TREES Corp (Colorado) 10-Q

ITEM 1. FINANCIAL STATEMENTS TREES CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 2024 December 31, 2023 (unaudited) (audited) Assets Current assets Cash and cash equivalents $ 245,367 $ 969,676 Accounts receivable, net of allowance of $ 50,471 and $ 42,000 , respectively 7,038 111,863 Inventories 687,763 860,918 Prepaid expenses and other current assets 365,553 411,911 Total current assets 1,305,721 2,354,368 Right-of-use operating lease asset 1,505,824 1,979,833 Property and equipment, net 1,220,260 1,395,104 Intangible assets, net 1,247,415 1,637,491 Goodwill 15,880,097 15,880,097 Total assets $ 21,159,317 $ 23,246,893 Liabilities and Stockholders' Equity (Deficit) Current liabilities Accounts payable and accrued expenses $ 2,648,984 $ 2,617,536 Interest payable 2,088,731 1,570,077 Income tax payable 392,765 392,765 Uncertain tax benefit liability, net 990,731 — Operating lease liability, current 766,562 846,201 Finance lease liability, current 71,230 205,400 Accrued stock payable 60,900 60,900 Accrued dividends 123,900 106,200 Warrant derivative liability — 4,716 Accrued legal fees 54,000 102,000 Notes payable - current 945,571 1,092,382 Contingent earnout liability — 367,056 Total current liabilities 8,143,374 7,365,233 Operating lease liability, non-current 843,835 1,218,392 Finance lease liability, non-current 581,294 501,248 Notes payable - non-current (net of unamortized discount) 14,214,151 14,013,861 Total liabilities 23,782,654 23,098,734 Commitments and contingencies (Note 6) Stockholders’ equity (deficit) Preferred stock, no par value; 5,000,000 and 5,000,000 shares authorized; 1,180 and 1,180 issued and outstanding, respectively 1,073,446 1,073,446 Common stock, $ 0.001 par value; 200,000,000 and 200,000,000 shares authorized; 108,746,520 and 108,746,520 shares issued and outstanding, respectively 108,746 108,746 Additional paid-in capital 99,729,914 99,450,307 Accumulated deficit ( 103,535,443 ) ( 100,484,340 ) Total stockholders’ equity (deficit) ( 2,623,337 ) 148,159 Total liabilities and stockholders’ equity (deficit) $ 21,159,317 $ 23,246,893 See Notes to unaudited condensed consolidated financial statements. 1 TREES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three months ended Nine months ended September 30, September 30, 2024 2023 2024 2023 Revenue Retail sales $ 3,298,839 $ 4,038,019 $ 10,673,842 $ 14,228,202 Cultivation sales 11,420 73,564 11,420 91,994 Total revenue 3,310,259 4,111,583 10,685,262 14,320,196 Costs and expenses Cost of sales 1,957,455 2,442,541 5,833,992 8,731,032 Selling, general and administrative 1,271,696 1,962,641 4,050,784 6,744,632 Stock-based compensation — 8,745 14,968 54,195 Professional fees 173,262 53,259 733,970 1,204,369 Depreciation and amortization 179,485 251,605 586,733 835,026 Total costs and expenses 3,581,898 4,718,791 11,220,447 17,569,254 Operating income (loss) ( 271,639 ) ( 607,208 ) ( 535,185 ) ( 3,249,058 ) Other income (expenses) Amortization of debt discount ( 123,888 ) ( 219,785 ) ( 418,523 ) ( 621,539 ) Interest expense ( 467,651 ) ( 296,242 ) ( 1,478,566 ) ( 1,462,281 ) Gain (loss) on extinguishment of debt 34,876 ( 218,237 ) 34,876 ( 218,237 ) Gain (loss) on derivative liability - ( 2,860 ) 4,716 2,359 Gain on contingent earnout - — 367,056 — Gain (loss) on disposal of assets ( 23,816 ) 2,400 ( 23,816 ) — Gain (loss) on termination of lease 6,770 — 6,770 — Other income — 526,809 — 896,680 Total other income (expenses) ( 573,709 ) ( 207,915 ) ( 1,507,487 ) ( 1,403,018 ) Net loss from operations before income taxes ( 845,348 ) ( 815,123 ) ( 2,042,672 ) ( 4,652,076 ) Benefit (provision) for income taxes 336,339 — ( 990,731 ) ( 85,736 ) Loss from operations ( 509,009 ) ( 815,123 ) ( 3,033,403 ) ( 4,737,812 ) Accrued preferred stock dividend — — ( 17,700 ) ( 17,700 ) Net loss attributable to common stockholders $ ( 509,009 ) $ ( 815,123 ) $ ( 3,051,103 ) $ ( 4,755,512 ) Basic and diluted loss per common share Net loss attributable to common stockholders’ per share $ ( 0.00 ) $ ( 0.01 ) $ ( 0.03 ) $ ( 0.04 ) Basic and diluted weighted average common shares outstanding 108,746,520 118,664,094 108,746,520 118,664,094 See Notes to unaudited condensed consolidated financial statements. 2 TREES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine months ended September 30, 2024 2023 Cash flows from operating activities Net loss $ ( 3,033,403 ) $ ( 4,737,812 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Amortization of debt discount and equity issuance costs 418,522 621,539 Depreciation and amortization 586,735 835,026 Loss on disposal of assets 23,816 15,840 Gain on lease termination ( 6,770 ) — Amortization of right of use lease assets 82,503 — Non-cash lease expense 378,620 42,762 Bad debt expense ( 9,471 ) — (Gain) loss on extinguishment of debt ( 34,876 ) 202,397 Loss (gain) on contingent earnout ( 367,056 ) — Loss (gain) on derivative liability ( 4,716 ) ( 2,359 ) Stock-based compensation 14,968 54,195 Changes in operating assets and liabilities, net of acquisitions Accounts receivable ( 62,361 ) ( 163,805 ) Prepaid expenses and other assets 219,015 ( 182,130 ) Inventories 173,155 488,409 Income taxes — 85,742 Uncertain tax