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TREES Corp (Colorado) - Quarter Report: 2023 March (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended March 31, 2023.

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:  000-54457

TREES CORPORATION

(Exact name of registrant as specified in its charter)

Colorado

    

90-1072649

(State of incorporation)

(IRS Employer Identification No.)

215 Union Boulevard, Suite 415
Lakewood, CO 80228

(Address of principal executive offices) (Zip Code)

(303) 759-1300

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

Ticker symbol

N/A

N/A

N/A

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. 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). 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

Non-accelerated filer

Smaller reporting company

Emerging growth company

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    No þ

As of May 22, 2023, there were 118,664,094 issued and outstanding shares of the Company's common stock.

Table of Contents

TREES CORPORATION

FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

3

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

29

Item 4.

Controls and Procedures

29

PART II. OTHER INFORMATION

30

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Defaults Upon Senior Securities

30

Item 4.

Mine Safety Disclosures

30

Item 5.

Other Information

30

Item 6.

Exhibits

31

Signatures

32

2

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TREES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2023

December 31, 2022

(unaudited)

Assets

 

  

 

  

Current assets

 

  

 

  

Cash and cash equivalents

$

1,460,162

$

2,583,833

Accounts receivable, net of allowance of $42,000, respectively

 

62,841

 

41,373

Inventories

2,413,115

2,066,662

Prepaid expenses and other current assets

 

262,633

 

259,598

Total current assets

 

4,198,751

 

4,951,466

Right-of-use operating lease asset

4,029,769

3,866,406

Property and equipment, net

1,888,239

1,947,969

Intangible assets, net

2,925,631

2,543,898

Goodwill

18,384,974

18,384,974

Total assets

$

31,427,364

$

31,694,713

Liabilities and Stockholders' Equity

 

 

Current liabilities

 

 

Accounts payable and accrued expenses

$

2,627,318

$

1,899,450

Interest payable

 

909,699

 

488,813

Income tax payable

290,659

204,917

Operating lease liability, current

843,431

1,433,184

Finance lease liability, current

60,008

55,777

Accrued stock payable

 

60,900

 

60,900

Accrued dividends

106,200

88,500

Warrant derivative liability

 

4,201

 

5,508

Notes payable - current

1,879,173

1,903,344

Total current liabilities

 

6,781,589

 

6,140,393

Operating lease liability, non-current

3,314,127

2,541,590

Finance lease liability, non-current

689,497

706,653

Notes payable - non-current (net of unamortized discount)

16,112,500

15,899,588

Total liabilities

26,897,713

25,288,224

Commitments and contingencies (Note 10)

Stockholders’ equity

 

  

 

  

Preferred stock, no par value; 5,000,000 shares authorized; 1,180 issued and outstanding, respectively

1,073,446

1,073,446

Common stock, $0.001 par value; 200,000,000 shares authorized; 118,664,094 shares issued and outstanding, respectively

118,664

118,664

Additional paid-in capital

 

98,626,157

 

98,598,761

Accumulated deficit

 

(95,288,616)

 

(93,384,382)

Total stockholders’ equity

 

4,529,651

 

6,406,489

Total liabilities and stockholders’ equity

$

31,427,364

$

31,694,713

See Notes to unaudited condensed consolidated financial statements.

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TREES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three months ended March 31, 

2023

2022

Revenue

Retail sales

$

5,110,619

$

3,297,546

Cultivation sales

275,762

Total revenue

5,110,619

3,573,308

Costs and expenses

Cost of sales

3,057,714

2,074,888

Selling, general and administrative

2,296,240

1,326,116

Stock-based compensation

27,396

76,117

Professional fees

607,544

281,384

Depreciation and amortization

292,842

231,846

Total costs and expenses

6,281,736

3,990,351

Operating loss

(1,171,117)

(417,043)

Other expenses (income)

Amortization of debt discount

181,677

214,281

Interest expense

449,311

174,351

(Gain) loss on derivative liability

(1,307)

60,664

Total other expenses, net

629,681

449,296

Net loss from continuing operations before income taxes

(1,800,798)

(866,339)

Provision for income taxes

85,736

Loss from continuing operations

(1,886,534)

(866,339)

Income from discontinued operations, net of tax

5,283

Net loss

$

(1,886,534)

$

(861,056)

Accrued preferred stock dividend

(17,700)

Net loss attributable to common stockholders

$

(1,904,234)

$

(861,056)

Per share data - basic and diluted

Net loss from continuing operations per share

$

(0.02)

$

(0.01)

Net loss from discontinued operations per share

$

0.00

$

0.00

Net loss attributable to common stockholders per share

$

(0.02)

$

(0.01)

Weighted average number of common shares outstanding

118,664,094

95,749,505

See Notes to unaudited condensed consolidated financial statements.

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TREES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Three months ended March 31, 

2023

2022

Cash flows from operating activities

  

 

  

Net loss

$

(1,886,534)

$

(861,056)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

  

 

Amortization of debt discount and equity issuance costs

 

181,677

 

214,281

Depreciation and amortization

 

292,842

 

231,846

Non-cash lease expense

19,421

298,484

Bad debt expense

(5,085)

(Gain) loss on derivative liability

 

(1,307)

 

60,664

Stock-based compensation

 

27,396

 

76,117

Changes in operating assets and liabilities, net of acquisitions

 

 

Accounts receivable

 

(21,468)

 

13,892

Prepaid expenses and other assets

 

(3,035)

 

(17,142)

Inventories

 

(346,453)

 

(59,278)

Income taxes

85,742

Accounts payable, accrued liabilities, and interest payable

1,148,754

370,074

Operating lease liabilities

(277,574)

Net cash (used in) provided by operating activities

 

(502,965)

 

45,223

Cash flows from investing activities

 

  

 

  

Purchase of property and equipment

 

(24,310)

 

(8,571)

Acquisition of Station 2 assets

(256,582)

Proceeds on notes receivable

75,000

Acquisition of Trees MLK

(256,582)

Net cash used in investing activities

 

(280,892)

 

(190,153)

Cash flows from financing activities

 

  

 

Payments on notes payable and finance lease

(339,814)

(258,057)

Net cash used in financing activities

 

(339,814)

 

(258,057)

Net decrease in cash and cash equivalents

 

(1,123,671)

 

(402,987)

Cash and cash equivalents, beginning of period

 

2,583,833

 

2,054,050

Cash and cash equivalents, end of period

$

1,460,162

$

1,651,063

Supplemental schedule of cash flow information

 

  

 

  

Cash paid for interest

$

28,425

$

1,851

Cash paid for taxes

$

6

$

Non-cash investing & financing activities

 

  

 

  

Non-cash debt issuance for acquisition of Station 2 assets

$

333,953

$

Issuance of accrued stock

$

17,700

$

383,994

See Notes to unaudited condensed consolidated financial statements.

