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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 11/14/22 TREES Corp. (Colorado) 10-Q 9/30/22 70:8.8M Toppan Merrill Bridge/FA |
Document/Exhibit Description Pages Size
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2: EX-31.1 Certification -- §302 - SOA'02 HTML 24K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 24K
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10: R1 Document And Entity Information HTML 71K
11: R2 Condensed Consolidated Balance Sheets HTML 131K
12: R3 Condensed Consolidated Balance Sheets HTML 42K
(Parenthetical)
13: R4 Condensed Consolidated Statements of Operations HTML 144K
14: R5 Condensed Consolidated Statements of Cash Flows HTML 131K
15: R6 Condensed Consolidated Statements of Cash Flows HTML 24K
(Parenthetical)
16: R7 Condensed Consolidated Statements of Changes in HTML 118K
Stockholders' Equity
17: R8 Condensed Consolidated Statements of Changes in HTML 24K
Stockholders' Equity (Parenthetical)
18: R9 Nature of Operations, History and Presentation HTML 37K
19: R10 Business Acquisition HTML 101K
20: R11 Discontinued Operations HTML 79K
21: R12 Inventories, Net HTML 33K
22: R13 Leases HTML 41K
23: R14 Accrued Stock Payable HTML 37K
24: R15 Notes Payable HTML 87K
25: R16 Warrant Derivative Liability HTML 65K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM i 10-Q
i ☑ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended i September 30, 2022.
i ☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from ____________ to ____________.
Commission file number: i 000-54457
i TREES CORPORATION
(Exact name of registrant as specified in its charter)
i Colorado |
| i 90-1072649 |
(State of incorporation) | | (IRS Employer Identification No.) |
| ||
(Address of principal executive offices) (Zip Code) | ||
| ||
( i 303) i 759-1300 | ||
(Registrant’s Telephone Number, Including Area Code) | ||
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. i Yes þ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). i Yes þ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
i Non-accelerated filer | ☑ | Smaller reporting company | i ☑ |
| | Emerging growth company | i ☐ |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i ☐ No þ
As of November 7, 2022, there were i 96,192,184 issued and outstanding shares of the Company's common stock.
TREES CORPORATION
FORM 10-Q
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 | |
29 | ||
29 | ||
| | |
30 | ||
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30 | ||
30 | ||
30 | ||
30 | ||
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33 | ||
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TREES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | |
| | | | | | |
| | | ||||
| | (unaudited) | | | ||
Assets |
| |
|
| |
|
Current assets |
| |
|
| |
|
Cash and cash equivalents | | $ | i 1,964,660 | | $ | i 2,054,050 |
Restricted cash | | | i 4,037,500 | | | — |
Accounts receivable, net of allowance of $ i 38,000 and $ i 61,000, respectively | |
| i 165,217 | |
| i 80,188 |
Current portion of notes receivable, net of allowance of i nil and $ i 43,108, respectively | | | — | | | i 73,000 |
Inventories, net | | | i 1,201,293 | | | i 1,123,083 |
Prepaid expenses and other current assets | |
| i 168,553 | |
| i 149,075 |
Total current assets | |
| i 7,537,223 | |
| i 3,479,396 |
| | | | | | |
Right-of-use operating lease asset | | | i 2,951,736 | | | i 3,065,152 |
Property and equipment, net | | | i 606,474 | | | i 680,327 |
Intangible assets, net | | | i 2,087,946 | | | i 5,999,813 |
Goodwill | | | i 14,612,038 | | | i 8,799,657 |
Total assets | | $ | i 27,795,417 | | $ | i 22,024,345 |
| | | | | | |
Liabilities and Stockholders' Equity | |
| | |
| |
| | | | | | |
Current liabilities | |
| | |
|
|
Accounts payable | | $ | i 2,195,532 | | $ | i 1,170,708 |
Interest payable | |
| i 63,000 | |
| i 621,085 |
Income tax payable | | | i 254,000 | | | — |
Operating lease liability, current | | | i 663,883 | | | i 721,809 |
Accrued stock payable | |
| i 60,900 | |
| i 444,894 |
Accrued dividends | | | i 70,800 | | | — |
Warrant derivative liability | |
| i 13,358 | |
| i 28,317 |
Notes payable - current | | | i 1,307,569 | | | i 1,094,398 |
Total current liabilities | |
| i 4,629,042 | |
| i 4,081,211 |
| | | | | | |
Operating lease liability, non-current | | | i 2,343,362 | | | i 2,427,762 |
Notes payable - long-term (net of discount) | | | i 12,146,691 | | | i 5,619,570 |
Related party long-term notes payable (net of discount) | | | i 332,204 | | | i 288,229 |
Total liabilities | | | i 19,451,299 | | | i 12,416,772 |
| | | | | | |
Commitments and contingencies (Note 9) | | | | | | |
| | | | | | |
Stockholders’ equity | |
|
| |
|
|
Preferred stock, i i no / par value; i i 5,000,000 / shares authorized; i i 1,180 / issued and outstanding, respectively | | | i 1,073,446 | | | i 1,073,446 |
Common stock, $ i i 0.001 / par value; i i 200,000,000 / shares authorized; i 96,192,184 shares and i 89,551,993 shares issued and outstanding, respectively | | | i 96,192 | | | i 89,552 |
Additional paid-in capital | |
| i 94,814,583 | |
| i 92,265,390 |
Accumulated deficit | |
| ( i 87,640,103) | |
| ( i 83,820,815) |
Total stockholders’ equity | |
| i 8,344,118 | |
| i 9,607,573 |
Total liabilities and stockholders’ equity | | $ | i 27,795,417 | | $ | i 22,024,345 |
See Notes to unaudited condensed consolidated financial statements.
3
TREES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | | | | | | | | | | | |
|
| Three months ended | | Nine months ended | | ||||||||
| | September 30, | | | |||||||||
| | 2022 | | 2021 | | 2022 | | 2021 | | ||||
Revenue |
| | | | | | | | | | | | |
Retail sales | | $ | i 3,080,778 | | $ | i 855,841 | | $ | i 9,536,659 | | $ | i 855,841 | |
Cultivation sales | | | i 96,399 | | | i 809,801 | | | i 449,553 | | | i 2,157,742 | |
Interest | | | — | | | — | | | — | | | i 14,472 | |
Total revenue | | | i 3,177,177 | | | i 1,665,642 | | | i 9,986,212 | | | i 3,028,055 | |
| | | | | | | | | | | | | |
Costs and expenses | | | | | | | | | | | | | |
Cost of sales | | | i 2,036,532 | | | i 1,473,209 | | | i 5,856,995 | | | i 2,539,840 | |
Selling, general and administrative | | | i 1,462,902 | | | i 672,981 | | | i 4,001,816 | | | i 1,853,731 | |
Stock-based compensation | | | i 38,460 | | | i 131,836 | | | i 156,961 | | | i 194,120 | |
Professional fees | | | i 197,565 | | | i 144,289 | | | i 716,410 | | | i 760,437 | |
Depreciation and amortization | | | i 98,915 | | | i 115,355 | | | i 190,770 | | | i 305,824 | |
Total costs and expenses | | | i 3,834,374 | | | i 2,537,670 | | | i 10,922,952 | | | i 5,653,952 | |
| | | | | | | | | | | | | |
Operating loss | | | ( i 657,197) | | | ( i 872,028) | | | ( i 936,740) | | | ( i 2,625,897) | |
| | | | | | | | | | | | | |
Other expenses (income) | | | | | | | | | | | | | |
Amortization of debt discount | | | i 1,285,392 | | | i 216,516 | | | i 1,716,334 | | | i 470,306 | |
Interest expense | | | i 213,833 | | | i 150,503 | | | i 564,229 | | | i 444,186 | |
Loss on extinguishment of debt | | | i 310,622 | | | i 233,374 | | | i 310,622 | | | i 233,374 | |
(Gain) loss on derivative liability | | | ( i 16,365) | | | ( i 52,452) | | | ( i 14,959) | | | i 1,043,531 | |
Gain on sale of assets | | | — | | | ( i 132,979) | | | ( i 13,000) | | | ( i 131,512) | |
Total other expenses, net | | | i 1,793,482 | | | i 414,962 | | | i 2,563,226 | | | i 2,059,885 | |
| | | | | | | | | | | | | |
Net loss from continuing operations before income taxes | | | ( i 2,450,679) | | | ( i 1,286,990) | | | ( i 3,499,966) | | | ( i 4,685,782) | |
| | | | | | | | | | | | | |
Provision for income taxes | | | i 254,000 | | | — | | | i 254,000 | | | — | |
Loss from continuing operations | | | ( i 2,704,679) | | | ( i 1,286,990) | | | ( i 3,753,966) | | | ( i 4,685,782) | |
| | | | | | | | | | | | | |
Income (loss) from discontinued operations, net of tax | | | i 195 | | | ( i 40,605) | | | i 5,478 | | | ( i 377,134) | |
Net loss | | $ | ( i 2,704,484) | | $ | ( i 1,327,595) | | $ | ( i 3,748,488) | | $ | ( i 5,062,916) | |
| | | | | | | | | | | | | |
Accrued preferred stock dividend | | | ( i 70,800) | | | — | | | ( i 70,800) | | | — | |
| | | | | | | | | | | | | |
Net loss attributable to common stockholders | | $ | ( i 2,775,284) | | $ | ( i 1,327,595) | | $ | ( i 3,819,288) | | $ | ( i 5,062,916) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Per share data - basic and diluted | | | | | | | | | | | | | |
Net loss from continuing operations per share | | $ | ( i 0.03) | | $ | ( i 0.02) | | $ | ( i 0.04) | | $ | ( i 0.07) | |
Net loss from discontinued operations per share | | $ | i 0.00 | | $ | i 0.00 | | $ | i 0.00 | | $ | ( i 0.01) | |
Net loss attributable to common stockholders per share | | $ | ( i 0.03) | | $ | ( i 0.02) | | $ | ( i 0.04) | | $ | ( i 0.08) | |
Weighted average number of common shares outstanding | | | i 96,192,184 | | | i 69,122,293 | | | i 96,046,246 | | | i 64,381,989 | |
See Notes to unaudited condensed consolidated financial statements.