benefit liability 990,731 — Accounts payable, accrued liabilities, and interest payable 493,902 1,595,527 Operating lease liabilities ( 345,253 ) ( 2,763 ) Net cash used in operating activities ( 481,939 ) ( 1,147,432 ) Cash flows from investing activities Purchase of property and equipment ( 45,631 ) ( 9,277 ) Acquisition of Station 2 assets — ( 256,581 ) Net cash used in investing activities ( 45,631 ) ( 265,858 ) Cash flows from financing activities Payments on notes payable ( 1,057,328 ) — Payments on finance lease ( 139,411 ) ( 918,852 ) Proceeds from notes payable 1,000,000 — Net cash (used in) provided by financing activities ( 196,739 ) ( 918,852 ) Net decrease in cash and cash equivalents ( 724,309 ) ( 2,332,142 ) Cash and cash equivalents, beginning of period 969,676 2,583,833 Cash and cash equivalents, end of period $ 245,367 $ 251,691 Supplemental schedule of cash flow information Cash paid for interest $ 919,724 $ 675,477 Cash paid for taxes $ 6,319 $ 6 Non-cash investing & financing activities Operating lease right-of-use asset obtained in exchange for new operating lease liabilities $ — $ 348,825 Non-cash debt issuance for acquisition of Station 2 assets $ — $ 333,953 Non-cash extinguishment of debt for the surrender of Station 2 assets — $ ( 356,152 ) Accrued dividends $ 17,700 $ 17,700 Non-cash extinguishment of debt for Trees MLK Assets $ 264,639 $ — Non-cash extinguishment of debt for previous year Accounting Fees $ 43,077 $ — See Notes to unaudited condensed consolidated financial statements. 3 TREES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (Unaudited) For the three months ended September 30, 2024 Preferred Stock Common Stock Additional Paid-in Accumulated Shares Amount Shares Amount Capital Deficit Total July 1, 2024 1,180 $ 1,073,446 108,746,520 $ 108,746 $ 99,729,914 $ ( 103,026,434 ) $ ( 2,114,328 ) Net loss — — — — — ( 509,009 ) ( 509,009 ) September 30, 2024 1,180 $ 1,073,446 108,746,520 $ 108,746 $ 99,729,914 $ ( 103,535,443 ) $ ( 2,623,337 ) For the three months ended September 30, 2023 Preferred Stock Common Stock Additional Paid-in Accumulated Shares Amount Shares Amount Capital Deficit Total July 1, 2023 1,180 $ 1,073,446 118,664,094 $ 118,664 $ 98,644,211 $ ( 97,324,771 ) $ 2,511,550 Share-based compensation — — — — 8,745 — 8,745 Net loss — — — — — ( 815,123 ) ( 815,123 ) September 30, 2023 1,180 $ 1,073,446 118,664,094 $ 118,664 $ 98,652,956 $ ( 98,139,894 ) $ 1,705,172 For the nine months ended September 30, 2024 Preferred Stock Common Stock Additional Paid-in Accumulated Shares Amount Shares Amount Capital Deficit Total January 1, 2024 1,180 $ 1,073,446 108,746,520 $ 108,746 $ 99,450,307 $ ( 100,484,340 ) $ 148,159 Share-based compensation — — — — 14,968 — 14,968 Capital contribution related to the forgiveness of the Trees MLK Note — — — — 264,639 — 264,639 Dividend on Preferred Stock — — — — — ( 17,700 ) ( 17,700 ) Net loss — — — — — ( 3,033,403 ) ( 3,033,403 ) September 30, 2024 1,180 $ 1,073,446 108,746,520 $ 108,746 $ 99,729,914 $ ( 103,535,443 ) $ ( 2,623,337 ) For the nine months ended September 30, 2023 Preferred Stock Common Stock Additional Paid-in Accumulated Shares Amount Shares Amount Capital Deficit Total January 1, 2023 1,180 $ 1,073,446 118,664,094 $ 118,664 $ 98,598,761 $ ( 93,384,382 ) $ 6,406,489 Share-based compensation — — — — 54,195 — 54,195 Dividend on Preferred Stock — — — — — ( 17,700 ) ( 17,700 ) Net loss — — — — — ( 4,737,812 ) ( 4,737,812 ) September 30, 2023 1,180 $ 1,073,446 118,664,094 $ 118,664 $ 98,652,956 $ ( 98,139,894 ) $ 1,705,172 See Notes to unaudited condensed consolidated financial statements. 4 TREES CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. NATURE OF OPERATIONS, HISTORY, AND PRESENTATION Nature of Operations TREES Corporation, a Colorado Corporation (the “Company,” “we,” “us,” or “our,”) is a cannabis retailer and cultivator in the States of Colorado and Oregon. We presently operate five (5) cannabis dispensaries as follows: ● Englewood, Colorado o 5005 S Federal Boulevard – Recreational license only ● Denver, Colorado o East Hampden Avenue (formerly Green Man) – Recreational license only ● Longmont, Colorado o 12626 N. 107 th Street (formerly Green Tree/Ancient Alternatives) – Medical and Recreational licenses ● Two (2) in Oregon o SW Corbett Avenue, Portland, OR – Medical and Recreational licenses o NE 102 nd Avenue, Portland, OR – Medical and Recreational licenses We also operate two (2) cultivation facilities in Colorado as follows: ● SevenFive Farm – 3705 N. 75 th Street, Boulder – Retail cultivation license only ● 6859 N. Foothills Highway E-100 (formerly Green Tree/Hillside Enterprises) – Retail cultivation license only Our principal business model is to acquire, integrate and optimize cannabis companies in the retail and cultivation segments utilizing the combined experience of entrepreneurs and synergistic operations of our vertically integrated network. Basis of Presentation The accompanying unaudited condensed consolidated financial statements include all accounts of the Company and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) can be condensed or omitted. The condensed consolidated balance sheet for the year ended December 31, 2023, was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. The information included in this quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto of the Company for the year ended December 31, 2023, which were included in the annual report on Form 10-K filed by the Company on April 10, 2024. 