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 Condensed 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, 2019, as amended. 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,” “our,” or “GCC” and the “Company,” they refer to General Cannabis Corp (formerly, “Advanced Cannabis Solutions, Inc.”). COVID-19 The recent outbreak of the novel coronavirus disease (“COVID-19”), was labeled a global pandemic by the World Health Organization in March 2020 and has led to material and adverse impacts on the U.S. and global economies and created widespread uncertainty, including locations where we do business. As of the date of this Quarterly Report on Form 10-Q, we have experienced disruption in our operations as a result of the COVID-19 pandemic and are conducting business with modifications to employee travel and employee work locations, among other modifications. We will continue to actively monitor the development of the COVID-19 pandemic and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, clients, partners, and stockholders. The full extent of the pandemic, related business and travel restrictions, governmental regulations and changes to consumer behavior intended to reduce its spread are uncertain as of the date of this Quarterly Report on Form 10-Q, and the timing of the peak of the pandemic and its ultimate impact on the U.S. and global economies remains uncertain. Therefore, the full extent to which the COVID-19 pandemic may impact our results of operations, liquidity or financial position is uncertain. In addition, the COVID-19 pandemic has had and is likely to continue to have adverse effects on our clients, suppliers and third-party business partners. Management continues to monitor the impact that the COVID-19 pandemic is having on the Company and the economies in which we operate. We anticipate that our liquidity may be materially impacted by the COVID-19 pandemic and we expect that the effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods. 23 Table of Contents Our Products, Services and Customers Through our three reporting segments Operations Consulting and Products, Cultivation and Capital Investments, we provide products, services and capital to the regulated cannabis industry and non-cannabis customers, which include the following: Operations Consulting and Products (“Operations Segment”) Through Next Big Crop (“NBC”), we deliver comprehensive consulting services to the cannabis industry that include obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and construction, and expansion of existing operations. During the three and nine months ended September 30, 2020, 60% and 76% of NBC’s revenue was with one and four customers, respectively. NBC oversees our wholesale equipment and supply business, operated under the name “GC Supply,” which provides turnkey sourcing and stocking services to cultivation, retail and infused products manufacturing facilities. Our products include building materials, equipment, consumables and compliance packaging. There are generally multiple suppliers for the products we sell; however, there are a limited number of manufacturers of certain high-tech cultivation equipment. Cultivation (“Cultivation Segment”) Through our new acquisition of SevenFive Farm (“SevenFive”), we operate a licensed light deprivation greenhouse cultivation facility. We believe our production capability is sufficient to meet the diverse needs of our recreational consumers in Colorado, from cost-effective, high-yield inputs to sophisticated and dried cannabis flower. During the three and nine months ended September 30, 2020, 15% and 27% of SevenFive’s revenue was with one and two customers, respectively. Capital Investments (“Investments Segment”) As a publicly traded company, we have access to capital that may not be available to businesses operating in the cannabis industry. Accordingly, we may provide debt or equity capital through investing in businesses using cash or shares of our common stock. 24 Table of Contents 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 condensed consolidated financial statements and the notes thereto in this report. Consolidated Results ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2020 ​ 2019 ​ Change ​ Change Revenues $ 1,585,564 $ 862,931 $ 722,633 84 % Costs and expenses ​ (3,091,379) ​ (2,716,094) ​ (375,285) 14 % Other income (expense) ​ 930,546 ​ (36,750) ​ 967,296 (2,632) % Net loss from continuing operations ​ (575,269) ​ (1,889,913) ​ 1,314,644 (70) % Gain (loss) from discontinued operations ​ 69,005 ​ (364,409) ​ 433,414 (119) % Net loss ​ $ (506,264) ​ $ (2,254,322) ​ $ 1,748,058 (78) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2020 ​ 2019 ​ Change ​ Change Revenues $ 4,986,077 $ 2,478,270 $ 2,507,807 101 % Costs and expenses ​ (10,169,191) ​ (9,257,661) ​ (911,530) 10 % Other income (expense) ​ 840,919 ​ (1,726,750) ​ 2,567,669 (149) % Net loss from continuing operations ​ (4,342,195) ​ (8,506,141) ​ 4,163,946 (49) % Loss from discontinued operations ​ (78,620) ​ (1,156,678) ​ 1,078,058 (93) % Net loss ​ $ (4,420,815) ​ $ (9,662,819) ​ $ 5,242,004 (54) % ​ Revenues Revenue increased for both our Operations Consulting and Investments Segments. The addition of our Cultivation Segment contributed to the increase in sales. See Segment discussions below for further details. Costs and expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2020 ​ 2019 ​ Change ​ Change Cost of sales $ 989,916 $ 452,220 $ 537,696 119 % Selling, general and administrative ​ 956,576 ​ 1,181,270 ​ (224,694) (19) % Stock-based compensation expense ​ 420,990 ​ 768,079 ​ (347,089) (45) % Professional fees ​ 672,987 ​ 282,688 ​ 390,299 138 % Depreciation and amortization ​ 50,910 ​ 31,837 ​ 19,073 60 % ​ ​ $ 3,091,379 ​ $ 2,716,094 ​ $ 375,285 14 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2020 ​ 2019 ​ Change ​ Change Cost of sales $ 3,725,600 $ 1,669,314 $ 2,056,286 123 % Selling, general and administrative ​ 3,123,196 ​ 3,240,742 ​ (117,546) (4) % Stock-based compensation expense ​ 1,427,931 ​ 3,013,042 ​ (1,585,111) (53) % Professional fees ​ 1,784,684 ​ 1,254,183 ​ 530,501 42 % Depreciation and amortization ​ 107,780 ​ 80,380 ​ 27,400 34 % ​ ​ $ 10,169,191 ​ $ 9,257,661 ​ $ 911,530 10 % ​ 25 Table of Contents Cost of sales fluctuates with the changes in revenue and product sales in our Operations Consulting Segment. Product sales has a smaller margin than our service revenues. Cost of sales also includes costs associated with cultivation sales, which fluctuates with the changes in cultivation revenues. See Segment discussions below for further details. Selling, general and administrative expense decreased for the three months ended September 30, 2020 as compared to September 30, 2019 due to a reduction in employees during the third quarter of 2020 and a concerted effort by management to reduce expenses. Selling, general and administrative expense stayed relatively static for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. Stock-based compensation expense included the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2020 ​ 2019 ​ Change ​ Change Employee awards $ 259,930 $ 552,119 $ (292,189) (53) % Consulting awards ​ — ​ 18,758 ​ (18,758) (100) % Feinsod agreement ​ 161,062 ​ 197,202 ​ (36,140) (18) % ​ ​ $ 420,992 ​ $ 768,079 ​ $ (347,087) (45) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2020 ​ 2019 ​ Change ​ Change Employee awards $ 931,986 $ 2,406,088 $ (1,474,102) (61) % Consulting awards ​ 73,603 ​ 39,961 ​ 33,642 84 % Feinsod agreement ​ 422,342 ​ 566,993 ​ (144,651) (26) % ​ ​ $ 1,427,931 ​ $ 3,013,042 ​ $ (1,585,111) (53) % ​ Employee awards are issued under our 2014 Equity Incentive Plan, which was approved by shareholders on June 26, 2015, and expense varies primarily due to the number of stock options granted and the share price on the date of grant. The decrease in expense for the three and nine months ended September 30, 2020 as compared to September 30, 2019 is due to the restructuring of the Company in the first quarter of 2020 and the reduction in workforce. We decreased our employee count by over 50% resulting in a sharp decrease in employee award expense. Consulting awards are granted to third parties in lieu of cash for services provided. The Feinsod Agreement expense represents stock-based compensation pursuant to agreements with Michael Feinsod for serving as the Executive Chairman of our Board. Professional fees consist primarily of accounting and legal expenses and increased for the three months and nine ended September 30, 2020 as compared to the three and nine months ended September 30, 2019 due to increased activity related to acquisitions, fund raisings and litigation. 26 Table of Contents Other Expense ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2020 ​ 2019 ​ Change ​ Change Amortization of debt discount and equity issuance costs $ 61,002 $ 83,094 $ (22,092) (27) % Interest expense ​ 84,716 ​ 75,996 ​ 8,720 11 % Debt extinguishment ​ — ​ 298,500 ​ (298,500) (100) % Gain on derivative liability ​ (1,076,264) ​ (420,840) ​ (655,424) 156 % ​ ​ $ (930,546) ​ $ 36,750 ​ $ (967,296) (2,632) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2020 ​ 2019 ​ Change ​ Change Amortization of debt discount and equity issuance costs $ 199,839 $ 1,976,869 $ (1,777,030) (90) % Interest expense ​ 359,436 ​ 274,083 ​ 85,353 31 % Debt extinguishment ​ 1,186,336 ​ 298,500 ​ 887,836 297 % Gain on derivative liability ​ (2,447,343) ​ (822,702) ​ (1,624,641) 197 % Gain on sale of building ​ (139,187) ​ — ​ (139,187) (100) % ​ ​ $ (840,919) ​ $ 1,726,750 ​ $ (2,567,669) (149) % ​ Amortization of debt discount was lower in 