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. 24 Table of Contents 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 TREES Corporation is a cannabis retailer and cultivator in the States of Colorado and Oregon. ​ We presently operate six (6) cannabis dispensaries as follows: ● Englewood, Colorado o 5005 S. Federal Boulevard – Recreational license only ​ ● Denver, Colorado 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 two (2) cultivation facilities in Colorado as follows: ● SevenFive Farm – 3705 N. 75 th Street, Boulder – Retail cultivation license only ​ ● 6859 N. Foothills Highway E-100 (formerly Green Tree/Hillside Enterprises) – Retail 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 September 30, 2023 and 2022, 89% of SevenFive’s revenue was with five customers and 79% was with one customer, respectively. During the nine months ended September 30, 2023 and 2022, 50% of SevenFive’s revenue was with one customer and 66% was with one customer, respectively. Two of the customers with sales in the three months ended September 30, 2023 are related party dispensaries and the revenues associated with these customers are eliminated in consolidation. During the three months ended September 30, 2023, 84% of Green Tree’s revenue was with four customers. During the nine months ended September 30, 2023, 78% 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. 25 Table of Contents 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 September 30, ​ ​ ​ ​ Percent ​ ​ 2023 ​ 2022 ​ Change ​ Change Revenues $ 4,111,583 ​ $ 3,177,177 $ 934,406 29 % Costs and expenses ​ (4,718,791) ​ ​ (3,834,374) ​ ​ (884,417) ​ 23 % Other expense ​ (207,915) ​ ​ (1,793,482) ​ ​ 1,585,567 ​ (88) % Net loss from continuing operations before income taxes ​ (815,123) ​ ​ (2,450,679) ​ ​ 1,635,556 ​ (67) % Loss from discontinued operations ​ — ​ ​ 195 ​ ​ (195) ​ (100) % Loss from operations before income taxes ​ $ (815,123) ​ $ (2,450,484) ​ $ 1,635,361 ​ (67) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2023 ​ 2022 ​ Change ​ Change Revenues $ 14,320,196 $ 9,986,212 $ 4,333,984 43 % Costs and expenses ​ (17,569,254) ​ (10,922,952) ​ (6,646,302) ​ 61 % Other expense ​ (1,403,018) ​ (2,563,226) ​ 1,160,208 ​ (45) % Net loss from continuing operations before income taxes ​ (4,652,076) ​ (3,499,966) ​ (1,152,110) ​ 33 % Gain (loss) from discontinued operations ​ — ​ 5,478 ​ (5,478) ​ (100) % Loss from operations before income taxes ​ $ (4,652,076) ​ $ (3,494,488) ​ $ (1,157,588) ​ 33 % 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 September 30, 2023 compared to September 30, 2022, and for the nine months ended September 30, 2023 and September 30, 2022, respectively. Costs and expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2023 ​ 2022 ​ Change ​ Change Cost of sales $ 2,442,541 $ 2,036,532 $ 406,009 20 % Selling, general and administrative ​ 1,962,641 ​ 1,462,902 ​ 499,739 34 % Stock-based compensation ​ 8,745 ​ 38,460 ​ (29,715) (77) % Professional fees ​ 53,259 ​ 197,565 ​ (144,306) (73) % Depreciation and amortization ​ 251,605 ​ 98,915 ​ 152,690 154 % ​ ​ $ 4,718,791 ​ $ 3,834,374 ​ $ 884,417 23 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ 2023 2022 Change Change Cost of sales ​ $ 8,731,032 ​ $ 5,856,995 ​ $ 2,874,037 ​ 49 % Selling, general and administrative ​ 6,744,632 ​ 4,001,816 ​ 2,742,816 69 % Stock-based compensation ​ 54,195 ​ 156,961 ​ (102,766) (65) % Professional fees ​ 1,204,369 ​ 716,410 ​ 487,959 68 % Depreciation and amortization ​ 835,026 ​ 190,770 ​ 644,256 338 % ​ ​ $ 17,569,254 ​ $ 10,922,952 ​ $ 6,646,302 61 % ​ Cost of sales increased for three and nine months ended September 30, 2023, as compared to September 30, 2022 due to the additional sales driven from the Green Tree and Green Man acquisitions. Selling, general and administrative expense increased for the three and nine months ended September 30, 2023, as compared to September 30, 2022, due to the increased expenses resulting from the acquisition of three dispensaries in the 26 Table of Contents fourth quarter