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TREES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY

For the three months ended March 31, 2023

Preferred Stock

Common Stock

Additional

Accumulated

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-in Capital

    

Deficit

    

Total

January 1, 2023

    

1,180

$

1,073,446

118,664,094

    

$

118,664

    

$

98,598,761

    

$

(93,384,382)

    

$

6,406,489

Share-based compensation

27,396

27,396

Dividends on preferred stock

(17,700)

(17,700)

Net loss

 

 

 

 

(1,886,534)

 

(1,886,534)

March 31, 2023

 

1,180

$

1,073,446

118,664,094

$

118,664

$

98,626,157

$

(95,288,616)

$

4,529,651

For the three months ended March 31, 2022

Preferred Stock

Common Stock

Additional

Accumulated

Shares

    

Amount

Shares

Amount

Paid-in Capital

Deficit

Total

January 1, 2022

1,180

$

1,073,446

89,551,993

    

$

89,550

    

$

92,265,392

    

$

(83,820,815)

    

$

9,607,573

Common stock issue for acquisition of Trees Waterfront LLC

1,669,537

 

1,670

 

382,324

 

 

383,994

Common stock issued for acquisition of Trees MLK LLC

4,970,654

4,971

1,337,105

1,342,076

Share-based compensation

76,117

76,117

Net loss

(861,056)

(861,056)

March 31, 2022

1,180

$

1,073,446

96,192,184

$

96,191

$

94,060,938

$

(84,681,871)

$

10,548,704

See Notes to unaudited condensed consolidated financial statements.

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TREES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1.  NATURE OF OPERATIONS, HISTORY, AND PRESENTATION

Nature of Operations

TREES Corporation, a Colorado Corporation (the “Company,” “we,” “us,” or “our,”) is a cannabis retailer and cultivator in the States of Colorado and Oregon.

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

Englewood, Colorado

o

5005 S. Federal Boulevard – Recreational license only

Two (2) in Denver, Colorado

o

468 S. Federal Boulevard – Recreational license only

o

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

Longmont, Colorado

o

12626 N. 107th Street (formerly Green Tree/Ancient Alternatives) – Medical and Recreational licenses

Berthoud, Colorado

o

1090 N. 2nd Street (formerly Green Tree/Natural Alternatives for Life) – Medical and Recreational licenses

Three (3) in Oregon

o

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

o

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

o

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

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

SevenFive Farm – 3705 N. 75th Street, Boulder – Retail cultivation license only

6859 N. Foothills Highway D-300 (formerly Green Tree/Ancient Alternatives) – Medical and Retail cultivation licenses

6859 N. Foothills Highway C-100 (formerly Green Tree/Mountainside Industries) – Medical and Retail cultivation licenses

6859 N. Foothills Highway E-100 (formerly Green Tree/Hillside Enterprises) – Retail cultivation license only

1090 N. 2nd Street (formerly Green Tree/Natural Alternatives for Life) – Medical cultivation license only

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

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 $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. Pursuant to amendment, the buyer paid the additional $75,000 in March 2022, and the 10% profit share described above was eliminated.

Basis 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, 2022, 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 audited consolidated financial statements and notes thereto of the Company for the year ended December 31, 2022, which were included in the annual report on Form 10-K filed by the Company on April 17, 2023.

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 months ended March 31, 2023, are not necessarily indicative of the operating results for the year ending December 31, 2023, 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.

8

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Reclassifications

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.

Use 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.

Concentrations 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 March 31, 2023, 88% of SevenFive’s revenue was with three customers. During the three months ended March 31, 2022, 45% of SevenFive’s revenue was with one customer.  The customers in both 2023 and 2022 are related party dispensaries and the revenues associated with these customers are eliminated in consolidation.

During the three months ended March 31, 2023, 88% of Green Tree’s revenue was with three customers. The customers in 2023 are related party dispensaries and the revenues associated with these customers are eliminated in consolidation.

Going Concern

We incurred net losses of $1,886,534 during the three months ended March 31, 2023, and $861,056 for the three months ended March 31, 2022, and had an accumulated deficit of $95,288,616 as of March 31, 2023. We had cash and cash equivalents of $1,460,162 and $2,583,833 as of March 31, 2023, and December 31, 2022, 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 fund operations, support our planned investing activities, and repay our debt obligations as they become due. 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.

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Summary of Significant Accounting Policies

See our Annual Report on Form 10-K for the year ended December 31, 2022, for discussion of the Company's significant accounting policies.

Recently 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. We adopted this ASU in the first quarter of 2022, and the adoption did not have a material effect on our financial statements.

NOTE 2. BUSINESS ACQUISITION

On December 12, 2022, we completed the Green Tree Acquisition which consisted of the acquisition of substantially all of the assets of Ancient Alternatives LLC, Natural Alternatives For Life, LLC, Mountainside Industries, LLC, Hillside Enterprises, LLC, and GT Creations, LLC, each a Colorado limited liability company (collectively, the "Green Tree Entities”). We assumed certain operating obligations at closing, including certain manufacturing agreements between GT Creations and affiliates of the Green Tree Entities. Allyson Feiler, a principal owner of the Green Tree Entities, was also elected to our Board of Directors effective the date of acquisition.

We paid cash in the amount of $500,000 and stock consideration of 17,977,528 shares of our Common Stock. The closing price of our Common Stock on December 12, 2022, the date of license transfer, was $0.165 per share, as such, fair value of the equity consideration is $2,966,292. An additional $3,500,000 in cash will be paid to the sellers in fifteen (15) equal monthly payments commencing on the 9-month anniversary of the closing. Based on a discount rate of 12%, the fair value of these additional monthly payments is approximately $3,017,510. This liability is included in Notes payable- current and Notes payable- non-current in the accompanying consolidated balance sheets.

The table below reflects the Company’s preliminary estimates of the acquisition date fair values of the assets acquired.

Cash

    

$

3,928

Inventory

1,588,454

Fixed assets

688,655

Tradename

950,000

Goodwill

 

3,255,679

$

6,486,716

We have not completed the allocation of the purchase price for the Green Tree Acquisition. As of March 31, 2023, the consolidated balance sheet includes a preliminary allocation of fixed assets, inventory, intangible assets, and goodwill. Management anticipates completing the purchase price allocation as soon as possible, but no later than one year from the acquisition date.