4
TREES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | |
| | Nine months ended September 30, | ||||
| | 2022 | | 2021 | ||
Cash flows from operating activities | | |
|
| |
|
Net loss | | $ | ( i 3,748,488) | | $ | ( i 5,062,916) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
|
| |
|
|
Amortization of debt discount and equity issuance costs | |
| i 1,716,334 | |
| i 470,306 |
Depreciation and amortization | |
| i 190,770 | |
| i 317,183 |
Loss on extinguishment of debt | | | i 310,622 | | | i 233,374 |
Non-cash lease expense | | | i 670,685 | | | i 364,520 |
Bad debt recovery | | | ( i 10,280) | | | ( i 44,163) |
(Gain) loss on disposal of property and equipment | | | ( i 13,000) | | | i 1,467 |
Loss on warrant derivative liability | |
| ( i 14,959) | |
| i 1,043,531 |
Stock-based compensation | |
| i 156,961 | |
| i 194,120 |
Changes in operating assets and liabilities, net of acquisitions | |
| | |
| |
Accounts receivable | |
| ( i 76,749) | |
| i 258,811 |
Prepaid expenses and other assets | |
| ( i 19,478) | |
| i 559,073 |
Inventories | |
| ( i 78,210) | |
| i 72,711 |
Income taxes | | | i 254,000 | | | — |
Accounts payable and accrued liabilities | | | i 466,744 | | | ( i 566,932) |
Operating lease liabilities | | | ( i 699,595) | | | ( i 330,215) |
Net cash used in operating activities: | |
| ( i 894,643) | |
| ( i 2,489,130) |
| | | | | | |
Cash flows from investing activities | |
|
| |
|
|
Purchase of property and equipment | |
| ( i 33,903) | |
| ( i 323,879) |
Proceeds for sale of equipment | | | i 13,000 | | | i 208,761 |
Proceeds on notes receivable | | | i 75,000 | | | i 433,393 |
Acquisition of TDM, LLC | | | — | | | ( i 1,122,015) |
Acquisition of TREES MLK | | | ( i 256,582) | | | — |
Net proceeds from sale of Next Big Crop | | | — | | | ( i 132,979) |
Net cash used in investing activities | |
| ( i 202,485) | |
| ( i 936,719) |
| | | | | | |
Cash flows from financing activities | |
|
| |
| |
Proceeds from exercise of stock options | | | — | | | i 194,634 |
Proceeds from preferred stock offering | | | — | | | i 1,180,000 |
Proceeds from notes payable | | | i 9,912,250 | | | i 3,960,000 |
Payments on notes payable | | | ( i 4,867,012) | | | ( i 200,000) |
Net cash provided by financing activities | |
| i 5,045,238 | |
| i 5,134,634 |
| | | | | | |
Net increase in cash and cash equivalents | |
| i 3,948,110 | |
| i 1,708,785 |
Cash and cash equivalents, beginning of period | |
| i 2,054,050 | |
| i 755,769 |
Cash and cash equivalents, end of period | | $ | i 6,002,160 | | $ | i 2,464,554 |
| | | | | | |
Supplemental schedule of cash flow information | |
|
| |
|
|
Cash paid for interest | | $ | i 1,122,314 | | $ | i 16,224 |
| | | | | | |
Non-cash investing & financing activities | |
|
| |
|
|
Operating lease right-of-use asset/Operating lease liability | | $ | i 172,053 | | $ | i 700,351 |
Issuance of accrued stock | | $ | i 383,994 | | $ | — |
i 12% Warrants recorded as a debt discount and additional paid-in capital | | $ | i 569,223 | | $ | — |
i 12% Warrants recorded as a loss on extinguishment of debt and additional paid-in capital | | $ | i 103,577 | | $ | — |
Accrued dividends on preferred stock | | $ | i 70,800 | | $ | — |
Cashless warrant exercise | | $ | — | | $ | i 1,557,078 |
Beneficial conversion feature | | $ | — | | $ | i 1,110,039 |
i 10% Warrants recorded as a loss on extinguishment of debt and additional paid-in capital | | $ | — | | $ | i 1,239,300 |
Issuance of common stock to a consultant | | $ | — | | $ | i 120,142 |
See Notes to unaudited condensed consolidated financial statements.
5
TREES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS’ EQUITY (DEFICIT)
| | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, 2022 | |||||||||||||||||
| | Preferred Stock | | Common Stock | | Additional | | Accumulated | | | | ||||||||
| | Shares |
| Amount | | Shares | | Amount | | Paid-in Capital | | Deficit | | Total | |||||
| i 1,180 | | $ | i 1,073,446 | | i 96,192,184 |
| $ | i 96,192 |
| $ | i 94,103,321 |
| $ | ( i 84,864,819) |
| $ | i 10,408,140 | |
Warrants issued with i 12% Notes | | — | | | — | | — | | | — | | | i 672,802 | | | — | | | i 672,802 |
Share-based compensation | | — | | | — | | — | | | — | | | i 38,460 | | | — | | | i 38,460 |
Dividends on preferred stock | | — | | | — | | — | | | — | | | — | | | ( i 70,800) | | | ( i 70,800) |
Net loss |
| — | | | — | | — | |
| — | |
| — | |
| ( i 2,704,484) | |
| ( i 2,704,484) |
| i 1,180 | | $ | i 1,073,446 | | i 96,192,184 | | $ | i 96,192 | | $ | i 94,814,583 | | $ | ( i 87,640,103) | | $ | i 8,344,118 | |
| | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, 2021 | |||||||||||||||||
| | Preferred Stock | | Common Stock | | Additional | | Accumulated | | | | ||||||||
| | Shares |
| Amount | | Shares | | Amount | | Paid-in Capital | | Deficit | | Total | |||||
| — | | $ | — | | i 62,266,275 |
| $ | i 62,264 |
| $ | i 80,140,373 |
| $ | ( i 78,686,757) |
| $ | i 1,515,880 | |
Common stock issued upon exercise of stock options | | — | | | — | | i 33,140 | |
| i 33 | |
| i 12,892 | |
| — | |
| i 12,925 |
Common stock issued to a consultant | | — | | | — | | i 34,140 | | | i 34 | | | i 20,108 | | | — | | | i 20,142 |
Common stock issued for acquisition of TDM, LLC | | — | | | — | | i 22,380,310 | | | i 22,380 | | | i 10,384,464 | | | — | | | i 10,406,844 |
Preferred shares issued | | i 1,180 | | | i 1,073,446 | | — | | | — | | | — | | | — | | | i 1,073,446 |
Warrants issued with preferred stock | | — | | | — | | — | | | — | | | i 106,554 | | | — | | | i 106,554 |
Modification of Warrants | | — | | | — | | — | | | — | | | i 233,374 | | | — | | | i 233,374 |
Modification of Options | | — | | | — | | — | | | — | | | i 21,525 | | | — | | | i 21,525 |
Stock-based compensation | | — | | | — | | — | | | — | | | i 110,311 | | | — | | | i 110,311 |
Net loss | | — | | | — | | — | |
| — | |
| — | |
| ( i 1,327,595) | |
| ( i 1,327,595) |
| i 1,180 | | $ | i 1,073,446 | | i 84,713,865 | | $ | i 84,711 | | $ | i 91,029,601 | | $ | ( i 80,014,352) | | $ | i 12,173,406 | |
| | | | | | | | | | | | | | | | | | | |
|
| For the nine months ended September 30, 2022 | |||||||||||||||||
| | Preferred Stock | | Common Stock | | Additional | | Accumulated | | | | ||||||||
|
| Shares |
| Amount | | Shares |
| Amount |
| Paid-in Capital |
| Deficit |
| Total | |||||
| i 1,180 | | $ | i 1,073,446 | | i 89,551,993 | | $ | i 89,551 | | $ | i 92,265,391 | | $ | ( i 83,820,815) | | $ | i 9,607,573 | |
Common stock issued for acquisition of Trees Waterfront LLC | | — | | | — | | i 1,669,537 | | | i 1,670 | | | i 382,324 | | | — | | | i 383,994 |
Common stock issued for acquisition of Trees MLK LLC | | — | | | — | | i 4,970,654 | | | i 4,971 | | | i 1,337,105 | | | — | | | i 1,342,076 |
Warrants issued with i 12% Notes | | — | | | — | | — | | | — | | | i 672,802 | | | — | | | i 672,802 |
Share-based compensation | | — | | | — | | — | | | — | | | i 156,961 | | | — | | | i 156,961 |
Dividends on preferred stock | | — | | | — | | — | | | — | | | — | | | ( i 70,800) | | | ( i 70,800) |
Net loss | | — | | | — | | — | |
| — | |
| — | |
| ( i 3,748,488) | |
| ( i 3,748,488) |
| i 1,180 | | $ | i 1,073,446 | | i 96,192,184 | | $ | i 96,192 | | $ | i 94,814,583 | | $ | ( i 87,640,103) | | $ | i 8,344,118 | |
| | | | | | | | | | | | | | | | | | | |
| | For the nine months ended September 30, 2021 | |||||||||||||||||
| | Preferred Stock | | Common Stock | | Additional | | Accumulated | | | | ||||||||
| | Shares |
| Amount | | Shares |
| Amount |
| Paid-in Capital |
| Deficit |
| Total | |||||
| — | | $ | — | | i 60,813,673 | | $ | i 60,813 | | $ | i 75,891,414 | | $ | ( i 74,951,436) | | $ | i 1,000,791 | |
Common stock issued to a consultant | | — | |
| — | | i 146,499 | |
| i 146 | |
| i 119,996 | |
| — | |
| i 120,142 |
Common stock issued upon exercise of stock options | | — | | | — | | i 366,760 | | | i 367 | | | i 194,267 | | | — | | | i 194,634 |
Common stock issued for acquisition of TDM, LLC | | — | | | — | | i 22,380,310 | | | i 22,380 | | | i 10,384,464 | | | — | | | i 10,406,844 |
Warrants issued with i 10% Notes | | — | |
| — | | — | |
| — | |
| i 1,239,300 | |
| — | |
| i 1,239,300 |
Beneficial conversion feature | | — | |
| — | | — | |
| — | |
| i 1,110,039 | |
| — | |
| i 1,110,039 |
Cashless exercise of warrants | | — | |
| — | | i 1,006,623 | |
| i 1,005 | |
| i 1,556,073 | |
| — | |
| i 1,557,078 |
Stock-based compensation | | — | | | — | | — | | | — | | | i 172,595 | | | — | | | i 172,595 |
Preferred shares issued | | i 1,180 | | | i 1,073,446 | | — | | | — | | | — | | | — | | | i 1,073,446 |
Warrants issued with preferred stock | | — | | | — | | — | | | — | | | i 106,554 | | | — | | | i 106,554 |
Modification of Warrants | | — | | | — | | — | | | — | | | i 233,374 | | | — | | | i 233,374 |
Modification of Options | | — | | | — | | — | | | — | | | i 21,525 | | | — | | | i 21,525 |
Net loss | | — | |
| — | | — | |
| — | |
| — | |
| ( i 5,062,916) | |
| ( i 5,062,916) |
| i 1,180 | | $ | i 1,073,446 | | i 84,713,865 | | $ | i 84,711 | | $ | i 91,029,601 | | $ | ( i 80,014,352) | | $ | i 12,173,406 | |
See Notes to unaudited condensed consolidated financial statements.
