TREES Corp (Colorado) 10-K for FY2021
TREES Corp (Colorado) (CANN)
About this 10-K
TREES Corp (Colorado) filed this 10-K on March 25, 2022, covering the fiscal year ended December 31, 2021 (FY2021).
Headline figures
Fiscal year ended December 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $5.91M
- up 159.3% from $2.28M a year earlier
- Net loss
- $8.87M
- compared with a net loss of $7.68M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the fiscal year ended
For the transition period from ____________ to ____________
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻
Indicate by check mark whether the registrant (1) has filed all reports 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 such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations 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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 | ◻ | ⌧ | |
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 provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes
The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the registrant’s common stock on June 30, 2021, was $
As of March 21, 2022, the Registrant had
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference information (to the extent specific sections are referred to in this Report) from the registrant’s Proxy Statement for its 2022 Annual Meeting of Stockholders.
TABLE OF CONTENTS
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PART I
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K (this “Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future, and they are not guarantees. Such statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, level of activity, performance, or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.
We cannot predict all risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements will occur or that our objectives and plans will be achieved, and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management, any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.
Some factors that might cause such differences are described in the section entitled “Risk Factors” in this Report and in other documents that we file from time to time with the Securities and Exchange Commission (“SEC”), which factors include, without limitation, the following:
| ● | Competition from other similar companies; |
| ● | Regulatory limitations on the products or services we can offer and markets we can serve; |
| ● | Other changes in the regulation of medical and recreational cannabis use; |
| ● | Changes in underlying consumer behavior, which may affect the business of our customers; |
| ● | Our ability to access adequate financing on reasonable terms and our ability to raise additional capital in order to fund our operations; |
| ● | Our ability to identify and successfully integrate acquisitions, and the ability of acquired businesses to perform as expected; |
| ● | Challenges with new products, services, and markets; and |
| ● | Fluctuations in the credit markets and demand for credit. |
These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.
Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether because of new information, future events, a change in events, conditions, circumstances, or assumptions underlying such statements, or otherwise.
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The following description of the business of General Cannabis Corp should be read in conjunction with the information included elsewhere in this Report. Unless the context indicates otherwise, references to the words “we,” “us,” “our,” “GCC,” and the “Company” in this Report refer to General Cannabis Corp.
ITEM 1. BUSINESS.
Business Strategy
The cannabis industry is dynamic and becoming more mature. As markets like Colorado mature, we believe that an opportunity exists for operationally excellent companies to build scale by acquiring and operating licensed cannabis businesses. Accordingly, we are focused on (1) identifying licensed cannabis assets that we can acquire, (2) focusing on execution, which will allow us to continue to generate cash and meet our financial commitments, and (3) moving with an urgency that reflects our conviction and confidence in our ability to create the customers’ loyalty and advocacy. To that end, during the years ended 2021 and 2020, we implemented the following significant actions in support of our continued growth:
| ● | 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 ("Trees Transaction”). The cash paid in connection with the Oregon Closing consisted of $331,581 and stock consideration of 6,423,575 shares of our Common Stock. Further, cash equal to $497,371 will be paid to sellers in equal monthly installments over a period of 24 months from the Oregon Closing. |
| ● | On September 10, 2021, we entered into a Securities Purchase Agreement with various accredited investors, pursuant to which the Company issued and sold Units consisting of Series A Convertible Preferred Stock (“Series A Preferred”) and warrants (“Warrants”) to purchase shares of our common stock with a par value of $0.001 per share (the “Common Stock”). The total number of Units sold was 1,180. Each Unit consists of one (1) share of Series A Preferred and 300 Warrants. The purchase price of each Unit was $1,000, for an aggregate amount sold of $1,180,000. Each share of Series A Preferred is convertible into 1,000 shares of Common Stock upon the consummation of a capital raise of at least $5 million. |
| ● | On September 2, 2021, we completed the acquisition of substantially all the assets of TDM, LLC, representing a portion of the overall Trees transaction. The cash paid by the Company consisted of $1,155,256. We issued 22,380,310 shares of our Common Stock. Further, cash equal to $1,732,884 will be paid to Seller in equal monthly installments over a period of 24 months. |
| ● | On July 16, 2021, we entered into an Asset Purchase Agreement with NBC Holdings LLC and Richard Cardinal (“Buyer”) pursuant to which we agreed to sell substantially all the assets in our cultivation consulting business known as Next Big Crop (“NBC”) to Buyer. The Board of Directors approved the Agreement in furtherance of its previously disclosed plan to identify and acquire licensed cannabis assets that will allow us to continue to generate cash and meet our financial commitments. The purchase price for the sale consists of a payment by Buyer of $75,000 payable upon signing, an additional $75,000 payable within one year of the closing, and ten percent (10%) of profits generated by Buyer in the states of Michigan, Mississippi and Massachusetts for a period of twelve months from the Closing. Pursuant to amendment, Buyer paid the additional $75,000 in March 2022, and the 10% profit share described above was eliminated. |
| ● | On April 20, 2021, we entered into an Agreement and Plan of Reorganization and Liquidation among the Company, Trees Acquisition Corp., a newly-formed indirect wholly-owned subsidiary of the Company, and TDM, LLC and Station 2, LLC (“Colorado Sellers”), as well as a separate Agreement and Plan of Reorganization and Liquidation among the Company, Trees Acquisition, and Trees Waterfront, LLC, Trees MLK Inc. and Trees Portland, LLC (“Oregon Sellers” and collectively with the Colorado Sellers, the “Sellers”) (collectively, the “Plans”). Pursuant to the Plans, we agreed to purchase substantially all the assets of each of the Colorado Sellers and Oregon Sellers. The assets principally consist of the cannabis business licenses, inventory, and intellectual property related to the Sellers’ cannabis dispensaries located in Englewood and Denver, Colorado and Portland, Oregon together with substantially all related assets. We are not assuming any |
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| liabilities of any of the Sellers. The purchase price for the transaction consists of a cash payment of $2 million at closing, and an additional $3 million in cash payable in equal monthly amounts of $125,000 for a period of 24 months from the closing. In the event we consummate a capital raise of $5 million or greater during such 24-month period, such monthly payments will increase to $200,000 per month and the payout period decreases to 15 months from the closing, with a one-time ‘catch-up’ payment such that the total additional cash consideration equals $3 million. In addition, at the closing, we will issue to the Sellers 38,745,193 shares of the Company’s common stock (“Seller Shares”). |
