TREES CORPORATION
This Management's Discussion and Analysis ("MD&A") is intended to provide an
understanding of our financial condition, results of operations and cash flows
by focusing on changes in certain key measures from year to year. This
discussion should be read in conjunction with the Condensed Consolidated
Unaudited Financial Statements contained in this Quarterly Report on Form 10-Q
and the Consolidated Financial Statements and related notes and MD&A appearing
in our Annual Report on Form 10-K as of and for the year ended December 31,
2021 . The results of operations for an interim period may not give a true
indication of results for future interim periods or for the year.
Cautionary Statement Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q, including the financial statements and related notes, contains forward-looking statements that discuss, among other things, future expectations and projections regarding future developments, operations and financial conditions. All forward-looking statements are based on management's existing beliefs about present and future events outside of management's control and on assumptions that may prove to be incorrect. If any underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or intended. We undertake no obligation to publicly update or revise any forward-looking statements to reflect actual results, changes in expectations or events or circumstances after the date of this Quarterly Report on Form 10-Q.
When this report uses the words "we," "us," or "our," and the "Company," they
refer to TREES Corporation (formerly, "
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 ofTDM, LLC ("TREES Englewood") inSeptember 2021 , our acquisition ofTrees Portland, LLC ,Trees Waterfront, LLC inDecember 2021 , and our acquisition ofTrees MLK, LLC inJanuary 2022 , we operate a retail dispensary store inEnglewood, Colorado and three retail stores inPortland, Oregon .
Cultivation ("Cultivation Segment")
Through our acquisition of
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During the three months endedSeptember 30, 2022 and 2021, 79% and 24% of SevenFive's revenue was with one and two customers, respectively. During the nine months endedSeptember 30, 2022 and 2021, 66% and 12% was with one customer, respectively. The customer in 2022 is a related party dispensary and the revenues associated with this customer is eliminated in consolidation.
Discontinued Operations -
Through Next Big Crop, we delivered comprehensive consulting services to the cannabis industry that included obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and construction, and expansion of existing operations.NBC oversaw our wholesale equipment and supply business, operating under the name "GC Supply," which provided turnkey sourcing and stocking services to cultivation, retail, and infused products manufacturing facilities. Our products included building materials, equipment, consumables, and compliance packaging.NBC also provided operational support for our internal cultivation. OnJuly 16, 2021 , we entered into an Asset Purchase Agreement with an individual to sell substantially all the assets ofNBC for a total of$150,000 and 10% of profits generated by the buyer in the states ofMichigan ,Mississippi , andMassachusetts for a period of twelve months from the closing. OnAugust 2, 2021 , the sale
ofNBC was completed. Results of Operations
The following tables set forth, for the periods indicated, statements of operations data. The tables and the discussion below should be read in conjunction with the accompanying condensed consolidated financial statements and the notes thereto in this report.
Three months ended September 30, Percent
2022 2021 Change Change
Revenues $ 3,177,177 $ 1,665,642 $ 1,511,535 91 %
Costs and expenses (3,834,374) (2,537,670) (1,296,704) 51 %
Other expense (1,793,482) (414,962) (1,378,520) 332 %
Net loss from continuing
operations before income
taxes (2,450,679) (1,286,990) (1,163,689) 90 %
Loss from discontinued
operations 195 (40,605) 40,800 (100) %
Loss from operations before
income taxes $ (2,450,484) $ (1,327,595) $ (1,122,889) 85 %
Nine months ended September 30, Percent
2022 2021 Change Change
Revenues $ 9,986,212 $ 3,028,055 $ 6,958,157 230 %
Costs and expenses (10,922,952) (5,653,952) (5,269,000) 93 %
Other expense (2,563,226) (2,059,885) (503,341) 24 %
Net loss from continuingoperations before income taxes (3,499,966) (4,685,782)
1,185,816 (25) % Loss from discontinued operations 5,478 (377,134) 382,612 (101) % Loss from operations before income taxes$ (3,494,488) $ (5,062,916) $ 1,568,428 (31) % Revenues
The addition of our Retail segment contributed to the significant increase in revenues for the three and nine months endedSeptember 30, 2022 . See Segment discussions below for further details. 24 Table of Contents 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 endedSeptember 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 endedSeptember 30, 2022 , as compared toSeptember 30, 2021 , due to the acquisition of three dispensaries in the third and fourth quarter of 2021 and one additional dispensary in the first quarter of 2022. This resulted in an increase in employees and an increase in rent expense. Professional fees consist primarily of accounting and legal expenses. Professional fees increased slightly for the three months endedSeptember 30, 2022 as compared toSeptember 30, 2021 due to the increased acquisition activity in the third quarter of 2022. Professional fees decreased slightly for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 , due to a concentrated effort on reduction of expenses.
Stock-based compensation included the following:
Three months ended September 30, Percent
2022 2021 Change Change
Employee awards $ 38,460 $ 131,836 $ (93,376) (71) %
$ 38,460 $ 131,836 $ (93,376) (71) %
Nine months ended September 30, Percent
2022 2021 Change Change
Employee awards $ 156,961 $ 194,120 $ (37,159) (19) %
$ 156,961 $ 194,120 $ (37,159) (19) %
Employee awards are issued under our 2020 Omnibus Incentive Plan, which was approved by shareholders onNovember 23, 2020 , and our 2014 Equity Incentive Plan, which was approved by shareholders onJune 26, 2015 . Expense varies primarily due to the number of stock options granted and the share price on the date of grant. The decrease in expense for the three and nine months endedSeptember 30, 2022 , as compared toSeptember 30, 2021 , is due to not issuing options in the third quarter of 2022. 25 Table of Contents Other Expense Three months ended September 30, Percent 2022 2021 Change Change Amortization of debt discount$ 1,285,392 $ 216,516$ 1,068,876 494 % Interest expense 213,833 150,503 63,330 42 % Loss on extinguishment of debt 310,622 233,374 77,248 33 % (Gain) loss on derivative liability (16,365) (52,452) 36,087 (69) % Gain on sale of assets - (132,979) 132,979 (100) %$ 1,793,482 $ 414,962$ 1,378,520 332 % Nine months ended September 30, Percent 2022 2021 Change Change Amortization of debt discount$ 1,716,334 $ 470,306$ 1,246,028 265 % Interest expense 564,229 444,186 120,043 27 % Loss on extinguishment of debt 310,622 233,374 77,248 33 % Loss (gain) on derivative liability (14,959) 1,043,531 (1,058,490) (101) % Gain on sale of assets (13,000) (131,512) 118,512 (90) %$ 2,563,226 $ 2,059,885 $ 503,341 24 %
Amortization of debt discount and loss on extinguishment of debt increased during the three and nine months endedSeptember 30, 2022 , as compared toSeptember 30, 2021 , due to the senior convertible promissory notes with warrants ("12% Notes") issued inSeptember 2022 and the rollover and repayment of the 10% Notes. Interest expense increased during the three and nine months endedSeptember 30, 2022 , as compared toSeptember 30, 2021 , due to the addition of the 10% Notes with an interest rate of 10% in 2021. The gain on warrant derivative liability reflects the change in the fair value of the 2019 Warrants. Retail Three months ended September 30, Percent 2022 2021 Change Change Revenues $ 3,080,778$ 855,841 $ 2,224,937 260 % Costs and expenses (2,413,190) (891,126) (1,522,064) 171 % $ 667,588$ (35,285) $ 702,873 (1,992) % Nine months ended September 30, Percent 2022 2021 Change Change Revenues$ 9,536,657 $ 855,841 $ 8,680,816 1,014 % Costs and expenses (7,169,103) (891,126)
(6,277,977) 704 %
Segment operating income
With the addition of the TREES Englewood dispensary onSeptember 2, 2021 , TreesPortland and Trees Waterfront onDecember 30, 2021 , and Trees MLK onJanuary 5, 2022 , we have established our retail footprint in theColorado andOregon markets and have become a vertically integrated company. The Retail Segment will provide consistent positive cash flows which will significantly contribute to our working capital position. 26 Table of Contents Cultivation Three months ended September 30, Percent 2022 2021 Change Change Revenues $ 448,623 $ 835,719$ (387,096) (46) % Costs and expenses (849,269) (865,490) 16,221 (2) %$ (400,646) $ (29,771) $ (370,875) 1,246 % Nine months ended September 30, Percent 2022 2021 Change Change Revenues$ 1,316,241 $ 2,183,660 $ (867,419) (40) % Costs and expenses (1,971,550) (2,340,913) 369,363 (16) %$ (655,309) $ (157,253) $ (498,056) 317 %
The decrease in revenues for the three and nine months endedSeptember 30, 2022 , over prior year is due to the decrease in overall market price of flower. The decrease in gross margin is due to overall increase in expenses due to inflation. Liquidity Sources of liquidity Our sources of liquidity include cash generated from operations, the cash exercise of common stock options and warrants, debt, and the issuance of common stock or other equity-based instruments. We anticipate our significant uses of resources will include funding operations and developing infrastructure. InSeptember 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. InSeptember 2021 , we received$1,180,000 in cash in a private placement with certain accredited investors pursuant to the Series A Convertible Preferred Stock to be used for the acquisition of dispensaries and for operating capital. (See Note 10 of the accompanying unaudited condensed consolidated financial statements).
In
In
Sources and uses of cash
We had cash of
Nine months ended September 30,
2022 2021
Net cash used in operating activities$ (894,643) $ (2,489,130) Net cash used in investing activities$ (202,485) $ (936,719) Net cash provided by financing activities$ 5,045,238 $ 5,134,634
Net cash used in operating activities decreased in 2022 due to the acquisition of TREES Englewood, Trees Portland, Trees Waterfront and Trees MLK which provides positive operating cash flows and adjustments relating to non-cash activities.
Net cash used in investing activities for the nine months endedSeptember 30, 2022 , increased fromSeptember 30, 2021 , due to the purchase of,Trees MLK, Inc and the purchase of property and equipment, offset by the receipt of notes
receivable.
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Net cash provided by financing activities for the nine months ended September
30, 2022 , related to the cash proceeds of the new debt of $10,587,250 , offset by
payment on notes payable of $3,987,250 .
Capital Resources
We had no material commitments for capital expenditures as of
Non-GAAP Financial Measures
Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss) attributable to common stockholders calculated in accordance with GAAP, adjusted for the impact of stock-based compensation expense, acquisition or disposal-related transaction costs , non-recurring professional fees in relation to litigation and other non-recurring expenses, depreciation and amortization, amortization of debt discounts and equity issuance costs, loss on extinguishment of debt, interest expense, income taxes and certain other non-cash items. Below we have provided a reconciliation of Adjusted EBITDA per share to the most directly comparable GAAP measure, which is net income (loss) per share. We believe that the disclosure of Adjusted EBITDA provides investors with a better comparison of our period-to-period operating results. We exclude the effects of certain items when we evaluate key measures of our performance internally and in assessing the impact of known trends and uncertainties on our business. We also believe that excluding the effects of these items provides a more comparable view of the underlying dynamics of our operations. We believe such information provides additional meaningful methods of evaluating certain aspects of our operating performance from period to period on a basis that may not be otherwise apparent on a GAAP basis. This supplemental financial information should be considered in addition to, not in lieu of, our condensed consolidated financial statements.
The following table reconciles Adjusted EBITDA to the most directly comparable GAAP measure, which is net loss.
Three months ended September
30, Nine months ended
2022 2021 2022 2021
Net loss from continuing operations $ (2,704,679) $ (1,327,595) $ (3,753,966) $ (5,062,916)
Adjustment for loss from discontinued
operations 195 40,605 (5,478) 377,134
Net loss (2,704,484) (1,286,990) (3,759,444) (4,685,782) Adjustments: Stock-based compensation
38,460 131,836 156,961 194,120
Depreciation and amortization 98,915 115,355 190,770 305,824
Amortization of debt discount and
equity issuance costs 1,285,392 216,516 1,716,334 470,306
Loss on extinguishment of debt 310,622 233,374 310,622 233,374
Interest expense 213,833 150,503 564,229 444,186
Gain on sale of assets - (132,979) (13,000) (131,512)
(Gain) loss on derivative liability (16,365) (52,452) (14,959) 1,043,531
Severance - - 4,731 -
Acquisition related expenses 162,634 35,360 193,956 98,243
Provision for income taxes 254,000 - 254,000 -
Total adjustments 2,347,491 697,513 3,363,644 2,658,072
Adjusted EBITDA $ (356,993) $ (589,477) $ (395,800) $ (2,027,710) Off-balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
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Critical Accounting Policies
Our unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance withU.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 endedDecember 31, 2021 , and Note 1 to the Unaudited Condensed Consolidated Financial Statements in this Form 10-Q.
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