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Item 7. Management’s Discussion and Analysis

2023-04-17 compared with 2022-03-25 · 50 added, 52 removed, 154 unchanged (40% of the section changed)

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We undertake no obligation to publicly update or revise any forward-looking statements to reflect actual results, changes in expectations, events or circumstances after the date of this Report is filed.

General Cannabis Corp and its subsidiaries are referred to collectively as “GCC” “the Company,” “we, “us” or “our” in the following discussion and analysis.

TREES Corporation and its subsidiaries are referred to collectively as “TREES” “the Company,” “we, “us” or “our” in the following discussion and analysis.

Going Concern

The consolidated financial statements included elsewhere in this Form 10-K, have been prepared on a going concern basis, which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future.

Our cash of $2,054,050 as of December 31, 2021 is not sufficient to absorb our operating losses and retire our debt of $8,913,644 and other obligations as they come due.

Our cash of $2,583,833 as of December 31, 2022 is not sufficient to absorb our operating losses and retire our notes payable of $17,802,932 and other obligations as they come due.

Our ability to continue as a going concern is dependent upon our generating profitable operations in the future and/or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due.

Management believes that (a) we will be successful obtaining additional capital and (b) actions presently being taken to further implement our business plan and generate additional revenues provide opportunity for the Company to continue as a

going concern.

Management believes that (a) we will be successful in obtaining additional capital and (b) actions presently being taken to further implement our business plan to reduce costs and generate additional revenues provide the opportunity for the Company to continue as a going concern.

While we believe in the viability of our strategy to generate additional revenues and our ability to raise additional funds, there can be no assurances to that effect.

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Net loss from continuing operations before income taxes

Loss from discontinued operations

Gain (loss) from discontinued operations

Loss from operations before income taxes

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See Note 3 to the consolidated financial statements for information concerning discontinued operations.

The addition of our Retail segment and a full year of our Cultivation segment contributed to the significant increase in revenues for the year ended December 31, 2021.

The full year impact of the retail operations acquired in the Trees Acquisition acquired at the end of 2021 resulted in the significant increase in revenues for the year ended December 31, 2022.

The increase in retail revenue was partially offset by lower revenue in the Cultivation segment due primarily to a significant decline in the wholesale prices of marijuana flower.

See Segment discussions below for further details.

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Depreciation and amortization

Cost of sales increased year over year due to the addition of our Retail Segment and a full year of expenses in relation to our Cultivation Segment.

Cost of sales and selling, general and administrative expenses both increased year over year primarily due to the full year impact of the retail operations acquired in the Trees Transaction acquired at the end of 2022.

See Segment discussions below for further details.

Selling, general and administrative expense decreased by $0.1 million to $2.8 million for the year ended December 31, 2021 from $2.9 million for the year ended December 31, 2020, primarily due to management’s emphasis on cost controls and decreases in salary expense due to the discontinuation of certain business operations.

One-time bonus payments of $767,000 as part of employment agreements for two former owners of the Green Tree Entities also contributed to the increase in selling, general and administrative costs.

Stock-based compensation included the following:

Year ended December 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 year ended December 31, 2021 as compared to December 31, 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.

Consulting awards are granted to third parties in lieu of cash for services provided.

Professional fees consist primarily of accounting and legal expenses and have decreased from 2020 due to the addition of internal counsel.

Depreciation and amortization expense increased in 2021 due to the acquisition of TREES Englewood, TREES Portland and TREES Waterfront.

We also recognized a full year of depreciation and amortization expense in 2021, in relation to our acquisition of SevenFive Farm in May of 2020.

Stock-based awards

Stock-based 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 awards granted and the share price on the date of grant.

The decrease in expense for the year ended December 31, 2022 as compared to December 31, 2021 is due to the decrease in the number of stock-based awards granted.

Professional fees consist primarily of accounting, consulting and legal expenses and have remained consistent from 2021 to 2022.