of 2022 and one additional dispensary license 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 for the three and nine months ended September 30, 2023 as compared to September 30, 2022 due to the acquisition activity in the first quarter of 2023, as well as the accrued legal expenses for the settlement reached in the second quarter of 2023. Stock-based compensation included the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2023 ​ 2022 ​ Change ​ Change Employee awards $ 8,745 $ 38,460 $ (29,715) (77) % ​ ​ $ 8,745 ​ $ 38,460 ​ $ (29,715) (77) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2023 ​ 2022 ​ Change ​ Change Employee awards $ 54,195 $ 156,961 $ (102,766) (65) % ​ ​ $ 54,195 ​ $ 156,961 ​ $ (102,766) (65) % ​ 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, 2023, as compared to 2022, is due to not issuing options in the third quarter of 2023. Other Expense ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ 2023 2022 Change Change Amortization of debt discount ​ $ 219,785 ​ $ 1,285,392 ​ $ (1,065,607) ​ (83) % Interest expense ​ 296,242 ​ ​ 213,833 ​ ​ 82,409 ​ 39 % Loss on extinguishment of debt ​ ​ 218,237 ​ ​ 310,622 ​ ​ (92,385) ​ (30) % (Gain) loss on derivative liability ​ ​ 2,860 ​ ​ (16,365) ​ ​ 19,225 ​ (117) % Loss on transfer of assets ​ (2,400) ​ ​ — ​ ​ (2,400) ​ 100 % Other income ​ ​ (526,809) ​ ​ — ​ ​ (526,809) ​ 100 % ​ ​ $ 207,915 ​ $ 1,793,482 ​ $ (1,585,567) ​ (88) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ 2023 2022 Change Change Amortization of debt discount ​ $ 621,539 ​ $ 1,716,334 ​ $ (1,094,795) ​ (64) % Interest expense ​ 1,462,281 ​ 564,229 ​ 898,052 ​ 159 % Loss on extinguishment of debt ​ ​ 218,237 ​ ​ 310,622 ​ ​ (92,385) ​ (30) % Gain on derivative liability ​ (2,359) ​ (14,959) ​ 12,600 ​ (84) % Gain on sale of assets ​ — ​ (13,000) ​ 13,000 ​ (100) % Other income ​ ​ (896,680) ​ ​ — ​ ​ (896,680) ​ 100 % ​ ​ $ 1,403,018 ​ $ 2,563,226 ​ $ (1,160,208) ​ (45) % ​ Amortization of debt discount decreased during the three and nine months ended September 30, 2023, as compared to September 30, 2022 due to the rollover and repayment of the 10% Notes. Interest expense increased during the three and nine months ended September 30, 2023, as compared to September 30, 2022, due to the addition of the 12% Notes with an interest rate of 12% in Q3 2022. Loss on extinguishment of debt decreased during the three and nine months ended September 30, 2023, as compared to September 30, 2022 due to loss on extinguishment of debt from the rollover of the 10% Notes to 12% Notes being higher than the loss on extinguishment of debt resulting from the transfer of the Station 2 license (see Note 5). The gain on warrant derivative liability reflects the change in the fair value of the 2019 Warrants. Gain on sale of assets decreased during the nine months ended September 30, 2023, as compared to September 30, 2022 as no assets were sold during the nine months ended September 30, 2023. Other Income increased during the three months 27 Table of Contents and nine months ended September 30, 2023, as compared to September 30, 2022 due to the Company applying for employee retention credits through the CARES Act. Retail ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ 2023 2022 Change Change Revenues ​ $ 4,038,019 ​ $ 3,080,778 ​ $ 957,241 31 % Costs and expenses ​ (3,403,102) ​ (2,413,190) ​ (989,912) 41 % Segment operating (loss) income ​ $ 634,917 ​ $ 667,588 ​ $ (32,671) (5) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ ​ 2023 ​ 2022 ​ Change ​ Change Revenues $ 14,228,202 $ 9,536,657 $ 4,691,545 49 % Costs and expenses ​ (13,285,938) ​ (7,169,103) ​ (6,116,835) 85 % Segment operating income ​ $ 942,264 ​ $ 2,367,554 ​ $ (1,425,290) (60) % ​ With the acquisition of Green Tree on December 12, 2022, and the acquisition of Green Man on December 19, 2022, as well as the acquisition of the dispensary license for 468 Federal Street, retail revenue increased for the three and nine months ended September 30, 2023, compared to September 30, 2022. Costs and expenses also