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The accompanying consolidated financial statements include the results of the Green Tree Entities from the date of acquisition for financial reporting purposes, December 12, 2022. The pro forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2022, are as follows:

    

Three months ended

March 31, 

2023

2022

Total revenues

$

$

5,976,828

Net income (loss) attributable to Common Stockholders

$

$

(854,259)

Net income (loss) per common share

$

$

(0.01)

Weighted average number of basic and diluted common shares outstanding

113,727,033

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, 2022, or to project potential operating results as of any future date or for any future periods.

On December 19, 2022, we completed the Green Man Acquisition, consisting of the acquisition of substantially all of the assets of Green Man. We paid cash in the amount of $1,225,000 and stock consideration of 4,494,382 shares of Common Stock. The closing price of our Common Stock on December 19, 2022, the date of license transfer, was $0.18 per share, as such, fair value of the equity consideration is $808,989. An additional $1,500,000 in cash will be paid to the sellers in eighteen (18) equal monthly payments commencing on the 12-month anniversary of the closing. Based on a discount rate of 12%, the fair value of these additional monthly payments is approximately $1,224,846. This liability is included in Notes payable-current and Notes payable-non-current in the accompanying consolidated balance sheets.

The table below reflects the Company’s preliminary estimates of the acquisition date fair values of the assets acquired:

Cash

    

$

8,594

Inventory

108,543

Fixed assets

23,500

Tradename

150,000

Goodwill

 

2,968,198

$

3,258,835

We have not completed the allocation of the purchase price for the Green Man Acquisition. As of March 31, 2023, the consolidated balance sheet includes a preliminary allocation of fixed assets, inventory, intangible assets, and goodwill. Management anticipates completing the purchase price allocation as soon as possible, but no later than one year from the acquisition date.

The accompanying consolidated financial statements include the results of Green Man from the date of acquisition for financial reporting purposes, December 19, 2022. The pro forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2022, are as follows:

    

Three months ended

March 31, 

2023

2022

Total revenues

$

$

5,010,218

Net income (loss) attributable to Common Stockholders

$

$

(950,487)

Net income (loss) per common share

$

$

(0.01)

Weighted average number of basic and diluted common shares outstanding

100,243,887

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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, 2022, or to project potential operating results as of any future date or for any future periods.

NOTE 3. ASSET ACQUISITION

In February 2023, we completed the acquisition of the assets of Station 2, LLC. The assets consist of a medical and retail cannabis license for a dispensary located in Denver, CO. We also assumed responsibility of the operating lease for the dispensary and recorded the relating ROU asset which is disclosed separately on the accompanying consolidated balance sheets. The consideration paid by the Company consists of cash at closing equal to $256,582 plus an additional $385,873 in twenty-four (24) equal monthly payments commencing May 2023. As the dispensary was not in operation and there was no assembled workforce at the time of acquisition, the acquisition was accounted for as an asset acquisition of a license. As of March 31, 2023, the balance of the license was $580,694, which is recorded within Intangible assets, net in our condensed consolidated balance sheets.

NOTE 4. 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 $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. Pursuant to amendment, the buyer paid the additional $75,000 in March 2022, and the 10% profit share described above was eliminated.

A summary of the discontinued operations for the Operations Segment is presented as follows:

Three months ended

March 31, 

    

2023

    

2022

Product revenues

$

$

3,438

    

Service revenues

Total revenues

3,438

Cost of sales

 

 

Selling, general and administrative

 

 

(1,845)

Professional fees

 

 

Depreciation and amortization

Total costs and expenses

 

 

(1,845)

Income from discontinued operations

$

$

5,283

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NOTE 5. INVENTORIES, NET

Our inventories consisted of the following:

March 31, 

December 31, 

    

2023

    

2022

Raw materials

$

8,883

$

8,883

Work-in-progress and finished goods

2,404,232

2,057,779

Inventories

$

2,413,115

$

2,066,662

NOTE 6. LEASES

The Company’s leases consist primarily of real estate leases for retail, cultivation, and manufacturing facilities.

All but one of the Company’s leases are classified as operating leases. The lease for the retail dispensary acquired in the Green Man Transaction is classified as a finance lease. The current and non-current portions of the operating lease liabilities and finance lease liabilities are disclosed separately on the accompanying consolidated balance sheets. The finance lease ROU asset is included in property and equipment, net and the operating lease ROU asset is disclosed separately on the accompanying consolidated balance sheets. As the rate implicit in the Company’s leases is not readily determinable, we used an estimated incremental borrowing rate of 20% in determining the present value of lease payments.

The operating lease expense for the three months ended March 31, 2023, and March 31, 2022, is as follows:

For the three months ended March 31,

    

2023

    

2022

Straight-line operating lease expense

$

393,265

$

192,016

Variable lease cost

202,826

15,282

Total operating lease expense

$

596,091

$

207,298

The finance lease expense for the three months ended March 31, 2023, and March 31, 2022, was approximately $50,000 and nil, respectively.

Related party leases

As of March 31, 2023, three of the Company’s operating leases, one retail dispensary lease, one cultivation facility lease, and one lease that includes both cultivation and retail, are related party leases as the landlords are current, and former, board members, principal shareholders, or employees. During the three months ended Mach 31, 2022, the related party operating leases consisted of one dispensary and one cultivation facility. The retail dispensary lease was with a related party through May 2022, when the building was sold to an unaffiliated third-party. As of March 31, 2023, the ROU asset, operating lease liability, current, and operating lease liability, non-current for the related party leases were $1,002,335, $529,299, and $539,267, respectively. For the periods ended March 31, 2023 and 2022, the total lease expense for related party leases was $127,790 and $147,937, respectively.

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Lease Maturities

Future remaining minimum lease payments were as follows:

Year ending December 31, 

    

Operating leases

Finance lease

2023 (remaining nine months)

$

1,184,542

$

150,000

2024

 

1,617,657

 

205,400

2025

 

1,309,970

 

171,043

2026

 

846,823

 

136,940

2027

507,871

143,102

Thereafter

 

965,354

 

818,100

Total

 

6,432,217

 

1,624,585

Less: Present value adjustment

 

(2,274,659)

 

(875,080)

Lease liability

4,157,558

749,505

Less: Lease liability, current

(843,431)

(60,008)

Lease liability, non-current

$

3,314,127

$

689,497

The total remaining lease payments in the table above include $2,995,100 related to renewal option periods that management is reasonably certain will be exercised. The majority of this amount relates to the flagship Trees location in Englewood, Colorado and the retail and certain cultivation facilities that were acquired in the Green Tree Acquisition and are eligible for renewal in 2023.