6
TREES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
iNOTE 1. NATURE OF OPERATIONS, HISTORY, AND PRESENTATION
iNature of Operations
TREES Corporation, a Colorado Corporation (the “Company,” “we,” “us,” or “our,”) (formerly, General Cannabis Corp), was incorporated on June 3, 2013, and provides services and products to the regulated cannabis industry. On June 8, 2022, our shareholders, upon recommendation of the Board, approved an amendment to our Amended and Restated Articles of Incorporation at our 2022 Annual Meeting of Stockholders. The amendment to our Amended and Restated Articles of Incorporation was filed with the Secretary of State of the State of Colorado on June 8, 2022 and formally changed the name of the Company to TREES Corporation. As of September 30, 2022, our operations are segregated into the following segments:
Retail (“Retail Segment”)
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 i three retail stores in Portland, Oregon.
Cultivation (“Cultivation Segment”)
Through our acquisition of SevenFive Farm ("SevenFive") in May 2020, we operate a i 17,000 square foot licensed light deprivation greenhouse cultivation facility.
Discontinued Operations - Operations Consulting and Products (“Operations Segment”)
Through Next Big Crop (“NBC”), 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 $ i 150,000 and i 10% of profits generated by the buyer in the states of Michigan, Mississippi, and Massachusetts for a period of i twelve months from the closing. On August 2, 2021, the sale of NBC was completed. Pursuant to amendment, the buyer paid the additional $ i 75,000 in March 2022, and the i 10% profit share described above was eliminated.
/ iBasis of Presentation
The accompanying unaudited condensed consolidated financial statements include all accounts of the Company and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States of America ("U.S. GAAP") can be condensed or omitted. The condensed consolidated balance sheet for the year ended December 31, 2021, was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto of the Company for the year ended December 31, 2021, which were included in the annual report on Form 10-K filed by the Company on March 25, 2022.
/7
In the opinion of management, these unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and notes thereto of the Company and include all adjustments, consisting only of normal recurring adjustments, considered necessary for the fair presentation of the Company's financial position and operating results. The results for the three and nine months ended September 30, 2022, are not necessarily indicative of the operating results for the year ending December 31, 2022, or any other interim or future periods. Since the date of the Annual Report, there have been no material changes to the Company’s significant accounting policies.
iReclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
iUse of Estimates
The preparation of our unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Furthermore, when testing assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment charges may result. In particular, the COVID-19 pandemic has adversely impacted and is likely to further adversely impact the Company's business and markets. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company's business, results of operations, and financial condition, including revenues, expenses, reserves and allowances, fair value measurements and asset impairment charges, will depend on future developments that are highly uncertain and difficult to predict. These developments include, but are not limited to, the duration and spread of the pandemic, its severity in our markets and elsewhere, governmental actions to contain the spread of the pandemic and respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.
iConcentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consisted primarily of cash, accounts receivable and revenue.
Customer and Revenue Concentrations
During the three months ended September 30, 2022 and 2021, i 79% and i 24% of SevenFive’s revenue was with i one and i two customers, respectively. During the nine months ended September 30, 2022 and 2021, i 66% and i 12% was with i i one / customer, respectively. The customer in 2022 is a related party dispensary and the revenues associated with this customer is eliminated in consolidation.
/ iDiscontinued Operations
On July 16, 2021, we entered into an Asset Purchase Agreement with an individual to sell substantially all of the assets of NBC for a total of $ i 150,000 and i 10% of profits generated by the buyer in the states of Michigan, Mississippi, and Massachusetts for a period of i twelve months from the closing. On August 2, 2021, the sale of NBC was completed. Pursuant to amendment, the buyer paid the additional $ i 75,000 in March 2022, and the i 10% profit share described above was eliminated.
On January 1, 2021, we discontinued our investments segment. As this is not a materially significant segment, we have not shown the effects of the discontinued segment separately in the financial statements.
The cash flows related to discontinued operations have not been segregated and are included in the consolidated statements of cash flows.
/8
Going Concern
We incurred net losses of $ i 2,704,484 and $ i 3,748,488 during the three and nine months ended September 30, 2022, respectively, and $ i 1,327,595 and $ i 5,062,916 for the three and nine months ended September 30, 2021, respectively, and had an accumulated deficit of $ i 87,640,103 as of September 30, 2022. We had cash and cash equivalents of $ i 1,964,660 and $ i 2,054,050 as of September 30, 2022, and December 31, 2021, respectively.
The accompanying unaudited condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets, and the satisfaction of liabilities and commitments in the ordinary course of business. We have incurred recurring losses and negative cash flows from operations since inception and have primarily funded our operations with proceeds from the issuance of convertible debt. We expect our operating losses to continue into the foreseeable future as we continue to execute our acquisition and growth strategy. As a result, we have concluded that there is substantial doubt about our ability to continue as a going concern. Our unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our ability to continue as a going concern is dependent upon our ability to raise additional capital to support our planned investing activities. If we are unable to obtain additional funding, we would be forced to delay, reduce, or eliminate some or all of our acquisition efforts, which could adversely affect our growth plans.
/Summary of Significant Accounting Policies
See our Annual Report on Form 10-K for the year ended December 31, 2021, for discussion of the Company's significant accounting policies.
iRecently Issued Accounting Standards
FASB ASU 2020-06 – “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”- In June 2020, the Financial Accounting Standards Board (“FASB”) issued guidance which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Accounting Standards Updates (“ASU”) also removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and simplifies the diluted earnings per share calculation in certain areas. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2023, although early adoption is permitted. The Company is currently evaluating the impact of the adoption of the standard on the consolidated financial statements.
FASB ASU 2019-12 – “Income Taxes (Topic 740)” – In December 2019, the FASB issued guidance which simplifies certain aspects of accounting for income taxes. The guidance is effective for interim and annual reporting periods beginning after December 15, 2020, and early adoption is permitted. We adopted this ASU in the first quarter of 2021. This ASU did not have a material effect on our condensed consolidated financial statements.
iNOTE 2. BUSINESS ACQUISITION
On September 2, 2021, we completed the acquisition of substantially all of the assets of TREES Englewood, representing a portion of the overall Trees transaction (“Trees Transaction”) previously disclosed pursuant to that certain First Amended and Restated Agreement and Plan of Reorganization and Liquidation dated May 28, 2021, by and among the Company, seller and certain other sellers party thereto, that consists of the assets relating to the Trees dispensary located in Englewood, Colorado (“Englewood Closing”). We paid $ i 1,155,256 in cash in connection with the Englewood Closing and stock consideration of i 22,380,310 shares of our Common Stock. The closing price of our common stock on September 2, 2021, the date of license transfer, was $ i 0.47 per share, as such, fair value of consideration is $ i 10,518,746. Further, cash equal to $ i 1,732,884 will be paid to the seller in equal monthly installments over a period of i 24 months from the Englewood Closing. As of September 30, 2022, we have completed the allocation of the purchase price. Based on the completed purchase price, there was an adjustment from the tradename to goodwill in the amount of
/9
$ i 3,601,000. As of September 30, 2022, the unaudited condensed consolidated balance sheet includes an allocation of cash, fixed assets, inventory, intangible assets and goodwill.
The table below reflects the Company’s estimates of the acquisition date fair values of the assets acquired:
i
| | | |
Cash | | $ | i 32,941 |
Fixed assets |
| | i 59,335 |
Inventory | | | i 586,495 |
Tradename | | | i 1,399,000 |
Goodwill | |
| i 11,216,913 |
| | $ | i 13,294,684 |
The accompanying unaudited condensed consolidated financial statements include the results of Trees Englewood from the date of acquisition for financial reporting purposes, September 2, 2021. The pro-forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2020, are as follows:
i
| | | | | | | |
|
| Three months ended |
| Nine months ended | |||
| | September 30, | | ||||
| | 2021 | | 2021 | | ||
Total revenues | | $ | i 2,766,183 | | $ | i 8,847,507 | |
Net income (loss) attributable to common stockholders | | $ | i 254,862 | | $ | i 749,341 | |
Net income (loss) per common share | | $ | i 0.00 | | $ | i 0.01 | |
Weighted average number of basic and diluted common shares outstanding | | | i 84,691,204 | | | i 84,384,904 | |
The unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2020, or to project potential operating results as of any future date or for any future periods.
On December 30, 2021, we completed the acquisition of substantially all the assets of Trees Portland, LLC and Trees Waterfront, LLC, representing a portion of the overall Trees Transaction, which consists of the assets relating to certain Trees dispensaries located in Portland, Oregon ("Oregon Closing”). We paid cash in the amount of $ i 331,581 in connection with the Oregon Closing and stock consideration of i 6,423,575 shares of our Common Stock. The closing price of our common stock on December 30, 2021, the date of license transfer, was $ i 0.23 per share, as such, fair value of consideration is $ i 1,477,422. Further, cash equal to $ i 497,371 will be paid to the sellers in equal monthly installments over a period of i 24 months from the Oregon Closing. As of September 30, 2022, we have completed the allocation of the purchase price. Based on the purchase price, there was an adjustment from the tradename to goodwill in the amount of $ i 341,000. As of September 30, 2022, the condensed consolidated balance sheet includes an allocation of cash, fixed assets, inventory, intangible assets and goodwill.