| ● | On April 20, 2021, we completed an offering with accredited investors, pursuant to which the Company issued and sold convertible notes with an aggregate principal amount of $2.3 million to such Investors (“Offering”). The notes are part of an over-allotment approved by the existing noteholders in connection with the original convertible note offering (and previous over-allotment) of $4.6 million consummated on December 23, 2020, and February 8, 2021. In connection with the Offering, 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 warrant coverage to one investor acting as lead investor in the Offering received approximately 35.5% of the aggregate principal amount invested. The notes bear interest at an annual rate of 10% and will mature on April 20, 2024. The investors have the option to convert up to 50% of the outstanding unpaid principal and accrued interest of the 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. |
| ● | On December 23, 2020, and February 8, 2021, the Company issued and sold senior convertible promissory notes with an aggregate principal amount of $4,600,000 in exchange for payment to the Company by certain investors of an aggregate amount of $3,600,000 in cash, as well as cancellation of outstanding indebtedness in the aggregate amount of $1,000,000 represented by certain of the prior promissory notes issued by the Company in February 2020 to certain other investors. In connection with the issuance of the notes, the holders received warrants to purchase shares of the Company’s common stock equal to 20% coverage of the aggregate principal amount at $0.56 per share. The notes bear interest at an annual rate of 10%. Notes with an aggregate principal amount of $2,940,000 will mature on December 23, 2023, and notes with an aggregate principal amount of $1,660,000 will mature on February 8, 2024. The investors have the option at any time to convert up to 50% of the outstanding unpaid principal and accrued interest of the notes into the Company’s 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. |
| ● | In September 2020, we added to the strength of our Board of Directors by adding Carl Williams as Chairman and Independent Director, Richard Travia as Independent Director and Barker Dalton as Director. |
| ● | On May 29, 2020, we entered into a subscription agreement, as amended with Hershey Strategic Capital, LP and Shore Ventures III, LP (collectively the “Hershey Investor”) with respect to the sale of shares of common stock and warrants to purchase common stock. During the year ended December 31, 2020, we sold $3,000,000 of securities to the Hershey Investor, representing 7,532,010 shares of common stock and warrants to purchase 5,649,007 shares of common stock with an exercise price of $0.5565 per share. In accordance with the terms of the subscription agreement, we issued an additional 1,631,000 warrants in December 2020 to purchase common stock with an exercise price of $0.4917 to the Hershey Investor. As part of these transactions, Adam Hershey joined our Board of Directors in July 2020. |
| ● | On May 13, 2020, we received approval of the transaction and transfer of the Dalton Adventures, LLC (“Seller”) license from the Colorado Marijuana Enforcement Division (“the MED”). On May 25, 2020, we finalized the acquisition, pursuant to which we acquired the assets of the Seller that constitute the business of SevenFive Farm, a cultivation facility located in Boulder, Colorado. The purchase price paid by the Company to the Seller was 8,859,117 shares of common stock. Barker Dalton, the sole member and owner of Dalton Adventures, LLC, joined our Board of Directors in September 2020. |
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| ● | On May 4, 2020, we received a Suitability Approval from the Colorado Marijuana Enforcement Division (“MED”), becoming one of the first, and to date, one of the only public companies pre-approved to acquire licensed cannabis facilities. |
We determined the sale of our operations consulting and products segment represented a strategic shift that had a significant effect on our results of operations and, as a result, we have presented the disposal as discontinued operations in our financial statements. Unless noted otherwise, discussion in this Annual Report on Form 10-K pertains to our continuing operations.
History and Corporate Structure
The accompanying consolidated financial statements include the results of GCC and its nine wholly-owned subsidiary companies: (a) 6565 E. Evans Owner LLC, a Colorado limited liability company formed in 2014; (b) General Cannabis Capital Corporation, a Colorado corporation formed in 2015; (c) GC Security LLC (“GCS”), a Colorado limited liability company formed in 2015; (d) Standard Cann, Inc., a Colorado corporation formed in 2019; (e) SevenFive Farm LLC, a Colorado limited liability company formed in 2020; (f) SevenFive Farm Cultivation LLC, a Colorado limited liability company formed in 2020; (g) Trees Colorado LLC, a Colorado limited liability company formed in 2021; (h) Trees Oregon LLC, a Colorado limited liability company formed in 2021; (i) GC Corp., a Colorado corporation, originally formed in 2013 under the name ACS Corp. In 2015, the name was changed to GC Corp.
Our Products, Services and Customers
Through our reporting segments (Operations, Cultivation, and Investments), we provide products, services, and capital to the regulated cannabis industry and non-cannabis customers, which include the following:
Retail (“Retail Segment”)
Through our acquisition of TDM, LLC (“TREES Englewood”) in September 2021 and our acquisition of Trees Portland, LLC (“TREES Portland”) and Trees Waterfront, LLC (“TREES Waterfront”) in December 2021, we operate a retail dispensary store in Englewood, Colorado, and two retail stores in Portland, Oregon.
Cultivation (“Cultivation Segment”)
Through our acquisition of SevenFive Farm ("SevenFive") in May 2020, we operate a licensed light deprivation greenhouse cultivation facility. During 2021 and 2020, 31% and 28%, respectively, of SevenFive Farm’s revenue was from two customers.
Competitive Strengths
We believe we possess certain competitive strengths and advantages in the industries in which we operate:
Experience. Our management teams have extensive experience with a proven track record of success in developing, launching, and managing grow operations and retail dispensaries.
Strategic Alliances. We are dedicated to growing through strategic acquisitions, partnerships, and agreements that will enable us to enter and expand into new markets. Our strategy is to pursue alliances with potential targets that have the ability to generate positive cash flow, effectively meet customer needs, and supply desirable products, services or technologies, among other considerations.
Regulatory Compliance. The state and local laws regulating the cannabis industry change at a rapid pace. We have resources committed to ensure our operations comply with all state and local laws, policies, guidance, and regulations to which we are subject. We apply this compliance knowledge to our customers to ensure that they, too, are in full compliance.
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Industry Knowledge. We continue to create, share, and leverage information and experiences with the purpose of creating awareness and identifying opportunities to increase shareholder value. Our management team has business expertise, extensive knowledge of the cannabis industry, and closely monitors changes in legislation. We work with partners who enhance the breadth of our industry knowledge.
Competition
Overall, we believe we have a competitive advantage by providing a range of goods and services to the cannabis industry. This allows us to provide integrated solutions to our customers, as well as sell additional goods and services to customers of a single segment. However, there is no aspect of our business that is protected by patents or copyrights.
Retail. We will compete with a variety of different operators across the states in which we operate. In most of such states, there are specific license caps that create high barriers to entry. However, in some markets, such as Colorado, there are few caps on licenses creating a more open marketplace.
Cultivation. The Colorado cultivation market is highly fragmented. There are over one million cannabis plants cultivated for cannabis sales each year, and a typical 15,000 to 20,000 square foot grow facility contains approximately 5,000 to 7,500 plants. We believe that there is a significant opportunity to identify and acquire additional cultivation assets, which will ultimately supply our own proprietary brands and retail locations.