As of March 31, 2023, the weighted average remaining term of the Company’s operating leases is 4.5 years, and the remaining term on the finance lease is 9.75 years.

None of the Company’s leases contain residual value guarantees or restrictive covenants.

Supplemental cash flow information

For the three months ended March 31,

    

2023

    

2022

Supplemental cash flow information

Cash paid for amounts included in operating lease liability

$

373,840

$

170,276

Cash paid for amounts included in finance lease liability

$

50,000

$

Supplemental lease disclosures of non-cash transactions:

ROU assets obtained in exchange for operating lease liabilities

$

348,825

$

172,053

NOTE 7. ACCRUED STOCK PAYABLE

The following tables summarize the changes in accrued common stock payable:

Number of

    

Amount

    

Shares

Balance as of December 31, 2021

$

444,894

1,769,537

Stock issued

(383,994)

(1,669,537)

Balance as of December 31, 2022

$

60,900

100,000

Stock issued

Balance as of March 31, 2023

$

60,900

100,000

In December 2021, we completed the acquisition of Trees Waterfront. As part of the transaction, we granted 1,669,537 shares of our common stock. The stock was issued on January 6, 2022.

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The outstanding balance of accrued stock payable as of March 31, 2023 relates to a February 18, 2020 grant of 100,000 fully vested shares for consulting services. Based on a stock price of $0.61 on the date of grant, the consultant will receive $60,900 worth of our Common Stock. As of March 31, 2023, none of the stock has been issued.

NOTE 8.   NOTES PAYABLE

Our notes payable consisted of the following:

March 31, 2023

December 31, 2022

Third-party

Related-party

Total

Third-party

Related-party

Total

2022 12% Notes

$

13,167,796

$

332,204

$

13,500,000

$

13,167,796

$

332,204

$

13,500,000

2023 12% Notes

384,873

384,873

Trees Transaction Notes

864,977

864,977

1,191,865

1,191,865

Green Tree Acquisition Notes

774,750

2,725,250

3,500,000

774,750

2,725,250

3,500,000

Green Man Acquisition Notes

1,500,000

1,500,000

1,500,000

1,500,000

Unamortized debt discount

(1,399,890)

(358,287)

(1,758,177)

(1,527,346)

(361,587)

(1,888,933)

Total debt

14,042,656

3,949,017

17,991,673

13,915,200

3,887,732

17,802,932

Less: Current portion

(466,853)

(1,412,320)

(1,879,173)

(179,827)

(1,723,517)

(1,903,344)

Long-term portion

$

13,575,803

$

2,536,697

$

16,112,500

$

13,735,373

$

2,164,215

$

15,899,588

Trees Transaction Notes

In January 2022, with the completion of the Trees MLK acquisition, we are obligated to pay the Seller cash equal to $384,873 in equal month installments over a period of 24 months. The payments began on June 15, 2022 and the payment is equal to $16,036 per month.

In December 2022, with the completion of the Green Tree Acquisition, we are obligated to pay the Seller cash equal to $3,500,000 in equal month installments over a period of 15 months. The payments begin in September 2023, and the payment is equal to $233,333 per month. The relative fair value of this obligation resulted in a debt discount of $512,367. We recorded amortization of debt discount expense from this obligation of $61,016 and nil for the three months ended March 31, 2023 and March 31, 2022, respectively.

In December 2022, with the completion of the Green Man Acquisition, we are obligated to pay the Seller cash equal to $1,500,000 in equal month installments over a period of 18 months. The payments begin in December 2023 and the payment is equal to $83,333 per month. The relative fair value of this obligation resulted in a debt discount of $275,154. We recorded amortization of debt discount expense from this obligation of $37,250 and nil for the three months ended March 31, 2023 and March 31, 2022, respectively.

12% Notes

On September 15, 2022, we entered into a Securities Purchase Agreement with certain accredited investors (the “12% Investors”), pursuant to which we agreed to issue and sell senior secured convertible notes (the “12% Notes”) with an aggregate principal amount of $13,500,000 to such 12% Investors, in exchange for payment by certain 12% Investors of an aggregate amount of $10,587,250 in cash, as well as cancellation of outstanding indebtedness in the aggregate amount of $2,912,750 represented by the 10% Notes discussed below.

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In connection with the 12% Notes, the 12% Investors received warrants (the “12% Warrants”) to purchase shares of our common stock equal to 20% coverage of the aggregate principal amount with an exercise price of $0.70 per share, which equals an aggregate of warrants to purchase 3,857,150 shares of Common Stock. The lead 12% Investor received an additional 10% warrant coverage on the aggregate principal amount of 12% Notes for total additional warrants to purchase 1,928,571 shares of Common Stock. The lead 12% Investor also will receive a five percent fee on the aggregate principal amount of the 12% Notes. This total fee in the amount of $675,000 was recorded as a debt discount and will be amortized over the life of the loan. The 12% Notes bear interest at an annual rate of 12% and will mature on September 16, 2026. The 12% Investors have the option to convert up to 50% of the outstanding unpaid principal and accrued interest of the 12% Notes into Common Stock at a fixed conversion price equal to $1.00 per share.

The relative fair value of the new funding on the 12% Warrants was recorded as a debt discount and additional paid-in capital of $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 $103,577. We recorded amortization of debt discount expense from the 12% Notes of $76,699 and nil for the three months ended March 31, 2023 and 2022, respectively. We determined there was no beneficial conversion feature on the 12% Notes issued. The 12% 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 12% Warrants as of September 15, 2022, were:

Current stock price

    

$

0.20

Exercise price

$

0.70

Risk-free interest rate

3.66%

Expected dividend yield

Expected term (in years)

5.0

Expected volatility

107%

In connection with the acquisition of Station 2, LLC in February 2023, we agreed to issue and sell an additional 12% Note with an aggregate principal amount of $385,873, payable in twenty-four equal monthly payments commencing in May 2023. The relative fair value of this 12% Note resulted in a debt discount of $50,918. We recorded amortization of debt discount expense from this Note of $6,712 for the three months ended March 31, 2023. This 12% Note is treated as conventional debt.