5 In the opinion of management, these unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and notes thereto of the Company and include all adjustments, consisting only of normal recurring adjustments, considered necessary for the fair presentation of the Company’s financial position and operating results. The results for the nine months ended September 30, 2024, are not necessarily indicative of the operating results for the year ending December 31, 2024, or any other interim or future periods. Since the date of the Annual Report, there have been no material changes to the Company’s significant accounting policies. Reclassifications Certain prior period amounts have been reclassified for consistency with current period presentation. These reclassifications had no effect on the reported results of operations. Use of Estimates The preparation of our unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Furthermore, when testing assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment charges may result. Concentrations of Credit Risk Financial instruments that potentially subject us to significant concentrations of credit risk consisted primarily of cash and accounts receivable. Customer and Revenue Concentrations – Cultivation Segment During the three months ended September 30, 2024, SevenFive had zero dollars in revenue and during the three months ended September 30, 2023, 89 % of SevenFive’s revenue was with five customers, respectively. During the nine months ended September 30, 2024 and 2023, 100 % of SevenFive’s revenue was with three customers and 50 % of SevenFive’s revenue was with one customer, respectively. The customers in 2024 are related party dispensaries and the revenues associated with these customers are eliminated in consolidation. During the three months ended September 30, 2024 and 2023, 92 % of Hillside Cultivation’s (formerly noted as Green Tree) revenue was with three customers, and 84 % of Hillside Cultivation’s (formerly noted as Green Tree) revenue was with four customers, respectively. During the nine months ended September 30, 2024 and 2023, 98 % of Hillside Cultivation’s (formerly noted as Green Tree) revenue was with three customers, and 78 % of Hillside Cultivation’s (formerly noted as Green Tree) revenue was with three customers, respectively. The customers in 2024 are related party dispensaries and the revenues associated with these customers are eliminated in consolidation. Hillsides Cultivation’s revenue includes revenue from an external wholesale vendor totaling $ 5,084 which has been applied to open accounts payable for the retail segment of the Company for the same vendor. Accounts payable and the associated cost of goods sold expense have been increased for the retail segment to account for this adjustment. Deferred Revenue from Loyalty Program For the Company's retail locations, the Company offers a loyalty reward program to its dispensary customers that allows customers to earn reward credits to be used on future purchases. Loyalty reward credits issued as part of a sales transaction results in revenue being deferred until the loyalty reward is redeemed by the customer. The loyalty rewards are recorded as reductions to revenue on the condensed consolidated statements of operations and included as deferred revenue on the condensed consolidated balance sheets. A portion of the revenue generated in a sale must be allocated to the loyalty points earned. The amount allocated to the points earned is deferred until the loyalty points are redeemed. 6 Deferred revenue due to outstanding loyalty points at September 30, 2024 and 2023 was $ 146,672 and nil , respectively. The deferred revenue is included on the Condensed Consolidated Balance Sheet with Accounts payable and accrued expenses and will be recognized in the consolidated Income Statement with net revenue upon redemption of the loyalty points. Basic and Diluted Loss Per Share The Company presents basic earnings per share (EPS) on the face of the statements of operation. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including convertible debt, stock options, and warrants, using the treasury stock method, and convertible debt instrument, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares as their effect is anti-dilutive. The calculation of basic and diluted net loss per share is as follows: For the three months ended September 30, For the nine months ended September 30, 2024 2023 2024 2023 Loss Per Share: Net Loss $ ( 509,009 ) $ ( 815,123 ) $ ( 3,051,103 ) $ ( 4,755,512 ) Denominator: Weighted-Average common shares outstanding 108,746,520 118,664,094 108,746,520 118,664,094 Basic net loss per share $ ( 0.00 ) $ ( 0.01 ) $ ( 0.03 ) $ ( 0.04 ) Potentially dilutive securities excluded from the basic and diluted net income per share are as follows: For the three months ended September 30, For the nine months ended September 30, 2024 2023 2024 