TREES Corp (Colorado) 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management’s Discussion and Analysis (“MD&A”) is intended to provide an understanding of our financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. This discussion should be read in conjunction with the Condensed Consolidated Unaudited Financial Statements contained in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and related notes and MD&A appearing in our Annual Report on Form 10-K as of and for the year ended December 31, 2023. The results of operations for an interim period may not give a true indication of results for future interim periods or for the year. Cautionary Statement Regarding Forward Looking Statements This Quarterly Report on Form 10-Q, including the financial statements and related notes, contains forward-looking statements that discuss, among other things, future expectations and projections regarding future developments, operations and financial conditions. All forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control and on assumptions that may prove to be incorrect. If any underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or intended. We undertake no obligation to publicly update or revise any forward-looking statements to reflect actual results, changes in expectations or events or circumstances after the date of this Quarterly Report on Form 10-Q. When this report uses the words “we,” “us,” or “our,” and the “Company,” they refer to TREES Corporation (formerly, “General Cannabis Corp”). Our Products, Services, and Customers TREES Corporation 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 16 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. 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. Results of Operations The following tables set forth, for the periods indicated, statements of operations data. The tables and the discussion below should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto in this report. Three months ended September 30, Percent 2024 2023 Change Change Revenues $ 3,310,259 $ 4,111,583 $ (801,324 ) (19 )% Costs and expenses (3,581,898 ) (4,718,791 ) 1,136,893 (24 )% Other expense (573,709 ) (207,915 ) (365,794 ) 176 % Net Gain (Loss) before income taxes $ (845,348 ) $ (815,123 ) $ (30,225 ) 4 % Nine months ended September 30, Percent 2024 2023 Change Change Revenues $ 10,685,262 $ 14,320,196 $ (3,634,934 ) (25 )% Costs and expenses (11,220,447 ) (17,569,254 ) (6,348,807 ) (36 )% Other expense (1,507,487 ) (1,403,018 ) (104,469 ) 7 % Net Loss before income taxes $ (2,042,672 ) $ (4,652,076 ) $ 2,609,404 (56 )% Revenues The reversal of the acquisition of a portion of the Green Tree assets, which were returned in Q3 2023, contributed to the decrease in revenues and expenses for the three months ended September 30, 2024 compared to September 30, 2023, and for the nine months ended September 30, 2024 and 2023, respectively. 17 Costs and expenses Three months ended September 30, Percent 2024 2023 Change Change Cost of sales $ 1,957,455 $ 2,442,541 $ (485,086 ) (20 )% Selling, general and administrative 1,271,696 1,962,641 (690,945 ) (35 )% Stock-based compensation — 8,745 (8,745 ) (100 )% Professional fees 173,262 53,259 120,003 225 % Depreciation and amortization 179,485 251,605 (72,120 ) (29 )% $ 3,581,898 $ 4,718,791 $ (1,136,893 ) (24 )% Nine months ended September 30, Percent 2024 2023 Change Change Cost of sales $ 5,833,992 $ 8,731,032 $ (2,897,040 ) (33 )% Selling, general and administrative 4,050,784 6,744,632 (2,693,848 ) (40 )% Stock-based compensation 14,968 54,195 (39,227 ) (72 )% Professional fees 733,970 1,204,369 (470,399 ) (39 )% Depreciation and amortization 586,733 835,026 (248,293 ) (30 )% $ 11,220,447 $ 17,569,254 $ (6,348,807 ) (36 )% Cost of sales decreased for three and nine months ended September 30, 2024, as compared to September 30, 2023 due to the reversal of the acquisition of a portion of the Green Tree assets. Selling, general and administrative expense decreased for the three and nine months ended September 30, 2024, as compared to September 30, 2023 due to the decreased expenses resulting from the reversal of the acquisition of one dispensary and one cultivation facility in the third quarter of 2023 and one additional dispensary license in the first quarter of 2023, resulting in a decrease in employees and rent expense. Stock-based compensation included the following: Three months ended September 30, Percent 2024 2023 Change Change Restricted Stock Awards $ — $ 8,745 $ (8,745 ) (100 )% $ — $ 8,745 $ (8,745 ) (100 )% Nine months ended September 30, Percent 2024 2023 Change Change Restricted Stock Awards $ 14,968 $ 54,195 $ (39,227 ) (72 )% $ 14,968 $ 54,195 $ (39,227 ) (72 )% Employee awards are issued under our 2020 Omnibus Incentive Plan, which was approved by shareholders on November 23, 2020. Expense varies primarily due to the number of stock options and restricted stock awards granted and the share price on the date of grant. The decrease in expense for the three and nine months ended September 30, 2024, as compared to September 30, 2023, is due to issuing less restricted stock awards at a higher per unit grant date value in the second quarter of 2024. Professional fees consist primarily of accounting and legal expenses. Professional fees increased for the three months ended September 30, 2024 due to increased accounting and legal fees related to our 2023 tax return and the related tax position therein (See Note 6 Income Tax Payable for details). Professional fees decreased for the nine months ended September 30, 2024 as compared to September 30, 2023 due to the lack of unusual accounting activity in the first and second quarters of 2024 as compared to the 2023 periods. Depreciation and amortization decreased due to the reversal of the acquisition of a portion of the Green Tree assets and a revaluation of the Green Tree and Green Man acquisitions as of the three and nine months ended September 30, 2024, as compared to September 30, 2023. 