Depreciation and amortization expense increased in 2022 due to an impairment of intangible assets in the Cultivation segment in 2021.

As a result of the impairment, the depreciable base of the intangible asset was significantly reduced resulting in the lower amortization.

Other Expense

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Loss on impairment of assets

Loss (gain) on derivative liability

Gain (loss) on derivative liability

Other expense (income), net

Loss on investment

Amortization of debt discount increased during the year ended December 31, 2021 as compared to December 31, 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 year ended December 31, 2021 as compared to December 31, 2020 due to the addition of the 10% Notes with an interest rate of 10%.

The loss on warrant derivative liability reflects the change in the fair value of the 2019 Warrants.

The loss on extinguishment of debt for the year ended December 31, 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 13 of the accompanying audited consolidated financial statements for further information.

The loss on impairment of assets is due to a goodwill impairment and intangible impairment adjustment on our Cultivation Segment.

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.

Amortization of debt discount increased during the year ended December 31, 2022 as compared to December 31, 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 year ended December 31, 2022 as compared to December 31, 2021 due to the additional borrowings from the issuance of the 12% Notes.

The gain (loss) on warrant derivative liability reflects the change in the fair value of the 2019 Warrants.

The loss on extinguishment of debt during 2022 relates to the rollover and repayment of the 10% Notes.

The loss on extinguishment of debt for the year ended December 31, 2021 was due to the modification of warrants that occurred on the 15% Warrants during the third quarter of 2021.

The loss on impairment of assets in 2022 is due primarily to goodwill and intangible impairments at our Trees Oregon locations included in our Retail Segment.

The loss on impairment of assets in 2021 is due to goodwill and intangible impairments in our Cultivation Segment.

Year ended December 31,

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Segment operating income

With the addition of the TREES Englewood dispensary on September 2, 2021 and the addition of TREES Portland and TREES Waterfront on December 30, 2021, 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.

With the addition of the Trees Englewood dispensary on September 2, 2021 and the addition of Treees Portland and Trees Waterfront on December 30, 2021, we have established our retail footprint in the Colorado and Oregon markets and have become a vertically integrated company.

We continued to expand our retail footprint in Oregon with the addition of the Trees MLK dispensary in January 2022 and in Colorado with the Green Man Acquisition and Green Tree Acquisition in December 2022.

The dispensaries acquired in the Green Man Acquisition and Green Tree Acquisition did not have a material impact on the Retail segment results in 2022.

The increase in revenue in the year ended December 31, 2022 compared to the year ended December 31, 2021 is due to the full year impact of the Trees retail locations.

The increased costs and expenses in 2022 include $2.7 million of non-cash goodwill and intangible asset impairment charges.

The Retail Segment is expected to provide consistent positive cash flows which will significantly contribute to our working capital position.

Year ended December 31,

Costs and expenses

This increase in revenues for the year ended December 31, 2021 as compared to December 31, 2020, is due to owning SevenFive Farm for a full year.

We also started selling premium cannabis blunts that command a higher price than the traditional wholesale cannabis.

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

The additional increase in costs and expenses is due to a goodwill impairment and intangible impairment adjustment.

This decrease in revenues for the year ended December 31, 2022 as compared to December 31, 2021, is due to significant declines in the wholesale price of marijuana flower.

The costs and expenses include non-cash goodwill and intangible asset impairment charges of $0.3 million and $3.0 million for the years ended December 31, 2022 and 2021, respectively.

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 define Adjusted EBITDA as net loss calculated in accordance with GAAP, adjusted for discontinued operations, 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 to the most directly comparable GAAP measure, which is net loss.

We believe that the disclosure of Adjusted EBITDA provides investors with a better comparison of our period-to-period operating results.

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Year ended December 31,

Loss from operations before income taxes

Net loss from continuing operations

Adjustment for loss from discontinued operations

Net loss from continuing operations before income taxes

Deemed dividend

Stock-based compensation

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Gain on sale of assets

Loss on investment

(Gain) loss on derivative liability

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Nonrecurring professional services

Provision for income taxes

Total adjustments

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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 more significant uses of resources will include funding operations, developing infrastructure, and business acquisitions.