2023 Convertible Debt 16,875,000 24,107,143 16,875,000 24,107,143 Warrants to purchase common stock 68,013,005 31,804,686 49,652,254 24,013,547 Options to purchase common stock 4,711,825 4,973,825 4,711,825 4,973,825 89,599,830 60,885,654 71,239,079 53,094,515 Going Concern The accompanying unaudited condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets, and the satisfaction of liabilities and commitments in the ordinary course of business. The Company has incurred recurring losses and negative cash flows from operations since inception and have primarily funded its operations with proceeds from the issuance of debt and equity. The Company incurred a net loss of $ 3,033,403 and lost $ 724,309 in cash from operations during the nine months ended September 30, 2024, respectively, and had an accumulated deficit of $ 103,535,443 as of September 30, 2024. We had cash and cash equivalents of $ 245,367 as of September 30, 2024. The Company expects our operating losses to continue into the foreseeable future as we continue to execute our acquisition and growth strategy. As a result, the Company has concluded that there is substantial doubt about its ability to continue as a going concern. The Company’s unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital to fund operations, support our planned investing activities, and repay its debt obligations as they become due. If the Company is unable to obtain additional funding, the Company would be forced to delay, reduce, or eliminate some or all of our acquisition efforts, which could adversely affect its growth plans. 7 Summary of Significant Accounting Policies See our Annual Report on Form 10-K for the year ended December 31, 2023, as amended, for discussion of the Company’s significant accounting policies. Recently Issued Accounting Standards In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting – Improvements to Reportable Segment Disclosures” (“ASU 2023-07”). ASU 2023-07 requires disclosure of more detailed information about a reportable segment’s expenses. ASU 203-07 is effective for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024. The amendments must be applied retrospectively, and early adoption is permitted. The Company is currently assessing the effects of adoption on its consolidated financial statements. In December 2023, the FASB issued ASU No. 2023-09, “Improvements to Income Tax Disclosures” (“ASU 2023-09”). ASU 2023-09 applies to all entities subject to income taxes and requires public business entities such as the Company to provide a tabular rate reconciliation and a separate disclosure for any reconciling items with certain categories that are equal to or greater than a specified quantitative threshold. The new standard is effective for annual periods beginning after December 15, 2024 and is to be applied on a prospective basis with the option to apply the standard retrospectively, early adoption is permitted. The Company is currently assessing the effects of adoption on its consolidated financial statements. NOTE 2. INVENTORIES Our inventories consisted of the following: September 30, December 31, 2024 2023 Raw materials $ — $ 351,241 Work-in-progress and finished goods 687,763 509,677 Inventories $ 687,763 $ 860,918 NOTE 3. LEASES The Company’s leases consist primarily of real estate leases for retail and cultivation facilities. All but one of the Company’s leases are classified as operating leases. The lease for the retail dispensary acquired in the Green Man transaction is classified as a finance lease. The current and non-current portions of the operating lease liabilities and finance lease liabilities are disclosed separately on the accompanying condensed balance sheets. The finance lease ROU asset is included in property and equipment, net and the operating lease ROU asset is disclosed separately on the accompanying condensed balance sheets. As the rate implicit in the Company’s leases is not readily determinable, we used an estimated incremental borrowing rate of 20 % in determining the present value of lease payments. The operating lease expense for the three and nine months ended September 30, 2024, and September 30, 2023, is as follows: For the three months ended September 30, For the nine months ended September 30, 2024 2023 2024 2023 Straight-line operating lease expense $ 202,436 $ 197,513 $ 665,014 $ 929,241 Variable lease cost 77,040 44,239 181,666 502,413 Total operating lease expense $ 279,476 $ 241,752 $ 846,680 $ 1,431,654 The finance lease expense for the three months ended September 30, 2024, and September 30, 2023, was approximately $ 41,823 and $ 41,823 , respectively. The finance lease expense for the nine months ended September 30, 2024, and September 30, 2023 was approximately $ 125,470 and $ 125,470 , respectively. Related party lease s As of September 30, 2024, one of the Company’s operating leases, a cultivation facility lease, is a related party lease as the landlord is a principal shareholder and former board member of the Company. As of September 30, 2024, the ROU asset, operating lease liability, current, and operating lease liability, non-current for the related party leases were $ 69,368 , $ 80,000 and ($ 6,029 ), respectively. For the three months ended September 30, 2024 and 2023, the total lease expense for related party leases was $ 30,000 and $ 127,790 , respectively. For the nine months ended September 30, 2024 and 2023, the total lease expense for related party leases was $ 90,000 and $ 383,371 , respectively. 