The table below reflects the Company’s estimates of the acquisition date fair values of the assets acquired:
i
| | | |
Cash | | $ | i 14,568 |
Fixed assets |
| | i 56,015 |
Inventory | | | i 202,046 |
Tradename | | | i 509,000 |
Goodwill | |
| i 1,524,744 |
| | $ | i 2,306,373 |
10
The accompanying unaudited condensed consolidated financial statements include the results of Trees Oregon from the date of acquisition for financial reporting purposes, December 30, 2021. The pro-forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2020, are as follows:
i
| | | | | | | |
|
| Three months ended | Nine months ended | ||||
| | September 30, | |||||
| | 2021 | | 2021 | | ||
Total revenues | | $ | i 450,296 | | $ | i 1,190,985 | |
Net income (loss) attributable to common stockholders | | $ | i 93,796 | | $ | i 153,612 | |
Net income (loss) per common share | | $ | i 0.00 | | $ | i 0.00 | |
Weighted average number of basic and diluted common shares outstanding | | | i 75,545,868 | | | i 70,805,564 | |
The unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2020, or to project potential operating results as of any future date or for any future periods.
On January 5, 2022, we completed the acquisition of substantially all of the assets of Trees MLK Inc. (“MLK”), representing the remaining Oregon dispensary in connection with the overall Trees transaction. We paid cash in the amount of $ i 256,582 and stock consideration of i 4,970,654 shares of our Common Stock. The closing price of our common stock on January 5, 2022, the date of license transfer, was $ i 0.27 per share, as such, fair value of consideration is $ i 1,342,076. Further, cash equal to $ i 384,873 will be paid to the sellers in equal monthly installments over a period of i 24 months from the MLK closing. When we closed on MLK it was a non-operating dispensary. We opened the dispensary in the second quarter of 2022. As of September 30, 2022, we have completed the allocation of the purchase price. Based on the purchase price, there was an adjustment from the tradename to goodwill in the amount of $ i 912,000. As of September 30, 2022, the unaudited condensed consolidated balance sheet includes an allocation of fixed assets, intangible assets and goodwill.
The table below reflects the Company’s estimates of the acquisition date fair values of the assets acquired:
i
| | | |
Fixed assets |
| $ | i 25,150 |
Tradename | | | i 88,000 |
Goodwill | |
| i 1,870,381 |
| | $ | i 1,983,531 |
The accompanying unaudited condensed consolidated financial statements include the results of Trees MLK from the date of acquisition for financial reporting purposes, January 5, 2022. The pro-forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2021, are as follows:
i
| | | | | | | | | | | | |
|
| Three months ended |
| Nine months ended | ||||||||
| | September 30, | | |||||||||
| | 2022 | | 2021 | | 2022 | | 2021 | ||||
Total revenues | | $ | i 69,161 | | $ | — | | $ | i 91,579 | | $ | — |
Net income (loss) attributable to common stockholders | | $ | ( i 51,105) | | $ | ( i 29,022) | | $ | ( i 94,693) | | $ | ( i 106,691) |
Net income (loss) per common share | | $ | ( i 0.00) | | $ | ( i 0.00) | | $ | ( i 0.00) | | $ | ( i 0.00) |
Weighted average number of basic and diluted common shares outstanding | | | i 96,192,184 | | | i 74,092,947 | | | i 96,155,491 | | | i 69,352,643 |
The unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2021, or to project potential operating results as of any future date or for any future periods.
11
NOTE 3. DISCONTINUED OPERATIONS
On July 16, 2021, we entered into an Asset Purchase Agreement with an individual to sell substantially all of the assets of NBC for a total of $ i 150,000 and i 10% of profits generated by the buyer in the states of Michigan, Mississippi, and Massachusetts for a period of i twelve months from the closing. On August 2, 2021, the sale of NBC was completed. Pursuant to amendment, the buyer paid the additional $ i 75,000 in March 2022, and the i 10% profit share described above was eliminated.
A summary of the discontinued operations for the Operations Segment is presented as follows:
i
| | | | | | | | | | | | |
| | Three months ended | | Nine months ended | ||||||||
| | September 30, | | |||||||||
|
| 2022 |
| 2021 | | 2022 | | 2021 | ||||
Product revenues | | $ | — | | $ | i 463 |
| $ | i 3,438 |
| $ | i 614,764 |
Service revenues | | | — | | | i 4,116 | | | — | | | i 523,994 |
Total revenues | | | — | | | i 4,579 | | | i 3,438 | | | i 1,138,758 |
| | | | | | | | | | | | |
Cost of sales | |
| — | |
| i 29,480 | | | — | | | i 1,157,035 |
Selling, general and administrative | |
| ( i 195) | |
| i 12,721 | | | ( i 2,040) | | | i 342,554 |
Professional fees | |
| — | |
| i 143 | | | — | | | i 4,944 |
Depreciation and amortization | | | — | | | i 2,840 | | | — | | | i 11,359 |
Total costs and expenses | |
| ( i 195) | |
| i 45,184 | | | ( i 2,040) | | | i 1,515,892 |
Income (loss) from discontinued operations | | $ | i 195 | | $ | ( i 40,605) | | $ | i 5,478 | | $ | ( i 377,134) |
The cash flows related to discontinued operations have not been segregated and are included in the consolidated statements of cash flows. The following table provides selected information on cash flows related to discontinued operations for the Operations Segment for the nine months ended September 30, 2022 and 2021.
i
| | | | | | | |
| | Nine months ended | | ||||
| | | |||||
|
| 2022 |
| 2021 | | ||
Accounts receivables | | $ | — | | $ | i 183,364 | |
Prepaid expenses and other current assets | | | — | | | i 519,274 | |
Depreciation and amortization | | | — | | | i 231 | |
Capital expenditures | | | — | | | — | |
Accounts payable and accrued expenses | | | — | | | — | |
Customer deposits | | | — | | | — | |
/
iNOTE 4. INVENTORIES, NET
Our inventories consisted of the following:
i
| | | | | | |
| | September 30, | | |||
|
| 2022 |
| 2021 | ||
Raw materials | | $ | i 12,127 | | $ | i 13,343 |
Work-in-progress and finished goods | | | i 1,189,166 | | | i 1,109,740 |
Less: Inventory reserves | | | — | | | — |
Inventories, net | | $ | i 1,201,293 | | $ | i 1,123,083 |
/
12
NOTE 5. LEASES
On September 2, 2021, we entered into a commercial real estate lease with a related party (see Note 11) for retail space for our dispensary in Englewood, CO, with an initial term of i 5 years and, at our option, i two additional terms of i 3 years each. Rent is $ i 10,000 per month with i 3% annual escalations during the initial term and i 4% annual escalations during the option term. We also pay our portion of real estate taxes. In June 2022, we amended the lease to amend the option to renew for i two additional terms of 3 years each, amended to i one additional term of i 5 years. No other changes to the lease were made. We accounted for the amendment as a lease modification and remeasured the lease with an incremental borrowing rate of i 20% which resulted in a decrease of $ i 25,805 to the right-of-use operating lease asset and lease liability from the initial lease valued on September 2, 2021. We determined the present value of the future lease payments using a discount rate of i 20% over a i 9.25 remaining year term, resulting in a right-of-use asset and lease liability of $ i 576,335 which are being applied ratably over the remaining term of the lease. As of September 30, 2022, the balance of the right-of-use asset and lease liability was $ i 557,556 and $ i 564,624, respectively.
Through the acquisition of Trees Englewood, we entered into a commercial real estate lease for office space in Denver, CO. This office space is our corporate office. The lease expires in November 2022. Rent is $ i 7,150 per month with a i 3% escalation beginning in November 2021. We also pay our portion of real estate taxes. We determined the present value of the future lease payments using a discount rate of i 20% over a i 15-month term, resulting in a right-of-use asset and lease liability of $ i 98,211 which are being applied ratably over the term of the lease. As of September 30, 2022, the balance of the right-of-use asset and lease liability was $ i 14,311 and $ i 14,367, respectively.
Through the acquisition of Trees Portland, we entered into a commercial real estate lease in Portland, OR. The lease expires in April 2027. Rent is $ i 5,124 per month with a i 5% annual escalation beginning in May 2022. The rent includes payment of property taxes. We determined the present value of the future lease payments using a discount of i 20% over a i 5.5-year term, resulting in a right-of-use asset and lease liability of $ i 229,501. As of September 30, 2022, the balance of the right-of-use asset and lease liability was $ i 205,660 and $ i 211,313, respectively.
Through the acquisition of Trees Waterfront, we entered into a commercial real estate lease in Portland, OR. The lease has an initial term of i 5 years and, at our option an additional term of i 5 years. The lease expires in March 2031. Rent is $ i 6,683 per month with a i 3% annual escalation. The rent includes payment of property taxes. We determined the present value of the future lease payments using a discount rate of i 20% over a i 10-year term, resulting in a right-of-use asset and lease liability of $ i 381,272. As of September 30, 2022, the balance of the right-of-use asset and lease liability was $ i 361,287 and $ i 369,604, respectively.
Through the acquisition of Trees MLK, we entered into a commercial real estate lease in Portland, OR. The lease has an initial term of i 3 years and at our option i two additional terms of i 3 years each. The lease expires in July 2029. Rent is $ i 3,150 per month with a i 5% annual escalation. The rent includes payment of property taxes. We determined the present value of the future lease payments using a discount rate of i 20% over a i 10-year term, resulting in a right-of-use asset and lease liability of $ i 172,053. As of September 30, 2022, the balance of the right-of-use asset and lease liability was $ i 160,267 and $ i 165,744, respectively.
In April 2022, we entered into an Amendment to Lease with Dalton Farms, LLC, the landlord of our grow facility. Pursuant to the Lease Amendment, commencing April 1, 2022, base rent decreases to $ i 27,000 per month for the remainder of 2022. Increases in base rent become effective January 1, 2023 and are as otherwise provided for in the original lease. We accounted for the amendment as a lease modification and remeasured the lease with an incremental borrowing rate of i 20% which resulted in a decrease of $ i 173,716 to the right-of-use operating lease asset and lease liability from the first amended lease valued in December 2021. We determined the present value of the future lease payments using a discount rate of i 20% over a i 13 remaining year term, resulting in a right-of-use asset and lease liability of $ i 1,703,707 which are being applied ratably over the remaining term of the lease. As of September 30, 2022, the balance of the right-of-use asset and lease liability was $ i 1,652,655 and $ i 1,681,593, respectively.
