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. 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, Retail and Cultivation, we provide products to the regulated cannabis industry, which include the following: Retail (“Retail Segment”) Through our acquisition of TDM, LLC (“TREES Englewood”), we operate a retail dispensary store in Englewood, Colorado. 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 nine months ended September 30, 2021, 24% and 12% of SevenFive’s revenue was with two and one customer, respectively. 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. 22 Table of Contents 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. NBC also provides operational support for our internal cultivation. 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 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 September 30, ​ ​ ​ ​ Percent ​ ​ 2021 ​ 2020 ​ Change ​ Change Revenues $ 1,665,642 ​ $ 820,068 $ 845,574 103 % Costs and expenses ​ (2,537,670) ​ ​ (2,185,910) ​ ​ (351,760) ​ 16 % Other expense ​ (414,962) ​ ​ 930,546 ​ ​ (1,345,508) ​ (145) % Net loss from continuing operations before income taxes ​ (1,286,990) ​ ​ (435,296) ​ ​ (851,694) ​ 196 % Loss from discontinued operations ​ (40,605) ​ ​ (70,968) ​ ​ 30,363 ​ (43) % Loss from operations before income taxes ​ $ (1,327,595) ​ $ (506,264) ​ $ (821,331) ​ 162 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2021 ​ 2020 ​ Change ​ Change Revenues $ 3,028,055 $ 1,391,341 $ 1,636,714 118 % Costs and expenses ​ (5,653,952) ​ (6,342,585) ​ 688,633 ​ (11) % Other expense ​ (2,059,885) ​ 840,919 ​ (2,900,804) ​ (345) % Net loss from continuing operations before income taxes ​ (4,685,782) ​ (4,110,325) ​ (575,457) ​ 14 % Loss from discontinued operations ​ (377,134) ​ (310,490) ​ (66,644) ​ 21 % Loss from operations before income taxes ​ $ (5,062,916) ​ $ (4,420,815) ​ $ (642,101) ​ 15 % ​ Revenues The addition of our Retail segment contributed to the significant increase in revenues for the three and nine months ended September 30, 2021. See Segment discussions below for further details. Costs and expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2021 ​ 2020 ​ Change ​ Change Cost of sales $ 1,473,209 $ 304,031 $ 1,169,178 385 % Selling, general and administrative ​ 672,981 ​ 751,211 ​ (78,230) (10) % Stock-based compensation ​ 131,836 ​ 420,992 ​ (289,156) (69) % Professional fees ​ 144,289 ​ 662,687 ​ (518,398) (78) % Depreciation and amortization ​ 115,355 ​ 46,989 ​ 68,366 145 % ​ ​ $ 2,537,670 ​ $ 2,185,910 ​ $ 351,760 16 % ​ 23 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ 2021 2020 Change Change Cost of sales ​ $ 2,539,840 ​ $ 585,274 ​ $ 1,954,566 ​ 334 % Selling, general and administrative ​ 1,853,731 ​ 2,464,476 ​ (610,745) (25) % Stock-based compensation ​ 194,120 ​ 1,427,931 ​ (1,233,811) (86) % Professional fees ​ 760,437 ​ 1,768,714 ​ (1,008,277) (57) % Depreciation and amortization ​ 305,824 ​ 96,190 ​ 209,634 218 % ​ ​ $ 5,653,952 ​ $ 6,342,585 ​ $ (688,633) (11) % ​ Cost of sales increased year over year due to the addition of the Retail Segment in the third quarter. See Segment discussions below for further details. Selling, general and administrative expense decreased for the three months and nine months ended September 30, 2021 as compared to September 30, 2020 due to a reduction in employees throughout 2021 and a concerted effort by management to reduce expenses. Professional fees consist primarily of accounting and legal expenses and decreased for the three and nine months ended September 30, 2021 as compared to the three and nine months ended September 30, 2020 due to the hiring of internal counsel to be more cost effective. Stock-based compensation included the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2021 ​ 2020 ​ Change ​ Change Employee awards $ 131,836 $ 420,992 $ (289,156) (69) % ​ ​ $ 131,836 ​ $ 420,992 ​ $ (289,156) (69) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2021 ​ 2020 ​ Change ​ Change Employee awards $ 194,120 $ 1,354,328 $ (1,160,208) (86) % Consulting awards ​ — ​ 73,603 ​ (73,603) (100) % ​ ​ $ 194,120 ​ $ 1,427,931 ​ $ (1,233,811) (86) % ​ 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. 