10% Notes

In December 2020, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement’) with certain accredited investors (the “10% Investors”), pursuant to which we issued and sold senior convertible promissory notes (the “10% Notes”) with an aggregate principal amount of $2,940,000 in exchange for payment to us by certain 10% Investors of an aggregate amount of $1,940,000 in cash, as well as cancellation of outstanding indebtedness of previously issued 15% notes in the aggregate amount of $1,000,000. In connection with the issuance of the 10% Notes, the holders of the 10% Notes received warrants (the “10% Warrants”) to purchase shares of our common stock equal to 20% coverage of the aggregate principal amount at $0.56 per share. In the aggregate, this equals 1,050,011 shares of our common stock. The 10% Notes bear interest at an annual rate of 10% and will mature on December 23, 2023. The 10% Investors have the option at any time to convert up to 50% of the outstanding unpaid principal and accrued interest of the 10% Notes into Common Stock at a variable price of 80% of the market price but no less than $0.65 per share and no more than $1.00 per share. The 10% Warrants are exercisable at an exercise price of $0.56 per warrant.

The relative fair value of the new funding on the 10% Warrants was recorded as a debt discount and additional paid-in capital of $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 $131,000. We recorded amortization of debt discount expense from the 10% Notes of nil and $21,393 for the three months ended March 31, 2023 and 2022. We determined there was no beneficial conversion feature on the 10% Notes issued in December 2020. The 10% Notes are treated as conventional debt.

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For purposes of determining the debt discount, the underlying assumptions used in the Black-Scholes model to determine the fair value of the 10% Warrants as of December 23, 2020, were:

Current stock price

    

$

0.53

Exercise price

$

0.56

Risk-free interest rate

0.38%

Expected dividend yield

Expected term (in years)

5.0

Expected volatility

115%

On February 8, 2021, we entered into a Securities Purchase Agreement with an accredited 10% Investor, pursuant to which we issued and sold 10% Notes with an aggregate principal amount of $1,660,000 to such 10% Investor.  The 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 10% Notes, the holder received warrants to purchase shares of our common stock equal to 20% coverage of the aggregate principal amount at $0.56 per share. In the aggregate, this equals 592,858 shares of our common stock with a par value $0.001 per share. The 10% Notes bear interest at an annual rate of 10% and will mature on February 8, 2024.  The 10% Investor has the option to convert up to 50% of the outstanding unpaid principal and accrued interest of the 10% Notes into Common Stock at a variable price of 80% of the market price but no less than $0.65 per share and no more than $1.00 per share. The 10% Warrants are exercisable at an exercise price of $0.56 per warrant.

The relative fair value of the new funding on the 10% Warrants was recorded as a debt discount and additional paid-in capital of $429,300. We determined that this 10% Note had a beneficial conversion feature and is calculated at its intrinsic value (that is, the difference between the effective conversion price of $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 $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 $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 February 2021 10% Notes of nil and $69,603 for the three months ended March 31, 2023 and 2022, respectively. The 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 10% Warrants as of February 8, 2021, were:

Current stock price

    

$

1.12

Exercise price

$

0.56

Risk-free interest rate

0.48%

Expected dividend yield

Expected term (in years)

5.0

Expected volatility

118%

On April 20, 2021, we entered into a Securities Purchase Agreement with accredited 10% Investors, pursuant to which we issued and sold 10% Notes with an aggregate principal amount of $2,300,000 to such 10% Investors. The 10% Notes are part of an over-allotment approved by the existing noteholders in connection with the original convertible note offering of $4,600,000 consummated on December 23, 2020, and February 8, 2021. In connection with the issuance of the 10% Notes, each holder received warrants to purchase shares of our common stock equal to 20% coverage of the aggregate principal amount at $0.56 per share, except that the warrants coverage to one Investor acting as lead investor in the raise received approximately 35.5% of the aggregate principal amount invested. The 10% Notes bear interest at an annual rate of 10% and will mature on April 20, 2024. The 10% Investors have the option to convert up to 50% of the outstanding unpaid principal and accrued interest of the 10% Notes into Common Stock at a variable price of 80% of the market price but no less than $0.65 per share and no more than $1.00 per share. The 10% Warrants are exercisable at an exercise price of $0.56 per warrant.

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The relative fair value of the new funding on the 10% Warrants was recorded as a debt discount and additional paid-in capital of $810,000. We determined that these 10% Notes had a beneficial conversion feature and is calculated at its intrinsic value (that is, the difference between the effective conversion price of $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 $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 $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 April 2021 10% Notes of nil and $123,285 for the three months ended March 31, 2023 and 2022. The 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 10% Warrants as of April 20, 2021, were:

Current stock price

    

$

0.83

Exercise price

$

0.56

Risk-free interest rate

0.81%

Expected dividend yield

Expected term (in years)

5.0

Expected volatility

115%

In September 2022, $2,912,750 of the 10% Notes were exchanged for the 12% Notes (see above) and the remaining $3,987,250 was paid in full. Of the remaining debt discount, $207,045 was expensed to extinguishment of debt and $1,125,844 was expensed to amortization of debt discount.

NOTE 9. WARRANT DERIVATIVE LIABILITY

On May 31, 2019, we received gross proceeds of $3 million by issuing three million shares of our common stock and three million warrants (“2019 Warrants”) to purchase shares of our common stock (“2019 Units”) in a registered direct offering for $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 $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 $0.45 per share and the number of shares subject to the 2019 Warrants increased to 8,666,666 shares of common stock as of December 31, 2019. In May 2020, we issued securities at a price lower than the $0.45 per share above. As a result, the exercise price of the 2019 Warrants decreased to $0.3983 per share and the number of shares subject to the 2019 Warrants increased to 9,591,614 shares of common stock.

During the first quarter of 2021 the warrant holders exercised 1,323,000 warrants into 747,208 shares of our common stock through cashless exercise. We recorded an adjustment to the derivative liability of $1,523,117 as a result.

During the three months ended March 31, 2023, and 2022, we recognized a $1,307 gain and $60,664 loss on the change in fair value of the derivative liability, respectively. As of March 31, 2023, there were 322,807 of the 2019 Warrants outstanding.

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The following are the key assumptions that were used to determine the fair value of the 2019 Warrants

March 31, 

December 31, 

 

2023

2022

 

Number of shares underlying the warrants

322,807

322,807

Fair market value of stock

$

0.16

$

0.15

Exercise price

$

0.40

$

0.40

Volatility

73

%

 

78

%

Risk-free interest rate

4.64

%

 

3.99

%

Warrant life (years)

1.16

 

1.41

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:

March 31, 

    

2023

    

2022

Beginning balance

$

5,508

$

28,317

Warrant exercise

Change in fair value of warrants derivative liability

(1,307)

60,664

Ending balance

$

4,201

$

88,981

NOTE 10.  COMMITMENTS AND CONTINGENCIES

From time to time, the Company is a party to various litigation matters incidental to the conduct of its business. The Company is not presently a party to any legal proceedings that would have a material adverse effect on its business, operating results, financial condition, or cash flows, except as set forth below.