/13
Future remaining minimum lease payments were as follows:
i
| | | |
Year ending December 31, |
| Amount | |
2022 (remaining three months) | | $ | i 173,339 |
2023 | |
| i 656,415 |
2024 | |
| i 685,056 |
2025 | |
| i 702,501 |
2026 | |
| i 720,840 |
Thereafter | |
| i 4,632,898 |
Total | |
| i 7,571,049 |
Less: Present value adjustment | |
| ( i 4,563,804) |
| | | i 3,007,245 |
Less: Current portion | | | ( i 663,883) |
Long-term operating lease liability | | $ | i 2,343,362 |
iNOTE 6. ACCRUED STOCK PAYABLE
The following tables summarize the changes in accrued common stock payable:
i
| | | | | | |
| | | | | Number of | |
|
| Amount |
| Shares | ||
Balance as of December 31, 2020 | | $ | i 94,861 | | | i 359,415 |
Trees Waterfront acquisition stock accrual | | | i 383,994 | | | i 1,669,537 |
Stock issued | | | ( i 33,961) | | | ( i 259,415) |
Balance as of December 31, 2021 | | $ | i 444,894 | | | i 1,769,537 |
Stock issued | | | ( i 383,994) | | | ( i 1,669,537) |
Balance as of September 30, 2022 | | $ | i 60,900 | | | i 100,000 |
In December 2021, we completed the acquisition of Trees Waterfront. As part of the transaction, we granted i 1,669,537 shares of our common stock. The stock was issued on January 6, 2022.
/ iNOTE 7. NOTES PAYABLE
Our notes payable consisted of the following:
i
| | | | | | |
|
| September 30, |
| |||
| | 2022 | | 2021 | ||
2022 12% Notes | | $ | i 13,167,795 | | $ | — |
2020 10% Notes | | | — | | | i 6,580,000 |
Related party note payable | | | i 332,204 | | | i 320,000 |
Trees Acquisition Notes | | | i 1,518,755 | | | i 2,013,644 |
Unamortized debt discount | | | ( i 1,232,290) | | | ( i 1,911,447) |
| | | i 13,786,464 | | | i 7,002,197 |
Less: Current portion | | | ( i 1,307,569) | | | ( i 1,094,398) |
Long-term portion | | $ | i 12,478,895 | | $ | i 5,907,799 |
i 12% Notes
On September 15, 2022, we entered into a Securities Purchase Agreement with certain accredited investors (the “ i 12% Investors”), pursuant to which we agreed to issue and sell senior secured convertible notes (the “ i 12% Notes”) with an aggregate principal amount of $ i 13,500,000 to such i 12% Investors, in exchange for payment by certain i 12% Investors of an aggregate amount of $ i 10,587,250 in cash, as well as cancellation of outstanding indebtedness in the aggregate amount of $ i 2,912,750 represented by the i 10% Notes discussed below. Of the $ i 10,587,250, $ i 4,037,500 is held in restricted cash. These amounts are to be used for the acquisitions discussed in Note 13, subsequent events. In connection with the i 12%
/14
Notes, the i 12% Investors received warrants (the “ i 12% Warrants”) to purchase shares of our common stock equal to i 20% coverage of the aggregate principal amount with an exercise price of $ i 0.70 per share, which equals an aggregate of warrants to purchase i 3,857,150 shares of Common Stock. The lead i 12% Investor received an additional i 10% warrant coverage on the aggregate principal amount of i 12% Notes for total additional warrants to purchase i 1,928,571 shares of Common Stock. The lead i 12% Investor also will receive a i five percent fee on the aggregate principal amount of the i 12% Notes. This total fee in the amount of $ i 675,000 was recorded as a debt discount and will be amortized over the life of the loan. The i 12% Notes bear interest at an annual rate of i 12% and will mature on September 16, 2026. The i 12% Investors have the option to convert up to i 50% of the outstanding unpaid principal and accrued interest of the i 12% Notes into Common Stock at a fixed conversion price equal to $ i 1.00 per share.
The relative fair value of the new funding on the i 12% Warrants was recorded as a debt discount and additional paid-in capital of $ i 569,223. The relative fair value of the cancellation of the outstanding indebtedness was recorded as an extinguishment of debt and additional paid-in capital of $ i 103,577. We recorded amortization of debt discount expense from the i 12% Notes of $ i 11,931 and i nil for the three and nine months ended September 30, 2022 and 2021, respectively. We determined there was no beneficial conversion feature on the i 12% Notes issued. The i 12% Notes are treated as conventional debt.
iFor purposes of determining the debt discount, the underlying assumptions used in the black-scholes model to determine the fair value of the i 12% Warrants as of September 15, 2022, were:
| | | |
Current stock price |
| $ | i 0.20 |
Exercise price | | $ | i 0.70 |
Risk-free interest rate | | | i 3.66 % |
Expected dividend yield | | | — |
Expected term (in years) | | | i 5.0 |
Expected volatility | | | i 107% |
i 10% Notes
In December 2020, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement’) with certain accredited investors (the “ i 10% Investors”), pursuant to which we issued and sold senior convertible promissory notes (the “ i 10% Notes”) with an aggregate principal amount of $ i 2,940,000 in exchange for payment to us by certain i 10% Investors of an aggregate amount of $ i 1,940,000 in cash, as well as cancellation of outstanding indebtedness of previously issued i 15% notes in the aggregate amount of $ i 1,000,000. In connection with the issuance of the i 10% Notes, the holders of the i 10% Notes received warrants (the “ i 10% Warrants”) to purchase shares of our common stock equal to i 20% coverage of the aggregate principal amount at $ i 0.56 per share. In the aggregate, this equals i 1,050,011 shares of our common stock. The i 10% Notes bear interest at an annual rate of i 10% and will mature on December 23, 2023. The i 10% Investors have the option at any time to convert up to i 50% of the outstanding unpaid principal and accrued interest of the i 10% Notes into Common Stock at a variable price of i 80% of the market price but no less than $ i 0.65 per share and no more than $ i 1.00 per share. The i 10% Warrants are exercisable at an exercise price of $ i 0.56 per warrant.
The relative fair value of the new funding on the i 10% Warrants was recorded as a debt discount and additional paid-in capital of $ i 254,400. The relative fair value of the cancellation of the outstanding indebtedness was recorded as an extinguishment of debt and additional paid-in capital of $ i 131,000. We recorded amortization of debt discount expense from the i 10% Notes of $ i 41,352 and $ i 21,868 for the three months ended September 30, 2022 and 2021, respectively and $ i 84,375 and $ i 64,891 during the nine months ended September 30, 2022 and 2021, respectively. We determined there was i no beneficial conversion feature on the i 10% Notes issued in December 2020. The i 10% Notes are treated as conventional debt.
i
15
For purposes of determining the debt discount, the underlying assumptions used in the black-scholes model to determine the fair value of the i 10% Warrants as of December 23, 2020, were:
| | | |
Current stock price |
| $ | i 0.53 |
Exercise price | | $ | i 0.56 |
Risk-free interest rate | | | i 0.38 % |
Expected dividend yield | | | — |
Expected term (in years) | | | i 5.0 |
Expected volatility | | | i 115% |
On February 8, 2021, we entered into a Securities Purchase Agreement with an accredited i 10% Investor, pursuant to which we issued and sold i 10% Notes with an aggregate principal amount of $ i 1,660,000 to such i 10% Investor. The i 10% Notes are part of an over-allotment option exercised by us in connection with the convertible note offering consummated on December 23, 2020, as discussed above. In connection with the issuance of the i 10% Notes, the holder received warrants to purchase shares of our common stock equal to i 20% coverage of the aggregate principal amount at $ i 0.56 per share. In the aggregate, this equals i 592,858 shares of our common stock with a par value $ i 0.001 per share. The i 10% Notes bear interest at an annual rate of i 10% and will mature on February 8, 2024. The i 10% Investor has the option to convert up to i 50% of the outstanding unpaid principal and accrued interest of the i 10% Notes into Common Stock at a variable price of i 80% of the market price but no less than $ i 0.65 per share and no more than $ i 1.00 per share. The i 10% Warrants are exercisable at an exercise price of $ i 0.56 per warrant.
The relative fair value of the new funding on the i 10% Warrants was recorded as a debt discount and additional paid-in capital of $ i 429,300. We determined that this i 10% Note had a beneficial conversion feature and is calculated at its intrinsic value (that is, the difference between the effective conversion price of $ i 0.66 at the date of the note issuance and the fair value of the common stock into which the debt is convertible at the commitment date, per share being $ i 0.90, multiplied by the number of shares into which the debt is convertible). The valuation of the beneficial conversion feature recorded cannot be greater than the face value of the note issued. We recorded $ i 417,539 as additional paid in capital and a debt discount and included in our consolidated statement of operations. We recorded amortization of debt discount expense from the i 10% Notes issued in February 2021 of $ i 454,741 and $ i 71,150 for the three months ended September 30, 2022 and 2021, respectively and $ i 594,721 and $ i 180,968 during the nine months ended September 30, 2022 and 2021, respectively. The i 10% Notes are treated as conventional debt.
For purposes of determining the debt discount, the underlying assumptions used in the black-scholes model to determine the fair value of the i 10% Warrants as of February 8, 2021, were:
| | | |
Current stock price |
| $ | i 1.12 |
Exercise price | | $ | i 0.56 |
Risk-free interest rate | | | i 0.48 % |
Expected dividend yield | | | — |
Expected term (in years) | | | i 5.0 |
Expected volatility | | | i 118% |
On April 20, 2021, we entered into a Securities Purchase Agreement with accredited i 10% Investors, pursuant to which we issued and sold i 10% Notes with an aggregate principal amount of $ i 2,300,000 to such i 10% Investors. The i 10% Notes are part of an over-allotment approved by the existing noteholders in connection with the original convertible note offering of $ i 4,600,000 consummated on December 23, 2020, and February 8, 2021. In connection with the issuance of the i 10% Notes, each holder received warrants to purchase shares of our common stock equal to i 20% coverage of the aggregate principal amount at $ i 0.56 per share, except that the warrants coverage to i one Investor acting as lead investor in the raise received approximately i 35.5% of the aggregate principal amount invested. The i 10% Notes bear interest at an annual rate of i 10% and will mature on April 20, 2024. The i 10% Investors have the option to convert up to i 50% of the outstanding unpaid principal and accrued interest of the i 10% Notes into Common Stock at a variable price of i 80% of the market price but no less than $ i 0.65 per share and no more than $ i 1.00 per share. The i 10% Warrants are exercisable at an exercise price of $ i 0.56 per warrant.
