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, 2020, 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. 17 Table of Contents 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 General Cannabis Corp (formerly, “Advanced Cannabis Solutions, Inc.”). Our Products, Services and Customers Through our two reporting segments Operations Consulting and Products, and Cultivation, we provide products and services 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 months ended March 31, 2021 and 2020, 69% and 73% of NBC’s revenue was with three 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 acquisition of SevenFive Farm (“SevenFive”), we operate a 17,000 square foot 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 months ended March 31, 2021, 18% of SevenFive’s revenue was with one customer. 18 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ ​ ​ ​ Percent ​ ​ 2021 ​ 2020 ​ Change ​ Change Revenues $ 1,647,990 $ 1,664,188 $ (16,198) (1) % Costs and expenses ​ (2,635,461) ​ (3,665,437) ​ 1,029,976 ​ (28) % Other expense (income) ​ (1,371,597) ​ 139,928 ​ (1,511,525) ​ (1,080) % Net loss from continuing operations ​ (2,359,068) ​ (1,861,321) ​ (497,747) ​ 27 % Loss from discontinued operations ​ — ​ (152,858) ​ 152,858 ​ (100) % Net loss ​ $ (2,359,068) ​ $ (2,014,179) ​ $ (344,889) ​ 17 % ​ Revenues Revenue decreased for our Operations Consulting Segment. The addition of our Cultivation Segment contributed to an increase in sales. See Segment discussions below for further details. Costs and expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ ​ ​ ​ Percent ​ 2021 2020 Change Change Cost of revenues ​ $ 1,396,097 ​ $ 1,423,980 ​ $ (27,883) ​ (2) % Selling, general and administrative ​ 750,577 ​ 1,039,934 ​ (289,357) (28) % Stock-based compensation ​ 103,932 ​ 572,574 ​ (468,642) (82) % Professional fees ​ 262,914 ​ 597,036 ​ (334,122) (56) % Depreciation and amortization ​ 121,941 ​ 31,913 ​ 90,028 282 % ​ ​ $ 2,635,461 ​ $ 3,665,437 ​ $ (1,029,976) (28) % ​ 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 March 31, 2021 as compared to March 31, 2020 due to a reduction in employees throughout 2020, a reduction in legal fees in the first quarter of 2021 and a concerted effort by management to reduce expenses. Stock-based compensation expense included the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ ​ ​ ​ Percent ​ ​ 2021 ​ 2020 ​ Change ​ Change Employee awards $ 103,932 $ 501,559 $ (397,627) (79) % Consulting awards ​ — ​ 71,015 ​ (71,015) (100) % ​ ​ $ 103,932 ​ $ 572,574 ​ $ (468,642) (82) % ​ Employee awards are issued under our 2020 Omnibus Incentive Plan, which was approved by shareholders on November 23, 2020 and 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 months ended March 31, 2021 as compared to March 31, 2020 is due to the reduction in workforce and the decrease in the amount of options we issue on a quarterly basis. We decreased our employee count by over 50% resulting in a sharp decrease in employee award expense. 19 Table of Contents Professional fees consist primarily of accounting and legal expenses and decreased for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 due to the hiring of internal counsel and switching outside counsel during the third quarter of 2020 to be more cost effective. Other Expense ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ ​ ​ ​ Percent ​ ​ 2021 ​ 2020 ​ Change ​ Change Amortization of debt discount $ 68,330 $ 66,321 $ 2,009 3 % Interest expense ​ 103,056 ​ 171,048 ​ (67,992) (40) % Loss on extinguishment of debt ​ — ​ 1,137,428 ​ (1,137,428) (100) % Loss (gain) on derivative liability ​ 1,198,744 ​ (1,375,620) ​ 2,574,364 (187) % Other expense (income), net ​ 1,467 ​ (139,105) ​ 140,572 (100) % ​ ​ $ 1,371,597 ​ $ (139,928) ​ $ 1,511,525 (1,080) % ​ Amortization of debt discount stayed consistent in 2021 compared to 2020. Interest expense decreased in 2021 due to the new debt entered in the fourth quarter of 2020 and the payoff of the old debt. The new debt has an interest rate of 10% compared to the prior notes in which the interest rate was 15%. 