What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-22 compared with 2022-11-14 · 58 added, 82 removed, 76 unchanged (65% of the section changed)

10 unchanged sentences

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.

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.

TREES Corporation is a cannabis retailer and cultivator in the States of Colorado and Oregon.

We presently operate eight (8) cannabis dispensaries as follows:

Englewood, Colorado

Federal Boulevard – Recreational license only

Two (2) in Denver, Colorado

Federal Boulevard – Recreational license only

East Hampden Avenue (formerly Green Man) – Recreational license only

Longmont, Colorado

107 th Street (formerly Green Tree/Ancient Alternatives) – Medical and Recreational licenses

Berthoud, Colorado

2 nd Street (formerly Green Tree/Natural Alternatives for Life) – Medical and Recreational licenses

Three (3) in Oregon

SW Corbett Avenue, Portland, OR – Medical and Recreational licenses

NE 102 nd Avenue, Portland, OR – Medical and Recreational licenses

7050 NE MLK, Portland, OR – Medical and Recreational licenses

We also operate five (5) cultivation facilities in Colorado as follows:

SevenFive Farm – 3705 N.

75 th Street, Boulder – Retail cultivation license only

Foothills Highway D-300 (formerly Green Tree/Ancient Alternatives) – Medical and Retail cultivation licenses

Foothills Highway C-100 (formerly Green Tree/Mountainside Industries) – Medical and Retail cultivation licenses

Foothills Highway E-100 (formerly Green Tree/Hillside Enterprises) – Retail cultivation license only

2 nd Street (formerly Green Tree/Natural Alternatives for Life) – Medical cultivation license only

Our principal business model is to acquire, integrate and optimize cannabis companies in the retail and cultivation segments utilizing the combined experience of entrepreneurs and synergistic operations of our vertically integrated network.

During the three months ended March 31, 2023, 88% of SevenFive’s revenue was with three customers.

During the three months ended March 31, 2022, 45% of SevenFive’s revenue was with one customer.

The customers in both 2023 and 2022 are related party dispensaries and the revenues associated with these customers are eliminated in consolidation.

During the three months ended March 31, 2023, 88% of Green Tree’s revenue was with three customers.

The customers in 2023 are related party dispensaries and the revenues associated with these customers are eliminated in consolidation.

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,

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,

The tables and the discussion below should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto in this report.

Three months ended March 31,

Costs and expenses

3 unchanged sentences

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, 2022.

See Segment discussions below for further details.

The activity driven by Green Tree and Green Man, which we acquired in Q4 2022, contributed to the increase in revenues for the three months ended March 31, 2023 compared to March 31, 2022.

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

3 unchanged sentences

Depreciation and amortization

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.

Cost of sales increased three and months ended March 31, 2023, as compared to March 31, 2022 due to the additional sales driven from Green Tree and Green Man.

Selling, general and administrative expense increased for the three months ended March 31, 2023, as compared to March 31, 2022, due to the increased expenses resulting from the acquisition of three dispensaries in the fourth quarter of 2022 and one additional dispensary in the first quarter of 2023.

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.

Professional fees increased for the three months ended March 31, 2023 as compared to March 31, 2022 due to the acquisition activity in the first quarter of 2023.

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

1 unchanged sentence

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.

The decrease in expense for the three months ended March 31, 2023, as compared to 2022, is due to not issuing options in the first quarter of 2023.

Other Expense

Three months ended September 30,

Three months ended March 31,

Amortization of debt discount

Interest expense

Loss on extinguishment of debt

(Gain) loss on derivative liability

Gain on sale of assets

Nine months ended September 30,

Amortization of debt discount

Interest expense

Loss on extinguishment of debt

Loss (gain) on derivative liability

Gain on sale of assets

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.

Amortization of debt discount decreased during the three months ended March 31, 2023, as compared to March 31, 2022, due to the rollover and repayment of the 10% Notes.

Interest expense increased during the three months ended March 31, 2023, as compared to March 31, 2022, due to the addition of the 12% Notes with an interest rate of 12% in Q3 2022.

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

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, 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.

Three months ended September 30,

Costs and expenses

Nine months ended September 30,

The Retail Segment will provide positive cash flows which we anticipate will contribute to our working capital position.

Three months ended March 31,

Costs and expenses

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.

The increase in revenues for the three months ended March 31, 2023 compared to March 31, 2022 is attributed to the revenue driven from the cultivation spaces acquired in Q4 2022.

The steady decline in the wholesale pricing of flower going forward may lead to lower revenue and lower margins in the cultivation segment.

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.

Our sources of liquidity include 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).

In September 2022, we received $10,587,250 in cash in a private placement with certain accredited investors pursuant to the 12% Notes to be used for acquisition of dispensaries and operating capital.

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.

We had cash of $1,460,162 and $2,583,833 as of March 31, 2023 and December 31, 2022, respectively.

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

Nine months ended September 30,

Net cash used in operating activities

Three months ended March 31,

Net cash (used in) provided by operating activities

Net cash used in investing activities

Net cash provided by financing activities

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.

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.

Net cash used in financing activities

Net cash used in operating activities increased in 2023 due to the increased net loss driven from the expenses described above.

Net cash used in investing activities for the three months ended March 31, 2023 increased from March 31, 2022, as a result of the purchase price of the additional license acquired in February 2023 exceeding the acquisition activity in the three months prior period, as well as a decrease in proceeds from notes receivable.

Net cash used in financing activities for the three months ended March 31, 2023 increased from March 31, 2022 due to an increase in payments on notes payable and finance leases.

Capital Resources

We had no material commitments for capital expenditures as of September 30, 2022.

We had no material commitments for capital expenditures as of March 31, 2023.

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

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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.

Below we have provided a reconciliation of Adjusted EBITDA per share to the most directly comparable GAAP measure, which is net loss per share.

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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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.

This supplemental financial information should be considered in addition to, not in lieu of, our unaudited 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,

Three months ended March 31,

Net loss from continuing operations

3 unchanged sentences

Amortization of debt discount and equity issuance costs

Loss on extinguishment of debt

Interest expense

Gain on sale of assets

(Gain) loss on derivative liability

15 unchanged sentences

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