8 MLK Lease Termination During the nine months ended September 30, 2024, the Company’s lease at the MLK retail location was terminated by the landlord due to lack of payment of rent. The original lease had a term through August 31, 2023 and had continued on a month-to-month basis until July 31, 2024, when the landlord seized and auctioned the remaining assets at the address, applying the auction proceeds against the current outstanding lease balance. As a result of the termination, the Company removed the operating lease asset totaling $ 48,130 , the operating lease liability totaling $ 58,900 , the forfeited and applied $ 4,000 security deposit and recognized a gain on lease termination of $ 6,770 during the nine months ended September 30, 2024. Leasehold improvements, furniture and fixtures related to the seized facility with a net book value of $ 23,816 were recorded as a loss on disposal of assets during the nine months ended September 30, 2024. Lease Maturities Future remaining minimum lease payments on our operating leases and finance lease are as follows: Year ending December 31, Operating leases Finance lease 2024 (remaining three months) $ 200,712 $ 102,700 2025 729,592 171,043 2026 399,619 136,940 2027 279,435 143,102 2028 245,456 149,542 Thereafter 667,154 668,558 Total 2,521,968 1,371,885 Less: Present value adjustment ( 911,571 ) ( 719,361 ) Lease liability 1,610,397 652,524 Less: Lease liability, current ( 766,562 ) ( 71,230 ) Lease liability, non-current $ 843,835 $ 581,294 The total remaining lease payments in the table above include $ 772,051 related to renewal option periods that management is reasonably certain will be exercised. The majority of this amount relates to the flagship Trees location in Englewood, Colorado. As of September 30, 2024, the weighted average remaining term of the Company’s operating leases is 4.78 years, and the remaining term on the finance lease is 8.33 years. None of the Company’s leases contain residual value guarantees or restrictive covenants. Supplemental cash flow information For the nine months ended September 30, 2024 2023 Supplemental cash flow information Cash paid for amounts included in operating lease liability $ 665,014 $ 957,153 Cash paid for amounts included in finance lease liability $ 125,470 $ 150,000 Supplemental lease disclosures of non-cash transactions: ROU assets obtained in exchange for operating lease liabilities $ — $ 348,825 9 NOTE 4. ACCRUED STOCK PAYABLE The following tables summarize the changes in accrued common stock payable: Number of Amount Shares Balance as of December 31, 2022 $ 60,900 100,000 Stock issued — — Balance as of December 31, 2023 $ 60,900 100,000 Stock issued — — Balance as of September 30, 2024 $ 60,900 100,000 The outstanding balance of accrued stock payable as of September 30, 2024 relates to a February 18, 2020 grant of 100,000 fully vested shares for consulting services. Based on a stock price of $ 0.61 on the date of grant, the consultant will receive $ 60,900 worth of our Common Stock. As of September 30, 2024, none of the stock had been issued. NOTE 5. NOTES PAYABLE Our notes payable consisted of the following: September 30, 2024 December 31, 2023 Third-party Related-party Total Third-party Related-party Total 2022 12% Notes $ 13,167,796 332,204 13,500,000 $ 13,167,796 $ 332,204 $ 13,500,000 Trees Transaction Notes — — — — 326,811 326,811 Green Tree Acquisition Notes — 428,191 428,191 — 562,000 562,000 Green Man Acquisition Notes 1,107,500 — 1,107,500 1,555,000 — 1,555,000 Working Capital Notes 1,000,000 — 1,000,000 500,000 — 500,000 Centri Promissory Note 43,077 — 43,077 Unamortized debt discount ( 901,398 ) ( 17,648 ) ( 919,046 ) ( 1,312,427 ) ( 25,141 ) ( 1,337,568 ) Total debt 14,416,975 742,747 15,159,722 13,910,369 1,195,874 15,106,243 Less: Current portion ( 785,000 ) ( 160,571 ) ( 945,571 ) ( 605,000 ) ( 487,382 ) ( 1,092,382 ) Long-term portion $ 13,631,975 $ 582,176 $ 14,214,151 $ 13,305,369 $ 708,492 $ 14,013,861 Trees Transaction Notes In January 2022, with the completion of the Trees MLK acquisition, we are obligated to pay the Seller cash equal to $ 384,873 in equal monthly installments over a period of 24 months. As of September 30, 2024 and 2023, the debt balance of this note was nil and $ 264,639 , respectively. During the year, the Trees MLK Seller forgave the remaining principal balance $ 264,639 owed from the Trees MLK acquisition. As the debt holder is also a shareholder of the Company, the effect of this debt forgiveness was accounted for as a capital contribution in paid-in capital. Green Man Acquisition Notes In December 2022, with the completion of the Green Man Acquisition, we are obligated to pay the Seller cash equal to $ 1,575,000 in equal monthly installments over a period of 18 months. The payments begin in December 2023 based on the following schedule: Dates Total Payment December 2023 $ 20,000 January 2024 $ 25,000 February 2024 $ 30,000 March 2024 – August 2024 $ 52,500 September 2024 – October 2024 $ 57,500 November 2024 – December 2024 $ 60,000 January 2025 – June 2025 $ 65,000 July 2025 – February 2026 $ 70,000 10 The relative fair value of this obligation resulted in a debt discount of $ 275,154 . We recorded amortization of debt discount expense from this obligation of $ 33,723 and $ 39,545 for the three months ended September 30, 2024 and 2023, respectively, and $ 101,525 and $ 115,171 for the nine months ended September 30, 2024 and 2023, respectively. 