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, and the exchange of the 12% Notes into the 15% Notes that occurred during the first quarter of 2020. The other expense (income) in 2020 relates to the gain on the sale of the building we recognized as a result of the sale of our corporate office building in March 2020. Operations Consulting and Products ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ ​ ​ ​ Percent ​ ​ 2021 ​ 2020 ​ Change ​ Change Revenues $ 1,296,229 $ 1,647,459 $ (351,230) (21) % Costs and expenses ​ (1,266,727) ​ (1,616,487) ​ 349,760 (22) % Segment operating income ​ $ 29,502 ​ $ 30,972 ​ $ (1,470) (5) % ​ The decrease in NBC revenues for the three months ended March 31, 2021 as compared to March 31, 2020 is due to a decrease in both service and product revenues. Ongoing management revenue remained consistent with prior year. The decrease in expenses is in direct relation to the decrease in revenues. The segment operating income remained consistent with prior year due to the decrease in product sales which has a lower margin. Cultivation ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ ​ ​ ​ Percent ​ 2020 2019 Change Change Revenues ​ $ 649,333 ​ $ — ​ $ 649,333 100 % Costs and expenses ​ (797,708) ​ — ​ (797,708) 100 % ​ ​ $ (148,375) ​ $ — ​ $ (148,375) 100 % ​ This is a new segment as of the second quarter of 2020; therefore, all amounts are an increase from the prior quarter. 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 significant uses of resources will include funding operations and developing infrastructure. 20 Table of Contents In April 2021, we received $2,300,000 in cash in a private placement with certain accredited investors pursuant to the 10% Notes to be used for the acquisition of dispensaries (See Note 13 of the accompanying condensed consolidated financial statements). In February 2021, we received $1,660,000 in cash in a private placement with certain accredited investors pursuant to the 10% Notes. Sources and uses of cash We had cash of $840,092 and $750,218 as of March 31, 2021 and December 31, 2020, respectively. Our cash flows from operating, investing and financing activities were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ ​ 2021 ​ 2020 Net cash used in operating activities $ (1,449,925) $ (1,482,828) Net cash (used in) provided by investing activities ​ (55,353) ​ 1,418,123 Net cash provided by financing activities ​ 1,595,002 ​ 615,000 ​ Net cash used in operating activities decreased slightly in 2021 due to the acquisition of SevenFive Farm which provides positive operating cash flows. Net cash (used in) provided by investing activities for the three months ended March 31, 2021 decreased from March 31, 2020 due to the sale of the building in the first quarter of 2020. Net cash used in investing activities for the three months ended March 31, 2021 consisted of purchase of property and equipment for SevenFive Farms, offset by the sale of our investment during the first quarter. Net cash used in financing activities for the three months ended March 31, 2021 related to the payment on notes payable of $200,000, proceeds from notes payable of $1,660,000, and proceeds from the exercise of stock options of $135,002. Capital Resources We had no material commitments for capital expenditures as of March 31, 2021. 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. 21 Table of Contents The following table reconciles Adjusted EBITDA to the most directly comparable GAAP measure, which is net loss. ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ ​ 2021 ​ 2020 Net loss attributable to common stockholders $ (2,359,068) $ (2,014,179) Adjustment for loss from discontinued operations ​ — ​ 152,858 Loss from continuing operations attributable to common stockholders ​ (2,359,068) ​ (1,861,321) Adjustments: ​ ​ Stock-based compensation ​ 103,932 ​ 572,574 Depreciation and amortization ​ ​ 121,941 ​ ​ 31,913 Amortization of debt discount and equity issuance costs ​ 68,330 ​ 66,321 Loss on extinguishment of debt ​ — ​ 1,137,428 Interest expense ​ 103,056 ​ 171,048 Gain on sale of building ​ ​ — ​ ​ (139,105) Loss (gain) on derivative liability ​ 1,198,744 ​ (1,375,620) Acquisition related expenses ​ ​ 141,580 ​ ​ 308,196 Total adjustments ​ 1,737,583 ​ 772,755 Adjusted EBITDA ​ $ (621,485) ​ $ (1,088,566) ​ 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, 2020, 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.