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, 2021. 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 TREES Corporation (formerly, “General Cannabis Corp”). Our Products, Services, and Customers 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. Cultivation (“Cultivation Segment”) Through our acquisition of SevenFive Farm in May 2020, we operate a 17,000 square foot licensed light deprivation greenhouse cultivation facility. 23 Table of Contents During the three months ended September 30, 2022 and 2021, 79% and 24% of SevenFive’s revenue was with one and two customers, respectively. During the nine months ended September 30, 2022 and 2021, 66% and 12% was with one customer, respectively. The customer in 2022 is a related party dispensary and the revenues associated with this customer is eliminated in consolidation. Discontinued Operations - Operations Consulting and Products 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. 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 ​ ​ 2022 ​ 2021 ​ Change ​ Change Revenues $ 3,177,177 ​ $ 1,665,642 $ 1,511,535 91 % Costs and expenses ​ (3,834,374) ​ ​ (2,537,670) ​ ​ (1,296,704) ​ 51 % Other expense ​ (1,793,482) ​ ​ (414,962) ​ ​ (1,378,520) ​ 332 % Net loss from continuing operations before income taxes ​ (2,450,679) ​ ​ (1,286,990) ​ ​ (1,163,689) ​ 90 % Loss from discontinued operations ​ 195 ​ ​ (40,605) ​ ​ 40,800 ​ (100) % Loss from operations before income taxes ​ $ (2,450,484) ​ $ (1,327,595) ​ $ (1,122,889) ​ 85 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2022 ​ 2021 ​ Change ​ Change Revenues $ 9,986,212 $ 3,028,055 $ 6,958,157 230 % Costs and expenses ​ (10,922,952) ​ (5,653,952) ​ (5,269,000) ​ 93 % Other expense ​ (2,563,226) ​ (2,059,885) ​ (503,341) ​ 24 % Net loss from continuing operations before income taxes ​ (3,499,966) ​ (4,685,782) ​ 1,185,816 ​ (25) % Loss from discontinued operations ​ 5,478 ​ (377,134) ​ 382,612 ​ (101) % Loss from operations before income taxes ​ $ (3,494,488) ​ $ (5,062,916) ​ $ 1,568,428 ​ (31) % Revenues The addition of our Retail segment contributed to the significant increase in revenues for the three and nine months ended September 30, 2022. See Segment discussions below for further details. 24 Table of Contents Costs and expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2022 ​ 2021 ​ Change ​ Change Cost of sales $ 2,036,532 $ 1,473,209 $ 563,323 38 % Selling, general and administrative ​ 1,462,902 ​ 672,981 ​ 789,921 117 % Stock-based compensation ​ 38,460 ​ 131,836 ​ (93,376) (71) % Professional fees ​ 197,565 ​ 144,289 ​ 53,276 37 % Depreciation and amortization ​ 98,915 ​ 115,355 ​ (16,440) (14) % ​ ​ $ 3,834,374 ​ $ 2,537,670 ​ $ 1,296,704 51 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ 2022 2021 Change Change Cost of sales ​ $ 5,856,995 ​ $ 2,539,840 ​ $ 3,317,155 ​ 131 % Selling, general and administrative ​ 4,001,816 ​ 1,853,731 ​ 2,148,085 116 % Stock-based compensation ​ 156,961 ​ 194,120 ​ (37,159) (19) % Professional fees ​ 716,410 ​ 760,437 ​ (44,027) (6) % Depreciation and amortization ​ 190,770 ​ 305,824 ​ (115,054) (38) % ​ ​ $ 10,922,952 ​ $ 5,653,952 ​ $ 5,269,000 93 % ​ Cost of sales increased for the three and nine months ended September 30, 2022 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 increased for the three and nine months ended September 30, 2022, as compared to September 30, 2021, due to the acquisition of three dispensaries in the third and fourth quarter of 2021 and one additional dispensary in the first quarter of 2022. This resulted in an increase in employees and an increase in rent expense. Professional fees consist primarily of accounting and legal expenses. Professional fees increased slightly for the three months ended September 30, 2022 as compared to September 30, 2021 due to the increased acquisition activity in the third quarter of 2022. Professional fees decreased slightly for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021, due to a concentrated effort on reduction of expenses. Stock-based compensation included the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2022 ​ 2021 ​ Change ​ Change Employee awards $ 38,460 $ 131,836 $ (93,376) (71) % ​ ​ $ 38,460 ​ $ 131,836 ​ $ (93,376) (71) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2022 ​ 2021 ​ Change ​ Change Employee awards $ 156,961 $ 194,120 $ (37,159) (19) % ​ ​ $ 156,961 ​ $ 194,120 ​ $ (37,159) (19) % ​ 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, 2022, as compared to September 30, 2021, is due to not issuing options in the third quarter of 2022. 25 Table of Contents Other Expense ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ 2022 2021 Change Change Amortization of debt discount ​ $ 1,285,392 ​ $ 216,516 ​ $ 1,068,876 ​ 494 % Interest expense ​ 213,833 ​ ​ 150,503 ​ ​ 63,330 ​ 42 % Loss on extinguishment of debt ​ ​ 310,622 ​ ​ 233,374 ​ ​ 77,248 ​ 33 % (Gain) loss on derivative liability ​ ​ (16,365) ​ ​ (52,452) ​ ​ 36,087 ​ (69) % Gain on sale of assets ​ — ​ ​ (132,979) ​ ​ 132,979 ​ (100) % ​ ​ $ 1,793,482 ​ $ 414,962 ​ $ 1,378,520 ​ 332 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ 2022 2021 Change Change Amortization of debt discount ​ $ 1,716,334 ​ $ 470,306 ​ $ 1,246,028 ​ 265 % Interest expense ​ 564,229 ​ 444,186 ​ 120,043 ​ 27 % Loss on extinguishment of debt ​ ​ 310,622 ​ ​ 233,374 ​ ​ 77,248 ​ 33 % Loss (gain) on derivative liability ​ (14,959) ​ 1,043,531 ​ (1,058,490) ​ (101) % Gain on sale of assets ​ (13,000) ​ (131,512) ​ 118,512 ​ (90) % ​ ​ $ 2,563,226 ​ $ 2,059,885 ​ $ 503,341 ​ 24 % ​ Amortization of debt discount and loss on extinguishment of debt increased during the three and nine months ended September 30, 2022, as compared to September 30, 2021, due to the senior convertible promissory notes with warrants (“12% Notes”) issued in September 2022 and the rollover and repayment of the 10% Notes. Interest expense increased during the three and nine months ended September 30, 2022, as compared to September 30, 2021, due to the addition of the 10% Notes with an interest rate of 10% in 2021. The gain on warrant derivative liability reflects the change in the fair value of the 2019 Warrants. Retail ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ 2022 2021 Change Change Revenues ​ $ 3,080,778 ​ $ 855,841 ​ $ 2,224,937 260 % Costs and expenses ​ (2,413,190) ​ (891,126) ​ (1,522,064) 171 % ​ ​ $ 667,588 ​ $ (35,285) ​ $ 702,873 (1,992) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2022 ​ 2021 ​ Change ​ Change Revenues $ 9,536,657 $ 855,841 $ 8,680,816 1,014 % Costs and expenses ​ (7,169,103) ​ (891,126) ​ (6,277,977) 704 % Segment operating income ​ $ 2,367,554 ​ $ (35,285) ​ $ 2,402,839 (6,810) % ​ 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. ​ 26 Table of Contents Cultivation ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ 2022 2021 Change Change Revenues ​ $ 448,623 ​ $ 835,719 ​ $ (387,096) (46) % Costs and expenses ​ (849,269) ​ (865,490) ​ 16,221 (2) % ​ ​ $ (400,646) ​ $ (29,771) ​ $ (370,875) 1,246 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ 2022 2021 Change Change Revenues ​ $ 1,316,241 ​ $ 2,183,660 ​ $ (867,419) (40) % Costs and expenses ​ (1,971,550) ​ (2,340,913) ​ 369,363 (16) % ​ ​ $ (655,309) ​ $ (157,253) ​ $ (498,056) 317 % ​ The decrease in revenues for the three and nine months ended September 30, 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. 