Government and Industry Regulation
Cannabis is currently a Schedule I controlled substance under the Controlled Substances Act (“CSA”) and is, therefore, illegal under federal law. Even in those states in which the use of cannabis has been legalized pursuant to state law, its use, possession, and/or cultivation remains a violation of federal law. A Schedule I controlled substance is defined as one that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The U.S. Department of Justice (the “DOJ”) describes Schedule I controlled substances as “the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence.” If the federal government decides to enforce the CSA in Colorado with respect to state-regulated cannabis activities in Colorado and other states, persons that are charged with distributing, possessing with intent to distribute or growing cannabis could be subject to fines and/or terms of imprisonment, the maximum being life imprisonment and a $50 million fine.
Considering the conflict between federal laws and state laws regarding cannabis, the administration under President Obama had effectively stated that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis. For example, the prior DOJ Deputy Attorney General of the Obama administration, James M. Cole, issued a memorandum (the “Cole Memo”) to all United States Attorneys providing updated guidance to federal prosecutors concerning cannabis enforcement under the CSA. In addition, the Financial Crimes Enforcement Network (“FinCEN”) provided guidelines (the “FinCEN Guidelines”) on February 14, 2014, regarding how financial institutions can provide services to cannabis-related businesses consistent with their Bank Secrecy Act (“BSA”) obligations (see “-- FinCEN”). The policies of the Obama administration concerning federal law enforcement regarding cannabis, notwithstanding the rescission of the Cole Memo (see below), continued during the Trump administration and we expect them to be continued during the Biden administration.
Congress previously enacted an omnibus spending bill that included a provision (the “Rohrabacher-Blumenauer Amendment”) prohibiting the DOJ from using funds to prevent states with medical cannabis laws from implementing such laws. This provision is renewed annually by Congress and is current through September 30, 2021. In August 2016, a Ninth Circuit federal appeals court ruled in United States v. McIntosh that the Rohrabacher-Blumenauer Amendment bars the DOJ from spending funds on the prosecution of conduct that is allowed by state medical cannabis laws, provided that such conduct is in strict compliance with applicable state law. In March 2015, bipartisan legislation titled the Compassionate Access, Research Expansion, and Respect States Act (the “CARERS Act”) was introduced, proposing to allow states to regulate the medical use of cannabis by changing applicable federal law, including by reclassifying cannabis under the Controlled Substances Act to a Schedule II controlled substance and thereby changing
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the plant from a federally-criminalized substance to one that has recognized medical uses. More recently, the Respect State Marijuana Laws Act of 2017 has been introduced in the U.S. House of Representatives, which proposes to exclude persons who produce, possess, distribute, dispense, administer, or deliver marijuana in compliance with state laws from the regulatory controls and administrative, civil, and criminal penalties of the CSA.
These developments previously were met with a certain amount of optimism in the cannabis industry, but (i) neither the CARERS Act nor the Respect State Marijuana Laws Act of 2017 have yet been adopted, (ii) the Rohrabacher-Blumenauer Amendment, being an amendment to an appropriations bill that must be renewed annually, has not currently been renewed beyond September 30, 2021, and (iii) the ruling in United States v. McIntosh is only applicable precedent in the Ninth Circuit, which does not include Colorado, the state where we currently primarily operate.
Furthermore, on January 4, 2018, the former U.S. Attorney General, Jeff Sessions, issued a memorandum for all U.S. Attorneys (the “Sessions Memo”) stating that the Cole Memo was rescinded effectively immediately. In particular, Mr. Sessions stated that “prosecutors should follow the well-established principles that govern all federal prosecutions,” which require “federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.” The Sessions Memo went on to state that given the DOJ’s well-established general principles, “previous nationwide guidance specific to marijuana is unnecessary and is rescinded, effective immediately.”
In response to the Sessions Memo, U.S. Attorney Bob Troy for the District of Colorado, the state in which our principal business operations are presently located, issued a statement on January 4, 2018, stating that the United States Attorney’s Office in Colorado is already guided by the well-established principles referenced in the Sessions Memo, “focusing in particular on identifying and prosecuting those who create the greatest safety threats to our communities around the state. We will, consistent with the Attorney General’s latest guidance, continue to take this approach in all our work with our law enforcement partners throughout Colorado.”
It is unclear at this time whether the Sessions Memo will be rescinded by the Biden administration; nor is it clear whether the Biden administration will strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement. However, a significant change in the federal government’s enforcement policy with respect to current federal laws applicable to cannabis could cause significant financial damage to us. We currently cultivate, distribute, and sell cannabis. We may be irreparably harmed by a change in enforcement policies of the federal government depending on the nature of such change. As of the date of this Report, we have provided products and services to state-approved cannabis cultivators and dispensary facilities. Accordingly, we could be subject to criminal prosecution, which could lead to imprisonment and/or the imposition of penalties, fines, or forfeiture.
Recent legislative proposals have been introduced:
| ● | Marijuana Opportunity Reinvestment & Expungement Act (MORE Act). Reintroduced in 2021, the MORE Act aims to end criminalization of cannabis related past criminal penalties and convictions, and provide criminal justice reform, social justice, and economic development for those affected by the ‘war on drugs.’ The MORE Act would also tax cannabis products starting at 5% to 8% (increasing by 1% over five years). |
| ● | States Reform Act. This also seeks to decriminalize cannabis and provide retroactive expungement for non-violent federal cannabis offenses (except for persons involved in a drug cartel). |
| ● | Sensible Enforcement of Cannabis Act. This would protect cannabis businesses and consumers in states where cannabis has been legalized, while continuing the federal cannabis prohibition to remain in place in states where cannabis has not been legalized. |
| ● | Marijuana Revenue and Regulation Act. This would create a nationwide regulatory structure for legalizing cannabis and removing it from the CSA. |
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| ● | SAFE Banking Act. This would protect financial institutions that offer services to state-legal cannabis-related businesses. |
| ● | Marijuana Opportunity, Reinvestment, and Expungement Act (MORE Act). This would end the criminalization of cannabis at the federal level by removing it from the list of controlled substances in the CSA, as well as eliminating related criminal penalties. |
None of the above proposals have been enacted; and while the Biden administration appears to have a more friendly position toward legalization of cannabis generally than the Trump administration, it cannot presently be determined what position the current administration will take on either of these proposals.
The Cole Memo
Because of the discrepancy between the laws in some states, which permit the distribution and sale of medical and recreational cannabis, from federal law that prohibits any such activities, DOJ Deputy Attorney General James M. Cole issued the Cole Memo concerning cannabis enforcement under the CSA.