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, 2021 as compared to September 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, the departure of our Chief Financial Officer in September 2021 and a reduction in workforce in 2020 and 2021. Other Expense ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ 2021 2020 Change Change Amortization of debt discount and equity issuance costs ​ $ 216,516 ​ $ 61,002 ​ $ 155,514 ​ 255 % Interest expense ​ 150,503 ​ ​ 84,716 ​ ​ 65,787 ​ 78 % Loss on extinguishment of debt ​ 233,374 ​ ​ — ​ ​ 233,374 ​ 100 % (Gain) loss on derivative liability ​ ​ (52,452) ​ ​ (1,076,264) ​ ​ 1,023,812 ​ (95) % Gain on sale of assets ​ (132,979) ​ ​ — ​ ​ (132,979) ​ (100) % ​ ​ $ 414,962 ​ $ (930,546) ​ $ 1,345,508 ​ (145) % ​ 24 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ 2021 2020 Change Change Amortization of debt discount ​ $ 470,306 ​ $ 199,839 ​ $ 270,467 ​ 135 % Interest expense ​ 444,186 ​ 359,436 ​ 84,750 ​ 24 % Loss on extinguishment of debt ​ 233,374 ​ 1,186,336 ​ (952,962) ​ (80) % Loss (gain) on derivative liability ​ 1,043,531 ​ (2,447,343) ​ 3,490,874 ​ (143) % Other expense (income), net ​ (131,512) ​ (139,187) ​ 7,675 ​ (6) % ​ ​ $ 2,059,885 ​ $ (840,919) ​ $ 2,900,804 ​ (345) % ​ Amortization of debt discount increased during the three and nine months ended September 30, 2021 as compared to September 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 nine months ended September 30, 2021 as compared to September 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 for the three and nine months ended September 30, 2021 was due to the modification of warrants that occurred on the 15% Warrants during the third quarter. The loss on extinguishment of debt during 2020 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. Retail ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ 2021 2020 Change Change Revenues ​ $ 855,841 ​ $ — ​ $ 855,841 100 % Costs and expenses ​ (891,126) ​ — ​ (891,126) 100 % ​ ​ $ (35,285) ​ $ — ​ $ (35,285) 100 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2021 ​ 2020 ​ Change ​ Change Revenues $ 855,841 $ — $ 855,841 100 % Costs and expenses ​ (891,126) ​ — ​ (891,126) 100 % Segment operating income ​ $ (35,285) ​ $ — ​ $ (35,285) 100 % ​ With the addition of the TREES Englewood dispensary on September 2, 2021, we have established our retail footprint in the Colorado market and have become a vertically integrated company. The Retail Segment will provide consistent positive cash flows which will significantly contribute to our working capital position. The negative margin reported in the third quarter is primarily due to the inventory being marked to fair market value as of the acquisition date, September 2 nd , 2021. The company expects this inventory to mostly turn over before year end and start recognizing a positive margin in the 4 th quarter of 2021. Cultivation ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ 2021 2020 Change Change Revenues ​ $ 835,719 ​ $ 798,352 ​ $ 37,367 5 % Costs and expenses ​ (865,490) ​ (609,381) ​ (256,109) 42 % ​ ​ $ (29,771) ​ $ 188,971 ​ $ (218,742) (116) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ 2021 2020 Change Change Revenues ​ $ 2,183,660 ​ $ 1,307,527 ​ $ 876,133 67 % Costs and expenses ​ (2,340,913) ​ (1,025,507) ​ (1,315,406) 128 % ​ ​ $ (157,253) ​ $ 282,020 ​ $ (439,273) (156) % 25 Table of Contents The increase in revenues for the three and nine months ended September 30, 2021 over prior year is due to selling premium blunts that command a higher price than traditional wholesale cannabis. The decrease in gross margin is due to lower yields caused by several environmental factors. 