18 Other Expense Three months ended September 30, Percent 2024 2023 Change Change Amortization of debt discount $ 123,888 $ 219,785 $ (95,897 ) (44 )% Interest expense 467,651 296,242 171,409 58 % (Gain) loss on termination of lease (6,770 ) — (6,770 ) 100 % (Gain) loss on extinguishment of debt (34,876 ) 218,237 (253,113 ) (116 )% (Gain) loss on derivative liability — 2,860 (2,860 ) (100 )% (Gain) loss on sale/disposal of assets 23,816 (2,400 ) (26,216 ) (1,092 )% Other (income) — (526,809 ) 526,809 (100 )% Gain on contingent earnout — — — 0 % $ 573,709 $ 207,915 $ 365,794 176 % Other Expense Nine months ended September 30, Percent 2024 2023 Change Change Amortization of debt discount $ 418,523 $ 621,539 $ (203,016 ) (33 )% Interest expense 1,478,566 1,462,281 16,285 1 % (Gain) loss on termination of lease (6,770 ) — (6,770 ) 100 % (Gain) loss on extinguishment of debt (34,876 ) 218,237 (253,113 ) (116 )% (Gain) loss on derivative liability (4,716 ) (2,359 ) (2,357 ) 100 % (Gain) loss on sale/disposal of assets 23,816 — 23,816 100 % Other (income) — (896,680 ) 896,680 100 % Gain on contingent earnout (367,056 ) — (367,056 ) 100 % $ 1,507,487 $ 1,403,018 $ 104,469 7 % Amortization of debt discount decreased during the three and nine months ended September 30, 2024, as compared to September 30, 2023 due to the change in outstanding debt related to the Green Tree acquisition reversal. Interest expense increased during the three and nine months ended September 30, 2024, as compared to September 30, 2023, due to the resumption of interest in Q3 2023 of the 12% Notes. The gain on warrant derivative liability reflects the change in the fair value of the 2019 Warrants which expired in Q2 2024. The loss on contingent earnout reflects the change in the fair value of the Green Tree Contingent Earnout liability which expired in Q2 2024. Retail Three months ended September 30, Percent 2024 2023 Change Change Revenues $ 3,298,839 $ 4,038,019 $ (739,180 ) (18 )% Costs and expenses (2,750,610 ) (3,403,102 ) 652,492 (19 )% Segment operating income $ 548,229 $ 634,917 $ (86,688 ) 14 % Nine months ended September 30, Percent 2024 2023 Change Change Revenues $ 10,673,842 $ 14,228,202 $ (3,554,360 ) (25 )% Costs and expenses (8,848,802 ) (13,285,938 ) 4,437,136 (33 )% Segment operating income $ 1,825,040 $ 942,264 $ 882,776 94 % With the partial reversal of the acquisition of Green Tree in Q3 2023, retail revenue decreased for the three and nine months ended September 30, 2024, compared to September 30, 2023. Costs and expenses also decreased as a result of the partial acquisition reversal. 19 Cultivation Three months ended September 30, Percent 2024 2023 Change Change Revenues $ 185,318 $ 415,963 $ (230,645 ) (55 )% Costs and expenses (549,407 ) (1,272,117 ) 722,710 (57 )% Segment operating gain (loss) $ (364,089 ) $ (856,154 ) $ 492,065 (57 )% Nine months ended September 30, Percent 2024 2023 Change Change Revenues $ 778,109 $ 2,044,810 $ (1,266,701 ) (62 )% Costs and expenses (1,369,489 ) (3,457,964 ) 2,088,475 (60 )% Segment operating loss $ (591,380 ) $ (1,413,154 ) $ 821,774 (58 )% The decrease in revenues for the three and nine months ended September 30, 2024 compared to September 30, 2023, is due to the closure of three cultivations during Q2 2023 and a reduction in grow operations at one of the remaining cultivations facilities in Q1 2023. The decrease in cost and expenses for the three and nine months ended September 30, 2024 compared to September 30, 2023 is attributed to the closure of three cultivations during Q2 2023 and a reduction in grow operations at one of the remaining cultivations facilities in Q1 2023. The costs and expense incurred between our dispensaries and cultivation locations are eliminated in consolidation. Liquidity Sources of liquidity Our sources of liquidity historically have included the cash exercise of common stock options and warrants, debt, and the issuance of common stock or other equity-based instruments. We anticipate our significant uses of resources will include funding operations. Sources and uses of cash We had cash of $245,367 and $969,676 as of September 30, 2024 and December 31, 2023, respectively. Our cash flows from operating, investing and financing activities were as follows: Nine months ended September 30, 2024 2023 Net cash used in operating activities $ (481,939 ) $ (1,147,432 ) Net cash used in investing activities $ (45,631 ) $ (265,858 ) Net cash (used in) provided by financing activities $ (196,739 ) $ (918,852 ) Net cash used in operating activities increased in 2024 due to the expiration and subsequent gain of the Green Tree contingent earnout and gain on extinguishment of debt due to the Centri promissory note. Net cash used in investing activities for the nine months ended September 30, 2024 from September 30, 2023 decreased as a result of a lack of acquisition activity in 2024. Net cash used in financing activities for the nine months ended September 30, 2024 decreased from September 30, 2023 due to the partial reversal of the acquisition of a portion of the Green Tree assets and the issuance of the 2024 Working Capital Note. Capital Resources We had no material commitments for capital expenditures as of September 30, 2024. Part of our growth strategy, however, is to acquire operating businesses. We expect to fund such activity through cash on hand, the issuance of debt, common stock, warrants for our common stock or a combination thereof. 