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 $12,867. In 2020, we made initial payments (first month’s rent and security deposit) of $39,633; 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 or a motion for summary judgment in the alternative. Plaintiff filed a response and cross-motion for summary judgment thereafter. In October 2022, the court denied the motion to dismiss on the basis that Plaintiff sufficiently pled facts that raise a plausible claim for relief, notwithstanding our possible defenses, but has not specifically made any rulings on either party’s 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. The trial is currently scheduled for September 2023.

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NOTE 11.  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 $0.001 per share. The total number of Units sold was 1,180. Each Unit consists of one share of Series A Preferred and 354,000 Preferred Warrants. The purchase price of each Unit was $1,000, for an aggregate amount sold of $1,180,000. Each share of Series A Preferred is convertible into 1,000 shares of common stock upon the consummation of a capital raise of not less than $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 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 – 5,000
Voting Rights – None
Dividends – 6% per annum, ‘paid in kind’ in shares of Series A Preferred
Conversion – Each share of Series A Preferred is mandatorily convertible into 1,000 shares of common stock upon a minimum capital raise of $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 five-year term and an exercise price per Preferred Warrant share of $1.05. The warrants contain an anti-dilution provision pursuant to which upon a future capital raise at less than $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 $1,180,000, for the issuance of 1,180 Series A Preferred, plus 354,000 warrants. The warrants were valued using a Black Scholes model, at $117,131 and per the relative fair value allocation, $1,073,446 was allocated to the Series A proceeds.

As of March 31, 2023 we have recorded accrued dividends of $106,200.

Stock-based compensation

We use the fair value method to account for stock-based compensation on the grant date. We recorded $27,396 and $76,117 in compensation expense for the three months ended March 31, 2023 and 2022, 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.

During the year ended December 31, 2022, we granted options to purchase 250,000 common shares to directors. The options expire five years from the date of grant and vest over a period of one year. Fair value of the awards at the date of grants totaled $56,348.

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The following summarizes Employee Awards activity:

Weighted-  

Weighted- 

Average

Average

Remaining

Number of

Exercise Price

Contractual 

Aggregate 

    

 Shares

    

per Share

    

Term (in years)

    

Intrinsic Value

Outstanding as of December 31, 2022

4,936,825

$

1.08

4.4

$

22,000

Granted

  

  

Forfeited or expired

 

 

 

  

 

  

Outstanding as of March 31, 2023

 

4,936,825

 

$

1.08

 

4.4

$

22,000

Exercisable as of March 31, 2023

 

4,776,945

$

1.11

 

4.4

$

4,000

As of March 31, 2023, there was approximately $722 of total unrecognized compensation expense related to unvested employee awards, which is expected to be recognized over a weighted-average period of fourteen months.

On April 1, 2022 we entered into a Restricted Stock Unit Agreement with four participants. The Restricted Stock Unit’s (“RSU”) were granted pursuant to our 2020 Omnibus Incentive Plan. Four separate executives were each granted 300,000 RSU’s, for a total grant of 1,200,000 RSU’s. The 300,000 RSU’s are divided into three equal tranches of 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 $1.00, $2.00 and $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 $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 10 years. We recorded $13,894 and nil in compensation expense for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, none of the RSU’s have vested.

NOTE 12. RELATED PARTY TRANSACTIONS

On September 16, 2022, the Company entered into a new consulting agreement with Adam Hershey, its Interim Chief Executive Officer, pursuant to which Mr. Hershey will continue to serve as the Company’s Interim Chief Executive Officer with compensation equal to $200,000 per annum, payable by the Company, monthly. The term of the consulting agreement is for a period of one year, with automatic six-month renewals thereafter unless terminated by either party. The Company has also agreed to extend warrants to purchase 7,280,007 shares of Common Stock, held by an affiliate of Mr. Hershey, for an additional two years until, May 29, 2027. The exercise price and all other terms and conditions of such warrants remain unchanged. We paid $50,000 and $24,999 for the three months ended March 31, 2023 and 2022, respectively.

In February 2023, the Company completed the acquisition of Station 2, LLC’s assets. Station 2, LLC is owned by a board member, who is also a shareholder and executive level employee of the Company. See Note 3 for additional information regarding the Station 2 asset acquisition.

The Company currently has a lease agreement with Dalton Adventures, LLC in which the Company leases 17,000 square feet of greenhouse space in Boulder, Colorado for $29,691 a month, of which $27,000 is base rent and $2,691 is property taxes. The base rent increased to $27,405 per month starting in January 2023. The owner of Dalton Adventures, LLC is a principal shareholder and former board member of the Company. We have incurred $75,848 and $112,325 in related party lease expense for the three months ended March 31, 2023 and 2022, respectively. See Note 6 for further discussion of the Company’s obligations associated with related party leases.

The Company currently has a lease agreement with JLA Enterprises, LLC in which the Company leases a retail dispensary in Longmont, Colorado. A board member and an executive level employee of the Company are owners of

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JLA Enterprises, LLC. The Company also has a lease agreement with ALJ 1090, LLC in which the Company leases a building that has a retail dispensary and cultivation facility in Berthoud, Colorado. The same board member is an owner of ALJ 1090, LLC. These leases were assumed as part of the Green Tree Acquisition on December 12, 2022. We have incurred $51,942 and nil in related party lease expense for the three months ended March 31, 2023 and 2022, respectively. See Note 6 for further discussion of the Company’s obligations associated with related party leases.

The Company had a lease agreement with Bellewood Holdings, LLC in which the Company leased retail space for the Trees Englewood retail store in Englewood, Colorado for $11,287 per month, of which $10,000 is base rent and $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 incurred nil and $35,612 of related party lease expense for the three months ended March 31, 2023 and 2022, respectively. See Note 6 for further discussion of the Company’s obligations associated with related-party leases.

NOTE 13.  SEGMENT INFORMATION

Our operations are organized into 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.