16
The relative fair value of the new funding on the i 10% Warrants was recorded as a debt discount and additional paid-in capital of $ i 810,000. We determined that these i 10% Notes had a beneficial conversion feature and is calculated at its intrinsic value (that is, the difference between the effective conversion price of $ i 0.49 at the date of the note issuance and the fair value of the common stock into which the debt is convertible at the commitment date, per share being $ i 0.83, multiplied by the number of shares into which the debt is convertible). The valuation of the beneficial conversion feature recorded cannot be greater than the face value of the note issued. We recorded $ i 692,500 as additional paid in capital and a debt discount and included in our consolidated statement of operations. We recorded amortization of debt discount expense from the i 10% Notes issued in April 2021 of $ i 775,638 and $ i 126,025 for the three months ended September 30, 2022 and 2021, respectively and $ i 1,023,577 and $ i 224,446 for the nine months ended September 30, 2022 and 2021, respectively. The i 10% Notes are treated as conventional debt.
For purposes of determining the debt discount, the underlying assumptions used in the black-scholes model to determine the fair value of the i 10% Warrants as of April 20, 2021, were:
| | | |
Current stock price |
| $ | i 0.83 |
Exercise price | | $ | i 0.56 |
Risk-free interest rate | | | i 0.81% |
Expected dividend yield | | | — |
Expected term (in years) | | | i 5.0 |
Expected volatility | | | i 115% |
In September 2022, $ i 2,912,750 of the i 10% Notes were exchanged for the i 12% Notes (see above) and the remaining $ i 3,987,250 was paid in full. Of the remaining debt discount, $ i 207,045 was expensed to extinguishment of debt and $ i 1,125,844 was expensed to amortization of debt discount.
iNOTE 8. WARRANT DERIVATIVE LIABILITY
On May 31, 2019, we received gross proceeds of $ i 3 million by issuing i three million shares of our common stock and i three million warrants (“2019 Warrants”) to purchase shares of our common stock (“2019 Units”) in a registered direct offering for $ i 1.00 per 2019 Unit (collectively defined as the “2019 Capital Raise”). The 2019 Warrants, issued with the 2019 Capital Raise, are accounted for as a derivative liability. The 2019 Warrant agreements contain a cash settlement provision whereby the holders could settle the warrants for cash based on the Black-Scholes value, upon certain fundamental transactions, as defined in the 2019 Warrant agreement, which are considered outside of the control of management, such as a change of control. The original exercise price of the 2019 Warrants was $ i 1.30 per share. The 2019 Warrants contain certain anti-dilution adjustment provisions with respect to subsequent issuances of securities by the Company at a price below the exercise price of such warrants. As a result of such subsequent issuances of securities by the Company during the fourth quarter 2019, the exercise price of the 2019 Warrants decreased to $ i 0.45 per share and the number of shares subject to the 2019 Warrants increased to i 8,666,666 shares of common stock as of December 31, 2019. In May 2020, we issued securities at a price lower than the $ i 0.45 per share above. As a result, the exercise price of the 2019 Warrants decreased to $ i 0.3983 per share and the number of shares subject to the 2019 Warrants increased to i 9,591,614 shares of common stock.
During the first quarter of 2021 the warrant holders exercised i 1,323,000 warrants into i 747,208 shares of our common stock through cashless exercise. We booked an adjustment to the derivative liability of $ i 1,523,117 as a result. As of September 30, 2022, there were i 322,807 of the 2019 Warrants outstanding.
/17
The following are the key assumptions that were used to determine the fair value of the 2019 Warrants
i
| | | | | | | | |
|
| December 31, | |
| | |||
|
| 2021 | | 2022 |
| | ||
Number of shares underlying the warrants |
| | i 322,807 | | | i 322,807 | | |
Fair market value of stock | | $ | i 0.22 | | $ | i 0.19 | | |
Exercise price | | $ | i 0.40 | | $ | i 0.40 | | |
Volatility | | | i 94 | % | | i 82 | % | |
Risk-free interest rate | | | i 1.26 | % | | i 4.06 | % | |
Warrant life (years) | | | i 2.41 | |
| i 1.66 | | |
The following table sets forth a summary of the changes in the fair value of the warrant derivative liability, our Level 3 financial liabilities that are measured at fair value on a recurring basis:
i
| | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | | ||||
Beginning balance | | $ | i 29,723 | | $ | i 134,234 | | $ | i 28,318 | | $ | i 561,368 | |
Warrant exercise | | | — | | | — | | | — | | | ( i 1,523,118) | |
Change in fair value of warrants derivative liability | | | ( i 16,364) | | | ( i 52,453) | | | ( i 14,959) | | | i 1,043,531 | |
Ending balance | | $ | i 13,359 | | $ | i 81,781 | | $ | i 13,359 | | $ | i 81,781 | |
iNOTE 9. COMMITMENTS AND CONTINGENCIES
In July 2021, we were served with a Complaint in the District Court, County of Denver, Colorado, by plaintiff 2353 SB, LLC (“Plaintiff”). We entered into a lease with Plaintiff for the premises at 2353 South Broadway, Denver, CO with a term of three (3) years to commence on November 1, 2020. Monthly lease payments were to be $ i 12,866.66. In 2020, we made initial payments (first month’s rent and security deposit) of $ i 39,633.32; but subsequently did not take possession of the premises and have made no further payments in respect thereof, as a direct result of the COVID-19 pandemic. The lease contains a ‘force majeure’ clause which includes a provision that neither party is liable for failure to perform its obligations under the lease which have become practicably impossible because of circumstances beyond the reasonable control of the applicable party, including ‘pandemics or outbreak of communicable disease.’
We have taken the position that our failure to take possession and make any further payments under the lease is directly related to the COVID-19 pandemic. We are vigorously defending this action and believe that the above-referenced force majeure clause presents a complete defense to Plaintiff’s claims.
We filed a motion to dismiss; both parties also filed motions for summary judgment. In October 2022, the court denied our motion to dismiss on the basis that Plaintiff sufficiently pled facts that raise a plausible claim for relief, notwithstanding our possible defenses. The court did not rule on either motion for summary judgment. On November 14, 2022, we timely filed a formal answer to the complaint, denying each of Plaintiff’s substantive claims. We also asserted appropriate affirmative defenses, including the force majeure clause of the lease, which provides that we are not liable under the lease in the event of a variety of events outside our control, including “pandemics.” In addition, we have asserted a counterclaim against the Plaintiff for breach of contract to recover the initial payments made under the lease as well as attorneys’ fees and costs.
In June 2020, our former Executive Chairman resigned, claiming the resignation was for "Good Reason" under the terms of his employment agreement. An ultimate determination that such resignation was, in fact, for "Good Reason", rather than a voluntary act absent "Good Reason," could enable certain potential claims for benefits under his employment agreement, including for severance, vesting of unvested options and/or for the extension of the term within which options could be exercised in the future. We do not believe that the resignation was for "Good Reason" but rather voluntary, and consequently, that any such potential claims, if asserted, would be without substantial merit. Although the outcome of legal proceedings is subject to uncertainty, the Company will vigorously defend any future claims relating to this matter.
/18
From time to time, we are a party to various litigation matters incidental to the conduct of its business. We are not presently a party to any legal proceedings that would have a material adverse effect on our business, operating results, financial condition, or cash flows.
iNOTE 10. STOCKHOLDERS’ EQUITY
2021 Preferred stock offering
On September 10, 2021, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with various accredited investors (the “2021 Investors), pursuant to which we issued and sold Units consisting of Series A Convertible Preferred Stock (“Series A Preferred”) and warrants (the “Preferred Warrants”) to purchase shares of our common stock with a par value of $ i 0.001 per share. The total number of Units sold was i 1,180. Each Unit consists of i one share of Series A Preferred and i 354,000 Preferred Warrants. The purchase price of each Unit was $ i 1,000, for an aggregate amount sold of $ i 1,180,000. Each share of Series A Preferred is convertible into i 1,000 shares of common stock upon the consummation of a capital raise of not less than $ i 5,000,000. The Certificate of Designation of the Series A Preferred Stock (“Certificate of Designation”) was filed with the Secretary of the State of Colorado on September 14, 2021. The Certificate of Designations established the new preferred series entitled “Series A Convertible Preferred Stock” with i no par value pers share, and sets forth the rights, restrictions, preferences and privileges of the Series A Preferred, summarized as follows:
| ● | Authorized Number of Shares – i 5,000 |
| ● | Voting Rights – i None |
| ● | Dividends – i 6% per annum, ‘paid in kind’ in shares of Series A Preferred |
| ● | Conversion – Each share of Series A Preferred is mandatorily convertible into i 1,000 shares of common stock upon a minimum capital raise of $ i 5,000,000; sale, merger or business combination of the Company; or the Company listing on an exchange |
| ● | Redemption – No rights of redemption by 2021 Investors, nor mandatory redemption |
The Preferred Warrants have a i five-year term and an exercise price per Preferred Warrant share of $ i 1.05. The warrants contain an anti-dilution provision pursuant to which upon we do a future capital raise at less than $ i 1.00 per share, each Preferred Investor will be granted additional Preferred Warrants on a ‘full-ratchet’ basis.
The proceeds received in the sale of the Series A Preferred totaled $ i 1,180,000, for the issuance of i 1,180 Series A Preferred, plus i 354,000 warrants. The warrants were valued using a Black Scholes model, at $ i 117,131 and per the relative fair value allocation, $ i 1,073,446 was allocated to the Series A proceeds.
On September 10, 2022 we recorded an accrued dividend of $ i 70,800.
