’s stock options, is as follows:

The weighted average remaining term of the options is 9.79 years.

Summary of Stock Based Compensation Activity – Restricted Stock

On July 15, 2022, the Company granted 40,000 shares of restricted stock to its Independent Directors at $.50 a share The restricted stock vests over four quarters beginning in 3Q22 and is valued based on the market price of the common stock on the grant date.

The summary of stock-based compensation activity for the nine months ended September 30, 2022, with respect to the Trust’s restricted stock, was as follows:

Stock-based Compensation

During the nine months ended September 30, 2022, the Company recorded approximately $9,527 of non-cash expense related to restricted stock and options granted compared to $0 for the nine months ended September 30, 2021. As of September 30, 2022, there was approximately $92,029 of total unrecognized share-based compensation expense, which expense will be recognized through the third quarter of 2025. The Company does not currently have a policy regarding the repurchase of shares on the open market related to equity awards and does not currently intend to acquire shares on the open market.

12. RELATED PARTY TRANSACTIONS

Commencing September 2016, the Board approved payment to an entity affiliated with the CEO of the Company, Mr. Lesser, to reimburse such entity for accounting and administrative functions at a rate of $750 per month for each of Millennium Sustainable Ventures Corp. and Millennium HI Carbon LLC. On October 1, 2021, the Board of Directors approved an increase to $5,000 ($750 from MHC, $1,250 from MILC and $3,000 from MillCann) a month due to the increase in administrative and accounting support needed for the new focus of cannabis cultivation. During the three and nine months ended September 30, 2022, the total amount expensed to such affiliate was $15,000 and $45,000, and during the three and nine months ended September 30, 2021, the total amount expensed to such affiliate was $19,500 (a one-time charge of $15,000 was incurred for accounting work related to the conversion into a 1940 Act Company) and $28,500, respectively. As of September 30, 2022, $20,750 is included in accounts payable related to this expense.

The Company has hired Morrison Cohen, LLP (“MoCo”) as its legal counsel with respect to general corporate matters. The spouse of the Company’s CEO is a partner at MoCo. During the nine months ended September 2022 and 2021, the Company paid $0 to MoCo. There is no outstanding balance as of September 30, 2022.

As of September 30, 2022, MC has a long-term lease for a greenhouse cultivation property that is owned by a subsidiary of Power REIT (Ticker: PW and PW.PRA). David Lesser is the Chairman and CEO of both MILC and Power REIT.

WC, previously consolidated into MILC financial reports as a VIE based on the investment structured as a loan which was, under certain circumstances, convertible into a majority ownership position by Millennium Cannabis, as of September 30, 2022, is not included in the condensed consolidated financial reports and a bad debt expense of $1,505,898 was incurred in the second quarter, 2022 and is included in the accompanying condensed consolidated statements of operations.

The Company has entered into a credit facility with an affiliate of David H. Lesser, our Chairman and CEO on March 16, 2022, which provides cash to fund the capital needs of the company with a quarterly variable interest rate as determined by the Special Committee – Related Party Transactions of 0% for 1Q2022, 5% for 2Q2022, 7% for 3Q2022 and 9% for 4Q2022. The credit facility carries a default rate of 16% if not paid in full by maturity date. The Company is recording interest using an average interest rate on a straight-line basis. The credit facility matures on December 31, 2022. As of September 30, 2022, and December 31, 2021, the amount drawn on the credit facility is $1,925,060 and $0, respectively.

Given that a number of recent significant transactions are considered to be Related Party Transactions, the Board of Directors has established the Special Committee – Related Party Transactions. The purpose of this Special Committee is to approve all future transactions that can be considered Related Party Transactions. All such transactions will be presented to the Special Committee – Related Party Transactions which will then meet in an executive session to discuss the proposed transaction and ultimately vote on such transactions. The composition of the Special Committee will only include Independent Directors. The vote of a majority of the members of the Special Committee – Related Party Transactions will serve to approve transactions that are brought before the Special Committee – Related Party Transactions on behalf of the Board of Trustees.

MILC may enter into transactions in which directors, officers or employees have a financial interest, provided however, that in the case of a material financial interest, the transaction is disclosed to the Board of Directors to determine if the transaction is fair and reasonable. After consideration of the terms and conditions described herein, the independent directors approved such arrangements having determined such arrangements are fair and reasonable and in the interest of the Company.

13. SEGMENT INFORMATION

According to ASC 280, segment reporting establishes standards for reporting information about operating segments. Operating segments are defined as components of a business about which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s CODM is the Chief Executive Officer.

As of September 30, 2022, MILC businesses are organized, managed and internally reported as two reportable segments. The reportable segments are determined based on the difference in the product produced. The cannabis cultivation segment, MillCann, is focused on a sustainable approach to cannabis cultivation through Controlled Environmental Agriculture (“CEA”) in the form of greenhouses and is seeking to finalize licensing for a 550,000 square foot greenhouse located in Michigan. The carbon segment, MillCarbon, has developed a novel method for the sustainable production of activated carbon and has constructed a proof-of-concept pilot-scale plant in Kentucky to produce activated carbon from a waste stream generated by Bourbon distilleries.

The following information as of September 30, 2022 is presented net of discontinued operations. For more information see Note 6:

14. SUBSEQUENT EVENTS

On November 4, 2022, MILC received notification of a tax refund from India for taxes withheld related to prior sales of securities and is currently working to finalize receipt of the proceeds. The amount is approximately $500,000. This represents one of two potential refunds that MILC has been pursuing. The other refund is approximately $750,000. There can be no assurance as to the amount of the timing of the second tax refund.