Three months ended March 31,

2023

    

Retail

    

Cultivation

    

Eliminations

Total

Revenues

$

5,110,619

$

684,017

$

(684,017)

$

5,110,619

Costs and expenses

(4,535,568)

(1,139,573)

684,017

(4,991,124)

Segment operating income

$

575,051

$

(455,556)

$

119,495

Corporate expenses

(1,920,293)

Net loss from continuing operations before income taxes

 

$

(1,800,798)

2022

    

Retail

    

Cultivation

Eliminations

    

Total

Revenues

$

3,297,544

$

518,280

$

(242,516)

$

3,573,308

Costs and expenses

(2,593,269)

(707,549)

242,516

(3,058,302)

Segment operating income

$

704,275

$

(189,269)

$

515,006

Corporate expenses

 

  

 

  

(1,381,345)

Net loss from continuing operations before income taxes

 

$

(866,339)

March 31, 

December 31,

Total assets

    

2023

    

2022

Retail

$

25,691,073

$

25,212,245

Cultivation

4,925,079

4,628,452

Corporate

 

1,147,566

 

1,985,455

Total assets - segments

31,763,718

31,826,152

Intercompany eliminations

(336,354)

(131,439)

Total assets - consolidated

$

31,427,364

$

31,694,713

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NOTE 14.  SUBSEQUENT EVENTS

The Company evaluated subsequent events through the date that the accompanying financial statements were issued and has determined that subsequent to March 31, 2023, the Company issued 201,250 restricted stock units. Each restricted stock unit will vest for a period of seven years from the respective grant date and upon vesting will convert into one share of common stock.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis (“MD&A”) is intended to provide an understanding of our financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. This discussion should be read in conjunction with the Condensed Consolidated Unaudited Financial Statements contained in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and related notes and MD&A appearing in our Annual Report on Form 10-K as of and for the year ended December 31, 2022. The results of operations for an interim period may not give a true indication of results for future interim periods or for the year.

Cautionary Statement Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q, including the financial statements and related notes, contains forward-looking statements that discuss, among other things, future expectations and projections regarding future developments, operations and financial conditions. All forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control and on assumptions that may prove to be incorrect. If any underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or intended. We undertake no obligation to publicly update or revise any forward-looking statements to reflect actual results, changes in expectations or events or circumstances after the date of this Quarterly Report on Form 10-Q.

When this report uses the words “we,” “us,” or “our,” and the “Company,” they refer to TREES Corporation (formerly, “General Cannabis Corp”).

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Our Products, Services, and Customers

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

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

 

Englewood, Colorado

o

5005 S. Federal Boulevard – Recreational license only

Two (2) in Denver, Colorado

o

468 S. Federal Boulevard – Recreational license only

o

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

Longmont, Colorado

o

12626 N. 107th Street (formerly Green Tree/Ancient Alternatives) – Medical and Recreational licenses

Berthoud, Colorado

o

1090 N. 2nd Street (formerly Green Tree/Natural Alternatives for Life) – Medical and Recreational licenses

Three (3) in Oregon

o

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

o

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

o

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

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

SevenFive Farm – 3705 N. 75th Street, Boulder – Retail cultivation license only

 

6859 N. Foothills Highway D-300 (formerly Green Tree/Ancient Alternatives) – Medical and Retail cultivation licenses

 

6859 N. Foothills Highway C-100 (formerly Green Tree/Mountainside Industries) – Medical and Retail cultivation licenses

 

6859 N. Foothills Highway E-100 (formerly Green Tree/Hillside Enterprises) – Retail cultivation license only

 

1090 N. 2nd Street (formerly Green Tree/Natural Alternatives for Life) – Medical cultivation license only

 

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Our principal business model is to acquire, integrate and optimize cannabis companies in the retail and cultivation segments utilizing the combined experience of entrepreneurs and synergistic operations of our vertically integrated network. During the three months ended March 31, 2023, 88% of SevenFive’s revenue was with three customers. During the three months ended March 31, 2022, 45% of SevenFive’s revenue was with one customer.  The customers in both 2023 and 2022 are related party dispensaries and the revenues associated with these customers are eliminated in consolidation.

During the three months ended March 31, 2023, 88% of Green Tree’s revenue was with three customers. The customers in 2023 are related party dispensaries and the revenues associated with these customers are eliminated in consolidation.

Results of Operations

The following tables set forth, for the periods indicated, statements of operations data. The tables and the discussion below should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto in this report.

Three months ended March 31, 

Percent

 

2023

2022

Change

Change

 

Revenues

    

$

5,110,619

$

3,573,308

    

$

1,537,311

    

43

%

Costs and expenses

 

(6,281,736)

(3,990,351)

(2,291,385)

57

%

Other expense

 

(629,681)

(449,296)

(180,385)

40

%

Net loss from continuing operations before income taxes

 

(1,800,798)

(866,339)

(934,459)

108

%

Loss from discontinued operations

 

5,283

(5,283)

(100)

%

Loss from operations before income taxes

$

(1,800,798)

$

(861,056)

$

(939,742)

109

%

Revenues

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

Costs and expenses

Three months ended March 31, 

Percent

 

2023

2022

Change

Change

 

Cost of sales

    

$

3,057,714

    

$

2,074,888

    

$

982,826

    

47

%

Selling, general and administrative

 

2,296,240

 

1,326,116

 

970,124

 

73

%

Stock-based compensation

 

27,396

 

76,117

 

(48,721)

 

(64)

%

Professional fees

 

607,544

 

281,384

 

326,160

 

116

%

Depreciation and amortization

 

292,842

 

231,846

 

60,996

 

26

%

$

6,281,736

$

3,990,351

$

2,291,385

 

57

%

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

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

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

Stock-based compensation included the following:

Three months ended March 31, 

Percent

 

2023

2022

Change

Change

 

Employee awards

    

$

27,396

    

$

76,117

    

$

(48,721)

    

(64)

%

$

27,396

$

76,117

$

(48,721)

 

(64)

%

Employee awards are issued under our 2020 Omnibus Incentive Plan, which was approved by shareholders on November 23, 2020, and our 2014 Equity Incentive Plan, which was approved by shareholders on June 26, 2015. Expense varies primarily due to the number of stock options granted and the share price on the date of grant. The decrease in expense for the three months ended March 31, 2023, as compared to 2022, is due to not issuing options in the first quarter of 2023.

Other Expense

Three months ended March 31, 

Percent

 

    

2023

    

2022

    

Change

    

Change

 

Amortization of debt discount

$

181,677

$

214,281

$

(32,604)

(15)

%

Interest expense

 

449,311

174,351

274,960

158

%

(Gain) loss on derivative liability

(1,307)

60,664

(61,971)

(102)

%

$

629,681

$

449,296

$

180,385

40

%

Amortization of debt discount decreased during the three months ended March 31, 2023, as compared to March 31, 2022, due to the rollover and repayment of the 10% Notes. Interest expense increased during the three months ended March 31, 2023, as compared to March 31, 2022, due to the addition of the 12% Notes with an interest rate of 12% in Q3 2022. The gain on warrant derivative liability reflects the change in the fair value of the 2019 Warrants.

