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, 2022. 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”). ​ 23 Table of Contents Our Products, Services, and Customers 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 ​ o 5005 S. Federal Boulevard – Recreational license only ​ ● Two (2) in Denver, Colorado ​ o 468 S. Federal Boulevard – Recreational license only ​ ​ o East Hampden Avenue (formerly Green Man) – Recreational license only ​ ● Longmont, Colorado ​ o 12626 N. 107 th Street (formerly Green Tree/Ancient Alternatives) – Medical and Recreational licenses ​ ​ ● Berthoud, Colorado ​ o 1090 N. 2 nd Street (formerly Green Tree/Natural Alternatives for Life) – Medical and Recreational licenses ​ ​ ● Three (3) in Oregon ​ o SW Corbett Avenue, Portland, OR – Medical and Recreational licenses ​ o NE 102 nd Avenue, Portland, OR – Medical and Recreational licenses ​ o 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 ● 6859 N. Foothills Highway D-300 (formerly Green Tree/Ancient Alternatives) – Medical and Retail cultivation licenses ● 6859 N. Foothills Highway C-100 (formerly Green Tree/Mountainside Industries) – Medical and Retail cultivation licenses ● 6859 N. Foothills Highway E-100 (formerly Green Tree/Hillside Enterprises) – Retail cultivation license only ● 1090 N. 2 nd Street (formerly Green Tree/Natural Alternatives for Life) – Medical cultivation license only 24 Table of Contents 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 unaudited condensed consolidated financial statements and the notes thereto in this report. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ ​ ​ ​ Percent ​ ​ 2023 ​ 2022 ​ Change ​ Change Revenues $ 5,110,619 ​ $ 3,573,308 $ 1,537,311 43 % Costs and expenses ​ (6,281,736) ​ ​ (3,990,351) ​ ​ (2,291,385) ​ 57 % Other expense ​ (629,681) ​ ​ (449,296) ​ ​ (180,385) ​ 40 % Net loss from continuing operations before income taxes ​ (1,800,798) ​ ​ (866,339) ​ ​ (934,459) ​ 108 % Loss from discontinued operations ​ — ​ ​ 5,283 ​ ​ (5,283) ​ (100) % Loss from operations before income taxes ​ $ (1,800,798) ​ $ (861,056) ​ $ (939,742) ​ 109 % Revenues 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 March 31, ​ ​ ​ ​ Percent ​ ​ 2023 ​ 2022 ​ Change ​ Change Cost of sales $ 3,057,714 $ 2,074,888 $ 982,826 47 % Selling, general and administrative ​ 2,296,240 ​ 1,326,116 ​ 970,124 73 % Stock-based compensation ​ 27,396 ​ 76,117 ​ (48,721) (64) % Professional fees ​ 607,544 ​ 281,384 ​ 326,160 116 % Depreciation and amortization ​ 292,842 ​ 231,846 ​ 60,996 26 % ​ ​ $ 6,281,736 ​ $ 3,990,351 ​ $ 2,291,385 57 % ​ 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. ​ 25 Table of Contents Professional fees consist primarily of accounting and legal 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 March 31, ​ ​ ​ ​ Percent ​ ​ 2023 ​ 2022 ​ Change ​ Change Employee awards $ 27,396 $ 76,117 $ (48,721) (64) % ​ ​ $ 27,396 ​ $ 76,117 ​ $ (48,721) (64) % ​ 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 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 March 31, ​ ​ ​ ​ Percent ​ 2023 2022 Change Change Amortization of debt discount ​ $ 181,677 ​ $ 214,281 ​ $ (32,604) ​ (15) % Interest expense ​ 449,311 ​ ​ 174,351 ​ ​ 274,960 ​ 158 % (Gain) loss on derivative liability ​ ​ (1,307) ​ ​ 60,664 ​ ​ (61,971) ​ (102) % ​ ​ $ 629,681 ​ $ 449,296 ​ $ 180,385 ​ 40 % ​ ​ 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. Retail ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ ​ ​ ​ Percent ​ 2023 2022 Change Change Revenues ​ $ 5,110,619 ​ $ 3,297,544 ​ $ 1,813,075 55 % Costs and expenses ​ (4,535,568) ​ (2,593,269) ​ (1,942,299) 75 % ​ ​ $ 575,051 ​ $ 704,275 ​ $ (129,224) (18) % ​ 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 positive cash flows which we anticipate will contribute to our working capital position. ​ 26 Table of Contents Cultivation ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ ​ ​ ​ Percent ​ 2023 2022 Change Change Revenues ​ $ 684,017 ​ $ 518,280 ​ $ 165,737 32 % Costs and expenses ​ (1,139,573) ​ (707,549) ​ (432,024) 61 % ​ ​ $ (455,556) ​ $ (189,269) ​ $ (266,287) 141 % ​ 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. ​ Liquidity Sources of liquidity 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 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 $1,460,162 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ ​ 2023 ​ 2022 Net cash (used in) provided by operating activities $ (502,965) $ 45,223 Net cash used in investing activities ​ $ (280,892) ​ $ (190,153) Net cash used in financing activities ​ $ (339,814) ​ $ (258,057) ​ 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 March 31, 2023. 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. ​ 27 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 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 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 March 31, ​ ​ 2023 ​ 2022 Net loss from continuing operations $ (1,886,534) $ (866,339) Adjustment for loss from discontinued operations ​ — ​ 5,283 Net loss ​ (1,886,534) ​ (861,056) Adjustments: ​ ​ Stock-based compensation ​ 27,396 ​ 76,117 Depreciation and amortization ​ ​ 292,842 ​ ​ 231,846 Amortization of debt discount and equity issuance costs ​ 181,677 ​ 214,281 Interest expense ​ 449,311 ​ 174,351 (Gain) loss on derivative liability ​ (1,307) ​ 60,664 Severance ​ ​ — ​ ​ 4,731 Acquisition related expenses ​ ​ — ​ ​ 7,500 Provision for income taxes ​ ​ 85,736 ​ ​ — Total adjustments ​ 1,035,655 ​ 769,490 Adjusted EBITDA ​ $ (850,879) ​ $ (91,566) ​ 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, 2022, and Note 1 to the Unaudited Condensed Consolidated Financial Statements in this Form 10-Q. ​ 28 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.