Stock-based compensation
We use the fair value method to account for stock-based compensation on the grant date. We recorded $ i 24,958 and $ i 131,836 in compensation expense for the three months ended September 30, 2022 and 2021, respectively and $ i 129,959 and $ i 194,120 for the nine months ended September 30, 2022 and 2021, respectively. This includes expense related to options issued in prior years for which the requisite service period for those options includes the current period as well as options issued in the current period. Forfeited options result in a reversal in the period forfeited. The fair value of these instruments was calculated using the Black-Scholes option pricing method.
On September 3, 2021, we modified i two employees stock options in conjunction with revised employment agreements. As a result of the modification, we recognized an additional $ i 21,525 in compensation expense during the third quarter of 2021.
/19
During the nine months ended September 30, 2022, we granted options to purchase i 250,000 common shares to directors. The options expire i five years from the date of grant and vest over a period of i one year. Fair value of the awards at the date of grants totaled $ i 56,348.
The following summarizes Employee Awards activity:
i
| | | | | | | | | | |
| | | | | | | Weighted- | | | |
| | | | Weighted- | | Average | | | | |
| | | | Average | | Remaining | | | | |
| | Number of | | Exercise Price | | Contractual | | Aggregate | ||
|
| Shares |
| per Share |
| Term (in years) |
| Intrinsic Value | ||
Outstanding as of December 31, 2021 | | i 4,903,545 | | $ | i 1.09 | | i 5.3 | | $ | i 22,000 |
Granted | | i 250,000 | | | i 0.34 | |
| |
| |
Exercised |
| — |
| | — |
|
|
| |
|
Forfeited or expired |
| ( i 216,720) |
| | i 0.87 |
|
|
| |
|
Outstanding as of September 30, 2022 |
| i 4,936,825 |
| $ | i 1.08 |
| i 4.7 | | $ | i 22,000 |
| | | | | | | | | | |
Exercisable as of September 30, 2022 |
| i 4,314,445 | | $ | i 1.16 |
| i 4.7 | | $ | i 4,000 |
As of September 30, 2022, there was approximately $ i 31,039 of total unrecognized compensation expense related to unvested employee awards, which is expected to be recognized over a weighted-average period of i one month.
On April 1, 2022 we entered into a Restricted Stock Unit Agreement with i four participants. The Restricted Stock Unit’s (“RSU”) were granted pursuant to our 2020 Omnibus Incentive Plan. i Four separate executives were each granted i 300,000 RSU’s, for a total grant of i 1,200,000 RSU’s. The i 300,000 RSU’s are divided into i three equal tranches of i 100,000 RSU’s. Each tranche of RSU will vest immediately if and upon the market price reaching a certain minimum market price of our common stock as reported on the OTCQB market. Each tranche will vest as the market price reaches $ i 1.00, $ i 2.00 and $ i 3.00. Upon the RSU’s vesting, the participant will be promptly issued shares of our common stock. If there is a change in control, all unvested RSU’s granted under this agreement will become fully vested and the vested RSU’s will be paid out or settled. The fair value of these instruments is $ i 535,976 and was calculated using the Monte Carlo model. The fair value of the RSU’s is recognized over the requisite service period. As these RSU’s do not have a service period, we used the requisite service period derived from the valuation of i 10 years. We recorded $ i 13,502 and i nil in compensation expense for the three months ended September 30, 2022 and 2021, respectively and $ i 27,004 and i nil for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, i none of the RSU’s have vested.
iNOTE 11. RELATED PARTY TRANSACTIONS
On June 3, 2020, we entered into a consulting agreement with Adam Hershey, Interim Chief Executive Officer, board member and investor, pursuant to which he would act as a strategic consultant for the Company, including providing assistance with the sourcing and evaluation of merger and acquisition deals, strategic capital, and strategic partnerships or joint ventures. Mr. Hershey is paid an initial monthly rate of $ i 8,333 for the services, subject to certain adjustments. On September 16, 2022, we entered into a new consulting agreement with Adam Hershey, in which Mr. Hershey will continue to serve as our Interim Chief Executive Officer with compensation equal to $ i 200,000 per annum, payable monthly. The term of the Consulting Agreement is for a period of i one year, with automatic i six-month renewals. In addition to the Consulting Agreement, we agreed to extend Mr. Hershey’s warrants to purchase i 7,280,007 shares of Common Stock for an additional i two years, with an expiration date of May 29, 2027. The modification of warrants were recorded as equity and equity issuance costs in the amount of $ i 367,445. We paid $ i i 24,999 / for the three months ended September 30, 2022 and 2021 and $ i i 74,997 / for the nine months ended September 30, 2022 and 2021.
On September 16, 2022, we entered into a consulting agreement with Ed Myers in which Mr. Myers will serve as our Chief Operating Officer. Mr. Myers will receive compensation expense equal to $ i 200,000 per annum, payable monthly. Payments are to start October 1, 2022.
/20
We currently have a lease agreement with Dalton Adventures, LLC in which we rent i 17,000 square feet of greenhouse space in Boulder, Colorado for $ i 29,691 a month, of which $ i 27,000 is base rent and $ i 2,691 is property taxes. The owner of Dalton Adventures, LLC is a principal shareholder and board member of the Company. We have paid approximately $ i 89,073 and $ i 115,000 in rent for the three months ended September 30, 2022 and 2021, respectively and $ i 267,219 and $ i 344,000 in rent for the nine months ended September 30, 2022 and 2021, respectively.
We had a lease agreement with Bellewood Holdings, LLC in which we rented retail space for the Trees Englewood retail store in Englewood, Colorado for $ i 11,287 per month, of which $ i 10,000 is base rent and $ i 1,287 is property taxes. The owner of Bellewood Holdings, LLC is a principal shareholder and board member of the Company. In June 2022, the building was sold to an unrelated party. We paid approximately nil of rent expense for the three months ended September 30, 2022 and 2021, respectively and $ i 52,287 and i nil for the nine months ended September 30, 2022 and 2021, respectively.
On December 23, 2020, i four of our current board members purchased senior convertible promissory notes from the Company for an aggregate amount of $ i 320,000. These notes are included in the i 10% Notes discussed in Note 7. On September 15, 2022, all i four of our current board members transferred a portion of their i 10% Note amounts and some accrued interest into the i 12% Notes discussed in Note 7. The total amount rolled was $ i 332,204. Accrued interest earned and owed to the board members was $ i 1,292 as of September 30, 2022.
iNOTE 12. SEGMENT INFORMATION
Our operations are organized into i two segments: Retail and Cultivation. All revenue originates, and all assets are located in the United States. Segment information is presented in accordance with ASC 280, "Segments Reporting." This standard is based on a management approach that requires segmentation based upon our internal organization and disclosure of revenue and certain expenses based upon internal accounting methods. Our financial reporting systems present various data for management to run the business, including internal profit and loss statements prepared on a basis not consistent with GAAP. The following information is presented net of discontinued operations.
iThree months ended September 30,
| | | | | | | | | | | | |
2022 |
| Retail |
| Cultivation |
| Eliminations | | Total | ||||
Revenues | | $ | i 3,080,778 | | $ | i 448,623 | | $ | ( i 352,224) | | $ | i 3,177,177 |
Costs and expenses | | | ( i 2,413,190) | | | ( i 849,269) | | | i 352,224 | | | ( i 2,910,235) |
Segment operating income | | $ | i 667,588 | | $ | ( i 400,646) | | $ | — | | | i 266,942 |
Corporate expenses | | | | | | | | | | | | ( i 2,971,621) |
Net loss from continuing operations before income taxes | | | | |
| | | | | | $ | ( i 2,704,679) |
| | | | | | | | | | | | |
2021 |
| Retail |
| Cultivation | | Eliminations |
| Total | ||||
Revenues | | $ | i 855,841 | | $ | i 835,719 | | $ | ( i 25,918) | | $ | i 1,665,642 |
Costs and expenses | | | ( i 891,126) | | | ( i 865,490) | | | i 9,048 | | | ( i 1,747,568) |
Segment operating income | | $ | ( i 35,285) | | $ | ( i 29,771) | | $ | ( i 16,870) | | | ( i 81,926) |
Corporate expenses | |
|
| |
|
| | | | | | ( i 1,205,064) |
Net loss from continuing operations before income taxes | | | | |
| | | | | | $ | ( i 1,286,990) |
Nine months ended September 30,
| | | | | | | | | | | | |
2022 |
| Retail |
| Cultivation |
| Eliminations |
| Total | ||||
Total revenues | | $ | i 9,536,657 | | $ | i 1,316,241 | | $ | ( i 866,686) | | $ | i 9,986,212 |
Costs and expenses | |
| ( i 7,169,103) | |
| ( i 1,971,550) | |
| i 866,686 | |
| ( i 8,273,967) |
Operating (loss) income | | $ | i 2,367,554 | | $ | ( i 655,309) | | $ | i 0 | | | i 1,712,245 |
Corporate expenses | |
| | |
|
| |
|
| |
| ( i 5,466,211) |
Net loss from continuing operations before income taxes | | | | | | | | | | | $ | ( i 3,753,966) |
/ /21
| | | | | | | | | | | | |
2021 |
| Retail |
| Cultivation |
| Eliminations |
| Total | ||||
Total revenues | | $ | i 855,841 | | $ | i 2,183,660 | |
| ( i 25,918) | | $ | i 3,013,583 |
Costs and expenses | |
| ( i 891,126) | |
| ( i 2,340,913) | |
| i 25,918 | |
| ( i 3,206,121) |
Operating income | | $ | ( i 35,285) | | $ | ( i 157,253) | | $ | — | | | ( i 192,538) |
Corporate expenses | | | | |
|
| |
|
| | | ( i 4,493,244) |
Net loss from continuing operations before income taxes | | | | | | | | | | | $ | ( i 4,685,782) |
| | | | | | |
| | September 30, | | December 31, | ||
Total assets |
| 2022 |
| 2021 | ||
Retail | | $ | i 18,991,886 | | $ | i 16,831,580 |
Cultivation | | | i 3,084,202 | | | i 3,634,406 |
Corporate | |
| i 5,775,358 | |
| i 1,709,496 |
Total assets - segments | | | i 27,851,446 | | | i 22,175,482 |
Intercompany eliminations | | | ( i 56,029) | | | ( i 151,137) |
Total assets - consolidated | | $ | i 27,795,417 | | $ | i 22,024,345 |
iNOTE 13. SUBSEQUENT EVENTS
On September 13, 2022, we entered into an Asset Purchase Agreement (“APA”) with Ancient Alternatives LLC (“Ancient”), Natural Alternatives For Life, LLC, (“Natural”), Mountainside Industries, LLC (“Mountainside”), Hillside Enterprises, LLC (“Hillside”), and GT Creations, LLC (“GT Creations”), each a Colorado limited liability company (“Green Tree Entities”), pursuant to which we agreed to purchase substantially all of the assets of the Green Tree Entities (“Green Tree Acquisition”). The purchase price in connection with the Green Tree Acquisition consists of cash equal to $ i 500,000 payable at closing; i 17,977,528 shares (“Buyer Shares”) of our common stock, par value $ i 0.01 per share (“Common Stock”), deliverable at closing; and an additional $ i 3,500,000 in cash in i fifteen (15) equal monthly payments commencing on the 9-month anniversary of the closing. The number of Buyer Shares is subject to adjustment based upon a formula specified in the APA. The APA provides that we will assume certain liabilities at closing, including certain manufacturing agreements between GT Creations and affiliates of the Green Tree Entities. The Green Tree Acquisition is subject to certain conditions, including regulatory approval of the Colorado Marijuana Enforcement Division.