2020 compared to 2019, due to the April 2018 debt paid off in the second quarter of 2019. This was offset slightly by new debt issued in the third and fourth quarters of 2019 and the first quarter of 2020. Interest expense increased in 2020 due to the new debt entered in the third and fourth quarters of 2019 and the first quarter of 2020. The gain on warrant derivative liability reflects the change in the fair value of the 2019 Warrants. The loss on extinguishment of debt is due to the conversion and extension of the SBI debt, the exchange of the 12% Notes into the 15% Notes and the extension of a portion of the 15% Notes. The gain on the sale of the building is the gain we recognized as a result of the sale of our building in March 2020. Operations Consulting and Products ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2020 ​ 2019 ​ Change ​ Change Revenues $ 765,496 $ 834,334 $ (68,838) (8) % Costs and expenses ​ (905,469) ​ (784,844) ​ (120,625) 15 % ​ ​ $ (139,973) ​ $ 49,490 ​ $ (189,463) (383) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2020 ​ 2019 ​ Change ​ Change Revenues $ 3,594,736 $ 2,407,077 $ 1,187,659 49 % Costs and expenses ​ (3,826,606) ​ (2,321,461) ​ (1,505,145) 65 % ​ ​ $ (231,870) ​ $ 85,616 ​ $ (317,486) (371) % ​ The decrease in NBC revenues for the three months ended September 30, 2020 as compared to September 30, 2019 is due to a decrease in both service and product revenues due to COVID-19. The increase in NBC revenues for the nine months ended September 30, 2020 is primarily related to an increase in product sales throughout 2020 with COVID-related decreases in services and application fees completed in 2020. Ongoing management revenue remained consistent with prior year. The lower margin is due to increased product sales and a decrease in applications. The increase in expenses is directly related to the increase in product sales. 27 Table of Contents Cultivation ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ 2020 2019 Change Change Revenues ​ $ 798,352 ​ $ — ​ $ 798,352 100 % Costs and expenses ​ (609,381) ​ — ​ (609,381) 100 % ​ ​ $ 188,971 ​ $ — ​ $ 188,971 100 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ 2020 2019 Change Change Revenues ​ $ 1,307,527 ​ $ — ​ $ 1,307,527 100 % Costs and expenses ​ (1,025,507) ​ — ​ (1,025,507) 100 % ​ ​ $ 282,020 ​ $ — ​ $ 282,020 100 % ​ This is a new segment as of September 30, 2020; therefore, all amounts are an increase from the prior year. Investments ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2020 ​ 2019 ​ Change ​ Change Revenues $ 21,716 $ 28,597 $ (6,881) (24) % Costs and expenses ​ — ​ — ​ — — % ​ ​ $ 21,716 ​ $ 28,597 ​ $ (6,881) (24) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2020 ​ 2019 ​ Change ​ Change Revenues $ 83,814 $ 71,193 $ 12,621 18 % Costs and expenses ​ (125,000) ​ (41,723) ​ (83,277) 200 % ​ ​ $ (41,186) ​ $ 29,470 ​ $ (70,656) (240) % ​ The decrease in investments revenue for the three months ended September 30, 2020 as compared to September 30, 2019 is due to one of the three notes being paid off in December 2019. The increase in revenues for the nine months ended September 30, 2020 as compared to September 30, 2019 is related to three new notes receivables that were executed in the first quarter of 2019. The increase in 2020 is due to a note that went into default during the second quarter of 2020, resulting in a higher interest rate in 2020. All revenue is interest, and loan origination fees related to these new notes. The increase in costs and expenses in 2020 is due to an allowance on one of our note receivables due to the note going into default in the second quarter of 2020. Liquidity Sources of liquidity Our sources of liquidity include cash generated from operations, the cash exercise of common stock options and warrants, debt, and the issuance of common stock or other equity-based instruments. We anticipate our more significant uses of resources will include funding operations and developing infrastructure. In July 2020, we received $815,000 in cash by issuing 2,046,196 shares of our common stock and 1,534,647 warrants to purchase common stock. In May and June 2020, we received $2,185,000 in cash by issuing 5,485,814 shares of our common stock and 4,114,360 warrants to purchase common stock. During January through March of 2020, we received $525,000 in cash in a private placement with certain accredited investors pursuant to the 15% Notes. 