20 Critical Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses. Critical accounting policies are those that require the application of management’s most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates. Actual results may differ from these estimates. We define critical accounting policies as those that are reflective of significant judgments and uncertainties, and which may potentially result in materially different results under different assumptions and conditions. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates. These estimates are subject to an inherent degree of uncertainty. Business Combinations Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions provided by management, including expected future cash flows. We allocate any excess purchase price over the fair value of the net assets and liabilities acquired to goodwill. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs, including advisory, legal, accounting, valuation, and other costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date. Goodwill and Intangibles Goodwill represents the excess of purchase price over the fair value of identifiable net assets acquired in a business combination. Goodwill and long-lived intangible assets are tested for impairment at least annually in accordance with the provisions of ASC No. 350, Intangibles-Goodwill and Other (“ASC No. 350”). ASC No. 350 requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carry value. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. We test goodwill annually in December, unless an event occurs that would cause us to believe the value is impaired at an interim date. See our Annual Report on Form 10-K for the year ended December 31, 2023, for discussion of the Company’s significant accounting policies. Intangible assets with finite useful lives are amortized over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Impairment of Long-lived Assets We periodically evaluate whether the carrying value of property and equipment has been impaired when circumstances indicate the carrying value of those assets may not be recoverable. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is not recoverable, the impairment loss is measured as the excess of the asset’s carrying value over its fair value. Our impairment analyses require management to apply judgment in estimating future cash flows as well as asset fair values, including forecasting useful lives of the assets, assessing the probability of different outcomes, and selecting the discount rate that reflects the risk inherent in future cash flows. If the carrying value is not recoverable, we assess the fair value of long-lived assets using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third-party comparable sales and undiscounted cash flow models. If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future. 21 Debt with Equity-linked Features We may issue debt that has separate warrants, conversion features, or other equity-linked attributes. Debt with warrants – When we issue debt with warrants, we treat the warrants as a debt discount, record as a contra-liability against the debt, and amortize the balance over the life of the underlying debt as amortization of debt discount expense in the consolidated statements of operations. The offset to the contra-liability is recorded as additional paid in capital in our consolidated balance sheets. If the debt is retired early, the associated debt discount is then recognized immediately as amortization of debt discount expense in the consolidated statement of operations. The debt is treated as conventional debt. We determine the value of the non-complex warrants using the Black-Scholes Option Pricing Model (“Black-Scholes”) using the stock price on the date of issuance, the risk-free interest rate associated with the life of the debt, and the volatility of our stock. For warrants with complex terms, we use the binomial lattice model to estimate their fair value. Convertible Debt - When we issue debt with a conversion feature, we must first assess whether the conversion feature meets the requirements to be treated as a derivative. If the conversion feature within convertible debt meets the requirements to be treated as a derivative, we estimate the fair value of the convertible debt derivative using Black-Scholes upon the date of issuance, using the stock price on the date of issuance, the risk-free interest rate associated with the life of the debt, and the estimated volatility of our stock. Modification of Debt - When we change the terms of existing notes payable, we evaluate the amendments under ASC 470-50, Debt Modification and Extinguishment to determine whether the change should be treated as a modification or as a debt extinguishment. This evaluation includes analyzing whether there are significant and consequential changes to the economic substance of the note. If the change is deemed insignificant then the change is considered a debt modification, whereas if the change is substantial the change is reflected as a debt extinguishment. Equity-based Payments We estimate the fair value of equity-based instruments issued to employees or to third parties for services or goods using Black-Scholes or the Binomial Model, which requires us to estimate the volatility of our stock and forfeiture rate. Revenue Recognition ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, judgment and estimates may be required within the revenue recognition process including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The following five steps are applied to achieve that core principle: ● Step 1: Identify the contract with the customer; ● Step 2: Identify the performance obligations in the contract; ● Step 3: Determine the transaction price; ● Step 4: Allocate the transaction price to the performance obligations in the contract; and ● Step 5: Recognize revenue when the company satisfies a performance obligation. 22 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.