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 2022, we received $10,587,250 in cash, of which $4,037,500 is held in restricted cash for future acquisitions. We received the cash in a private placement with certain accredited investors pursuant to the 12% Notes to be used for acquisition of dispensaries and operating capital. 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 7 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 (See Note 7 of the accompanying unaudited condensed consolidated financial statements). Sources and uses of cash We had cash of $1,964,660 and $2,054,050 as of September 30, 2022, and December 31, 2021, respectively. Our cash flows from operating, investing and financing activities were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ 2022 ​ 2021 Net cash used in operating activities $ (894,643) $ (2,489,130) Net cash used in investing activities ​ $ (202,485) ​ $ (936,719) Net cash provided by financing activities ​ $ 5,045,238 ​ $ 5,134,634 ​ Net cash used in operating activities decreased in 2022 due to the acquisition of TREES Englewood, Trees Portland, Trees Waterfront and Trees MLK which provides positive operating cash flows and adjustments relating to non-cash activities. Net cash used in investing activities for the nine months ended September 30, 2022, increased from September 30, 2021, due to the purchase of, Trees MLK, Inc and the purchase of property and equipment, offset by the receipt of notes receivable. 27 Table of Contents Net cash provided by financing activities for the nine months ended September 30, 2022, related to the cash proceeds of the new debt of $10,587,250, offset by payment on notes payable of $3,987,250. Capital Resources We had no material commitments for capital expenditures as of September 30, 2022. 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 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, ​ ​ 2022 ​ 2021 ​ 2022 ​ 2021 Net loss from continuing operations $ (2,704,679) $ (1,327,595) $ (3,753,966) $ (5,062,916) Adjustment for loss from discontinued operations ​ 195 ​ 40,605 ​ (5,478) ​ 377,134 Net loss ​ (2,704,484) ​ (1,286,990) ​ (3,759,444) ​ (4,685,782) Adjustments: ​ ​ ​ ​ Stock-based compensation ​ 38,460 ​ 131,836 ​ 156,961 ​ 194,120 Depreciation and amortization ​ ​ 98,915 ​ ​ 115,355 ​ ​ 190,770 ​ ​ 305,824 Amortization of debt discount and equity issuance costs ​ 1,285,392 ​ 216,516 ​ 1,716,334 ​ 470,306 Loss on extinguishment of debt ​ ​ 310,622 ​ ​ 233,374 ​ ​ 310,622 ​ ​ 233,374 Interest expense ​ 213,833 ​ 150,503 ​ 564,229 ​ 444,186 Gain on sale of assets ​ ​ — ​ ​ (132,979) ​ ​ (13,000) ​ ​ (131,512) (Gain) loss on derivative liability ​ (16,365) ​ (52,452) ​ (14,959) ​ 1,043,531 Severance ​ ​ — ​ ​ — ​ ​ 4,731 ​ ​ — Acquisition related expenses ​ ​ 162,634 ​ ​ 35,360 ​ ​ 193,956 ​ ​ 98,243 Provision for income taxes ​ ​ 254,000 ​ ​ — ​ ​ 254,000 ​ ​ — Total adjustments ​ 2,347,491 ​ 697,513 ​ 3,363,644 ​ 2,658,072 Adjusted EBITDA ​ $ (356,993) ​ $ (589,477) ​ $ (395,800) ​ $ (2,027,710) ​ Off-balance Sheet Arrangements We currently have no off-balance sheet arrangements. 28 Table of Contents 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, 2021, and Note 1 to the Unaudited 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.