28 Table of Contents Sources and uses of cash We had cash of $734,305 and $122,390 as of September 30, 2020 and December 31, 2019, respectively. Our cash flows from operating, investing and financing activities were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ 2020 ​ 2019 Net cash used in operating activities $ (4,384,372) $ (4,529,312) Net cash provided by (used in) investing activities ​ 1,264,790 ​ (1,001,091) Net cash provided by (used in) financing activities ​ 3,615,000 ​ (1,794,875) ​ Net cash used in operating activities decreased slightly in 2020 due to an increase in revenue as well as the acquisition of SevenFive Farm which provides positive operating cash flows. Net cash provided by investing activities for the nine months ended September 30, 2020 consisted of proceeds of $1,421,134 from the sale of the office building in Denver, CO and purchases of equipment of $156,344. Net cash used in investing activities for the nine months ended September 30, 2019 consisted of issuing notes receivable of $705,000 as well as the purchase of equipment of $296,091. Net cash provided by financing activities for the nine months ended September 30, 2020 related to proceeds of $1,500,000 from a notes payable offset by payment on a notes payable of $975,000. We also received $3,000,000 in proceeds related to the sale of our common stock and $90,000 from the exercise of warrants. Net cash used in financing activities for the nine months ended September 30, 2019 related to the payment on notes payable of $5,743,000, proceeds from the sale of common stock and warrants of $2,604,355, proceeds from notes payable of $1,155,000 and proceeds from the exercise of stock options of $188,770. Capital Resources We had no material commitments for capital expenditures as of September 30, 2020. 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. Non-GAAP Financial Measures Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss) attributable to common stockholders calculated in accordance with GAAP, adjusted for the impact of stock-based compensation expense, acquisition related expenses, non-recurring professional fees in relation to litigation and other non-recurring expenses, depreciation and amortization, amortization of debt discounts and equity issuance costs, loss on extinguishment of debt, interest expense, income taxes and certain other non-cash items. Below we have provided a reconciliation of Adjusted EBITDA per share to the most directly comparable GAAP measure, which is net income (loss) per share. We believe that the disclosure of Adjusted EBITDA provides investors with a better comparison of our period-to-period operating results. We exclude the effects of certain items when we evaluate key measures of our performance internally and in assessing the impact of known trends and uncertainties on our business. We also believe that excluding the effects of these items provides a more comparable view of the underlying dynamics of our operations. We believe such information provides additional meaningful methods of evaluating certain aspects of our operating performance from period to period on a basis that may not be otherwise apparent on a GAAP basis. This supplemental financial information should be considered in addition to, not in lieu of, our condensed consolidated financial statements. 29 Table of Contents The following table reconciles Adjusted EBITDA to the most directly comparable GAAP measure, which is net loss. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ Nine months ended September 30, ​ ​ 2020 ​ 2019 ​ 2020 ​ 2019 Net loss attributable to common stockholders $ (574,460) $ (2,254,322) $ (4,627,546) $ (10,854,819) Adjustment for (gain) loss from discontinued operations ​ (69,005) ​ 364,409 ​ 78,620 ​ 1,156,678 Loss from continuing operations attributable to common stockholders ​ (643,465) ​ (1,889,913) ​ (4,548,926) ​ (9,698,141) Adjustments: ​ ​ ​ ​ Stock-based compensation ​ 420,990 ​ 768,079 ​ 1,427,931 ​ 3,013,042 Acquisition related expenses ​ ​ 183,793 ​ ​ — ​ ​ 491,989 ​ ​ 318,681 Non-recurring professional services ​ ​ 263,522 ​ ​ 59,377 ​ ​ 790,565 ​ ​ 394,563 Depreciation and amortization ​ 50,910 ​ 31,837 ​ 107,780 ​ 80,380 Amortization of debt discount and equity issuance costs ​ 61,002 ​ 83,094 ​ 199,839 ​ 1,976,869 Loss on extinguishment of debt ​ — ​ 298,500 ​ 1,186,336 ​ 298,500 Interest expense ​ 84,716 ​ 75,996 ​ 359,436 ​ 274,083 Severance ​ ​ 63,052 ​ ​ 100,000 ​ ​ 103,302 ​ ​ 100,000 Gain on sale of building ​ ​ — ​ ​ — ​ ​ (139,187) ​ ​ — Gain on warrant derivative liability ​ (1,076,264) ​ (420,840) ​ (2,447,343) ​ (822,702) Provision for income taxes ​ ​ 68,196 ​ ​ — ​ ​ 108,731 ​ ​ — Total adjustments ​ 119,917 ​ 996,043 ​ 2,189,379 ​ 5,633,416 Adjusted EBITDA ​ $ (523,548) ​ $ (893,870) ​ $ (2,359,547) ​ $ (4,064,725) ​ Off-balance Sheet Arrangements We currently have no off-balance sheet arrangements. Critical Accounting Policies Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates used to prepare the condensed financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, as amended, and Note 1 to the Condensed Consolidated Financial Statements in this Form 10-Q. 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.