What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-13 compared with 2021-11-12 · 42 added, 78 removed, 85 unchanged (59% of the section changed)

1 unchanged sentence

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.

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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.

Through our two reporting segments, Retail and Cultivation, we provide products to the regulated cannabis industry and its customers, which include the following:

Through our acquisition of TDM, LLC (“TREES Englewood”) in September 2021, our acquisition of Trees Portland, LLC, Trees Waterfront, LLC in December 2021, and our acquisition of Trees MLK, LLC in January 2022, we operate a retail dispensary store in Englewood, Colorado and three retail stores in Portland, Oregon.

The Trees MLK location is currently not in operation.

This location should be operational in the second quarter of 2022.

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.

Through our acquisition of SevenFive Farm in May 2020, we operate a 17,000 square foot licensed light deprivation greenhouse cultivation facility.

During the three months ended March 31, 2022 and 2021, 45% and 18% of SevenFive’s revenue was with 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.

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.

Through Next Big Crop, we delivered comprehensive consulting services to the cannabis industry that included obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and construction, and expansion of existing operations.

NBC oversaw our wholesale equipment and supply business, operating under the name “GC Supply,” which provided turnkey sourcing and stocking services to cultivation, retail, and infused products manufacturing facilities.

Our products included building materials, equipment, consumables, and compliance packaging.

NBC also provided operational support for our internal cultivation.

On July 16, 2021, we entered into an Asset Purchase Agreement with an individual to sell substantially all 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.

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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 September 30,

Costs and expenses

Other expense

Net loss from continuing operations before income taxes

Loss from discontinued operations

Loss from operations before income taxes

Nine months ended September 30,

Three months ended March 31,

Costs and expenses

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Loss from operations before income taxes

The addition of our Retail segment contributed to the significant increase in revenues for the three and nine months ended September 30, 2021.

The addition of our Retail segment contributed to the significant increase in revenues for the three months ended March 31, 2022.

See Segment discussions below for further details.

Costs and expenses

Three months ended September 30,

Cost of sales

Selling, general and administrative

Stock-based compensation

Professional fees

Depreciation and amortization

Nine months ended September 30,

Three months ended March 31,

Cost of sales

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Depreciation and amortization

Cost of sales increased year over year due to the addition of the Retail Segment in the third quarter.

Cost of sales increased year over year due to the addition of the Retail Segment in the third and fourth quarters of 2021.

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.

Selling, general and administrative expense increased for the three months ended March 31, 2022, as compared to March 31, 2021, due to the acquisition of three dispensaries in the third and fourth quarter of 2021.

This resulted in an increase in employees and an increase in rent expense.

Professional fees consist primarily of accounting and legal expenses and increased slightly for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, due to the growth of our retail segment.

Stock-based compensation included the following:

Three months ended September 30,

Employee awards

Nine months ended September 30,

Three months ended March 31,

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.

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.

The decrease in expense for the three months ended March 31, 2022, as compared to March 31, 2021, 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 the departure of our Chief Financial Officer in September 2021.

Other Expense

Three months ended September 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

Nine months ended September 30,

Three months ended March 31,

Amortization of debt discount

Interest expense

Loss on extinguishment of debt

Loss (gain) on derivative liability

Other expense (income), net

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%.

Other expenses, net

Amortization of debt discount increased during the three months ended March 31, 2022, as compared to March 31, 2021, 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 months ended March 31, 2022, as compared to March 31,

2021, 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.

Three months ended September 30,

Costs and expenses

Nine months ended September 30,

Three months ended March 31,

Costs and expenses

Segment operating income

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.

With the addition of the TREES Englewood dispensary on September 2, 2021, Trees Portland and Trees Waterfront on December 30, 2021, and Trees MLK on January 5, 2022, we have established our retail footprint in the Colorado and Oregon markets 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.

Three months ended September 30,

Costs and expenses

Nine months ended September 30,

Three months ended March 31,

Costs and expenses

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.

The decrease in revenues for the three months ended March 31, 2022, over prior year is due to the decrease in overall market price of flower.

The decrease in gross margin is due to overall increase in expenses due to inflation.

Sources of liquidity

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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.

We had cash of $1,651,063 and $2,054,050 as of March 31, 2022, and December 31, 2021, respectively.

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

Nine months ended September 30,

Net cash used in operating activities

Net cash provided by investing activities

Net cash provided by financing activities

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.

Three months ended March 31,

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net cash provided by (used in) operating activities decreased in 2022 due to the acquisition of TREES Englewood, Trees Portland and Trees Waterfront which provides positive operating cash flows and adjustments relating to non-cash activities.

Net cash used in investing activities for the three months ended March 31, 2022, increased from March 31, 2021, due to the purchase of, Trees MLK, Inc and the purchase of property and equipment, offset by the receipt of notes receivable.

Net cash provided by (used in) financing activities for the three months ended March 31, 2022, related to the payment on notes payable of $258,057.

Capital Resources

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

We had no material commitments for capital expenditures as of March 31, 2022.

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

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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,

Three months ended March 31,

Loss from operations before income taxes

4 unchanged sentences

Amortization of debt discount and equity issuance costs

Loss on extinguishment of debt

Interest expense

1 unchanged sentence

(Gain) loss on derivative liability

Transaction costs

Acquisition related expenses

Total adjustments

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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