12% Notes – 2023 Modification On December 15, 2023, the Company entered into Amended and Restated Senior Secured Convertible Notes with certain accredited investors to modify the original terms of the 12 % Notes. We recorded amortization of debt discount expense from the 12 % Notes of $ 90,164 and $ 78,404 for the three months ended September 30, 2024 and 2023, respectively and $ 285,236 and $ 232,651 for the nine months ended September 30, 2024 and 2023, respectively. In addition to the Amended Notes, the Lead Investor agreed to provide an additional $ 250,000 in a separate note (the “2023 Working Capital Note”) which includes a liquidation preference to recover 1.25x the original investment in the event that the Company commences any dissolution, liquidation, or winding up. At our option, the Lead Investor shall provide up to an additional $ 250,000 , and, in such event, the 2023 Working Capital Note shall have a liquidation preference of 1.5x the original investment, applicable to the full $ 500,000 , in the event that the Company commences any dissolution, liquidation, or winding up. The 2023 Working Capital Note bears interest at 12 % per annum and is due and payable on September 15, 2026. As of December 31, 2023, the balance of the Working Capital Note was $ 500,000 , as the Company requested and received the additional $ 250,000 optional amount. On June 15 th , 2024 the Lead Investor agreed to provide an additional $ 250,000 in a separate note (the “2024 Working Capital Note”) which includes a liquidation preference to recover 1.25x the original investment in the event that the Company commences any dissolution, liquidation, or winding up. At our option, the Lead Investor shall provide up to an additional $ 250,000 , and, in such event, the 2024 Working Capital Note shall have a liquidation preference of 1.5x the original investment, applicable to the full $ 500,000 , in the event that the Company commences any dissolution, liquidation, or winding up. The 2024 Working Capital Note bears interest at 12 % per annum and is due and payable on September 15, 2026. As of September 30, 2024, the balance of the Working Capital Note was $ 500,000 , as the Company requested and received the additional $ 250,000 optional amount. Centri Promissory Note On August 20 th , 2024 Centri Business Consulting, LLC (“Centri”) agreed to exchange amounts due for professional accounting fees incurred during the prior fiscal year totaling $ 77,953 at December 31, 2023 into a non-interest bearing promissory note in the amount of $ 43,077 to be paid in eighteen installments of $ 2,393 beginning October 1 st , 2024. As a result of the exchange, the Company recognized a gain of $ 34,876 during the nine months ended September 30, 2024. NOTE 6. COMMITMENTS AND CONTINGENCIES Income Tax Payable To date, the IRS has held that cannabis companies are subject to the limits of Internal Revenue Code (“IRC”) Section 280E for U.S. federal income tax purposes. This position was not held in Oregon or Colorado, where the Company operates. Under the IRS’s interpretation of IRC Section 280E, cannabis companies are only allowed to deduct expenses directly and indirectly related to the production of inventory. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E. As of December 31, 2023 the Company recorded a tax liability totaling $ 392,765 based on IRC Section 280E. Between the provision and filing the Company taxes on October 15, 2024 the Company has decided, through thorough tax and legal review, to record this and subsequent liabilities as an uncertain tax liability on the consolidated balance sheets due to tax positions taken on our 2023 federal and state tax returns. 11 For the period ended September 30, 2024 the Company has evaluated this tax position in relation to the previously recorded income tax liability of $ 1,327,070 as of September 30, 2024 and has concluded that the position meets the more-likely-than-not recognition threshold. In evaluating the tax position for recognition, the Company considered all relevant sources of tax law, including a court case in which the taxing authority has fully disallowed a similar tax position with an unrelated entity ( Canna Provisions et. Al. v Garland ). The taxing authority and Canna Provisions et. al. are currently litigating the matter. Due to this change, the Company has completed the provision for the nine months ended September 30, 2024 considering ASC 740-10. This includes an adjustment to the income tax payable account to return it back to the December 31, 2023 balance and recording an uncertain tax benefit (UTB) liability to reflect the expected tax liability should the Internal Revenue