What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-11 compared with 2021-05-17 · 73 added, 56 removed, 78 unchanged (62% of the section changed)

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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 our one reporting segment Cultivation, we provide products to the regulated cannabis industry, which include the following:

Cultivation (“Cultivation Segment”)

Through 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 and six months ended June 30, 2021, 11% of SevenFive’s revenue was with one customer.

Discontinued Operations - Operations Consulting and Products

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.

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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.

During the three months ended March 31, 2021, 18% of SevenFive’s revenue was with one customer.

NBC also provides operational support for our internal cultivation.

In June 2021, we began talks with an individual to begin the sale of NBC.

On July 16, 2021, we entered into an Asset Purchase Agreement with this individual to sell substantially all of the assets of NBC for a total of $150,000 and 10% of profits generated by the buyer in the states of Michigan, Mississippi, and Massachusetts for a period of twelve months from the closing.

On August 2, 2021, the sale of NBC was completed.

Results of Operations

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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,

Three months ended June 30,

Costs and expenses

Other expense (income)

Net loss from continuing operations

Other expense

Net loss from continuing operations before income taxes

Loss from discontinued operations

Revenue decreased for our Operations Consulting Segment.

The addition of our Cultivation Segment contributed to an increase in sales.

Loss from operations before income taxes

Six months ended June 30,

Costs and expenses

Other expense

Net loss from continuing operations before income taxes

Loss from discontinued operations

Loss from operations before income taxes

Revenue increased for our Cultivation Segment due to a full three and six months of revenue in 2021, as SevenFive was acquired in May 2020.

See Segment discussions below for further details.

Costs and expenses

Three months ended March 31,

Cost of revenues

Three months ended June 30,

Cost of sales

Selling, general and administrative

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Depreciation and amortization

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.

Six months ended June 30,

Cost of sales

Selling, general and administrative

Stock-based compensation

Professional fees

Depreciation and amortization

Cost of sales 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,

Selling, general and administrative expense decreased for the three months and six months ended June 30, 2021 as compared to June 30, 2020 due to a reduction in employees throughout 2021 and a concerted effort by management to reduce expenses.

Stock-based compensation included the following:

Three months ended June 30,

Employee awards

Consulting awards

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.

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.

Six months ended June 30,

Employee awards

Consulting awards

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 six months ended June 30, 2021 as compared to June 30, 2020 is due to the decrease in the number of options we grant on a quarterly basis and an increase in forfeitures in 2021 due to the departure of our Chief Executive Officer in May 2021 and a reduction in workforce in 2020 and 2021.

Professional fees consist primarily of accounting and legal expenses and decreased for the three and six months ended June 30, 2021 as compared to the three and six months ended June 30, 2020 due to the hiring of internal counsel to be more cost effective.

Other Expense

Three months ended March 31,

Three months ended June 30,

Amortization of debt discount and equity issuance costs

Interest expense

Loss on extinguishment of debt

(Gain) loss on derivative liability

Gain on sale of assets

Six months ended June 30,

Amortization of debt discount

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Other expense (income), net

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%.

Amortization of debt discount increased during the three and six months ended June 30, 2021 as compared to June 30, 2020 due to the senior convertible promissory notes with warrants (“10% Notes”) issued in December 2020, February 2021 and April 2021.

Interest expense increased during the three and six months ended June 30, 2021 as compared to June 30, 2020 due to the addition of the 10% Notes with an interest rate of 10%.

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.

See Note 7 of the accompanying unaudited condensed consolidated financial statements for further information.

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,

Three months ended June 30,

Costs and expenses

Segment operating income

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.

Three months ended March 31,

Six months ended June 30,

Costs and expenses

This is a new segment as of the second quarter of 2020;

therefore, all amounts are an increase from the prior quarter.

The increase in revenues for the three and six months ended June 30, 2021 over prior year is due to the acquisition of SevenFive Farm occurring in May 2020.

The decrease in gross margin is due to lower yields caused by several environmental factors.

Sources of liquidity

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We anticipate our significant uses of resources will include funding operations and developing infrastructure.

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.

We had cash of $2,307,604 and $750,218 as of June 30, 2021 and December 31, 2020, respectively.

Our cash flows from operating, investing and financing activities were as follows:

Three months ended March 31,

Six months ended June 30,

Net cash used in operating activities

Net cash (used in) provided by investing activities

Net cash provided by investing activities

Net cash provided by financing activities

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.

Net cash used in operating activities decreased in 2021 due to the acquisition of SevenFive Farm which provides positive operating cash flows and adjustments relating to non-cash activities.

Net cash provided by investing activities for the six months ended June 30, 2021 decreased from June 30, 2020 due to the sale of the building in the first quarter of 2020.

Net cash used in investing activities for the six months ended June 30, 2021 consisted of purchase of property and equipment for SevenFive Farms, offset by the sale of our investment during the first quarter and repayment of our notes receivable in the second quarter.

Net cash provided by financing activities for the six months ended June 30, 2021 related to the payment on notes payable of $200,000, proceeds from notes payable of $3,960,000 and proceeds from the exercise of stock options of $181,709.

Capital Resources

We had no material commitments for capital expenditures as of March 31, 2021.

We had no material commitments for capital expenditures as of June 30, 2021.

Part of our growth strategy, however, is to acquire operating businesses.

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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.

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 or disposal-related transaction costs , 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.

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The following table reconciles Adjusted EBITDA to the most directly comparable GAAP measure, which is net loss.

Three months ended March 31,

Net loss attributable to common stockholders

Three months ended June 30,

Six months ended June 30,

Loss from operations before income taxes

Adjustment for loss from discontinued operations

Loss from continuing operations attributable to common stockholders

Net loss from continuing operations before income taxes

Stock-based compensation

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Interest expense

Gain on sale of building

Loss (gain) on derivative liability

Acquisition related expenses

Gain on sale of assets

(Gain) loss on derivative liability

Transaction costs

Total adjustments

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Critical Accounting Policies

Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S.

Our unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S.

The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues and expenses.

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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.

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 Unaudited Condensed Consolidated Financial Statements in this Form 10-Q.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis