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 SeptemberJune 30, 2022.2023.
☐ 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.) |
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(Address of principal executive offices) (Zip Code) | ||
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(303) 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. 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 November 7, 2022,August 9, 2023, there were 96,192,184118,664,094 issued and outstanding shares of the Company's common stock.
TREES CORPORATION
FORM 10-Q
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TREES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | |
| | | | | | |
| | September 30, 2022 | | December 31, 2021 | ||
| | (unaudited) | | | ||
Assets |
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Current assets |
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Cash and cash equivalents | | $ | 1,964,660 | | $ | 2,054,050 |
Restricted cash | | | 4,037,500 | | | — |
Accounts receivable, net of allowance of $38,000 and $61,000, respectively | |
| 165,217 | |
| 80,188 |
Current portion of notes receivable, net of allowance of nil and $43,108, respectively | | | — | | | 73,000 |
Inventories, net | | | 1,201,293 | | | 1,123,083 |
Prepaid expenses and other current assets | |
| 168,553 | |
| 149,075 |
Total current assets | |
| 7,537,223 | |
| 3,479,396 |
| | | | | | |
Right-of-use operating lease asset | | | 2,951,736 | | | 3,065,152 |
Property and equipment, net | | | 606,474 | | | 680,327 |
Intangible assets, net | | | 2,087,946 | | | 5,999,813 |
Goodwill | | | 14,612,038 | | | 8,799,657 |
Total assets | | $ | 27,795,417 | | $ | 22,024,345 |
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Liabilities and Stockholders' Equity | |
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Current liabilities | |
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Accounts payable | | $ | 2,195,532 | | $ | 1,170,708 |
Interest payable | |
| 63,000 | |
| 621,085 |
Income tax payable | | | 254,000 | | | — |
Operating lease liability, current | | | 663,883 | | | 721,809 |
Accrued stock payable | |
| 60,900 | |
| 444,894 |
Accrued dividends | | | 70,800 | | | — |
Warrant derivative liability | |
| 13,358 | |
| 28,317 |
Notes payable - current | | | 1,307,569 | | | 1,094,398 |
Total current liabilities | |
| 4,629,042 | |
| 4,081,211 |
| | | | | | |
Operating lease liability, non-current | | | 2,343,362 | | | 2,427,762 |
Notes payable - long-term (net of discount) | | | 12,146,691 | | | 5,619,570 |
Related party long-term notes payable (net of discount) | | | 332,204 | | | 288,229 |
Total liabilities | | | 19,451,299 | | | 12,416,772 |
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Commitments and contingencies (Note 9) | | | | | | |
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Stockholders’ equity | |
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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; 96,192,184 shares and 89,551,993 shares issued and outstanding, respectively | | | 96,192 | | | 89,552 |
Additional paid-in capital | |
| 94,814,583 | |
| 92,265,390 |
Accumulated deficit | |
| (87,640,103) | |
| (83,820,815) |
Total stockholders’ equity | |
| 8,344,118 | |
| 9,607,573 |
Total liabilities and stockholders’ equity | | $ | 27,795,417 | | $ | 22,024,345 |
| | | | | | |
| | June 30, 2023 | | December 31, 2022 | ||
| | (unaudited) | | | ||
Assets |
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Current assets |
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Cash and cash equivalents | | $ | 643,968 | | $ | 2,583,833 |
Accounts receivable, net of allowance of $42,000, respectively | |
| 114,052 | |
| 41,373 |
Inventories, net | | | 2,329,236 | | | 2,066,662 |
Prepaid expenses and other current assets | |
| 280,070 | |
| 259,598 |
Total current assets | |
| 3,367,326 | |
| 4,951,466 |
| | | | | | |
Right-of-use operating lease asset | | | 3,108,601 | | | 3,866,406 |
Property and equipment, net | | | 1,809,732 | | | 1,947,969 |
Intangible assets, net | | | 2,697,580 | | | 2,543,898 |
Goodwill | | | 18,384,974 | | | 18,384,974 |
Total assets | | $ | 29,368,213 | | $ | 31,694,713 |
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Liabilities and Stockholders' Equity | |
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Current liabilities | |
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Accounts payable and accrued expenses | | $ | 3,500,873 | | $ | 1,899,450 |
Interest payable | |
| 981,157 | |
| 488,813 |
Income tax payable | | | 290,659 | | | 204,917 |
Operating lease liability, current | | | 1,238,647 | | | 1,433,184 |
Finance lease liability, current | | | 64,455 | | | 55,777 |
Accrued stock payable | |
| 60,900 | |
| 60,900 |
Accrued dividends | | | 106,200 | | | 88,500 |
Warrant derivative liability | |
| 289 | |
| 5,508 |
Accrued legal fees - current | | | 90,000 | | | — |
Notes payable - current | | | 1,879,173 | | | 1,903,344 |
Total current liabilities | |
| 8,212,353 | |
| 6,140,393 |
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Operating lease liability, non-current | | | 2,016,117 | | | 2,541,590 |
Finance lease liability, non-current | | | 671,468 | | | 706,653 |
Accrued legal fees, non-current | | | 60,000 | | | — |
Notes payable - non-current (net of unamortized discount) | | | 15,896,725 | | | 15,899,588 |
Total liabilities | | | 26,856,663 | | | 25,288,224 |
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Commitments and contingencies (Note 10) | | | | | | |
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Stockholders’ equity | |
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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 | |
| 98,644,211 | |
| 98,598,761 |
Accumulated deficit | |
| (97,324,771) | |
| (93,384,382) |
Total stockholders’ equity | |
| 2,511,550 | |
| 6,406,489 |
Total liabilities and stockholders’ equity | | $ | 29,368,213 | | $ | 31,694,713 |
See Notes to unaudited condensed consolidated financial statements.
3
TREES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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| Three months ended | | Nine months ended | | | Three months ended | | Six months ended | | ||||||||||||||||
| | September 30, | | September 30, | | | June 30, | | June 30, | | ||||||||||||||||
| | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | 2023 | | 2022 | | ||||||||
Revenue |
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Retail sales | | $ | 3,080,778 | | $ | 855,841 | | $ | 9,536,659 | | $ | 855,841 | | | $ | 5,079,564 | | $ | 3,158,335 | | $ | 10,190,183 | | $ | 6,455,881 | |
Cultivation sales | | | 96,399 | | | 809,801 | | | 449,553 | | | 2,157,742 | | | | 18,430 | | | 77,392 | | | 18,430 | | | 353,154 | |
Interest | | | — | | | — | | | — | | | 14,472 | | |||||||||||||
Total revenue | | | 3,177,177 | | | 1,665,642 | | | 9,986,212 | | | 3,028,055 | | | | 5,097,994 | | | 3,235,727 | | | 10,208,613 | | | 6,809,035 | |
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Costs and expenses | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of sales | | | 2,036,532 | | | 1,473,209 | | | 5,856,995 | | | 2,539,840 | | | | 3,230,777 | | | 1,745,575 | | | 6,288,491 | | | 3,820,463 | |
Selling, general and administrative | | | 1,462,902 | | | 672,981 | | | 4,001,816 | | | 1,853,731 | | | | 2,485,751 | | | 1,212,796 | | | 4,781,991 | | | 2,538,914 | |
Stock-based compensation | | | 38,460 | | | 131,836 | | | 156,961 | | | 194,120 | | | | 18,054 | | | 42,386 | | | 45,450 | | | 118,501 | |
Professional fees | | | 197,565 | | | 144,289 | | | 716,410 | | | 760,437 | | | | 543,566 | | | 237,461 | | | 1,151,110 | | | 518,845 | |
Depreciation and amortization | | | 98,915 | | | 115,355 | | | 190,770 | | | 305,824 | | | | 290,579 | | | (139,991) | | | 583,421 | | | 91,855 | |
Total costs and expenses | | | 3,834,374 | | | 2,537,670 | | | 10,922,952 | | | 5,653,952 | | | | 6,568,727 | | | 3,098,227 | | | 12,850,463 | | | 7,088,578 | |
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Operating loss | | | (657,197) | | | (872,028) | | | (936,740) | | | (2,625,897) | | |||||||||||||
Operating (loss) income | | | (1,470,733) | | | 137,500 | | | (2,641,850) | | | (279,543) | | |||||||||||||
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Other expenses (income) | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortization of debt discount | | | 1,285,392 | | | 216,516 | | | 1,716,334 | | | 470,306 | | | | 220,077 | | | 216,661 | | | 401,754 | | | 430,942 | |
Interest expense | | | 213,833 | | | 150,503 | | | 564,229 | | | 444,186 | | | | 716,728 | | | 176,045 | | | 1,166,039 | | | 350,396 | |
Loss on extinguishment of debt | | | 310,622 | | | 233,374 | | | 310,622 | | | 233,374 | | |||||||||||||
(Gain) loss on derivative liability | | | (16,365) | | | (52,452) | | | (14,959) | | | 1,043,531 | | | | (3,912) | | | (59,258) | | | (5,219) | | | 1,406 | |
Gain on sale of assets | | | — | | | (132,979) | | | (13,000) | | | (131,512) | | |||||||||||||
Loss (gain) on sale of assets | | | 2,400 | | | (13,000) | | | 2,400 | | | (13,000) | | |||||||||||||
Other (income) | | | (369,871) | | | — | | | (369,871) | | | — | | |||||||||||||
Total other expenses, net | | | 1,793,482 | | | 414,962 | | | 2,563,226 | | | 2,059,885 | | | | 565,422 | | | 320,448 | | | 1,195,103 | | | 769,744 | |
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Net loss from continuing operations before income taxes | | | (2,450,679) | | | (1,286,990) | | | (3,499,966) | | | (4,685,782) | | | | (2,036,155) | | | (182,948) | | | (3,836,953) | | | (1,049,287) | |
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Provision for income taxes | | | 254,000 | | | — | | | 254,000 | | | — | | | | — | | | — | | | 85,736 | | | — | |
Loss from continuing operations | | | (2,704,679) | | | (1,286,990) | | | (3,753,966) | | | (4,685,782) | | | | (2,036,155) | | | (182,948) | | | (3,922,689) | | | (1,049,287) | |
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Income (loss) from discontinued operations, net of tax | | | 195 | | | (40,605) | | | 5,478 | | | (377,134) | | |||||||||||||
Income from discontinued operations, net of tax | | | — | | | — | | | — | | | 5,283 | | |||||||||||||
Net loss | | $ | (2,704,484) | | $ | (1,327,595) | | $ | (3,748,488) | | $ | (5,062,916) | | | $ | (2,036,155) | | | (182,948) | | $ | (3,922,689) | | $ | (1,044,004) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Accrued preferred stock dividend | | | (70,800) | | | — | | | (70,800) | | | — | | | | — | | | — | | | (17,700) | | | — | |
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Net loss attributable to common stockholders | | $ | (2,775,284) | | $ | (1,327,595) | | $ | (3,819,288) | | $ | (5,062,916) | | | $ | (2,036,155) | | | (182,948) | | $ | (3,940,389) | | $ | (1,044,004) | |
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Per share data - basic and diluted | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss from continuing operations per share | | $ | (0.03) | | $ | (0.02) | | $ | (0.04) | | $ | (0.07) | | | $ | (0.02) | | $ | (0.00) | | $ | (0.03) | | $ | (0.01) | |
Net loss from discontinued operations per share | | $ | 0.00 | | $ | 0.00 | | $ | 0.00 | | $ | (0.01) | | | $ | 0.00 | | $ | 0.00 | | $ | 0.00 | | $ | 0.00 | |
Net loss attributable to common stockholders per share | | $ | (0.03) | | $ | (0.02) | | $ | (0.04) | | $ | (0.08) | | | $ | (0.02) | | $ | (0.00) | | $ | (0.03) | | $ | (0.01) | |
Weighted average number of common shares outstanding | | | 96,192,184 | | | 69,122,293 | | | 96,046,246 | | | 64,381,989 | | | | 118,664,094 | | | 96,192,184 | | | 118,664,094 | | | 95,972,067 | |
See Notes to unaudited condensed consolidated financial statements.
4
TREES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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| | Nine months ended September 30, | Six months ended June 30, | ||||||||
| | 2022 | | 2021 | 2023 | | 2022 | ||||
Cash flows from operating activities | | |
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Net loss | | $ | (3,748,488) | | $ | (5,062,916) | $ | (3,922,689) | | $ | (1,044,004) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
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Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
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Amortization of debt discount and equity issuance costs | |
| 1,716,334 | |
| 470,306 |
| 401,754 | |
| 430,942 |
Depreciation and amortization | |
| 190,770 | |
| 317,183 |
| 583,421 | |
| 91,855 |
Loss on extinguishment of debt | | | 310,622 | | | 233,374 | |||||
Non-cash lease expense | | | 670,685 | | | 364,520 | | 40,829 | | | 447,766 |
Bad debt recovery | | | (10,280) | | | (44,163) | |||||
(Gain) loss on disposal of property and equipment | | | (13,000) | | | 1,467 | |||||
Loss on warrant derivative liability | |
| (14,959) | |
| 1,043,531 | |||||
Bad debt expense | | — | | | 1,156 | ||||||
Loss (gain) on disposal of property and equipment | | 2,400 | | | (13,000) | ||||||
(Gain) loss on derivative liability |
| (5,219) | |
| 1,406 | ||||||
Stock-based compensation | |
| 156,961 | |
| 194,120 |
| 45,450 | |
| 118,501 |
Changes in operating assets and liabilities, net of acquisitions | |
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Accounts receivable | |
| (76,749) | |
| 258,811 |
| (72,679) | |
| 55,972 |
Prepaid expenses and other assets | |
| (19,478) | |
| 559,073 |
| (20,472) | |
| (25,094) |
Inventories | |
| (78,210) | |
| 72,711 |
| (262,574) | |
| (207,701) |
Income taxes | | | 254,000 | | | — | | 85,742 | | | — |
Accounts payable and accrued liabilities | | | 466,744 | | | (566,932) | |||||
Accounts payable, accrued liabilities, and interest payable | | 2,243,767 | | | 398,802 | ||||||
Operating lease liabilities | | | (699,595) | | | (330,215) | | (3,035) | | | (502,090) |
Net cash used in operating activities: | |
| (894,643) | |
| (2,489,130) | |||||
Net cash used in operating activities |
| (883,305) | |
| (245,489) | ||||||
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Cash flows from investing activities | |
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Purchase of property and equipment | |
| (33,903) | |
| (323,879) |
| (10,732) | |
| (14,210) |
Acquisition of Station 2 assets | | (256,582) | | | — | ||||||
Proceeds for sale of equipment | | | 13,000 | | | 208,761 | | — | | | 13,000 |
Proceeds on notes receivable | | | 75,000 | | | 433,393 | | — | | | 75,000 |
Acquisition of TDM, LLC | | | — | | | (1,122,015) | |||||
Acquisition of TREES MLK | | | (256,582) | | | — | |||||
Net proceeds from sale of Next Big Crop | | | — | | | (132,979) | |||||
Acquisition of Trees MLK | | — | | | (256,582) | ||||||
Net cash used in investing activities | |
| (202,485) | |
| (936,719) |
| (267,314) | |
| (182,792) |
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Cash flows from financing activities | |
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Proceeds from exercise of stock options | | | — | | | 194,634 | |||||
Proceeds from preferred stock offering | | | — | | | 1,180,000 | |||||
Proceeds from notes payable | | | 9,912,250 | | | 3,960,000 | |||||
Payments on notes payable | | | (4,867,012) | | | (200,000) | |||||
Net cash provided by financing activities | |
| 5,045,238 | |
| 5,134,634 | |||||
Payments on notes payable and finance lease | | (789,246) | | | (552,873) | ||||||
Net cash used in financing activities |
| (789,246) | |
| (552,873) | ||||||
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Net increase in cash and cash equivalents | |
| 3,948,110 | |
| 1,708,785 | |||||
Net decrease in cash and cash equivalents |
| (1,939,865) | |
| (981,154) | ||||||
Cash and cash equivalents, beginning of period | |
| 2,054,050 | |
| 755,769 |
| 2,583,833 | |
| 2,054,050 |
Cash and cash equivalents, end of period | | $ | 6,002,160 | | $ | 2,464,554 | $ | 643,968 | | $ | 1,072,896 |
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Supplemental schedule of cash flow information | |
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Cash paid for interest | | $ | 1,122,314 | | $ | 16,224 | $ | 673,695 | | $ | 175,670 |
Cash paid for taxes | $ | 6 | | $ | — | ||||||
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Non-cash investing & financing activities | |
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Operating lease right-of-use asset/Operating lease liability | | $ | 172,053 | | $ | 700,351 | |||||
Issuance of accrued stock | | $ | 383,994 | | $ | — | |||||
12% Warrants recorded as a debt discount and additional paid-in capital | | $ | 569,223 | | $ | — | |||||
12% Warrants recorded as a loss on extinguishment of debt and additional paid-in capital | | $ | 103,577 | | $ | — | |||||
Accrued dividends on preferred stock | | $ | 70,800 | | $ | — | |||||
Cashless warrant exercise | | $ | — | | $ | 1,557,078 | |||||
Beneficial conversion feature | | $ | — | | $ | 1,110,039 | |||||
10% Warrants recorded as a loss on extinguishment of debt and additional paid-in capital | | $ | — | | $ | 1,239,300 | |||||
Issuance of common stock to a consultant | | $ | — | | $ | 120,142 | |||||
Operating lease right-of-use asset obtained in exchange for new operating lease liabilities | $ | 348,825 | | $ | 172,053 | ||||||
Non-cash debt issuance for acquisition of Station 2 assets | $ | 333,953 | | $ | — | ||||||
Accrued dividends | $ | 17,700 | | $ | 383,994 |
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 June 30, 2023 | |||||||||||||||||
| | Preferred Stock | | Common Stock | | Additional | | Accumulated | | | | ||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Paid-in Capital |
| Deficit |
| Total | |||||
April 1, 2023 |
| 1,180 | | $ | 1,073,446 | | 118,664,094 |
| $ | 118,664 |
| $ | 98,626,157 |
| $ | (95,288,616) |
| $ | 4,529,651 |
Share-based compensation | | — | | | — | | — | | | — | | | 18,054 | | | — | | | 18,054 |
Net loss |
| — | | | — | | — | |
| — | |
| — | |
| (2,036,155) | |
| (2,036,155) |
June 30, 2023 |
| 1,180 | | $ | 1,073,446 | | 118,664,094 | | $ | 118,664 | | $ | 98,644,211 | | $ | (97,324,771) | | $ | 2,511,550 |
| | | | | | | | | | | | | | | | | | | |
| | For the three months ended June 30, 2022 | |||||||||||||||||
| | Preferred Stock | | Common Stock | | Additional | | Accumulated | | | | ||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Paid-in Capital |
| Deficit |
| Total | |||||
April 1, 2022 | | 1,180 | | | 1,073,446 | | 96,192,184 | | | 96,191 | | | 94,060,936 | | | (84,681,871) | | | 10,548,702 |
Share-based compensation | | | | | | | | | | | | | 42,386 | | | | | | 42,386 |
Net loss | | — | | | — | | — | | | — | | | — | | | (182,948) | | | (182,948) |
June 30, 2022 | | 1,180 | | $ | 1,073,446 | | 96,192,184 | | $ | 96,191 | | $ | 94,103,322 | | $ | (84,864,819) | | $ | 10,408,140 |
| | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, 2022 | |||||||||||||||||
| | Preferred Stock | | Common Stock | | Additional | | Accumulated | | | | ||||||||
| | Shares |
| Amount | | Shares | | Amount | | Paid-in Capital | | Deficit | | Total | |||||
July 1, 2022 |
| 1,180 | | $ | 1,073,446 | | 96,192,184 |
| $ | 96,192 |
| $ | 94,103,321 |
| $ | (84,864,819) |
| $ | 10,408,140 |
Warrants issued with 12% Notes | | — | | | — | | — | | | — | | | 672,802 | | | — | | | 672,802 |
Share-based compensation | | — | | | — | | — | | | — | | | 38,460 | | | — | | | 38,460 |
Dividends on preferred stock | | — | | | — | | — | | | — | | | — | | | (70,800) | | | (70,800) |
Net loss |
| — | | | — | | — | |
| — | |
| — | |
| (2,704,484) | |
| (2,704,484) |
September 30, 2022 |
| 1,180 | | $ | 1,073,446 | | 96,192,184 | | $ | 96,192 | | $ | 94,814,583 | | $ | (87,640,103) | | $ | 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 | |||||
July 1, 2021 | | — | | $ | — | | 62,266,275 |
| $ | 62,264 |
| $ | 80,140,373 |
| $ | (78,686,757) |
| $ | 1,515,880 |
Common stock issued upon exercise of stock options | | — | | | — | | 33,140 | |
| 33 | |
| 12,892 | |
| — | |
| 12,925 |
Common stock issued to a consultant | | — | | | — | | 34,140 | | | 34 | | | 20,108 | | | — | | | 20,142 |
Common stock issued for acquisition of TDM, LLC | | — | | | — | | 22,380,310 | | | 22,380 | | | 10,384,464 | | | — | | | 10,406,844 |
Preferred shares issued | | 1,180 | | | 1,073,446 | | — | | | — | | | — | | | — | | | 1,073,446 |
Warrants issued with preferred stock | | — | | | — | | — | | | — | | | 106,554 | | | — | | | 106,554 |
Modification of Warrants | | — | | | — | | — | | | — | | | 233,374 | | | — | | | 233,374 |
Modification of Options | | — | | | — | | — | | | — | | | 21,525 | | | — | | | 21,525 |
Stock-based compensation | | — | | | — | | — | | | — | | | 110,311 | | | — | | | 110,311 |
Net loss | | — | | | — | | — | |
| — | |
| — | |
| (1,327,595) | |
| (1,327,595) |
September 30, 2021 | | 1,180 | | $ | 1,073,446 | | 84,713,865 | | $ | 84,711 | | $ | 91,029,601 | | $ | (80,014,352) | | $ | 12,173,406 |
| | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
|
| For the six months ended June 30, 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 | | — | | | — | | — | | | — | | | 45,450 | | | — | | | 45,450 | |||||||||||||||||||
Dividends on preferred stock | | — | | | — | | — | | | — | | | — | | | (17,700) | | | (17,700) | |||||||||||||||||||
Net loss | | — | | | — | | — | |
| — | |
| — | |
| (3,922,689) | |
| (3,922,689) | |||||||||||||||||||
June 30, 2023 | | 1,180 | | $ | 1,073,446 | | 118,664,094 | | $ | 118,664 | | $ | 98,644,211 | | $ | (97,324,771) | | $ | 2,511,550 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| For the nine months ended September 30, 2022 | | For the six months ended June 30, 2022 | ||||||||||||||||||||||||||||||||||
| | Preferred Stock | | Common Stock | | Additional | | Accumulated | | | | | Preferred Stock | | Common Stock | | Additional | | Accumulated | | | | ||||||||||||||||
|
| Shares |
| Amount | | Shares |
| Amount |
| Paid-in Capital |
| Deficit |
| Total |
| Shares |
| Amount |
| Shares |
| Amount |
| Paid-in Capital |
| Deficit |
| Total | ||||||||||
January 1, 2022 | | 1,180 | | $ | 1,073,446 | | 89,551,993 | | $ | 89,551 | | $ | 92,265,391 | | $ | (83,820,815) | | $ | 9,607,573 | | 1,180 | | $ | 1,073,446 | | 89,551,993 | | $ | 89,550 | | $ | 92,265,392 | | $ | (83,820,815) | | $ | 9,607,573 |
Common stock issued for acquisition of Trees Waterfront LLC | | — | | | — | | 1,669,537 | | | 1,670 | | | 382,324 | | | — | | | 383,994 | | — | | | — | | 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 | | — | | | — | | 4,970,654 | | | 4,971 | | | 1,337,105 | | | — | | | 1,342,076 |
Warrants issued with 12% Notes | | — | | | — | | — | | | — | | | 672,802 | | | — | | | 672,802 | |||||||||||||||||||
Share-based compensation | | — | | | — | | — | | | — | | | 156,961 | | | — | | | 156,961 | | — | | | — | | — | | | — | | | 118,501 | | | — | | | 118,501 |
Dividends on preferred stock | | — | | | — | | — | | | — | | | — | | | (70,800) | | | (70,800) | |||||||||||||||||||
Net loss | | — | | | — | | — | |
| — | |
| — | |
| (3,748,488) | |
| (3,748,488) | | — | |
| — | | — | | | — | | | — | | | (1,044,004) | |
| (1,044,004) |
September 30, 2022 | | 1,180 | | $ | 1,073,446 | | 96,192,184 | | $ | 96,192 | | $ | 94,814,583 | | $ | (87,640,103) | | $ | 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 | ||||||||||||||||||||||||
January 1, 2021 | | — | | $ | — | | 60,813,673 | | $ | 60,813 | | $ | 75,891,414 | | $ | (74,951,436) | | $ | 1,000,791 | |||||||||||||||||||
Common stock issued to a consultant | | — | |
| — | | 146,499 | |
| 146 | |
| 119,996 | |
| — | |
| 120,142 | |||||||||||||||||||
Common stock issued upon exercise of stock options | | — | | | — | | 366,760 | | | 367 | | | 194,267 | | | — | | | 194,634 | |||||||||||||||||||
Common stock issued for acquisition of TDM, LLC | | — | | | — | | 22,380,310 | | | 22,380 | | | 10,384,464 | | | — | | | 10,406,844 | |||||||||||||||||||
Warrants issued with 10% Notes | | — | |
| — | | — | |
| — | |
| 1,239,300 | |
| — | |
| 1,239,300 | |||||||||||||||||||
Beneficial conversion feature | | — | |
| — | | — | |
| — | |
| 1,110,039 | |
| — | |
| 1,110,039 | |||||||||||||||||||
Cashless exercise of warrants | | — | |
| — | | 1,006,623 | |
| 1,005 | |
| 1,556,073 | |
| — | |
| 1,557,078 | |||||||||||||||||||
Stock-based compensation | | — | | | — | | — | | | — | | | 172,595 | | | — | | | 172,595 | |||||||||||||||||||
Preferred shares issued | | 1,180 | | | 1,073,446 | | — | | | — | | | — | | | — | | | 1,073,446 | |||||||||||||||||||
Warrants issued with preferred stock | | — | | | — | | — | | | — | | | 106,554 | | | — | | | 106,554 | |||||||||||||||||||
Modification of Warrants | | — | | | — | | — | | | — | | | 233,374 | | | — | | | 233,374 | |||||||||||||||||||
Modification of Options | | — | | | — | | — | | | — | | | 21,525 | | | — | | | 21,525 | |||||||||||||||||||
Net loss | | — | |
| — | | — | |
| — | |
| — | |
| (5,062,916) | |
| (5,062,916) | |||||||||||||||||||
September 30, 2021 | | 1,180 | | $ | 1,073,446 | | 84,713,865 | | $ | 84,711 | | $ | 91,029,601 | | $ | (80,014,352) | | $ | 12,173,406 | |||||||||||||||||||
June 30, 2022 | | 1,180 | | $ | 1,073,446 | | 96,192,184 | | $ | 96,191 | | $ | 94,103,322 | | $ | (84,864,819) | | $ | 10,408,140 |
See Notes to unaudited condensed consolidated financial statements.
6
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,”) (formerly, General Cannabis Corp), was incorporated on June 3, 2013,is a cannabis retailer and provides services and products tocultivator in 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 StateStates 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: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 |
Retail (“Retail Segment”)
7
We also operate three (3) cultivation facilities in Colorado as follows:
● | SevenFive Farm – 3705 N. 75th Street, Boulder – Retail cultivation license only |
Through
● | 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 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 ("SevenFive") in May 2020, we operate a 17,000 square foot licensed light deprivation greenhouse cultivation facility.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$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, 2021,2022, 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, 2021,2022, which were included in the annual report on Form 10-K filed by the Company on March 25, 2022.April 17, 2023.
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 ninesix months ended SeptemberJune 30, 2022,2023, are not necessarily indicative of the operating results for the year ending December 31, 2022,2023, 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
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 and accounts receivable and revenue.receivable.
Customer and Revenue Concentrations – Cultivation Segment
During the three months ended SeptemberJune 30, 2023 and 2022, and 2021, 79% and 24%81% of SevenFive’s revenue was with two customers and 78% was with one and two customers,customer, respectively. During the ninesix months ended SeptemberJune 30, 2023 and 2022, and 2021, 66% and 12%77% of SevenFive’s revenue was with two customers and 59% was with one customer, respectively. The customer in 2022 is aThese customers are related party dispensarydispensaries and the revenues associated with this customer isthese customers are eliminated in consolidation.
Discontinued Operations
On July 16, 2021, we entered into an Asset Purchase AgreementDuring the three months ended June 30, 2023, 90% of Green Tree’s revenue was with an individual to sell substantially allfour customers. During the six months ended June 30, 2023, 83% of the assets of NBC for a total of $150,000 and 10% of profits generated by the buyerGreen Tree’s revenue was with three customers. The customers 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 2022,2023 are related party dispensaries and the 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 separatelyrevenues associated with these customers are eliminated in the financial statements.consolidation.
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 $2,704,484$2,036,155 and $3,748,488$3,922,689 during the three and ninesix months ended SeptemberJune 30, 2022,2023, respectively and $1,327,595$182,948 and $5,062,916$1,044,004 for the three and ninesix months ended SeptemberJune 30, 2021,2022, respectively, and had an accumulated deficit of $87,640,103$97,324,771 as of SeptemberJune 30, 2022.2023. We had cash and cash equivalents of $1,964,660$643,968 and $2,054,050$2,583,833 as of SeptemberJune 30, 2022,2023, and December 31, 2021,2022, 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.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.
Summary of Significant Accounting Policies
See our Annual Report on Form 10-K for the year ended December 31, 2021,2022, for discussion of the Company's significant accounting policies.
9
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. 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 ASU2022, and the adoption did not have a material effect on our condensed consolidated financial statements.
NOTE 2. BUSINESS ACQUISITION
On September 2, 2021,December 12, 2022, we completed the Green Tree Acquisition which consisted of the acquisition of substantially all of the assets of TREES Englewood, representingAncient Alternatives LLC, Natural Alternatives For Life, LLC, Mountainside Industries, LLC, Hillside Enterprises, LLC, and GT Creations, LLC, each a portionColorado 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 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 consistsGreen Tree Entities. Allyson Feiler, a principal owner of the assets relatingGreen Tree Entities, was also elected to our Board of Directors effective the Trees dispensary located in Englewood, Colorado (“Englewood Closing”). date of acquisition.
We paid $1,155,256 in cash in connection with the Englewood Closingamount of $500,000 and stock consideration of 22,380,31017,977,528 shares of our Common Stock. The closing price of our common stockCommon Stock on September 2, 2021,December 12, 2022, the date of license transfer, was $0.47$0.165 per share, as such, fair value of the equity consideration is $10,518,746. Further,$2,966,292. An additional $3,500,000 in cash equal to $1,732,884 will be paid to the sellersellers infifteen (15) equal monthly installments over a period of 24 months frompayments commencing on the Englewood Closing. As of September 30, 2022, we have completed the allocation9-month anniversary of the purchase price.closing. Based on a discount rate of 12%, the completed purchase price, there was an adjustment from the tradename to goodwillfair 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 amount of
9
$3,601,000. As of September 30, 2022, the unaudited condensedaccompanying consolidated balance sheet includes an allocation of cash, fixed assets, inventory, intangible assets and goodwill.sheets.
The table below reflects the Company’s preliminary estimates of the acquisition date fair values of the assets acquired:acquired.
| | | | | | |
Cash | | $ | 32,941 |
| $ | 3,928 |
Inventory | | | 1,588,454 | |||
Fixed assets |
| | 59,335 | | | 688,655 |
Inventory | | | 586,495 | |||
Tradename | | | 1,399,000 | | | 950,000 |
Goodwill | |
| 11,216,913 | |
| 3,255,679 |
| | $ | 13,294,684 | | $ | 6,486,716 |
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:
| | | | | | | |
|
| Three months ended |
| Nine months ended | |||
| | September 30, | | September 30, | |||
| | 2021 | | 2021 | | ||
Total revenues | | $ | 2,766,183 | | $ | 8,847,507 | |
Net income (loss) attributable to common stockholders | | $ | 254,862 | | $ | 749,341 | |
Net income (loss) per common share | | $ | 0.00 | | $ | 0.01 | |
Weighted average number of basic and diluted common shares outstanding | | | 84,691,204 | | | 84,384,904 | |
The unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results areWe have 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 $331,581 in connection with the Oregon Closing and stock consideration of 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 $0.23 per share, as such, fair value of consideration is $1,477,422. Further, cash equal to $497,371 will be paid to the sellers in equal monthly installments over a period of 24 months from the Oregon Closing. As of September 30, 2022, we have completed the allocation of the purchase price. Based onprice for the purchase price, there was an adjustment from the tradename to goodwill in the amount of $341,000.Green Tree Acquisition. As of SeptemberJune 30, 2022,2023, the condensed consolidated balance sheet includes ana preliminary allocation of cash, fixed assets, inventory, intangible assets, and goodwill.
The table below reflects Management anticipates completing the Company’s estimates ofpurchase price allocation as soon as possible, but no later than one year from the acquisition date fair values of the assets acquired:
| | | |
Cash | | $ | 14,568 |
Fixed assets |
| | 56,015 |
Inventory | | | 202,046 |
Tradename | | | 509,000 |
Goodwill | |
| 1,524,744 |
| | $ | 2,306,373 |
date.
10
The accompanying unaudited condensed consolidated financial statements include the results of Trees Oregonthe Green Tree Entities from the date of acquisition for financial reporting purposes, December 30, 2021.12, 2022. The pro-formapro forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2020,2022, are as follows:
| | | | | | | | | | | | | |
|
| Three months ended | Nine months ended |
| Three months ended |
| Six months ended | ||||||
| | September 30, | September 30, | | June 30, | | June 30, | ||||||
| | 2021 | | 2021 | |
| 2022 |
| 2022 | ||||
Total revenues | | $ | 450,296 | | $ | 1,190,985 | | | $ | 2,898,973 | | $ | 5,302,493 |
Net income (loss) attributable to common stockholders | | $ | 93,796 | | $ | 153,612 | | ||||||
Net income (loss) attributable to Common Stockholders | | $ | 511,727 | | $ | 518,524 | |||||||
Net income (loss) per common share | | $ | 0.00 | | $ | 0.00 | | | $ | 0.00 | | $ | 0.00 |
Weighted average number of basic and diluted common shares outstanding | | | 75,545,868 | | | 70,805,564 | | | | 113,727,033 | | | 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, 2020,2022, or to project potential operating results as of any future date or for any future periods.
On January 5,December 19, 2022, we completed the Green Man Acquisition, consisting of 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.Green Man. We paid cash in the amount of $256,582$1,225,000 and stock consideration of 4,970,6544,494,382 shares of our Common Stock. The closing price of our common stockCommon Stock on January 5,December 19, 2022, the date of license transfer, was $0.27$0.18 per share, as such, fair value of the equity consideration is $1,342,076. Further,$808,989. An additional $1,500,000 in cash equal to $384,873 will be paid to the sellers in eighteen (18) equal monthly installments overpayments commencing on the 12-month anniversary of the closing. Based on a perioddiscount rate of 24 months from12%, the MLK closing. When we closed on MLK it was a non-operating dispensary. We opened the dispensaryfair 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 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 $912,000. As of September 30, 2022, the unaudited condensedaccompanying consolidated balance sheet includes an allocation of fixed assets, intangible assets and goodwill.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 |
| $ | 25,150 | | | 23,500 |
Tradename | | | 88,000 | | | 150,000 |
Goodwill | |
| 1,870,381 | |
| 2,968,198 |
| | $ | 1,983,531 | | $ | 3,258,835 |
We have not completed the allocation of the purchase price for the Green Man Acquisition. As of June 30, 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 unaudited condensed consolidated financial statements include the results of Trees MLKGreen Man from the date of acquisition for financial reporting purposes, January 5,December 19, 2022. The pro-formapro forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2021,2022, are as follows:
| | | | | | | | | | | | | | | | | | |
|
| Three months ended |
| Nine months ended |
| Three months ended |
| Six months ended | ||||||||||
| | September 30, | | September 30, | | June 30, | | June 30, | ||||||||||
| | 2022 | | 2021 | | 2022 | | 2021 |
| 2022 |
| 2022 | ||||||
Total revenues | | $ | 69,161 | | $ | — | | $ | 91,579 | | $ | — | | $ | 1,383,551 | | $ | 2,820,461 |
Net income (loss) attributable to common stockholders | | $ | (51,105) | | $ | (29,022) | | $ | (94,693) | | $ | (106,691) | ||||||
Net income (loss) attributable to Common Stockholders | | $ | (545,791) | | $ | (456,360) | ||||||||||||
Net income (loss) per common share | | $ | (0.00) | | $ | (0.00) | | $ | (0.00) | | $ | (0.00) | | $ | (0.01) | | $ | 0.00 |
Weighted average number of basic and diluted common shares outstanding | | | 96,192,184 | | | 74,092,947 | | | 96,155,491 | | | 69,352,643 | | | 100,243,887 | | | 100,243,887 |
11
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, 2021,2022, or to project potential operating results as of any future date or for any future periods.
Table
In February 2023, we completed the acquisition of Contentsthe 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 note equal to $384,873. 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 June 30, 2023, the balance of the license was $565,931, which is recorded within Intangible assets, net in our condensed consolidated balance sheets.
NOTE 3.4. 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$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 | | Nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 | | 2022 | | 2021 | ||||
Product revenues | | $ | — | | $ | 463 |
| $ | 3,438 |
| $ | 614,764 |
Service revenues | | | — | | | 4,116 | | | — | | | 523,994 |
Total revenues | | | — | | | 4,579 | | | 3,438 | | | 1,138,758 |
| | | | | | | | | | | | |
Cost of sales | |
| — | |
| 29,480 | | | — | | | 1,157,035 |
Selling, general and administrative | |
| (195) | |
| 12,721 | | | (2,040) | | | 342,554 |
Professional fees | |
| — | |
| 143 | | | — | | | 4,944 |
Depreciation and amortization | | | — | | | 2,840 | | | — | | | 11,359 |
Total costs and expenses | |
| (195) | |
| 45,184 | | | (2,040) | | | 1,515,892 |
Income (loss) from discontinued operations | | $ | 195 | | $ | (40,605) | | $ | 5,478 | | $ | (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.
| | | | | | | | | | | | | | | | | | | | |
| | Nine months ended | | | Three months ended | | Six months ended | | ||||||||||||
| | September 30, | | | June 30, | | June 30, | | ||||||||||||
|
| 2022 |
| 2021 | |
| 2023 |
| 2022 |
| 2023 |
| 2022 | | ||||||
Accounts receivables | | $ | — | | $ | 183,364 | | |||||||||||||
Prepaid expenses and other current assets | | | — | | | 519,274 | | |||||||||||||
Product revenues | | $ | — | | $ | — | | $ | — | | $ | 3,438 |
| |||||||
Service revenues | | | — | | | — | | | — | | | — | | |||||||
Total revenues | | | — | | | — | | | — | | | 3,438 | | |||||||
| | | | | | | | | | | | | | |||||||
Cost of sales | | | — | | | — | |
| — | |
| — | | |||||||
Selling, general and administrative | | | — | | | — | |
| — | |
| (1,845) | | |||||||
Professional fees | | | — | | | — | |
| — | |
| — | | |||||||
Depreciation and amortization | | | — | | | 231 | | | | — | | | — | | | — | | | — | |
Capital expenditures | | | — | | | — | | |||||||||||||
Accounts payable and accrued expenses | | | — | | | — | | |||||||||||||
Customer deposits | | | — | | | — | | |||||||||||||
Total costs and expenses | | | — | | | — | |
| — | |
| (1,845) | | |||||||
Income from discontinued operations | | $ | — | | $ | — | | $ | — | | $ | 5,283 | |
12
NOTE 4.5. INVENTORIES, NET
Our inventories consisted of the following:
| | | | | | | | | | | | |
| | September 30, | | December 31, | | June 30, | | December 31, | ||||
|
| 2022 |
| 2021 |
| 2023 |
| 2022 | ||||
Raw materials | | $ | 12,127 | | $ | 13,343 | | $ | 8,883 | | $ | 8,883 |
Work-in-progress and finished goods | | | 1,189,166 | | | 1,109,740 | | | 2,373,493 | | | 2,057,779 |
Less: Inventory reserves | | | — | | | — | | | (53,140) | | | — |
Inventories, net | | $ | 1,201,293 | | $ | 1,123,083 | | $ | 2,329,236 | | $ | 2,066,662 |
12
NOTE 5.6. LEASES
On September 2, 2021, we entered into a commercialThe 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 and six months ended June 30, 2023, and June 30, 2022, is as follows:
| | | | | | | | | | | | |
| | For the three months ended June 30, | | For the six months ended June 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Straight-line operating lease expense | | $ | 338,463 | | $ | 192,016 | | $ | 731,728 | | $ | 384,032 |
Variable lease cost | | | 255,348 | | | 141,455 | | | 458,174 | | | 156,737 |
Total operating lease expense | | $ | 593,811 | | $ | 333,471 | | $ | 1,189,902 | | $ | 540,769 |
The finance lease expense for the three months ended June 30, 2023, and June 30, 2022, was approximately $41,823 and nil, respectively. The finance lease expense for the six months ended June 30, 2023, and June 30, 2022, was approximately $83,647 and nil, respectively.
Related party leases
As of June 30, 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 six months ended June 30, 2022, the related party operating leases consisted of one dispensary and one cultivation facility. During the three months ended June 30, 2022, the related party operating leases consisted of one dispensary and one cultivation facility. The retail dispensary lease was with a related party (see Note 11) for retail space for our dispensary in Englewood, CO, withthrough May 2022, when the building was sold to an initial termunaffiliated third-party. As of 5 yearsJune 30, 2023, the ROU asset, operating lease liability, current, and at our option, two additional terms of 3 years each. Rent is $10,000 per month with 3% annual escalations during the initial term and 4% annual escalations during the option term. We also pay our portion of real estate taxes. In June 2022, we amended theoperating lease to amend the option to renew for two additional terms of 3 years each, amended to one additional term of 5 years. No other changes to the lease were made. We accountedliability, non-current for the amendment as a lease modificationrelated party leases were $925,826, $532,221, and remeasured$456,033, respectively. For the lease with an incremental borrowing rate of 20% which resulted in a decrease of $25,805 to the right-of-use operating lease assetthree months ended June 30, 2023 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 20% over a 9.25 remaining year term, resulting in a right-of-use asset and lease liability of $576,335 which are being applied ratably over the remaining term of the lease. As of September 30, 2022, the balance oftotal lease expense for related party leases was $127,790 and $75,849, respectively. For the right-of-use assetsix months ended June 30, 2023 and lease liability was $557,556 and $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 $7,150 per month with a 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 20% over a 15-month term, resulting in a right-of-use asset and lease liability of $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 assettotal lease expense for related party leases was $255,580 and lease liability was $14,311 and $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 $5,124 per month with a 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 20% over a 5.5-year term, resulting in a right-of-use asset and lease liability of $229,501. As of September 30, 2022, the balance of the right-of-use asset and lease liability was $205,660 and $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 5 years and, at our option an additional term of 5 years. The lease expires in March 2031. Rent is $6,683 per month with a 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 20% over a 10-year term, resulting in a right-of-use asset and lease liability of $381,272. As of September 30, 2022, the balance of the right-of-use asset and lease liability was $361,287 and $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 3 years and at our option two additional terms of 3 years each. The lease expires in July 2029. Rent is $3,150 per month with a 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 20% over a 10-year term, resulting in a right-of-use asset and lease liability of $172,053. As of September 30, 2022, the balance of the right-of-use asset and lease liability was $160,267 and $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 $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 20% which resulted in a decrease of $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 20% over a 13 remaining year term, resulting in a right-of-use asset and lease liability of $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 $1,652,655 and $1,681,593,$75,849, respectively.
13
Lease Maturities
Future remaining minimum lease payments were as follows:
| | | | | | | | | |
Year ending December 31, |
| Amount |
| Operating leases |
| Finance lease | |||
2022 (remaining three months) | | $ | 173,339 | ||||||
2023 | |
| 656,415 | ||||||
2023 (remaining six months) | | $ | 614,541 | | $ | 100,000 | |||
2024 | |
| 685,056 | |
| 1,252,825 | |
| 205,400 |
2025 | |
| 702,501 | |
| 1,033,857 | |
| 171,043 |
2026 | |
| 720,840 | |
| 764,190 | |
| 136,940 |
2027 | | | 507,871 | | | 143,102 | |||
Thereafter | |
| 4,632,898 | |
| 965,358 | |
| 818,100 |
Total | |
| 7,571,049 | |
| 5,138,642 | |
| 1,574,585 |
Less: Present value adjustment | |
| (4,563,804) | |
| (1,883,878) | |
| (838,662) |
| | | 3,007,245 | ||||||
Less: Current portion | | | (663,883) | ||||||
Long-term operating lease liability | | $ | 2,343,362 | ||||||
Lease liability | | | 3,254,764 | | | 735,923 | |||
Less: Lease liability, current | | | (1,238,647) | | | (64,455) | |||
Lease liability, non-current | | $ | 2,016,117 | | $ | 671,468 |
The total remaining lease payments in the table above include $1,219,188 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 June 30, 2023, the weighted average remaining term of the Company’s operating leases is 4.71 years, and the remaining term on the finance lease is 9.50 years.
None of the Company’s leases contain residual value guarantees or restrictive covenants.
Supplemental cash flow information
| | | | | | |
For the six months ended June 30, |
| 2023 |
| 2022 | ||
Supplemental cash flow information | | | | | | |
Cash paid for amounts included in operating lease liability | | $ | 701,661 | | $ | 170,276 |
Cash paid for amounts included in finance lease liability | | $ | 100,000 | | $ | — |
Supplemental lease disclosures of non-cash transactions: | | | | | | |
ROU assets obtained in exchange for operating lease liabilities | | $ | 348,825 | | $ | 172,053 |
NOTE 6.7. ACCRUED STOCK PAYABLE
The following tables summarize the changes in accrued common stock payable:
| | | | | | | | | | | | |
| | | | | Number of | | | | | Number of | ||
|
| Amount |
| Shares |
| Amount |
| Shares | ||||
Balance as of December 31, 2020 | | $ | 94,861 | | | 359,415 | ||||||
Trees Waterfront acquisition stock accrual | | | 383,994 | | | 1,669,537 | ||||||
Stock issued | | | (33,961) | | | (259,415) | ||||||
Balance as of December 31, 2021 | | $ | 444,894 | | | 1,769,537 | | $ | 444,894 | | | 1,769,537 |
Stock issued | | | (383,994) | | | (1,669,537) | | | (383,994) | | | (1,669,537) |
Balance as of September 30, 2022 | | $ | 60,900 | | | 100,000 | ||||||
Balance as of December 31, 2022 | | $ | 60,900 | | | 100,000 | ||||||
Stock issued | | | — | | | — | ||||||
Balance as of June 30, 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.
14
The outstanding balance of accrued stock payable as of June 30, 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 June 30, 2023, none of the stock has been issued.
NOTE 7.8. NOTES PAYABLE
Our notes payable consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
|
| September 30, |
| December 31, | June 30, 2023 | | December 31, 2022 | ||||||||||||||||
| | 2022 | | 2021 | Third-party |
| Related-party |
| Total |
| Third-party |
| Related-party |
| Total | ||||||||
2022 12% Notes | | $ | 13,167,795 | | $ | — | $ | 13,167,796 | | $ | 332,204 | | $ | 13,500,000 | | $ | 13,167,796 | | $ | 332,204 | | $ | 13,500,000 |
2020 10% Notes | | | — | | | 6,580,000 | |||||||||||||||||
Related party note payable | | | 332,204 | | | 320,000 | |||||||||||||||||
Trees Acquisition Notes | | | 1,518,755 | | | 2,013,644 | |||||||||||||||||
2023 12% Notes | | — | | | 384,873 | | | 384,873 | | | — | | | — | | | — | ||||||
Trees Transaction Notes | | — | | | 429,125 | | | 429,125 | | | — | | | 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 | | | (1,232,290) | | | (1,911,447) | | (1,263,191) | | | (274,909) | | | (1,538,100) | | | (1,527,346) | | | (361,587) | | | (1,888,933) |
| | | 13,786,464 | | | 7,002,197 | |||||||||||||||||
Total debt | | 14,179,355 | | | 3,596,543 | | | 17,775,898 | | | 13,915,200 | | | 3,887,732 | | | 17,802,932 | ||||||
Less: Current portion | | | (1,307,569) | | | (1,094,398) | | (466,853) | | | (1,412,320) | | | (1,879,173) | | | (179,827) | | | (1,723,517) | | | (1,903,344) |
Long-term portion | | $ | 12,478,895 | | $ | 5,907,799 | $ | 13,712,502 | | $ | 2,184,223 | | $ | 15,896,725 | | $ | 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 $184,902 and nil for the six months ended June 30, 2023 and June 30, 2022, respectively, and $93,831 and nil for the three months ended June 30, 2023 and June 30, 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 $75,629 and nil for the six months ended June 30, 2023 and June 30, 2022, respectively, and $38,379 and nil for the three months ended June 30, 2023 and June 30, 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. Of the
$10,587,250, $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 12%
1415
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$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.$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.$103,577. We recorded amortization of debt discount expense from the 12% Notes of $11,931$154,250 and nil for the six months ended June 30, 2023 and 2022, respectively, and $77,551 and nil for the three and nine months ended SeptemberJune 30, 20222023 and 2021,June 30, 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-scholesBlack-Scholes model to determine the fair value of the 12% Warrants as of September 15, 2022, were:
| | | | | | |
Current stock price |
| $ | 0.20 |
| $ | 0.20 |
Exercise price | | $ | 0.70 | | $ | 0.70 |
Risk-free interest rate | | | 3.66 % | | | 3.66% |
Expected dividend yield | | | — | | | — |
Expected term (in years) | | | 5.0 | | | 5.0 |
Expected volatility | | | 107% | | | 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 $384,873. 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 $16,552 for the six months ended June 30, 2023, and $9,840 for the three months ended June 30, 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.$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 $41,352nil and $21,868$43,023 for the six months ended June 30, 2023 and 2022, and nil and $2,630 for the three months ended SeptemberJune 30, 20222023 and 2021, respectively and $84,375 and $64,891 during the nine months ended SeptemberJune 30, 2022, and 2021, respectively. We determined there was no beneficial conversion feature on the 10% Notes issued in December 2020. The 10% Notes are treated as conventional debt.
1516
For purposes of determining the debt discount, the underlying assumptions used in the black-scholesBlack-Scholes model to determine the fair value of the 10% Warrants as of December 23, 2020, were:
| | | | | | |
Current stock price |
| $ | 0.53 |
| $ | 0.53 |
Exercise price | | $ | 0.56 | | $ | 0.56 |
Risk-free interest rate | | | 0.38 % | | | 0.38% |
Expected dividend yield | | | — | | | — |
Expected term (in years) | | | 5.0 | | | 5.0 |
Expected volatility | | | 115% | | | 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.$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 issued in February 2021 of $454,741nil and $71,150$139,980 for the six months ended June 30, 2023 and 2022, respectively, and nil and $70,377 for the three months ended SeptemberJune 30, 2023 and June 30, 2022, and 2021, respectively and $594,721 and $180,968 during the nine months ended September 30, 2022 and 2021, respectively. The 10% Notes are treated as conventional debt.
For purposes of determining the debt discount, the underlying assumptions used in the black-scholesBlack-Scholes model to determine the fair value of the 10% Warrants as of February 8, 2021, were:
| | | | | | |
Current stock price |
| $ | 1.12 |
| $ | 1.12 |
Exercise price | | $ | 0.56 | | $ | 0.56 |
Risk-free interest rate | | | 0.48 % | | | 0.48% |
Expected dividend yield | | | — | | | — |
Expected term (in years) | | | 5.0 | | | 5.0 |
Expected volatility | | | 118% | | | 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.
1617
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.$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 issued in April 2021 of $775,638nil and $126,025$247,939 for the six months ended June 30, 2023 and 2022, respectively, and nil and $124,654 for the three months ended SeptemberJune 30, 20222023 and 2021, respectively and $1,023,577 and $224,446 for the nine months ended September 30, 2022, and 2021, respectively. The 10% Notes are treated as conventional debt.
For purposes of determining the debt discount, the underlying assumptions used in the black-scholesBlack-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$207,045 was expensed to extinguishment of debt and $1,125,844 was expensed to amortization of debt discount.
NOTE 8.9. 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 bookedrecorded an adjustment to the derivative liability of $1,523,117$1,523,117 as a result.
During the six months ended June 30, 2023, and 2022, we recognized a $5,219 gain and $1,406 loss on the change in fair value of the derivative liability, respectively. During the three months ended June 30, 2023, and 2022, we recognized a $3,912 gain and $59,258 gain on the change in fair value of the derivative liability, respectively. As of SeptemberJune 30, 2022,2023, there were 322,807 of the 2019 Warrants outstanding.
1718
The following are the key assumptions that were used to determine the fair value of the 2019 WarrantsWarrants:
| | | | | | | | | | | | | | | |
|
| December 31, | | September 30, |
| | | June 30, | | December 31, |
| ||||
|
| 2021 | | 2022 |
| | | 2023 | | 2022 |
| ||||
Number of shares underlying the warrants |
| | 322,807 | | | 322,807 | | | | | 322,807 | | | 322,807 | |
Fair market value of stock | | $ | 0.22 | | $ | 0.19 | | | | $ | 0.09 | | $ | 0.15 | |
Exercise price | | $ | 0.40 | | $ | 0.40 | | | | $ | 0.40 | | $ | 0.40 | |
Volatility | | | 94 | % | | 82 | % | | | | 73 | % |
| 78 | % |
Risk-free interest rate | | | 1.26 | % | | 4.06 | % | | | | 5.40 | % |
| 3.99 | % |
Warrant life (years) | | | 2.41 | |
| 1.66 | | | | | 0.92 | |
| 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | | Three months ended June 30, | | Six months ended June 30, | | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | |
| 2023 |
| 2022 |
| 2023 |
| 2022 | | ||||||||
Beginning balance | | $ | 29,723 | | $ | 134,234 | | $ | 28,318 | | $ | 561,368 | | | $ | 4,201 | | $ | 88,981 | | $ | 5,508 | | $ | 28,317 | |
Warrant exercise | | | — | | | — | | | — | | | (1,523,118) | | | | — | | | — | | | — | | | — | |
Change in fair value of warrants derivative liability | | | (16,364) | | | (52,453) | | | (14,959) | | | 1,043,531 | | | | (3,912) | | | (59,258) | | | (5,219) | | | 1,406 | |
Ending balance | | $ | 13,359 | | $ | 81,781 | | $ | 13,359 | | $ | 81,781 | | | $ | 289 | | $ | 29,723 | | $ | 289 | | $ | 29,723 | |
NOTE 9.10. 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 $12,866.66.$12,867. In 2020, we made initial payments (first month’s rent and security deposit) of $39,633.32;$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 takentook 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
In June 2023, via mediation conducted through the Judicial Arbiter Group and a duly executed settlement agreement, we settled this actionlitigation. As part of the settlement, Plaintiff agreed to waive and believerelease the Company et. al from all claims relating to the litigation; and in exchange, the Company has agreed to pay to Plaintiff an aggregate amount of $150,000, payable as follows: (i) one initial installment payment of $30,000 payable on August 1, 2023; and (ii) twenty (20) subsequent monthly payments of $6,000 each. In the event of default under the settlement agreement, the non-defaulting party must provide written notice and the defaulting party has a 7-day right of cure. The settlement agreement also provides for a ‘paper judgment’ in the event of an uncured default by the Company; in which event the full amount of $345,000 becomes due and payable. The parties will file a stipulated motion to administratively close the case and request that the above-referenced force majeure clause presents a complete defense to Plaintiff’s claims.court retain jurisdiction until completion of the settlement payments.
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.
1819
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.
NOTE 10.11. 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 1,180.1,180. Each Unit consists of one share of Series A Preferred and 354,000 Preferred Warrants. The purchase price of each Unit was $1,000,$1,000, for an aggregate amount sold of $1,180,000.$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.$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.$1.05. The warrants contain an anti-dilution provision pursuant to which upon we do a future capital raise at less than $1.00$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$117,131 and per the relative fair value allocation, $1,073,446 was allocated to the Series A proceeds.
On September 10, 2022As of June 30, 2023 we have recorded an accrued dividenddividends of $70,800.$106,200.
Stock-based compensation
We use the fair value method to account for stock-based compensation on the grant date. We recorded $24,958$18,054 and $131,836$28,886 in compensation expense for the three months ended SeptemberJune 30, 20222023 and 2021,2022, respectively and $129,959$45,450 and $194,120$105,001 for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, 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.
On September 3, 2021,During the year ended December 31, 2022, we modified two employees stockgranted options in conjunction with revised employment agreements. Asto purchase 250,000 common shares to directors. The options expire five years from the date of grant and vest over a resultperiod of one year. Fair value of the modification, we recognized an additional $21,525 in compensation expense duringawards at the third quarterdate of 2021.grants totaled $56,348.
1920
During the nine months ended September 30, 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.
The following summarizes Employee Awards activity:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | Weighted- | | | | | | | | | | Weighted- | | | |
| | | | Weighted- | | Average | | | | | | | Weighted- | | Average | | | | ||
| | | | Average | | Remaining | | | | | | | Average | | Remaining | | | | ||
| | Number of | | Exercise Price | | Contractual | | Aggregate | | Number of | | Exercise Price | | Contractual | | Aggregate | ||||
|
| Shares |
| per Share |
| Term (in years) |
| Intrinsic Value |
| Shares |
| per Share |
| Term (in years) |
| Intrinsic Value | ||||
Outstanding as of December 31, 2021 | | 4,903,545 | | $ | 1.09 | | 5.3 | | $ | 22,000 | ||||||||||
Outstanding as of December 31, 2022 | | 4,936,825 | | $ | 1.08 | | 4.4 | | $ | 22,000 | ||||||||||
Granted | | 250,000 | | | 0.34 | |
| |
| | | — | | | — | |
| |
| |
Exercised |
| — |
| | — |
|
|
| |
| ||||||||||
Forfeited or expired |
| (216,720) |
| | 0.87 |
|
|
| |
|
| — |
| | — |
|
|
| |
|
Outstanding as of September 30, 2022 |
| 4,936,825 |
| $ | 1.08 |
| 4.7 | | $ | 22,000 | ||||||||||
Outstanding as of June 30, 2023 |
| 4,936,825 |
| $ | 1.08 |
| 4.4 | | $ | 22,000 | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
Exercisable as of September 30, 2022 |
| 4,314,445 | | $ | 1.16 |
| 4.7 | | $ | 4,000 | ||||||||||
Exercisable as of June 30, 2023 |
| 4,936,825 | | $ | 1.08 |
| 4.4 | | $ | 22,000 |
As of SeptemberJune 30, 2022,2023, there was approximately $31,039 of totalno unrecognized compensation expense related to unvested employee awards, which is expected to be recognized over a weighted-average period of one month.awards.
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,$1.00, $2.00 and $3.00.$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$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.years. We recorded $13,502$26,799 and nil$13,500 in compensation expense for the six months ended June 30, 2023 and 2022, respectively, and $12,905 and $13,500 for the three months ended SeptemberJune 30, 20222023 and 2021, respectively and $27,004 and nil for the nine months ended September 30, 2022, and 2021, respectively. As of SeptemberJune 30, 2022, 2023, none of the RSU’s have vested.
NOTE 11.12. 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 $8,333 for the services, subject to certain adjustments. On September 16, 2022, wethe Company entered into a new consulting agreement with Adam Hershey, inits Interim Chief Executive Officer, pursuant to which Mr. Hershey will continue to serve as ourthe Company’s Interim Chief Executive Officer with compensation equal to $200,000$200,000 per annum, payable by the Company, monthly. The term of the Consulting Agreementconsulting agreement is for a period of one year, with automatic six-month renewals. In addition to the Consulting Agreement, we renewals thereafter unless terminated by either party. The Company has also agreed to extend Mr. Hershey’s warrants to purchase 7,280,007 shares of Common Stock, held by an affiliate of Mr. Hershey, for an additional two years, with an expiration date of until, May 29, 2027. The modificationexercise price and all other terms and conditions of such warrants were recorded as equity and equity issuance costs in the amount of $367,445.remain unchanged. We paid $24,999$50,000 and $24,999 for the three months ended SeptemberJune 30, 2023 and 2022, respectively, and 2021$100,000 and $74,997$49,998 for the ninesix months ended SeptemberJune 30, 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 2021.executive level employee of the Company. See Note 3 for additional information regarding the Station 2 asset acquisition.
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 $200,000 per annum, payable monthly. Payments are to start October 1, 2022.
20
WeThe Company currently havehas a lease agreement with Dalton Adventures, LLC in which we rentthe 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 paid approximately $89,073 and $115,000incurred $75,849 in rentrelated party lease expense for the three months ended SeptemberJune 30, 20222023 and 2021,2022, respectively, and $267,219$151,698 and $344,000 in rent$75,849 for the ninesix months ended SeptemberJune 30, 2023 and 2022, respectively. See Note 6 for further discussion of the Company’s obligations associated with related party leases.
21
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 2021,an executive level employee of the Company are owners of 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 June 30, 2023 and 2022, respectively, and $103,883 and nil for the six months ended June 30, 2023 and 2022, respectively. See Note 6 for further discussion of the Company’s obligations associated with related party leases.
WeThe Company had a lease agreement with Bellewood Holdings, LLC in which we rentedthe 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 paid approximately incurred nil and $22,574 of rentrelated party lease expense for the three months ended SeptemberJune 30, 20222023 and 2021,2022, respectively, and $52,287nil and nil$52,287 for the ninesix months ended SeptemberJune 30, 2023 and 2022, and 2021, respectively. See Note 6 for further discussion of the Company’s obligations associated with related-party leases.
On December 23, 2020, four of our current board members purchased senior convertible promissory notes from the Company for an aggregate amount of $320,000. These notes are included in the 10% Notes discussed in Note 7. On September 15, 2022, all four of our current board members transferred a portion of their 10% Note amounts and some accrued interest into the 12% Notes discussed in Note 7. The total amount rolled was $332,204. Accrued interest earned and owed to the board members was $1,292 as of September 30, 2022.
NOTE 12.13. 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. The following information is presented net of discontinued operations.
Three months ended SeptemberJune 30,
| | | | | | | | | | | | | | | | | | | | | | | | |
2022 |
| Retail |
| Cultivation |
| Eliminations | | Total | ||||||||||||||||
2023 |
| Retail |
| Cultivation |
| Eliminations | | Total | ||||||||||||||||
Revenues | | $ | 3,080,778 | | $ | 448,623 | | $ | (352,224) | | $ | 3,177,177 | | $ | 5,079,564 | | $ | 944,830 | | $ | (926,400) | | $ | 5,097,994 |
Costs and expenses | | | (2,413,190) | | | (849,269) | | | 352,224 | | | (2,910,235) | | | (5,347,268) | | | (1,046,274) | | | 926,400 | | | (5,467,142) |
Segment operating income | | $ | 667,588 | | $ | (400,646) | | $ | — | | | 266,942 | ||||||||||||
Segment operating loss | | $ | (267,704) | | $ | (101,444) | | $ | — | | | (369,148) | ||||||||||||
Corporate expenses | | | | | | | | | | | | (2,971,621) | | | | | | | | | | | | (1,667,007) |
Net loss from continuing operations before income taxes | | | | |
| | | | | | $ | (2,704,679) | | | | |
| | | | | | $ | (2,036,155) |
| | | | | | | | | | | | | | | | | | | | | | | | |
2021 |
| Retail |
| Cultivation | | Eliminations |
| Total | ||||||||||||||||
2022 |
| Retail |
| Cultivation | | Eliminations |
| Total | ||||||||||||||||
Revenues | | $ | 855,841 | | $ | 835,719 | | $ | (25,918) | | $ | 1,665,642 | | $ | 3,158,335 | | $ | 349,338 | | $ | (271,946) | | $ | 3,235,727 |
Costs and expenses | | | (891,126) | | | (865,490) | | | 9,048 | | | (1,747,568) | | | (2,162,644) | | | (414,732) | | | 271,946 | | | (2,305,430) |
Segment operating income | | $ | (35,285) | | $ | (29,771) | | $ | (16,870) | | | (81,926) | ||||||||||||
Segment operating income (loss) | | $ | 995,691 | | $ | (65,394) | | $ | — | | | 930,297 | ||||||||||||
Corporate expenses | |
|
| |
|
| | | | | | (1,205,064) | |
|
| |
|
| | | | | | (1,113,245) |
Net loss from continuing operations before income taxes | | | | |
| | | | | | $ | (1,286,990) | | | | |
| | | | | | $ | (182,948) |
NineSix months ended SeptemberJune 30,
| | | | | | | | | | | | | | | | | | | | | | | | |
2022 |
| Retail |
| Cultivation |
| Eliminations |
| Total | ||||||||||||||||
2023 |
| Retail |
| Cultivation |
| Eliminations |
| Total | ||||||||||||||||
Total revenues | | $ | 9,536,657 | | $ | 1,316,241 | | $ | (866,686) | | $ | 9,986,212 | | $ | 10,190,183 | | $ | 1,628,847 | | $ | (1,610,417) | | $ | 10,208,613 |
Costs and expenses | |
| (7,169,103) | |
| (1,971,550) | |
| 866,686 | |
| (8,273,967) | |
| (9,882,836) | |
| (2,185,847) | |
| 1,610,417 | |
| (10,458,266) |
Operating (loss) income | | $ | 2,367,554 | | $ | (655,309) | | $ | 0 | | | 1,712,245 | ||||||||||||
Segment operating income (loss) | | $ | 307,347 | | $ | (557,000) | | $ | — | | | (249,653) | ||||||||||||
Corporate expenses | |
| | |
|
| |
|
| |
| (5,466,211) | |
| | |
|
| |
|
| |
| (3,587,300) |
Net loss from continuing operations before income taxes | | | | | | | | | | | $ | (3,753,966) | | | | | | | | | | | $ | (3,836,953) |
2122
| | | | | | | | | | | | |
2021 |
| Retail |
| Cultivation |
| Eliminations |
| Total | ||||
Total revenues | | $ | 855,841 | | $ | 2,183,660 | |
| (25,918) | | $ | 3,013,583 |
Costs and expenses | |
| (891,126) | |
| (2,340,913) | |
| 25,918 | |
| (3,206,121) |
Operating income | | $ | (35,285) | | $ | (157,253) | | $ | — | | | (192,538) |
Corporate expenses | | | | |
|
| |
|
| | | (4,493,244) |
Net loss from continuing operations before income taxes | | | | | | | | | | | $ | (4,685,782) |
| | | | | | |
| | September 30, | | December 31, | ||
Total assets |
| 2022 |
| 2021 | ||
Retail | | $ | 18,991,886 | | $ | 16,831,580 |
Cultivation | | | 3,084,202 | | | 3,634,406 |
Corporate | |
| 5,775,358 | |
| 1,709,496 |
Total assets - segments | | | 27,851,446 | | | 22,175,482 |
Intercompany eliminations | | | (56,029) | | | (151,137) |
Total assets - consolidated | | $ | 27,795,417 | | $ | 22,024,345 |
| | | | | | | | | | | | |
2022 |
| Retail |
| Cultivation |
| Eliminations |
| Total | ||||
Total revenues | | $ | 6,455,881 | | $ | 867,616 | |
| (514,462) | | $ | 6,809,035 |
Costs and expenses | |
| (4,755,913) | |
| (1,122,281) | |
| 514,462 | |
| (5,363,732) |
Segment operating income (loss) | | $ | 1,699,968 | | $ | (254,665) | | $ | — | | | 1,445,303 |
Corporate expenses | | | | |
|
| |
|
| | | (2,494,590) |
Net loss from continuing operations before income taxes | | | | | | | | | | | $ | (1,049,287) |
| | | | | | |
| | June 30, | | December 31, | ||
Total assets |
| 2023 |
| 2022 | ||
Retail |
| $ | 25,047,473 | | $ | 25,212,245 |
Cultivation | | | 4,475,373 | | | 4,628,452 |
Corporate | |
| 673,465 | |
| 1,985,455 |
Total assets - segments | | | 30,196,311 | | | 31,826,152 |
Intercompany eliminations | | | (828,098) | | | (131,439) |
Total assets - consolidated | | $ | 29,368,213 | | $ | 31,694,713 |
NOTE 13.14. SUBSEQUENT EVENTS
The Company evaluated subsequent events through the date that the accompanying financial statements were issued and has determined that the events below occurred subsequent to June 30, 2023.
On September 13, 2022, we entered into an Asset Purchase Agreement (“APA”) with Ancient AlternativesJuly 1, 2023, the Company and its subsidiaries Green Tree Colorado, LLC, (“Ancient”), Natural Alternatives For Life,Green Tree Cultivation LLC, (“Natural”), Mountainside Industries,GT Retail LLC, (“Mountainside”), Hillside Enterprises,and Green Tree MIP LLC, (“Hillside”), and GT Creations, LLC (“GT Creations”), each a Colorado limited liability company, entered into a settlement agreement (“GreenSettlement Agreement”) with Allyson Feiler Downing (“Downing”) and Loree Schwartz (“Schwartz” and together with Downing, “Green Tree Entities”Parties”), pursuant to which wethe Company and the Green Tree Parties agreed to purchase substantially alltransfer and assign to new entities controlled by the Green Tree Parties, cannabis licenses and related assets owned by (i) GT Retail relating to a cultivation facility and a retail dispensary located in Berthoud, Colorado; (ii) GT MIP relating to a ‘marijuana infused product’ dispensary located in Boulder County, Colorado; and (iii) certain intellectual property in respect thereof (collectively, the “Transferred Assets”). The Company retained accounts payable and certain cannabis inventory in respect of the assetsTransferred Assets. Closing of the transaction is subject to approval of the license transfers by the Colorado Marijuana Enforcement Division as well as local regulatory authorities.
In exchange for the transfer to the Green Tree Parties of the Transferred Assets, the Company and the Green Tree Parties agreed that upon closing, the Green Tree Parties shall transfer and assign to the Company, and the Company shall redeem, 9,917,574 shares of the Company’s Common Stock owned by the Green Tree Parties and originally issued to the Green Tree Parties in the acquisition consummated in December 2022 pursuant to that certain Asset Purchase Agreement dated September 13, 2022, as amended, by and among the Company, Downing, Schwartz and various other parties thereto (the “APA”). Further, other than payments due Michael Abrams, no further payments shall be due either of the Green Tree EntitiesParties or any affiliate thereof under the APA or otherwise.
On July 1, 2023, the Company terminated the employment of each of Downing and Schwartz and each of Downing and Schwartz entered into a Termination of Employment Agreement and Mutual General Release with the Company (“Green Tree Acquisition”Termination Agreements”). The purchase price in connectionTermination Agreements provide for the termination of employment by the Company of each of Downing and Schwartz, including a termination of their respective Employment Agreements with the Green Tree Acquisition consists of cash equal to $500,000 payable at closing; 17,977,528 shares (“Buyer Shares”) of our common stock, par value $0.01 per share (“Common Stock”), deliverable at closing;Company dated December 12, 2022, mutual releases, and an additional $3,500,000 in cash in fifteen (15) equal monthly payments commencing on the 9-month anniversarya waiver of the closing. The number of Buyer Shares is subject to adjustment based upon a formula specifiednon-compete and non-solicitation agreements contained in the APA. The APA provides that we will assume certain liabilities at closing, including certain manufacturing agreements between GT Creationsparties also executed a separate waiver in respect thereof (“Waiver”).
Furthermore, also on July 1, 2023, the Company and affiliates ofa newly-formed entity controlled by the Green Tree Entities. The Green Tree Acquisition isParties entered into a consulting agreement pursuant to which such entity together with Downing agreed to pay consulting fees to the Company in an aggregate amount equal to $289,452, subject to certain conditions, including regulatory approvaland conditioned upon the Company’s completion of payments under the Colorado Marijuana Enforcement Division.APA to Michael Abrams of $562,381 (“Consulting Agreement”).
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 $225,000, with an agreed one-time bonus equal to $383,071.43, payable within 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 $150,000, also with an agreed one-time bonus equal to $383,071.43, payable within 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 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 $47,619.05 within 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 $186,238.09 within 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 $641,454.27, payable as follows: Cash at closing of $256,581.71; and a cash amount equal to $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 $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
2223
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, weJuly 1, 2023, the parties also entered into an Asset Purchasea Transition Services Agreement with GMC, LLC (“GMC”) and certain equity holders of GMC party thereto, pursuant to which we agreedthe Green Tree Parties will provide certain administrative and management services on a transition basis to purchase substantially allthe Company in respect of the assets of GMC, including two cannabis licenses held by GMC, certain inventory, contracts and other related assets (“GMC Acquisition”). The purchase priceTransferred Assets in connection withexchange for retaining all revenue generated from the GMC Acquisition consists of cash equal to $1,200,000 payable at closing; 4,494,382 shares of our common stock, issuablebusinesses relating to the GMC members upon closing; and an amount equal to $83,333.33 per month, commencing onTransferred Assets; until such time as the 12-month anniversary oftransfer under the closing, and continuing each month thereafter for a total of 18 months, for a total additional consideration of $1,500,000. The GMC AcquisitionSettlement Agreement is subject to certain conditions, including regulatory approval of the Colorado Marijuana Enforcement Division.consummated.
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, 2021.2022. 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”).
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.
2324
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 three (3) cultivation facilities in Colorado as follows:
● | SevenFive Farm – 3705 N. 75th Street, Boulder – Retail cultivation license only |
● | 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. During the three months ended SeptemberJune 30, 2023, 81% of SevenFive’s revenue was with two customers. During the three months ended June 30, 2022, and 2021, 79% and 24%78 % of SevenFive’s revenue was with one and two customers, respectively.customer. During the ninesix months ended SeptemberJune 30, 2023, 77% of SevenFive’s revenue was with two customers. During the six months ended June 30, 2022, and 2021, 66% and 12%59% of SevenFive’s revenue was with one customer, respectively.customer. The customercustomers in both 2023 and 2022 is aare related party dispensarydispensaries and the revenues associated with this customer isthese customers are eliminated in consolidation.
Discontinued Operations - Operations ConsultingDuring the three months ended June 30, 2023, 90% of Green Tree’s revenue was with four customers. During the six months ended June 30, 2023, 83% of Green Tree’s revenue was with three customers. The customers in 2023 are related party dispensaries 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 expansionrevenues associated with these customers are eliminated in consolidation.
25
Table of existing operations.Contents
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 unaudited condensed consolidated financial statements and the notes thereto in this report.
| | | | | | | | | | | | |
| | Three months ended June 30, | | | | | Percent |
| ||||
| | 2023 | | 2022 | | Change | | Change |
| |||
Revenues |
| $ | 5,097,994 | | $ | 3,235,727 |
| $ | 1,862,267 |
| 58 | % |
Costs and expenses | |
| (6,568,727) | | | (3,098,227) | | | (3,470,500) | | 112 | % |
Other expense | |
| (565,422) | | | (320,448) | | | (244,974) | | 76 | % |
Net loss from continuing operations before income taxes | |
| (2,036,155) | | | (182,948) | | | (1,853,207) | | 1,013 | % |
Loss from discontinued operations | |
| — | | | — | | | — | | — | % |
Loss from operations before income taxes | | $ | (2,036,155) | | $ | (182,948) | | $ | (1,853,207) | | 1,013 | % |
| | | | | | | | | | | | |
| | 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 |
| | Six months ended June 30, | | | | | Percent |
| ||||||||
| | 2022 | | 2021 | | Change | | Change |
| | 2023 | | 2022 | | Change | | Change |
| ||||||
Revenues |
| $ | 9,986,212 |
| $ | 3,028,055 |
| $ | 6,958,157 |
| 230 | % |
| $ | 10,208,613 |
| $ | 6,809,035 |
| $ | 3,399,578 |
| 50 | % |
Costs and expenses | |
| (10,922,952) | |
| (5,653,952) | |
| (5,269,000) | | 93 | % | |
| (12,850,463) | |
| (7,088,578) | |
| (5,761,885) | | 81 | % |
Other expense | |
| (2,563,226) | |
| (2,059,885) | |
| (503,341) | | 24 | % | |
| (1,195,103) | |
| (769,744) | |
| (425,359) | | 55 | % |
Net loss from continuing operations before income taxes | |
| (3,499,966) | |
| (4,685,782) | |
| 1,185,816 | | (25) | % | |
| (3,836,953) | |
| (1,049,287) | |
| (2,787,666) | | 266 | % |
Loss from discontinued operations | |
| 5,478 | |
| (377,134) | |
| 382,612 | | (101) | % | ||||||||||||
Gain (loss) from discontinued operations | |
| — | |
| 5,283 | |
| (5,283) | | (100) | % | ||||||||||||
Loss from operations before income taxes | | $ | (3,494,488) | | $ | (5,062,916) | | $ | 1,568,428 | | (31) | % | | $ | (3,836,953) | | $ | (1,044,004) | | $ | (2,792,949) | | 268 | % |
Revenues
The addition of our Retail segmentactivity driven by Green Tree and Green Man, which we acquired in Q4 2022, contributed to the significant increase in revenues for the three and nine months ended SeptemberJune 30, 2022. See Segment discussions below2023 compared to June 30, 2022, and for further details.the six months ended June 30, 2023 and June 30, 2022, respectively.
Costs and expenses
| | | | | | | | | | | | |
| | Three months ended June 30, | | | | | Percent |
| ||||
| | 2023 | | 2022 | | Change | | Change |
| |||
Cost of sales |
| $ | 3,230,777 |
| $ | 1,745,575 |
| $ | 1,485,202 |
| 85 | % |
Selling, general and administrative | |
| 2,485,751 | |
| 1,212,796 | |
| 1,272,955 |
| 105 | % |
Stock-based compensation | |
| 18,054 | |
| 42,386 | |
| (24,332) |
| (57) | % |
Professional fees | |
| 543,566 | |
| 237,461 | |
| 306,105 |
| 129 | % |
Depreciation and amortization | |
| 290,579 | |
| (139,991) | |
| 430,570 |
| (308) | % |
| | $ | 6,568,727 | | $ | 3,098,227 | | $ | 3,470,500 |
| 112 | % |
| | | | | | | | | | | | |
| | Six months ended June 30, | | | | | Percent |
| ||||
|
| 2023 |
| 2022 |
| Change |
| Change |
| |||
Cost of sales | | $ | 6,288,491 | | $ | 3,820,463 | | $ | 2,468,028 | | 65 | % |
Selling, general and administrative | |
| 4,781,991 | |
| 2,538,914 | |
| 2,243,077 |
| 88 | % |
Stock-based compensation | |
| 45,450 | |
| 118,501 | |
| (73,051) |
| (62) | % |
Professional fees | |
| 1,151,110 | |
| 518,845 | |
| 632,265 |
| 122 | % |
Depreciation and amortization | |
| 583,421 | |
| 91,855 | |
| 491,566 |
| 535 | % |
| | $ | 12,850,463 | | $ | 7,088,578 | | $ | 5,761,885 |
| 81 | % |
Cost of sales increased three and six months ended June 30, 2023, as compared to June 30, 2022 due to the additional sales driven from the Green Tree and Green Man acquisitions.
Selling, general and administrative expense increased for the three and six months ended June 30, 2023, as compared to June 30, 2022, due to the increased expenses resulting from the acquisition of three dispensaries in the fourth quarter of
2426
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 license in the first quarter of 2022.2023. This resulted in an increase in employees and an increase in rent expense.
Professional fees consist primarily of accounting and legal expenses. Professional fees increased slightly for the three and six months ended SeptemberJune 30, 20222023 as compared to SeptemberJune 30, 20212022 due to the increased acquisition activity in the thirdfirst quarter of 2022. Professional fees decreased slightly2023, as well as the accrued legal expenses for the nine months ended September 30, 2022, as compared tosettlement reached in the nine months ended September 30, 2021, due to a concentrated effort on reductionsecond quarter of expenses.2023.
Stock-based compensation included the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | | Percent |
| | Three months ended June 30, | | | | | Percent |
| ||||||||
| | 2022 | | 2021 | | Change | | Change |
| | 2023 | | 2022 | | Change | | Change |
| ||||||
Employee awards |
| $ | 38,460 |
| $ | 131,836 |
| $ | (93,376) |
| (71) | % |
| $ | 18,054 |
| $ | 42,386 |
| $ | (24,332) |
| (57) | % |
| | $ | 38,460 | | $ | 131,836 | | $ | (93,376) |
| (71) | % | | $ | 18,054 | | $ | 42,386 | | $ | (24,332) |
| (57) | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | | | | Percent |
| | Six months ended June 30, | | | | | Percent |
| ||||||||
| | 2022 | | 2021 | | Change | | Change |
| | 2023 | | 2022 | | Change | | Change |
| ||||||
Employee awards |
| $ | 156,961 |
| $ | 194,120 |
| $ | (37,159) |
| (19) | % |
| $ | 45,450 |
| $ | 118,501 |
| $ | (73,051) |
| (62) | % |
| | $ | 156,961 | | $ | 194,120 | | $ | (37,159) |
| (19) | % | | $ | 45,450 | | $ | 118,501 | | $ | (73,051) |
| (62) | % |
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 ninesix months ended SeptemberJune 30, 2022,2023, as compared to September 30, 2021,2022, is due to not issuing options in the thirdsecond quarter of 2022.2023.
25
Other Expense
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | | Percent |
| | Three months ended June 30, | | | | | Percent |
| ||||||||
|
| 2022 |
| 2021 |
| Change |
| Change |
|
| 2023 |
| 2022 |
| Change |
| Change |
| ||||||
Amortization of debt discount | | $ | 1,285,392 | | $ | 216,516 | | $ | 1,068,876 | | 494 | % | | $ | 220,077 | | $ | 216,661 | | $ | 3,416 | | 2 | % |
Interest expense | |
| 213,833 | | | 150,503 | | | 63,330 | | 42 | % | |
| 716,728 | | | 176,045 | | | 540,683 | | 307 | % |
Loss on extinguishment of debt | | | 310,622 | | | 233,374 | | | 77,248 | | 33 | % | ||||||||||||
(Gain) loss on derivative liability | | | (16,365) | | | (52,452) | | | 36,087 | | (69) | % | | | (3,912) | | | (59,258) | | | 55,346 | | (93) | % |
Gain on sale of assets | |
| — | | | (132,979) | | | 132,979 | | (100) | % | |
| 2,400 | | | (13,000) | | | 15,400 | | (118) | % |
Other income | | | (369,871) | | | — | | | (369,871) | | 100 | % | ||||||||||||
| | $ | 1,793,482 | | $ | 414,962 | | $ | 1,378,520 | | 332 | % | | $ | 565,422 | | $ | 320,448 | | $ | 244,974 | | 76 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | | | | Percent |
| | Six months ended June 30, | | | | | Percent |
| ||||||||
|
| 2022 |
| 2021 |
| Change |
| Change |
|
| 2023 |
| 2022 |
| Change |
| Change |
| ||||||
Amortization of debt discount | | $ | 1,716,334 | | $ | 470,306 | | $ | 1,246,028 | | 265 | % | | $ | 401,754 | | $ | 430,942 | | $ | (29,188) | | (7) | % |
Interest expense | |
| 564,229 | |
| 444,186 | |
| 120,043 | | 27 | % | |
| 1,166,039 | |
| 350,396 | |
| 815,643 | | 233 | % |
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) | % | ||||||||||||
Gain (loss) on derivative liability | |
| (5,219) | |
| 1,406 | |
| (6,625) | | (471) | % | ||||||||||||
(Gain) loss on sale of assets | | | 2,400 | | | (13,000) | | | 15,400 | | (118) | % | ||||||||||||
Other income | | | (369,871) | | | — | | | (369,871) | | 100 | % | ||||||||||||
| | $ | 2,563,226 | | $ | 2,059,885 | | $ | 503,341 | | 24 | % | | $ | 1,195,103 | | $ | 769,744 | | $ | 425,359 | | 55 | % |
Amortization of debt discount and loss on extinguishment of debt increased during the three and nine months ended SeptemberJune 30, 2022,2023, as compared to SeptemberJune 30, 2021,2022 due to the senior convertible promissory notes with warrants (“issuance of 12% Notes”) issued in SeptemberNotes related to the asset acquisition that occurred during Q1 2023. Amortization of debt discount decreased during the six months ended June 30, 2023, as compared to June 30, 2022, anddue to the rollover and repayment of the 10% Notes. Interest expense increased during the three and ninesix months ended SeptemberJune 30, 2022,2023, as compared to SeptemberJune 30, 2021,2022, due to the addition of the 10%12% Notes with an interest rate of 10%12% in 2021.Q3 2022. 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.
2627
CultivationRetail
| | | | | | | | | | | | |
| | 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 |
| | Three months ended June 30, | | | | | Percent |
| ||||||||
|
| 2022 |
| 2021 |
| Change |
| Change |
|
| 2023 |
| 2022 |
| Change |
| Change |
| ||||||
Revenues | | $ | 1,316,241 | | $ | 2,183,660 | | $ | (867,419) |
| (40) | % | | $ | 5,079,564 | | $ | 3,158,335 | | $ | 1,921,229 |
| 61 | % |
Costs and expenses | |
| (1,971,550) | |
| (2,340,913) | |
| 369,363 |
| (16) | % | |
| (5,347,268) | |
| (2,162,644) | |
| (3,184,624) |
| 147 | % |
| | $ | (655,309) | | $ | (157,253) | | $ | (498,056) |
| 317 | % | ||||||||||||
Segment operating (loss) income | | $ | (267,704) | | $ | 995,691 | | $ | (1,263,395) |
| (127) | % |
| | | | | | | | | | | | |
| | Six months ended June 30, | | | | | Percent |
| ||||
| | 2023 | | 2022 | | Change | | Change |
| |||
Revenues |
| $ | 10,190,183 |
| $ | 6,455,881 |
| $ | 3,734,302 |
| 58 | % |
Costs and expenses | |
| (9,882,836) | |
| (4,755,913) | |
| (5,126,923) |
| 108 | % |
Segment operating income | | $ | 307,347 | | $ | 1,699,968 | | $ | (1,392,621) |
| (82) | % |
With the acquisition of Green Tree on December 12, 2022, and the acquisition of Green Man on December 19, 2022, as well as the acquisition of the dispensary license for 468 Federal Street, retail revenue increased for the three and six months ended June 30, 2023, compared to June 30, 2022. Costs and expenses also increased as a result of the acquisitions.
Cultivation
| | | | | | | | | | | | |
| | Three months ended June 30, | | | | | Percent |
| ||||
|
| 2023 |
| 2022 |
| Change |
| Change |
| |||
Revenues | | $ | 944,830 | | $ | 349,338 | | $ | 595,492 |
| 170 | % |
Costs and expenses | |
| (1,046,274) | |
| (414,732) | |
| (631,542) |
| 152 | % |
Segment operating loss | | $ | (101,444) | | $ | (65,394) | | $ | (36,050) |
| 55 | % |
| | | | | | | | | | | | |
| | Six months ended June 30, | | | | | Percent |
| ||||
|
| 2023 |
| 2022 |
| Change |
| Change |
| |||
Revenues | | $ | 1,628,847 | | $ | 867,616 | | $ | 761,231 |
| 88 | % |
Costs and expenses | |
| (2,185,847) | |
| (1,122,281) | |
| (1,063,566) |
| 95 | % |
Segment operating loss | | $ | (557,000) | | $ | (254,665) | | $ | (302,335) |
| 119 | % |
The decreaseincrease in revenues for the three and ninesix months ended SeptemberJune 30, 2023 compared to June 30, 2022 over prior year is dueattributed to the decrease in overall market price of flower. The decrease in gross margin is due to overall increase in sales made to our dispensaries which are eliminated in consolidation. The increase in cost and expenses duefor the three and six months ended June 30, 2023 compared to inflation.June 30, 2022 is attributed to the acquisitions of Green Tree and Green Man that occurred during December of 2022, as well as the increase in sales made to our dispensaries. The costs and expense incurred between our dispensaries and cultivation locations are eliminated in consolidation.
Liquidity
Sources of liquidity
Our sources of liquidity include cash generated from operations,historically have included the cash exercise of common stock options and warrants, debt, and the issuance of common stock or other equity-based instruments. We anticipate our significant uses of resources will include funding operations and developing infrastructure.operations.
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.
28
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$643,968 and $2,054,050$2,583,833 as of SeptemberJune 30, 2022,2023 and December 31, 2021,2022, respectively. Our cash flows from operating, investing and financing activities were as follows:
| | | | | | | | | | | | |
| | Nine months ended September 30, | | Six months ended June 30, | ||||||||
| | 2022 | | 2021 | | 2023 | | 2022 | ||||
Net cash used in operating activities |
| $ | (894,643) |
| $ | (2,489,130) |
| $ | (883,305) |
| $ | (245,489) |
Net cash used in investing activities | | $ | (202,485) | | $ | (936,719) | | $ | (267,314) | | $ | (182,792) |
Net cash provided by financing activities | | $ | 5,045,238 | | $ | 5,134,634 | ||||||
Net cash used in financing activities | | $ | (789,246) | | $ | (552,873) |
Net cash used in operating activities decreasedincreased in 20222023 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.increased net loss driven from the expenses described above.
Net cash used in investing activities for the ninesix months ended SeptemberJune 30, 2023 increased from June 30, 2022, increased from September 30, 2021, due toas a result of the purchase price of Trees MLK, Inc and the purchase of property and equipment, offset byadditional license acquired in February 2023 exceeding the receipt of notes receivable.acquisition activity in the six month prior period.
27
Net cash provided byused in financing activities for the ninethree and six months ended SeptemberJune 30, 2023 increased from June 30, 2022 relateddue to the cash proceeds of the new debt of $10,587,250, offset by paymentan increase in payments on notes payable of $3,987,250.and finance leases.
Capital Resources
We had no material commitments for capital expenditures as of SeptemberJune 30, 2022.2023. Part of our growth strategy, however, is to acquire operating businesses. We expect to fund such activity through cash on hand, the issuance of debt, common stock, warrants for our common stock or a combination thereof.
29
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)loss per share.
We believe that the disclosure of Adjusted EBITDA provides investors with a better comparison of our period-to-period operating results. We exclude the effects of certain items when we evaluate key measures of our performance internally and in assessing the impact of known trends and uncertainties on our business. We also believe that excluding the effects of these items provides a more comparable view of the underlying dynamics of our operations. We believe such information provides additional meaningful methods of evaluating certain aspects of our operating performance from period to period on a basis that may not be otherwise apparent on a GAAP basis. This supplemental financial information should be considered in addition to, not in lieu of, our unaudited condensed consolidated financial statements.
The following table reconciles Adjusted EBITDA to the most directly comparable GAAP measure, which is net loss.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | Three months ended June 30, | | Six months ended June 30, | ||||||||||||||||
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 | ||||||||
Net loss from continuing operations |
| $ | (2,704,679) |
| $ | (1,327,595) |
| $ | (3,753,966) |
| $ | (5,062,916) |
| $ | (2,036,155) |
| $ | (182,948) |
| $ | (3,922,689) |
| $ | (1,049,287) |
Adjustment for loss from discontinued operations | |
| 195 | |
| 40,605 | |
| (5,478) | |
| 377,134 | |
| — | |
| — | |
| — | |
| 5,283 |
Net loss | |
| (2,704,484) | |
| (1,286,990) | |
| (3,759,444) | |
| (4,685,782) | |
| (2,036,155) | |
| (182,948) | |
| (3,922,689) | |
| (1,044,004) |
Adjustments: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Stock-based compensation | |
| 38,460 | |
| 131,836 | |
| 156,961 | |
| 194,120 | |
| 18,054 | |
| 42,386 | |
| 45,450 | |
| 118,501 |
Depreciation and amortization | | | 98,915 | | | 115,355 | | | 190,770 | | | 305,824 | | | 290,579 | | | (139,991) | | | 583,421 | | | 91,855 |
Amortization of debt discount and equity issuance costs | |
| 1,285,392 | |
| 216,516 | |
| 1,716,334 | |
| 470,306 | |
| 220,077 | |
| 216,661 | |
| 401,754 | |
| 430,942 |
Loss on extinguishment of debt | | | 310,622 | | | 233,374 | | | 310,622 | | | 233,374 | ||||||||||||
Interest expense | |
| 213,833 | |
| 150,503 | |
| 564,229 | |
| 444,186 | |
| 716,728 | |
| 176,045 | |
| 1,166,039 | |
| 350,396 |
Gain on sale of assets | | | — | | | (132,979) | | | (13,000) | | | (131,512) | ||||||||||||
Loss (gain) on sale of assets | | | 2,400 | | | (13,000) | | | 2,400 | | | (13,000) | ||||||||||||
(Gain) loss on derivative liability | |
| (16,365) | |
| (52,452) | |
| (14,959) | |
| 1,043,531 | |
| (3,912) | |
| (59,258) | |
| (5,219) | |
| 1,406 |
Severance | | | — | | | — | | | 4,731 | | | — | | | — | | | — | | | — | | | 4,731 |
Acquisition related expenses | | | 162,634 | | | 35,360 | | | 193,956 | | | 98,243 | | | — | | | 19,563 | | | — | | | 27,063 |
Provision for income taxes | | | 254,000 | | | — | | | 254,000 | | | — | | | — | | | — | | | 85,736 | | | — |
Other income | | | (369,871) | | | — | | | (369,871) | | | — | ||||||||||||
Total adjustments | |
| 2,347,491 | |
| 697,513 | |
| 3,363,644 | |
| 2,658,072 | |
| 874,055 | |
| 242,406 | |
| 1,909,710 | |
| 1,011,894 |
Adjusted EBITDA | | $ | (356,993) | | $ | (589,477) | | $ | (395,800) | | $ | (2,027,710) | | $ | (1,162,100) | | $ | 59,458 | | $ | (2,012,979) | | $ | (32,110) |
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, 2021,2022, and Note 1 to the Unaudited Condensed Consolidated Financial Statements in this Form 10-Q.
30
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 SeptemberJune 30, 2022,2023, 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 SeptemberJune 30, 2022.2023.
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.
29
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during the thirdsecond quarter of 2022,2023, 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.
31
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 $12,866.66.$12,867. In 2020, we made initial payments (first month’s rent and security deposit) of $39,633.32;$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 takentook 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
In June 2023, via mediation conducted through the Judicial Arbiter Group and a duly executed settlement agreement, we settled this actionlitigation. As part of the settlement, Plaintiff agreed to waive and believe thatrelease 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 answerCompany et. al from all claims relating to the complaint, denying eachlitigation; and in exchange, the Company has agreed to pay to Plaintiff an aggregate amount of Plaintiff’s substantive claims. We also asserted appropriate affirmative defenses, including$150,000, payable as follows: (i) one initial installment payment of $30,000 payable on August 1, 2023; and (ii) twenty (20) subsequent monthly payments of $6,000 each. In the force majeure clauseevent of the lease, which provides that we are not liabledefault under the leasesettlement agreement, the non-defaulting party must provide written notice and the defaulting party has a 7-day right of cure. The settlement agreement also provides for a ‘paper judgment’ in the event of an uncured default by the Company; in which event the full amount of $345,000 becomes due and payable. The parties will file a varietystipulated motion to administratively close the case and request that the court retain jurisdiction until completion 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.settlement payments.
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, 2021.2022.
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 |
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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. | |
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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: | | /s/ Adam Hershey |
| | Adam Hershey, Interim Chief Executive Officer |
| | Principal Executive Officer |
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| | /s/ |
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| | Principal Financial and Accounting Officer |
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