increased as a result of the acquisitions. Cultivation ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, ​ ​ ​ ​ Percent ​ 2023 2022 Change Change Revenues ​ $ 415,963 ​ $ 448,623 ​ $ (32,660) (7) % Costs and expenses ​ (1,272,117) ​ (849,269) ​ (422,848) 50 % Segment operating loss ​ $ (856,154) ​ $ (400,646) ​ $ (455,508) 114 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ ​ ​ Percent ​ 2023 2022 Change Change Revenues ​ $ 2,044,810 ​ $ 1,316,241 ​ $ 728,569 55 % Costs and expenses ​ (3,457,964) ​ (1,971,550) ​ (1,486,414) 75 % Segment operating loss ​ $ (1,413,154) ​ $ (655,309) ​ $ (757,845) 116 % ​ The decrease in revenues for the three months ended September 30, 2023 compared to September 30, 2022, is due to Green Tree revenues being recognized by the original owners as a result of the license transfer in July 2023. The increase in revenues for the nine months ended September 30, 2023 compared to September 30, 2022 is attributed to the increase in sales made to our dispensaries which are eliminated in consolidation. The increase in cost and expenses for the three and nine months ended September 30, 2023 compared to September 30, 2022 is attributed to the acquisitions of Green Tree and Green Man that occurred during December of 2022, as well as the increase in sales made to our dispensaries. The costs and expense incurred between our dispensaries and cultivation locations are eliminated in consolidation. ​ Liquidity Sources of liquidity Our sources of liquidity historically have included 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. 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. 28 Table of Contents Sources and uses of cash We had cash of $251,691 and $2,583,833 as of September 30, 2023 and December 31, 2022, respectively. Our cash flows from operating, investing and financing activities were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, ​ ​ 2023 ​ 2022 Net cash used in operating activities $ (1,147,432) $ (894,643) Net cash used in investing activities ​ $ (265,858) ​ $ (202,485) Net cash (used in) provided by financing activities ​ $ (918,852) ​ $ 5,045,238 ​ 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 nine months ended September 30, 2023 was comparable to the nine months ended September 30, 2022, as a result of the acquisition of Station 2 in 2023 and the acquisition of Trees in 2022. Net cash used in financing activities for the three and nine months ended September 30, 2023 increased from September 30, 2022 due to an increase in payments on notes payable and finance leases, and no debt raise. Capital Resources We had no material commitments for capital expenditures as of September 30, 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. 29 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 September 30, ​ Nine months ended September 30, ​ ​ 2023 ​ 2022 ​ 2023 ​ 2022 Net loss from continuing operations $ (815,123) $ (2,704,679) $ (4,737,812) $ (3,753,966) Adjustment for loss from discontinued operations ​ — ​ 195 ​ — ​ (5,478) Net loss ​ (815,123) ​ (2,704,484) ​ (4,737,812) ​ (3,759,444) Adjustments: ​ ​ ​ ​ Stock-based compensation ​ 8,745 ​ 38,460 ​ 54,195 ​ 156,961 Depreciation and amortization ​ ​ 251,605 ​ ​ 98,915 ​ ​ 835,026 ​ ​ 190,770 Amortization of debt discount ​ 219,785 ​ 1,285,392 ​ 621,539 ​ 1,716,334 Loss on extinguishment of debt ​ ​ 218,237 ​ ​ 310,622 ​ ​ 218,237 ​ ​ 310,622 Interest expense ​ 296,242 ​ 213,833 ​ 1,462,281 ​ 564,229 Gain on sale of assets ​ ​ — ​ ​ — ​ ​ — ​ ​ (13,000) (Gain) loss on derivative liability ​ 2,860 ​ (16,365) ​ (2,359) ​ (14,959) Severance ​ ​ — ​ ​ — ​ ​ — ​ ​ 4,731 Acquisition related expenses ​ ​ — ​ ​ 162,634 ​ ​ — ​ ​ 193,956 Provision for income taxes ​ ​ — ​ ​ 254,000 ​ ​ 85,736 ​ ​ 254,000 Other expense (income) ​ ​ (526,809) ​ ​ — ​ ​ (896,680) ​ ​ — Total adjustments ​ 470,665 ​ 2,347,491 ​ 2,377,975 ​ 3,363,644 Adjusted EBITDA ​ $ (344,458) ​ $ (356,993) ​ $ (2,359,837) ​ $ (395,800) ​ 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. ​ 30 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.