Retail

Three months ended March 31, 

Percent

 

    

2023

    

2022

    

Change

    

Change

 

Revenues

$

5,110,619

$

3,297,544

$

1,813,075

 

55

%

Costs and expenses

 

(4,535,568)

 

(2,593,269)

 

(1,942,299)

 

75

%

$

575,051

$

704,275

$

(129,224)

 

(18)

%

With the addition of the TREES Englewood dispensary on September 2, 2021, Trees Portland and Trees Waterfront on December 30, 2021, and Trees MLK on January 5, 2022, we have established our retail footprint in the Colorado and Oregon markets and have become a vertically integrated company. The Retail Segment will provide positive cash flows which we anticipate will contribute to our working capital position.

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Table of Contents

Cultivation

Three months ended March 31, 

Percent

 

    

2023

    

2022

    

Change

    

Change

 

Revenues

$

684,017

$

518,280

$

165,737

 

32

%

Costs and expenses

 

(1,139,573)

 

(707,549)

 

(432,024)

 

61

%

$

(455,556)

$

(189,269)

$

(266,287)

 

141

%

The increase in revenues for the three months ended March 31, 2023 compared to March 31, 2022 is attributed to the revenue driven from the cultivation spaces acquired in Q4 2022. The steady decline in the wholesale pricing of flower going forward may lead to lower revenue and lower margins in the cultivation segment.

Liquidity

Sources of liquidity

Our sources of liquidity include the cash exercise of common stock options and warrants, debt, and the issuance of common stock or other equity-based instruments. We anticipate our significant uses of resources will include funding operations and developing infrastructure.

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

Sources and uses of cash

We had cash of $1,460,162 and $2,583,833 as of March 31, 2023 and December 31, 2022, respectively. Our cash flows from operating, investing and financing activities were as follows:

Three months ended March 31, 

2023

2022

Net cash (used in) provided by operating activities

    

$

(502,965)

    

$

45,223

Net cash used in investing activities

$

(280,892)

$

(190,153)

Net cash used in financing activities

$

(339,814)

$

(258,057)

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

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

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

Capital Resources

We had no material commitments for capital expenditures as of March 31, 2023. Part of our growth strategy, however, is to acquire operating businesses. We expect to fund such activity through cash on hand, the issuance of debt, common stock, warrants for our common stock or a combination thereof.

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Table of Contents

Non-GAAP Financial Measures

Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss) attributable to common stockholders calculated in accordance with GAAP, adjusted for the impact of stock-based compensation expense, acquisition or disposal-related transaction costs , non-recurring professional fees in relation to litigation and other non-recurring expenses, depreciation and amortization, amortization of debt discounts and equity issuance costs, loss on extinguishment of debt, interest expense, income taxes and certain other non-cash items. Below we have provided a reconciliation of Adjusted EBITDA per share to the most directly comparable GAAP measure, which is net loss per share.

We believe that the disclosure of Adjusted EBITDA provides investors with a better comparison of our period-to-period operating results. We exclude the effects of certain items when we evaluate key measures of our performance internally and in assessing the impact of known trends and uncertainties on our business. We also believe that excluding the effects of these items provides a more comparable view of the underlying dynamics of our operations. We believe such information provides additional meaningful methods of evaluating certain aspects of our operating performance from period to period on a basis that may not be otherwise apparent on a GAAP basis. This supplemental financial information should be considered in addition to, not in lieu of, our unaudited condensed consolidated financial statements.

The following table reconciles Adjusted EBITDA to the most directly comparable GAAP measure, which is net loss.

Three months ended March 31, 

2023

2022

Net loss from continuing operations

    

$

(1,886,534)

    

$

(866,339)

Adjustment for loss from discontinued operations

 

 

5,283

Net loss

 

(1,886,534)

 

(861,056)

Adjustments:

 

  

 

  

Stock-based compensation

 

27,396

 

76,117

Depreciation and amortization

292,842

231,846

Amortization of debt discount and equity issuance costs

 

181,677

 

214,281

Interest expense

 

449,311

 

174,351

(Gain) loss on derivative liability

 

(1,307)

 

60,664

Severance

4,731

Acquisition related expenses

7,500

Provision for income taxes

85,736

Total adjustments

 

1,035,655

 

769,490

Adjusted EBITDA

$

(850,879)

$

(91,566)

Off-balance Sheet Arrangements

We currently have no off-balance sheet arrangements.

Critical Accounting Policies

Our unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues, and expenses. We continually evaluate the accounting policies and estimates used to prepare the condensed financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended December 31, 2022, and Note 1 to the Unaudited Condensed Consolidated Financial Statements in this Form 10-Q.

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Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.

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 March 31, 2023, 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 March 31, 2023.

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.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during the first quarter of 2023, 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.

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Table of Contents

PART II. OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

From time to time, we may be involved in various claims and legal actions in the ordinary course of business. Other than as set forth below, we are not currently involved in any material legal proceedings outside the ordinary course of our business.

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, last 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; or a motion for summary judgment in the alternative. Plaintiff filed a response and cross-motion for summary judgement thereafter. In October 2022, the court denied the motion to dismiss on the basis that Plaintiff sufficiently pled facts that raise a plausible claim for relief, notwithstanding our possible defenses, but has not specifically made any rulings on either party’s 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 Plaintiff for breach of contract to recover the initial payments made under the lease as well as attorneys’ fees and costs. The trial is currently scheduled for September 2023.

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, 2022.

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

 

 

 

31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1

Audited Financial Statements of TDM, LLC as of and for the years ended December 31, 2020 and 2019 (incorporated by reference to Exhibit 99.1 of our Form 8-K/A filed on August 26, 2022).

99.2

Audited Financial Statements of Trees Portland, LLC as of and for the years ended December 31, 2020 and 2019 (incorporated by reference to Exhibit 99.1 of our Form 8-K/A filed on August 26, 2022).

99.3

Audited Financial Statements of Trees Waterfront, LLC as of and for the years ended December 31, 2020 and 2019 (incorporated by reference to Exhibit 99.2 of our Form 8-K/A filed on August 26, 2022).

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

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

 

     

Date: May 22, 2023

/s/ Adam Hershey

 

Adam Hershey, Interim Chief Executive Officer

 

Principal Executive Officer

 

 

/s/ Edward Myers

 

Edward Myers, Interim Chief Financial Officer

 

Principal Financial and Accounting Officer

32