Our primary sources of liquidity include cash proceeds from debt, cash generated from operations, the cash exercise of Common Stock options and warrants, and the issuance of Common Stock or other equity-based instruments.

We anticipate our more significant uses of resources will include funding operations and additional business acquisitions.

In September 2022, we received $9,912,250 in cash, net of debt issue costs.

We received the cash in a private placement with certain accredited investors pursuant to the 12% Notes and was used to repay a portion of the 10% Notes, and to fund the acquisition of the Green Tree Entities and Green Man, and to fund operations.

In September 2021, we received $1,180,000 in cash by issuing 1,180 shares of our preferred stock and 354,000 warrants to purchase Common Stock.

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Net cash used in operating activities

Net cash provided by investing activities

Net cash used in investing activities

Net cash provided by financing activities

Net cash used in operating activities decreased in 2021 due to an increase in revenue as well as the acquisition of three dispensaries which provides positive operating cash flows.

Net cash used by investing activities for the year ended December 31, 2021 consisted of $1,439,027 from the purchase of the three dispensaries and purchase of equipment of $331,834.

Net cash used in operating activities decreased in 2022 due to due cash generated from the full year operations of the dispensaries acquired in the Trees Transaction.

The decrease was partially offset by additional costs associated with the completion of the Green Man Acquisition and Green Tree Acquisition.

Net cash used in investing activities for the year ended December 31, 2022 consisted primarily of $1,971,975 for the purchase Trees MLK, Green Man, and the Green Tree Entities.

Net cash used in investing activities for the year ended December 31, 2021 consisted primarily of $1,439,027 for the acquisition of the first three dispensaries of the Trees Transaction.

This is offset by the sale of our investment for $208,761, the sale of Next Big Crop in the amount of $150,000 and collection of notes receivables in the amount of $591,717.

Net cash provided by financing activities are primarily related to the sale of common stock and warrants and proceeds from notes payable.

This is offset by paying off debt.

Net cash provided by financing activities are primarily related to the issuance of the 12% Notes, partially offset by repayment of a portion of the 10% Notes and payments on the notes payable to the sellers in the Trees Transaction.

Capital Resources

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

We would anticipate funding such activity through cash on hand, the issuance of debt, common stock, warrants for our common stock or a combination thereof .

We would anticipate funding such activity through cash on hand, the issuance of debt, Common Stock, and warrants for our Common Stock or a combination thereof .

Off-Balance Sheet Arrangements

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350, Intangibles-Goodwill and Other (“ASC No.

350 requires that goodwill be tested for impairment at the reporting unit level (operating segment or on level below an operating segment) on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carry value.

350 requires that goodwill

be tested for impairment at the reporting unit level (operating segment or on level below an operating segment) on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carry value.

Application of the goodwill impairment test requires judgement, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit.

We test goodwill annually in

December, unless an event occurs that would cause the us to believe the value is impaired at an interim date.

We test goodwill annually in December, unless an event occurs that would cause us to believe the value is impaired at an interim date.

See Notes 1 and 9 to our consolidated financial statements for a description of our goodwill and intangible asset valuation and impairment policies and associated impacts for the reported periods.

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Modification of Debt - When we change the terms of existing notes payable, we evaluate the amendments under ASC 470-50, Debt Modification and Extinguishment to determine whether the change should be treated as a modification or as a debt extinguishment.

This evaluation includes analyzing whether there are significant and consequential changes to

the economic substance of the note.

This evaluation includes analyzing whether there are significant and consequential changes to the economic substance of the note.

If the change is deemed insignificant then the change is considered a debt modification, whereas if the change is substantial the change is reflected as a debt extinguishment.

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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-K

Item 7. Management’s Discussion and Analysis