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. In September 2021, we received $1,180,000 in cash in a private placement with certain accredited investors pursuant to the Series A Convertible Preferred Stock to be used for the acquisition of dispensaries and for operating capital. (See Note 10 of the accompanying unaudited condensed consolidated financial statements). 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 unaudited 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 $2,459,453 and $750,218 as of September 30, 2021 and December 31, 2020, respectively. Our cash flows from operating, investing and financing activities were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ 2021 ​ 2020 Net cash used in operating activities $ (2,489,130) $ (4,384,372) Net cash provided by investing activities ​ $ (936,719) ​ $ 1,264,790 Net cash provided by financing activities ​ $ 5,134,634 ​ $ 3,615,000 ​ Net cash used in operating activities decreased in 2021 due to the acquisition of SevenFive Farm and TREES Englewood which provides positive operating cash flows and adjustments relating to non-cash activities. Net cash provided by investing activities for the nine months ended September 30, 2021 decreased from September 30, 2020 due to the sale of the building in the first quarter of 2020. Net cash used in investing activities for the nine months ended September 30, 2021 consisted of purchase of, Trees Colorado, LLC and the 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 nine months ended September 30, 2021 related to the payment on notes payable of $200,000, proceeds from notes payable of $3,960,000, proceeds of the preferred stock offering of $1,180,000 and proceeds from the exercise of stock options of $194,634. Capital Resources We had no material commitments for capital expenditures as of September 30, 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. 26 Table of Contents 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 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. 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. 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, ​ ​ 2021 ​ 2020 ​ 2021 ​ 2020 Loss from operations before income taxes $ (1,327,595) $ (506,264) $ (5,062,916) $ (4,420,815) Adjustment for loss from discontinued operations ​ 40,605 ​ 70,968 ​ 377,134 ​ 310,490 Net loss from continuing operations before income taxes ​ (1,286,990) ​ (435,296) ​ (4,685,782) ​ (4,110,325) Adjustments: ​ ​ ​ ​ Stock-based compensation ​ 131,836 ​ 420,992 ​ 194,120 ​ 1,427,931 Depreciation and amortization ​ ​ 115,355 ​ ​ 46,989 ​ ​ 305,824 ​ ​ 96,190 Amortization of debt discount and equity issuance costs ​ 216,516 ​ 61,002 ​ 470,306 ​ 199,839 Loss on extinguishment of debt ​ 233,374 ​ — ​ 233,374 ​ 1,186,336 Interest expense ​ 150,503 ​ 84,716 ​ 444,186 ​ 359,436 Gain on sale of assets ​ ​ (132,979) ​ ​ — ​ ​ (131,512) ​ ​ (139,187) (Gain) loss on derivative liability ​ (52,452) ​ (1,076,264) ​ 1,043,531 ​ (2,447,343) Transaction costs ​ ​ 35,360 ​ ​ 183,793 ​ ​ 98,243 ​ ​ 318,681 Total adjustments ​ 697,513 ​ (278,772) ​ 2,658,072 ​ 1,001,883 Adjusted EBITDA ​ $ (589,477) ​ $ (714,068) ​ $ (2,027,710) ​ $ (3,108,442) ​ Off-balance Sheet Arrangements We currently have no off-balance sheet arrangements. Critical Accounting Policies Our unaudited 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 Unaudited Condensed Consolidated Financial Statements in this Form 10-Q. 27 Table of Contents 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.