Service reject the uncertain tax position taken by the company regarding 280E, net of the valuation allowance. As of September 30, 2024, the Income tax liability is $ 392,765 and the UTB liability, net of the valuation allowance, is $ 990,731 . Legal From time to time, we may be involved in various claims and legal actions in the ordinary course of business. We are not currently subject to any material legal proceedings outside the ordinary course of our business. NOTE 7. STOCKHOLDERS’ EQUITY 2021 Preferred stock dividends The Company’s Series A Preferred is convertible into 300 shares of common stock per share of Series A Preferred Stock upon the consummation of a capital raise of not less than $ 5,000,000 . Series A Preferred Stock has no par value per share and has the following rights, restrictions, preferences and privileges summarized as follows: ● Authorized Number of Shares – 5,000 ● Voting Rights – None ● Dividends – 6 % per annum, ‘paid in kind’ in shares of Series A Preferred ● Conversion – Each share of Series A Preferred is mandatorily convertible into 300 shares of Common Stock upon a minimum capital raise of $ 5,000,000 ; sale, merger or business combination of the Company; or the Company listing on an exchange ● Redemption – No rights of redemption by 2021 Investors, nor mandatory redemption As of September 30, 2024 and December 31, 2023, we have recorded accrued dividends of $ 123,900 and $ 106,200 , respectively. Dividends were $ 17,700 and $ 17,700 for the nine months ended September 30, 2024 and 2023, respectively. Stock-based compensation Stock-based Awards As of September 30, 2024, the Company has two active plans, the 2020 Omnibus Incentive Plan approved by the Board in November 2020 (“2020 Plan”) and the 2014 Equity Incentive Plan approved by the Board in October 2014 (“2014 Plan” and collectively with the 2020 Plan the “Stock Incentive Plans”) that allow the Board of Directors to grant stock-based awards to eligible employees, non-employee directors, and consultants of the Company and its subsidiaries. Under the Stock Incentive Plans, the Board may grant non-statutory and incentive stock options, stock appreciation rights, restricted stock awards, restricted stock units, deferred stock units, performance awards, non-employee director awards, and other stock-based awards. Subject to adjustment, the maximum number of shares of our common stock to be authorized for issuance under the Stock Incentive Plans is 25 million shares. As of September 30, 2024, stock-based awards for approximately 17.5 million shares are available to be issued under the Stock Incentive Plans. 12 Stock Options The following summarizes Employee Awards activity: Weighted- Weighted- Average Average Remaining Number of Exercise Price Contractual Shares per Share Term (in years) Outstanding as of December 31, 2023 4,796,825 $ 1.05 2.3 Granted 100,000 0.06 5.0 Forfeited or expired ( 185,000 ) 1.76 — Outstanding as of September 30, 2024 4,711,825 $ 0.95 1.8 Exercisable as of September 30, 2024 4,711,825 $ 0.95 1.8 The intrinsic value of the exercisable warrants as of September 30, 2024 was negative. As of September 30, 2024, there was no unrecognized compensation expense related to unvested employee awards. We recorded nil in compensation expense for the nine months ended September 30, 2024 and 2023, respectively. Restricted Stock Awards During the nine months ended September 30, 2024, the Company granted 429,630 Restricted Stock Units with a fair value of $ 28,656 pursuant to the 2020 Omnibus Incentive Plan to directors and an employee (“2024 RSUs”). The 2024 RSUs vest seven years from the grant date, or earlier upon certain triggering events as defined in the agreement, and upon vesting convert into one share of the Company’s common stock. The fair value of the 2024 RSUs is determined based on the closing price of the Company’s common stock on the grant date. The Company recorded $ 14,968 and $ 54,195 in compensation expense during the nine months ended September 30, 2024 and 2023, respectively. As of September 30, 2024, none of the RSU’s have vested. A summary of the Company’s grants of restricted stock units under the 2020 Omnibus Incentive Plan is presented below: Weighted- Average Number of Grant Shares Date Value Outstanding as of December 31, 2023 2,240,462 $ 0.04 Granted 429,630 0.07 Forfeited or expired — — Outstanding as of September 30, 2024 2,670,092 $ 0.05 Contingent Earnout Liability On December 12, 2022, we completed the Green Tree Acquisition which consisted of the acquisition of substantially all of the assets of Ancient Alternatives LLC, Natural Alternatives For Life, LLC, Mountainside Industries, LLC, Hillside Enterprises, LLC, and GT Creations, LLC, each a Colorado limited liability company (collectively, the “Green Tree Entities”). We paid cash in the amount of $ 500,000 and stock consideration of 17,977,528 shares of our Common Stock. The closing price of our Common Stock on December 12, 2022, the date of license transfer, was $ 0.165 per share, as such, fair value of the equity consideration is $ 2,966,292 . Additionally, we had a potential obligation to issue additional stock consideration up to 4,879,615 shares of our Common Stock