As part of the Green Tree Acquisition, we have agreed, upon the closing, to enter into two-year employment agreements with each of Allyson Feiler and Loree Schwartz, equity principals of the Green Tree Entities (“Employment Agreements”). Ms. Feiler will be employed by us as its Chief Marketing Officer at an annual base salary of $ i 225,000, with an agreed one-time bonus equal to $ i 383,071.43, payable within i 30 business days following the completion of the cannabis license transfers held by Ancient, Natural, Mountainside and GT Creations. Ms. Schwartz will be employed by us as its Chief Compliance Officer at an annual base salary of $ i 150,000, also with an agreed one-time bonus equal to $ i 383,071.43, payable within i 30 business days following the completion of the cannabis license transfers held by Ancient, Natural, Mountainside and GT Creations. Both Employment Agreements also provide for severance payouts up to the full initial i two-year term in the event of a termination without ‘Cause’ or for ‘Good Reason’ (as such terms are defined therein) during the initial term. In addition, we have agreed, upon the closing, to enter into consulting agreements (“Consulting Agreements”) with each of (i) CMD Consulting Services, Inc., pursuant to which consultant will be paid a one-time consulting fee equal to $ i 47,619.05 within i 30 days following the closing of each of Ancient, Natural and Hillside; and (ii) Silverfox LLC pursuant to which consultant will be paid a one-time consulting fee equal to $ i 186,238.09 within i 30 days following the closing of each of Ancient and Natural.
On October 14, 2022, we entered into an Asset Purchase Agreement with Station 2 LLC (“Station 2”) and Timothy Brown (“Brown”), pursuant to which we agreed to purchase substantially all of the assets of Station 2 (“Station 2 Acquisition”). The purchase price in connection with the Station 2 Acquisition consists of cash equal to $ i 641,454.27, payable as follows: Cash at closing of $ i 256,581.71; and a cash amount equal to $ i 16,036.36 per month for each of the twenty-four (24) months commencing on the first full calendar month following the closing, for an additional total of $ i 384,872.56. The Station 2 Acquisition was originally disclosed as part of the ‘Trees Acquisition’ in the Company’s Form 8-K filed on April 21, 2021 (“April 2021 Form 8-K”). The Station 2 Acquisition as disclosed herein constitutes a
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material modification to the original terms disclosed in the April 2021 Form 8-K. The Station 2 Acquisition is subject to certain conditions, including regulatory approval of the Colorado Marijuana Enforcement Division.
On October 28, 2022, we entered into an Asset Purchase Agreement with GMC, LLC (“GMC”) and certain equity holders of GMC party thereto, pursuant to which we agreed to purchase substantially all of the assets of GMC, including i two cannabis licenses held by GMC, certain inventory, contracts and other related assets (“GMC Acquisition”). The purchase price in connection with the GMC Acquisition consists of cash equal to $ i 1,200,000 payable at closing; i 4,494,382 shares of our common stock, issuable to the GMC members upon closing; and an amount equal to $ i 83,333.33 per month, commencing on the 12-month anniversary of the closing, and continuing each month thereafter for a total of i 18 months, for a total additional consideration of $ i 1,500,000. The GMC Acquisition is subject to certain conditions, including regulatory approval of the Colorado Marijuana Enforcement Division.
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
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
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.
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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
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
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
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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial and Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation under the supervision and with the participation of management, including our Principal Executive Officer and Principal Financial and Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2022, the end of the period covered by this report. Based on that evaluation, our Principal Executive Officer and Principal Financial and Accounting Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2022.
Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by the Board, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
| ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| ● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures of are being made only in accordance with authorizations of our management and directors; and |
| ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. |
Because of inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
29
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during the third quarter of 2022, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, which have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 2021, we were served with a Complaint in the District Court, County of Denver, Colorado, by plaintiff 2353 SB, LLC (“Plaintiff”). We entered into a lease with Plaintiff for the premises at 2353 South Broadway, Denver, CO with a term of three (3) years to commence on November 1, 2020. Monthly lease payments were to be $12,866.66. In 2020, we made initial payments (first month’s rent and security deposit) of $39,633.32; but subsequently did not take possession of the premises and have made no further payments in respect thereof, as a direct result of the COVID-19 pandemic. The lease contains a ‘force majeure’ clause which includes a provision that neither party is liable for failure to perform its obligations under the lease which have become practicably impossible because of circumstances beyond the reasonable control of the applicable party, including ‘pandemics or outbreak of communicable disease.’
We have taken the position that our failure to take possession and make any further payments under the lease is directly related to the COVID-19 pandemic. We are vigorously defending this action and believe that the above-referenced force majeure clause presents a complete defense to Plaintiff’s claims.
We filed a motion to dismiss; both parties also filed motions for summary judgment. In October 2022, the court denied our motion to dismiss on the basis that Plaintiff sufficiently pled facts that raise a plausible claim for relief, notwithstanding our possible defenses. The court did not rule on either motion for summary judgment. On November 14, 2022, we timely filed a formal answer to the complaint, denying each of Plaintiff’s substantive claims. We also asserted appropriate affirmative defenses, including the force majeure clause of the lease, which provides that we are not liable under the lease in the event of a variety of events outside our control, including “pandemics.” In addition, we have asserted a counterclaim against the Plaintiff for breach of contract to recover the initial payments made under the lease as well as attorneys’ fees and costs.
ITEM 1A. RISK FACTORS
As of the date of this report, there have been no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
Exhibits |
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|
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10.1 | |
10.2 | |
10.3 | |
10.4 | |
10.5 | |
10.6 | |
10.7 | |
10.8 | |
10.9 | |
10.10 | |
10.11 | |
10.12 | |
10.13 | |
10.14 | |
10.15 | |
10.16 | |
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
99.1 | |
99.2 | |
99.3 | |
101.INS | Inline XBRL Instance Document |
101.SCH | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TREES CORPORATION | |
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| |
Date: November 14, 2022 | | /s/ Adam Hershey |
| | Adam Hershey, Interim Chief Executive Officer |
| | Principal Executive Officer |
| | |
| | /s/ Jessica Bast |
| | Jessica Bast, Chief Financial Officer |
| | Principal Financial and Accounting Officer |
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| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 5/29/27 | ||||
| 9/16/26 | ||||
| 4/20/24 | ||||
| 2/8/24 | ||||
| 12/23/23 | ||||
| 12/15/23 | ||||
| 1/1/23 | ||||
| 12/31/22 | ||||
| Filed on: | 11/14/22 | |||
| 11/7/22 | ||||
| 10/28/22 | 8-K | |||
| 10/14/22 | 8-K | |||
| 10/1/22 | ||||
| For Period end: | 9/30/22 | |||
| 9/16/22 | ||||
| 9/15/22 | ||||
| 9/13/22 | 8-K | |||
| 9/10/22 | ||||
| 7/1/22 | 4 | |||
| 6/8/22 | 8-K, DEF 14A, PRE 14A | |||
| 4/1/22 | 4 | |||
| 3/25/22 | 10-K | |||
| 1/6/22 | 8-K | |||
| 1/5/22 | ||||
| 1/1/22 | ||||
| 12/31/21 | 10-K, 10-K/A, 4 | |||
| 12/30/21 | 8-K, 8-K/A | |||
| 9/30/21 | 10-Q, 4 | |||
| 9/14/21 | 8-K | |||
| 9/10/21 | 8-K | |||
| 9/3/21 | 8-K | |||
| 9/2/21 | 8-K, 8-K/A | |||
| 8/2/21 | ||||
| 7/16/21 | 8-K | |||
| 7/1/21 | 4 | |||
| 5/28/21 | ||||
| 4/21/21 | 4, 8-K | |||
| 4/20/21 | 4 | |||
| 2/8/21 | 8-K | |||
| 1/1/21 | ||||
| 12/31/20 | 10-K, 10-K/A, NT 10-K | |||
| 12/23/20 | 4, 8-K, SC 13D/A | |||
| 12/15/20 | 3, 4 | |||
| 11/23/20 | 8-K, DEF 14A, PRE 14A | |||
| 11/1/20 | ||||
| 6/3/20 | 8-K | |||
| 1/1/20 | ||||
| 12/31/19 | 10-K, 10-K/A, 8-K | |||
| 5/31/19 | 8-K | |||
| 6/26/15 | ||||
| 6/3/13 | ||||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 11/03/22 TREES Corp. (Colorado) 8-K:1,9 10/28/22 11:538K Toppan Merrill Bridge/FA 10/19/22 TREES Corp. (Colorado) 8-K:1,9 10/14/22 12:491K Toppan Merrill Bridge/FA 9/19/22 TREES Corp. (Colorado) 8-K:1,2,3,5 9/13/22 23:2.1M Toppan Merrill Bridge/FA 8/26/22 TREES Corp. (Colorado) 8-K/A:9 12/30/21 13:703K Toppan Merrill Bridge/FA 8/26/22 TREES Corp. (Colorado) 8-K/A:9 9/02/21 12:428K Toppan Merrill Bridge/FA |