on the achievement of certain performance indicators on or before June 12, 2024. In November 2023, the Company transferred a majority of the Green Tree Entities back to the original owners. Subsequent to this transfer, the aforementioned debt was modified. This liability is included in Notes payable- current and Notes payable- non-current in the accompanying condensed consolidated balance sheets. The fair value of the contingent earnout liability was nil and $ 367,056 at September 30, 2024 and December, 31 2023, respectively. The change in fair value in the three months and nine months ended September 30, 2024 resulted in a gain on change in fair value of nil and $ 367,056 , respectively. The contingent earnout liability remained after the Green Tree Acquisition was partially reversed in Q3 2023 and expired in Q2 2024. 13 NOTE 8. RELATED PARTY TRANSACTIONS On September 16, 2022, the Company entered into a new consulting agreement with Adam Hershey, its Interim Chief Executive Officer, pursuant to which Mr. Hershey will continue to serve as the Company’s Interim Chief Executive Officer with compensation equal to $ 200,000 per annum, payable by the Company, monthly. The term of the consulting agreement is for a period of one year, with automatic six-month renewals thereafter unless terminated by either party. As part of the new consulting agreement, the Company has also agreed to extend warrants to purchase 7,280,007 shares of Common Stock, held by an affiliate of Mr. Hershey, for an additional two years until May 29, 2027 . The exercise price and all other terms and conditions of such warrants remain unchanged. We paid $ 50,000 and $ 50,000 for the three months ended September 30, 2024 and 2023, respectively, and $ 150,000 and $ 150,000 for the nine months ended September 30, 2024 and 2023, respectively. In February 2023, the Company completed the acquisition of Station 2, LLC’s assets. Station 2, LLC is owned by a board member, who is also a shareholder of the Company. This acquisition was subsequently reversed in Q3 of 2023. The Company currently has a lease agreement with Dalton Adventures, LLC in which the Company leases 17,000 square feet of greenhouse space in Boulder, Colorado for $ 29,691 a month, of which $ 27,000 is base rent and $ 2,691 is property taxes. The base rent decreased to $ 10,000 per month starting in May 2023. The owner of Dalton Adventures, LLC is a principal shareholder and former board member of the Company. We have incurred $ 30,000 and $ 75,849 in related party lease expense for the three months ended September 30, 2024 and 2023, respectively, and $ 90,000 and $ 227,547 in related party lease expense for the nine months ended September 30, 2024 and 2023, respectively. See Note 3 for further discussion of the Company’s obligations associated with related party leases. NOTE 9. SEGMENT INFORMATION Our operations are organized into two segments: Retail and Cultivation. All revenue originates, and all assets are located in the United States. Segment information is presented in accordance with ASC 280, “Segments Reporting.” This standard is based on a management approach that requires segmentation based upon our internal organization and disclosure of revenue and certain expenses based upon internal accounting methods. Our financial reporting systems present various data for management to run the business, including internal profit and loss statements prepared on a basis not consistent with GAAP. Three months ended September 30, 2024 Retail Cultivation Eliminations Total Revenues $ 3,298,839 185,318 ( 173,898 ) 3,310,259 Costs and expenses ( 2,750,610 ) ( 549,407 ) 173,898 ( 3,126,119 ) Segment operating income $ 548,229 $ ( 364,089 ) $ — 184,140 Corporate expenses ( 1,029,488 ) ERC Credits — Net loss from continuing operations before income taxes $ ( 845,348 ) 2023 Retail Cultivation Eliminations Total Revenues $ 4,038,019 $ 415,963 $ ( 342,399 ) $ 4,111,583 Costs and expenses ( 3,403,102 ) ( 1,272,117 ) 342,399 ( 4,332,820 ) Segment operating income $ 634,917 $ ( 856,154 ) $ — ( 221,237 ) Corporate expenses ( 1,490,566 ) ERC Credits 896,680 Net loss from continuing operations before income taxes $ ( 815,123 ) 14 Nine months ended September 30, 2024 Retail Cultivation Eliminations Total Revenues $ 10,673,842 778,109 ( 766,689 ) 10,685,262 Costs and expenses ( 8,848,802 ) ( 1,369,489 ) 766,689 ( 9,451,602 ) Segment operating income $ 1,825,040 $ ( 591,380 ) $ — 1,233,660 Corporate expenses ( 3,276,332 ) ERC Credits — Net loss from continuing operations before income taxes $ ( 2,042,672 ) 2023 Retail Cultivation Eliminations Total Revenues $ 14,228,202 $ 2,044,810 $ ( 1,952,816 ) $ 14,320,196 Costs and expenses ( 13,285,938 ) ( 3,457,964 ) 1,952,816 ( 14,791,086 ) Segment operating income $ 942,264 $ ( 1,413,154 ) $ — ( 470,890 ) Corporate expenses ( 5,077,865 ) ERC Credits 896,679 Net loss from continuing operations before income taxes $ ( 4,652,076 ) September 30, December 31, Total assets 2024 2023 Retail $ 19,055,074 $ 20,491,961 Cultivation 1,735,873 1,736,685 Corporate 368,370 1,018,247 Total assets – segments 21,159,317 23,246,893 Intercompany eliminations — — Total assets – consolidated $ 21,159,317 $ 23,246,893 15