At the time of its issuance, the Cole Memo reiterated Congress’s determination that cannabis is a dangerous drug and that the illegal distribution and sale of cannabis is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels. The Cole Memo noted that the DOJ was committed to enforcement of the CSA consistent with those determinations. It also noted that the DOJ was committed to using its investigative and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way. In furtherance of those objectives, the Cole Memo provided guidance to DOJ attorneys and law enforcement to focus their enforcement resources on persons or organizations whose conduct interferes with any one or more of the following important priorities (the “Enforcement Priorities”) in preventing:
| ● | the distribution of cannabis to minors; |
| ● | revenue from the sale of cannabis from going to criminal enterprises, gangs, and cartels; |
| ● | the diversion of cannabis from states where it is legal under state law to other states; |
| ● | state-authorized cannabis activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity; |
| ● | violence and the use of firearms in the cultivation and distribution of cannabis; |
| ● | drugged driving and the exacerbation of other adverse public health consequences associated with cannabis use; |
| ● | the growing of cannabis on public lands and the attendant public safety and environmental dangers posed by cannabis production on public lands; and |
| ● | cannabis possession or use on federal property. |
Although the Sessions Memo has rescinded the Cole Memo and it is unclear at this time what the ultimate impact of that rescission will have on our business, if any, we intend to continue to conduct rigorous due diligence to verify the legality of all activities that we engage in and ensure that our activities do not interfere with any of the Enforcement Priorities set forth in the Cole Memo.
FinCEN
FinCEN provided guidance regarding how financial institutions can provide services to cannabis-related businesses consistent with their BSA obligations. For purposes of the FinCEN guidelines, a “financial institution” includes any person doing business in one or more of the following capacities:
| ● | bank (except bank credit card systems); |
| ● | broker or dealer in securities; |
| ● | money services business; |
| ● | telegraph company; |
| ● | card club; and |
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| ● | a person subject to supervision by any state or federal bank supervisory authority. |
In general, the decision to open, close, or refuse any particular account or relationship should be made by each financial institution based on several factors specific to that institution. These factors may include its particular business objectives, an evaluation of the risks associated with offering a particular product or service, and its capacity to manage those risks effectively. Thorough customer due diligence is a critical aspect of making this assessment.
In assessing the risk of providing services to a cannabis-related business, a financial institution should conduct customer due diligence that includes: (i) verifying with the appropriate state authorities whether the business is duly licensed and registered; (ii) reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its cannabis-related business; (iii) requesting from state licensing and enforcement authorities available information about the business and related parties; (iv) developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers); (v) ongoing monitoring of publicly available sources for adverse information about the business and related parties; (vi) ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and (vii) refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk. With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available.
As part of its customer due diligence, a financial institution should consider whether a cannabis-related business implicates one of the Cole Memo Enforcement Priorities or violates state law. This is a particularly important factor for a financial institution to consider when assessing the risk of providing financial services to a cannabis-related business. Considering this factor also enables the financial institution to provide information in BSA reports pertinent to law enforcement’s priorities. A financial institution that decides to provide financial services to a cannabis-related business would be required to file suspicious activity reports. It is unclear at this time what impact the Sessions Memo will have on customer due diligence by a financial institution.
While we believe we do not qualify as a financial institution in the United States, we cannot be certain that we do not fall under the scope of the FinCEN guidelines. We plan to use the FinCEN Guidelines, as may be amended, as a basis for assessing our relationships with potential tenants, clients, and customers. As such, as we engage in financing activities, we intend to adhere to the guidance of FinCEN in conducting and monitoring our financial transactions. Because this area of the law is uncertain and is expected to evolve rapidly, we believe that FinCEN’s guidelines will help us best operate in a prudent, reasonable, and acceptable manner. There is no assurance, however, that our activities will not violate some aspect of the CSA. If we are found to violate the federal statute or any other in connection with our activities, our company could face serious criminal and civil sanctions.
Moreover, since the use of cannabis is illegal under federal law, we may have difficulty acquiring or maintaining bank accounts and insurance, and our stockholders may find it difficult to deposit their stock with brokerage firms.
Licensing and Local Regulations
Where applicable, we apply for state licenses or similar approvals that are necessary to conduct our business in compliance with local laws. Our subsidiary, GC Corp., has been registered with the MED as an approved vendor since September 8, 2014. GCS, another subsidiary, has been registered as a MED approved vendor since March 11, 2015.
On May 1, 2020, the MED granted regulatory approval to the Company as a qualified and suitable buyer of licensed cannabis operations in the State. This authorization, known as a Suitability Approval, establishes the Company as one of the first public companies authorized to acquire licensed cultivation, manufacturing, and retail operations throughout Colorado.
Local laws at the county and municipal level add an additional layer of complexity to legalized cannabis. Despite a state’s adoption of legislation legalizing cannabis, counties and municipalities within the state may have the ability to
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otherwise restrict cannabis activities, including but not limited to cultivation, retail, distribution, manufacturing or consumption.
Zoning sets forth the approved use of land in any given city, county, or municipality. Zoning is set by local governments or local voter referendum and may otherwise be restricted by state laws. For example, under certain state laws a seller of liquor may not be allowed to operate within 1,000 feet of a school. There may be similar restrictions imposed on cannabis operators, which will restrict where cannabis operations may be located and the manner and size to which they can grow and operate. Zoning can be subject to change or withdrawal, discretionary approvals may be required for certain uses, and properties can be re-zoned. The zoning of our properties will have a direct impact on our business operations.
Human Capital
We are managed and operated by the Board of Directors and executive officers of General Cannabis Corp. As of December 31, 2021, we had 77 full-time employees. Executing our strategic vision requires that we attract and retain the best talent. The Company must appropriately reward high-performers and offer competitive benefits. The Company offers comprehensive benefits, including medical, dental and vision insurance for employees, their spouses or domestic partners, and their dependents. We also provide retirement programs, life insurance, family assistance, short-term disability and paid vacation and sick time. As a people-first company, our values help us achieve our purpose of cultivating an inclusive environment by hiring world-class individuals dedicated to fostering a culture that champions diversity, ensures equity, and celebrates inclusion. We provide opportunities for our employees to drive our strategy by creating programs that raise awareness, allowing courageous conversations and a more inclusive culture.
Corporate Contact Information
Our principal executive offices are located at 1901 S Navajo Street, Denver, Colorado 80223; Telephone No.: (303) 759-1300. Our website is http://www.treescann.com. The content on our website is available for informational purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Form 10-K.
Available Information
We maintain a website at www.treescann.com and make available, free of charge, on our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K (including any amendments thereto), registration statements and other information filed with, or furnished to, the SEC, as soon as reasonably practicable after such documents are so filed or furnished, as well as our Code of Ethics. Any materials we file with the SEC, including our annual reports, quarterly reports, current reports, proxy statements, information statements and other information, are also available at the SEC’s Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
ITEM 1A. RISK FACTORS.
Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and all other information contained in this Form 10-K, including our consolidated financial statements and the related notes, before investing in our common stock. The risks and uncertainties described below are not the only ones we face, but include the most significant factors currently known by us that make investing in our common stock speculative or risky. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of the following risks materialize, our business, financial condition and results of operations could be materially harmed. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.
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Risks Related to Our Business and Industry
We have a limited operating history in an evolving industry, which makes it difficult to accurately assess our future growth prospects.
We operate in an evolving industry that may not develop as expected. Furthermore, our operations continue to evolve under our business plan as we continually assess new strategic opportunities for our business within our industry. Assessing the future prospects of our business is challenging considering both known and unknown risks and difficulties we may encounter. Growth prospects in our industry can be affected by a wide variety of factors including:
| ● | Competition from other similar companies; |
| ● | Regulatory limitations on the products we can offer and markets we can serve; |
| ● | Other changes in the regulation of medical and recreational cannabis use; |
| ● | Changes in underlying consumer behavior, which may affect the business of our customers; |
| ● | Our ability to access adequate financing on reasonable terms and our ability to raise additional capital to fund our operations; |
| ● | Challenges with new products, services, and markets; and |
| ● | Fluctuations in the credit markets and demand for credit. |
We may not be able to successfully address these factors, which could negatively impact our growth, harm our business, and cause our operating results to be worse than expected.
We have a history of losses and may not achieve profitability in the future.
We generated net losses of approximately $8.9 million and $7.7 million, respectively, in the years ended December 31, 2021, and 2020. As of December 31, 2021, we had an accumulated deficit of approximately $83.8 million. We will need to generate and sustain increased revenues in future periods to become profitable, and, even if we do, we may not be able to maintain or increase any such level of profitability.
As we grow, we expect to continue to expend substantial financial and other resources on:
| ● | personnel, including significant increases to the total compensation we pay our employees as we grow our employee headcount; |
| ● | expenses relating to increased marketing efforts; |
| ● | strategic acquisitions of businesses and real estate; and |
| ● | general administration, including legal, accounting, and other compliance expenses related to being a public company. |
These expenditures are expected to increase and may adversely affect our ability to achieve and sustain profitability as we grow. Our efforts to grow our business may also be more costly than we expect, and we may not be able to increase our revenues enough to offset our higher operating expenses. We may incur losses in the future for several reasons, including the other risks described in this Report, unforeseen expenses, difficulties, complications and delays, and other unknown events. If we are unable to achieve and sustain profitability, the market price of our common stock may significantly decrease.
Cannabis remains illegal under federal law, and any change in the enforcement priorities of the federal government could render our current and planned future operations unprofitable or even prohibit such operations.
The cultivation, manufacture, distribution, and possession of marijuana continues to be illegal under U.S. federal law. The Supremacy Clause of the United States Constitution establishes that the US Constitution and federal laws made pursuant to it are paramount and, in case of conflict between federal and state law, the federal law must be applied. Accordingly, federal law applies even in those states in which the use of marijuana has been legalized. Enforcement of federal law regarding marijuana would harm our business, prospects, results of operation, and financial condition.
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The United States federal government regulates drugs through the Controlled Substances Act (the “CSA”), which places controlled substances, including cannabis, on one of five schedules. Cannabis is currently classified as a Schedule I controlled substance, which is viewed as having a high potential for abuse and having no currently accepted medical use in treatment in the United States. No prescriptions may be written for Schedule I substances, and such substances are subject to production quotas imposed by the United States Drug Enforcement Administration (the “DEA”). Because of this, doctors may not prescribe cannabis for medical use under federal law, although they can recommend its use under the First Amendment.
Currently, numerous U.S. states, the District of Columbia and U.S. territories have legalized cannabis for medical and/or recreational adult use. Such state and territorial laws conflict with the federal CSA, which makes cannabis use and possession illegal at the federal level. Because cannabis is a Schedule I controlled substance, however, the development of a legal cannabis industry under the laws of these states conflicts with the CSA, which makes cannabis use and possession illegal on a national level. The United States Supreme Court has confirmed that the federal government has the right to regulate and criminalize cannabis, including for medical purposes, and that federal law criminalizing the use of cannabis preempts state laws that legalize its use. We would likely be unable to execute our business plan if the federal government were to strictly enforce federal law regarding cannabis.
Considering such conflict between federal laws and state laws regarding cannabis, the administration under President Obama had effectively stated that it was not an efficient use of resources to direct law federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis. For example, the DOJ Deputy Attorney General of the Obama administration, James M. Cole, issued a memorandum (the “Cole Memo”) to all United States Attorneys providing updated guidance to federal prosecutors concerning cannabis enforcement under the CSA (see “Business—Government and Industry Regulation—The Cole Memo”). In addition, the Financial Crimes Enforcement Network (“FinCEN”) provided guidelines on February 14, 2014, regarding how financial institutions can provide services to cannabis-related businesses consistent with their Bank Secrecy Act obligations (see “Business—Government and Industry Regulation—FinCEN”).
Congress previously enacted an omnibus spending bill that included a provision (the “Rohrabacher-Blumenauer Amendment”) prohibiting the DOJ from using funds to prevent states with medical cannabis laws from implementing such laws. This provision is renewed annually by Congress and is current through March 11, 2022. In August 2016, a Ninth Circuit federal appeals court ruled in United States v. McIntosh that the Rohrabacher-Blumenauer Amendment bars the DOJ from spending funds on the prosecution of conduct that is allowed by state medical cannabis laws, provided that such conduct is in strict compliance with applicable state law. In March 2015, bipartisan legislation titled the Compassionate Access, Research Expansion, and Respect States Act (the “CARERS Act”) was introduced, proposing to allow states to regulate the medical use of cannabis by changing applicable federal law, including by reclassifying cannabis under the Controlled Substances Act to a Schedule II controlled substance and thereby changing the plant from a federally-criminalized substance to one that has recognized medical uses. More recently, the Respect State Marijuana Laws Act of 2017 has been introduced in the U.S. House of Representatives, which proposes to exclude persons who produce, possess, distribute, dispense, administer, or deliver marijuana in compliance with state laws from the regulatory controls and administrative, civil, and criminal penalties of the CSA.
These developments previously were met with a certain amount of optimism in the cannabis industry, but (i) neither the CARERS Act nor the Respect State Marijuana Laws Act of 2017 have yet been adopted, (ii) the Rohrabacher-Blumenauer Amendment, being an amendment to an appropriations bill that must be renewed annually, has not currently been renewed beyond March 11, 2022, and (iii) the ruling in United States v. McIntosh is only applicable precedent in the Ninth Circuit, which does not include Colorado, the state where we currently primarily operate.
Furthermore, on January 4, 2018, former U.S. Attorney General, Jeff Sessions, issued a memorandum for all U.S. Attorneys (the “Sessions Memo”) stating that the Cole Memo was rescinded effectively immediately. In particular, Mr. Sessions stated that “prosecutors should follow the well-established principles that govern all federal prosecutions,” which require “federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.” The Sessions Memo went on to
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state that given the DOJ’s well-established general principles, “previous nationwide guidance specific to marijuana is unnecessary and is rescinded, effective immediately.”
In response to the Sessions Memo, U.S. Attorney Bob Troy for the District of Colorado, the state in which our principal business operations are presently located, issued a statement on January 4, 2018, stating that the United States Attorney’s Office in Colorado is already guided by the well-established principles referenced in the Sessions Memo, “focusing in particular on identifying and prosecuting those who create the greatest safety threats to our communities around the state. We will, consistent with the Attorney General’s latest guidance, continue to take this approach in all our work with our law enforcement partners throughout Colorado.”
It is unclear at this time whether the Sessions Memo will be rescinded by the Biden administration, and/or the Cole Memo reinstated; nor is it clear whether the Biden administration will strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement. US Attorney General Merrick Garland has indicated his desire to reinstitute a version of the Cole Memo; however, this has not yet occurred. Any significant change in the federal government’s enforcement policy with respect to current federal laws applicable to cannabis could cause significant financial damage to us. We may be irreparably harmed by a change in enforcement policies of the federal government depending on the nature of such change. As of the date of this Report, we have provided products and services to state-approved cannabis cultivators and dispensary facilities. As a result, strict enforcement of federal prohibitions regarding cannabis could subject the Company to criminal prosecution.
Additionally, financial transactions involving proceeds generated by cannabis-related conduct can form the basis for prosecution under the federal money laundering statutes, unlicensed money transmitter statutes and the Bank Secrecy Act. Prior to the DOJ's rescission of the “Cole Memo”, supplemental guidance from the DOJ issued under the Obama administration directed federal prosecutors to consider the federal enforcement priorities enumerated in the “Cole Memo” when determining whether to charge institutions or individuals with any of the financial crimes described above based upon cannabis-related activity. It is unclear what impact the recent rescission of the “Cole Memo” will have, but federal prosecutors may increase enforcement activities against institutions or individuals that are conducting financial transactions related to cannabis activities.
Additionally, as we are always assessing potential strategic acquisitions of new businesses, we may in the future also pursue opportunities that include growing and/or distributing medical or recreational cannabis, should we determine that such activities are in the best interest of the Company and our stockholders. Any such pursuit would involve additional risks with respect to the regulation of cannabis, particularly if the federal government determines to strictly enforce all federal laws applicable to cannabis.
Federal prosecutors have significant discretion, and no assurance can be given that the federal prosecutor in each judicial district where we operate our business will not choose to strictly enforce the federal laws governing cannabis production or distribution. Any change in the federal government's enforcement posture with respect to state-licensed cultivation of medical-use cannabis, including the enforcement postures of individual federal prosecutors in judicial districts where we purchase properties, would result in our inability to execute our business plan, and we would likely suffer significant losses, which would adversely affect the trading price of our securities. Furthermore, following any such change in the federal government's enforcement position, we could be subject to criminal prosecution, which could lead to imprisonment and/or the imposition of penalties, fines, or forfeiture.
The potential regulation of cannabis by the US Food and Drug Administration could subject us to additional costs and regulatory requirements
Should the federal government legalize cannabis, it is possible that the US Food and Drug Administration (FDA), would seek to regulate it under the Food, Drug and Cosmetics Act of 1938. Additionally, the FDA may issue rules and regulations including good manufacturing practices, related to the growth, cultivation, harvesting and processing of medical cannabis. Clinical trials may be needed to verify efficacy and safety. It is also possible that the FDA would require that facilities where medical-use cannabis is grown register with the FDA and comply with certain federally prescribed regulations. If some or all of these regulations are imposed, the impact they would have on the cannabis industry is unknown, including what costs, requirements and possible prohibitions may be enforced. If we are unable to
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comply with the regulations or registration as prescribed by the FDA it may have an adverse effect on our business, operating results, and financial condition.
Any potential growth in the cannabis industry continues to be subject to new and changing state and local laws and regulations.
Continued development of the cannabis industry is dependent upon continued legislative legalization of cannabis at the state level, and a number of factors could slow or halt progress in this area, even where there is public support for legislative action. Any delay or halt in the passing or implementation of legislation legalizing cannabis use, or its cultivation, sale and distribution, or the re-criminalization or restriction of cannabis at the state level could negatively impact our business. Additionally, changes in applicable state and local laws or regulations, including zoning restrictions, permitting requirements, and fees, could restrict the products and services we offer or impose additional compliance costs on us or our customers and tenants. Violations of applicable laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our operations. We cannot predict the nature of any future laws, regulations, interpretations, or applications, and it is possible that regulations may be enacted in the future that will have be material adverse effects on our business.
Our business, results of operations and financial condition may be adversely affected by pandemic infectious diseases, particularly COVID-19.
Pandemic infectious diseases, such as COVID-19 and its variants, such as Omicron, may adversely impact our business, consolidated results of operations and financial condition. The global spread of COVID-19 has created significant volatility and uncertainty and economic disruption. The extent to which COVID-19 impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic; governmental, business, and individuals’ actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic on economic activity and actions taken in response; the effect on our customers and customer demand our services, products, and solutions; our ability to sell and provide its services and solutions, including as a result of travel restrictions and people working from home; the ability of our customers to pay for our services and solutions; and any closures of our offices and the offices and facilities of our customers. COVID-19, as well as measures taken by governmental authorities to limit the spread of this virus, may interfere with the ability of our employees, suppliers, and other business providers to carry out their assigned tasks or supply materials or services at ordinary levels of performance relative to the requirements of our business, which may cause us to materially curtail certain of our business operations. We require additional funding and such funding, may not be available to us because of contracting capital markets resulting from the COVID-19 pandemic. Any of these events could materially adversely affect our business, financial condition, results of operations and/or stock price.
The cannabis industry faces significant opposition, and any negative trends will adversely affect our business operations.
We are substantially dependent on the continued market acceptance, and the proliferation of consumers, of medical and recreational cannabis. We believe that with further legalization, cannabis will become more accepted, resulting in growth in consumer demand. However, we cannot predict the future growth rate or future market potential, and any negative outlook on the cannabis industry may adversely affect our business operations.
The recreational cannabis industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of the recreational cannabis produced. Cannabis is a controversial topic, and consumer perception of our products may be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of recreational cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable to the recreational cannabis market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favorable than, or that question, earlier research reports, findings or publicity could have a material adverse effect on the demand for our products and our business, results of operations, financial condition, and cash flows. Dependence upon consumer perceptions means that adverse scientific research reports, findings, regulatory proceedings, litigation, media
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attention or other publicity, regardless of accuracy or merit, could have a material adverse effect on our business and results of operations. Further, adverse publicity reports or other media attention regarding the safety, efficacy, and quality of recreational cannabis in general, or our products specifically, or associating the consumption of recreational cannabis with illness or other negative effects or events, could have such a material adverse effect. Such adverse publicity reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers’ failure to consume such products appropriately or as directed.
Large, well-funded business sectors may have strong economic reasons to oppose the development of the cannabis industry. For example, medical cannabis may adversely impact the existing market for the current “cannabis pill” sold by mainstream pharmaceutical companies. Should cannabis displace other drugs or products, the medical cannabis industry could face a material threat from the pharmaceutical industry, which is well-funded and possesses a strong and experienced lobby. Any inroads the pharmaceutical, or any other potentially displaced, industry or sector could make in halting or impeding the cannabis industry could have a detrimental impact on our business.
We operate an agricultural business and are subject to weather and climate conditions.
Our business involves the growing of recreational cannabis, an agricultural product. Such business will be subject to the risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Further, to the extent that our products are grown outside, we are subject to weather and climate conditions. Extended cold streaks, rain or snow, or generally cold weather or climate, could materially adversely affect our cannabis plants. Accordingly, there can be no assurance that natural elements will not have a material adverse effect on any future production of our products.
We operate in a highly competitive industry.
The markets for ancillary businesses in the medical marijuana and recreational marijuana industries are competitive and evolving. There is no material aspect of our business that is protected by patents, copyrights, trademarks, or trade names, and we face strong competition from larger companies that may offer similar products and services to ours. Many of our current and potential competitors have longer operating histories, significantly greater financial, marketing and other resources, and larger client bases than us, and there can be no assurance that we will be able to successfully compete against these or other competitors.
Given the rapid changes affecting the global, national, and regional economies generally and the medical marijuana and recreational marijuana industries, specifically, we may not be able to create and maintain a competitive advantage in the marketplace. Our success will depend on our ability to keep pace with any changes in our markets, particularly, legal, and regulatory changes. Our success will also depend on our ability to respond to, among other things, changes in the economy, market conditions, and competitive pressures. Any failure by us to anticipate or respond adequately to such changes could have a material adverse effect on our financial condition and results of operations.
Unfavorable tax treatment of cannabis businesses
Under Section 280E of the United States Internal Revenue Code of 1986 as amended (“Section 280E”), “no deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any state in which such trade or business is conducted.” This provision has been applied by the U.S. Internal Revenue Service to cannabis operations, prohibiting them from deducting expenses directly associated with the sale of cannabis. Although the IRS issued a clarification allowing the deduction of certain expenses that can be categorized as cost of sales, the scope of such items is interpreted very narrowly and include the cost of seeds, plants, and labor related to cultivation, while the bulk of operating costs and general administrative costs are not permitted to be deducted. Section 280E therefore has a significant impact on the retail side of cannabis, but a lesser impact on cultivation, processing, production, and packaging operations. A result of Section 280E is that an otherwise profitable business may, in fact, operate at a loss, after taking into account its U.S. income tax expenses.
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We may be limited in our ability to utilize, or may not be able to utilize, net operating loss carryforwards to reduce our future tax liability.
We have federal and state net operating loss carryforwards that may be limited or expire unused. The Company is currently evaluating whether there have been one or more ownership changes pursuant to IRC 382 and 383. If we determine there were one or more ownership changes under these rules, the use of our U.S. federal and state net operating loss carryforwards may be limited and/or otherwise expired unused. Any such limitation or expiration could materially affect our ability to offset future tax liabilities with net operating losses.
We may be unable to obtain capital to execute our business plan.
To execute on our business plan, we will need additional capital. However, there can be no assurance that we will be able to obtain financing on agreeable terms, if at all, and any future sale of our equity securities will dilute the ownership of our existing stockholders and could be at prices substantially below the price of the shares of common stock sold in the past. If we are unable to obtain the necessary capital, we may need to delay the implementation of or curtail our business plan.
We face risks associated with strategic acquisitions and our business strategy.
As an important part of our roll-up business strategy, we strategically acquire businesses and real property, some of which may be material. These acquisitions involve a number of financial, accounting, managerial, operational, legal, compliance and other risks and challenges, including the following, any of which could adversely affect our results of operations:
| ● | The applicable restrictions on the cannabis industry and its participants limit the number of available suitable businesses and real properties that we can acquire; |
| ● | Any acquired business or real property could under-perform relative to our expectations and the price that we paid for it, or not perform in accordance with our anticipated timetable; |
| ● | We may incur or assume significant debt in connection with our acquisitions; |
| ● | Acquisitions could cause our results of operations to differ from our own or the investment community’s expectations in any given period, or over the long term; and |
| ● | Acquisitions could create demands on our management that we may be unable to effectively address, or for which we may incur additional costs. |
Additionally, following any business acquisition, we could experience difficulty in integrating personnel, operations, financial and other systems, and in retaining key employees and customers.
We may record goodwill and other intangible assets on our consolidated balance sheet in connection with our acquisitions. If we are not able to realize the value of these assets, we may be required to incur charges relating to the impairment of these assets, which could materially impact our results of operations.
Our ability to grow our business depends on state laws pertaining to the cannabis industry.
Continued development of the cannabis industry depends upon continued legislative authorization of cannabis at the state level. The status quo of, or progress in, the cannabis industry is not assured, and any number of factors could slow or halt further progress in this area. While there may be ample public support for legislative action permitting the manufacture and use of cannabis, numerous factors impact the legislative process. For example, many states that voted to legalize medical and/or adult-use cannabis have seen significant delays in the drafting and implementation of industry regulations and issuance of licenses. In addition, burdensome regulation at the state level could slow or stop further development of the medical-use cannabis industry, such as limiting the medical conditions for which medical cannabis can be recommended by physicians for treatment, restricting the form in which medical cannabis can be consumed, imposing significant registration requirements on physicians and patients or imposing significant taxes on the growth, processing and/or retail sales of cannabis, which could have the impact of dampening growth of the cannabis industry and making it difficult for cannabis businesses, including our tenants, to operate profitably in those states. Any one of
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these factors could slow or halt additional legislative authorization of cannabis, which could harm our results of operations, business, and prospects.
Applicable state laws may prevent us from maximizing our potential income.
Depending on the laws of each particular state, we may not be able to fully realize our potential to generate profit. For example, some states have residency requirements for those directly involved in the cannabis industry, which may impede our ability to contract with cannabis businesses in those states. Furthermore, cities and counties are being given broad discretion to ban certain cannabis activities. Even if these activities are legal under state law, specific cities and counties may ban them.
Assets used in conjunction with cannabis businesses may be forfeited to the federal government.
Any assets used in conjunction with the violation of federal law are potentially subject to federal forfeiture, even in states where cannabis is legal. In July 2017, the U.S. Department of Justice issued a new policy directive regarding asset forfeiture, referred to as the "equitable sharing program." Under this new policy directive, federal authorities may adopt state and local forfeiture cases and prosecute them at the federal level, allowing for state and local agencies to keep up to 80% of any forfeiture revenue. This policy directive represents a reversal of the U.S. Department of Justice's policy under the Obama administration and allows for forfeitures to proceed that are not in accord with the limitations imposed by state-specific forfeiture laws. This new policy directive may lead to increased use of asset forfeitures by local, state, and federal enforcement agencies. If the federal government decides to initiate forfeiture proceedings against cannabis businesses, our investment in those businesses may be lost.
Our operating locations could be targets for theft and our physical security measures may not prevent all security breaches
Our operating locations could be targets for theft. While we have implemented security measures at our operating locations and we continue to monitor and improve security measures, our cultivation and processing facilities could be subject to break-ins, robberies, and other breaches in security. If there is a breach in security and we fall victim to a robbery or theft, the loss of cannabis plants, cannabis oils, cannabis flowers and cultivation and processing equipment could have a material adverse impact on our business, financial condition, and results of operations.
To the extent that our business involves the movement and transfer of cash which is collected from locations and deposited into financial institutions, there is a risk of theft or robbery during the transport of cash. We may engage a security firm to provide security in the transport and movement of large amounts of cash. While we have taken steps to prevent theft or robbery of cash during transport, there can be no assurance that there will not be a security breach during the transport and the movement of cash involving the theft of product or cash.
Our future success depends on our ability to grow and expand our customer base and operational territory.
Our success and the planned growth and expansion of our business depend on our products and services achieving greater and broader acceptance, resulting in a larger customer base, and on the expansion of our operations into new markets. However, there can be no assurance that customers will purchase our products and/or services, or that we will be able to continually expand our customer base. Additionally, if we are unable to effectively market or expand our product and/or service offerings, we will be unable to grow and expand our business or implement our business strategy.
Operating in new markets may expose us to new operational, regulatory, or legal risks and subject us to increased compliance costs. We may need to modify our existing business model and cost structure to comply with local regulatory or other requirements. Facilities we open in new markets may take longer to reach expected revenue and profit levels on a consistent basis, may have higher construction, occupancy, or operating costs, and may present different competitive conditions, consumer preferences and spending patterns than we anticipate. Any of the above could materially impair our ability to increase sales and revenue.
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We and our existing and potential customers, clients, and tenants have difficulty accessing the service of banks, which may make it difficult for them to operate.
Financial transactions involving proceeds generated by cannabis-related conduct can form the basis for prosecution under the federal money laundering statutes, unlicensed money transmitter statute and the Bank Secrecy Act. Previous guidance issued by the FinCen, a division of the U.S. Department of the Treasury, clarifies how financial institutions can provide services to cannabis-related businesses consistent with their obligations under the Bank Secrecy Act. Prior to the DOJ’s announcement in January 2018 of the rescission of the Cole Memo and related memoranda, supplemental guidance from the DOJ directed federal prosecutors to consider the federal enforcement priorities enumerated in the Cole Memo when determining whether to charge institutions or individuals with any of the financial crimes described above based upon cannabis-related activity. It is unclear what impact the recent rescission of the “Cole Memo” will have, but federal prosecutors may increase enforcement activities against institutions or individuals that are conducting financial transactions related to cannabis activities. The increased uncertainty surrounding financial transactions related to cannabis activities may also result in financial institutions discontinuing services to the cannabis industry.
Because the use, sale, and distribution of cannabis remains illegal under federal law, many banks will not accept deposits from or provide other bank services to businesses involved with cannabis. Consequently, those businesses involved in the cannabis industry continue to encounter difficulty establishing banking relationships, which may increase over time. Our inability to maintain our current bank accounts would make it difficult for us to operate our business, increase our operating costs, and pose additional operational, logistical and security challenges and could result in our inability to implement our business plan. Furthermore, the inability to open bank accounts may make it difficult for our existing and potential customers, clients, and tenants to operate and may make it difficult for them to contract with us.
Conditions in the economy, the markets we serve, and the financial markets generally may adversely affect our business and results of operations.
Our business is sensitive to general economic conditions. We believe that the state of global economic conditions is particularly uncertain due to recent and expected shifts in political, legislative, and regulatory conditions concerning, among other matters, international trade and taxation, and the impact of recent or future natural disasters and/or health and safety epidemics, including the outbreak of COVID-19. An uneven recovery or a renewed global downturn may put pressure on our sales due to reductions in customer demand as well as customers deferring purchases. Slower economic growth, volatility in the credit markets, high levels of unemployment, and other challenges that affect the economy adversely could affect us and our customers and suppliers. If growth in the economy or in any of the markets we serve slows for a significant period, if there is a significant deterioration in the economy or such markets or if improvements in the economy do not benefit the markets we serve, our business and results of operations could be adversely affected.
We depend on our management, certain key personnel, and board of directors, as well as our ability to attract, retain and motivate qualified personnel.
Our future success depends largely upon the experience, skill, and contacts of our key personnel, officers and directors, and the loss of the services of these key personnel, officers, or directors, particularly our chief executive officer and chairman of our board of directors, may have a material adverse effect upon our business. Additionally, our revenues are largely driven by several employees with particular expertise in cannabis retail and operations. If one of these key employees were to leave, it would negatively impact our short and long-term results from operations. Shortages in qualified personnel could also limit our ability to successfully implement our growth plan. As we grow, we will need to attract and retain highly skilled experts in the cannabis industry, as well as managerial, sales and marketing, and finance personnel. There can be no assurance, however, that we will be able to attract and retain such personnel.
Our reputation and ability to do business may be negatively impacted by the improper conduct by our business partners, employees, or agents.
We depend on third party suppliers to produce and timely ship our orders. Products purchased from our suppliers are resold to our customers. These suppliers could fail to produce products to our specifications or quality standards and may not deliver units on a timely basis. Any changes in our suppliers to resolve production issues could disrupt our ability to
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fulfill orders. Any changes in our suppliers to resolve production issues could also disrupt our business due to delays in finding new suppliers.
Furthermore, we cannot provide assurance that our internal controls and compliance systems will always protect us from acts committed by our employees, agents, or business partners in violation of U.S. federal or state laws. Any improper acts or allegations could damage our reputation and subject us to civil or criminal investigations and related shareholder lawsuits, could lead to substantial civil and criminal monetary and non-monetary penalties, and could cause us to incur significant legal and investigatory fees.
Due to our involvement in the cannabis industry, we may have difficulty obtaining various insurance policies that are desired to operate our business, which may expose us to additional risks and financial liabilities.
Insurance that is otherwise readily available, such as workers’ compensation, general liability, and directors’ and officers’ insurance, is more difficult for us to find and more expensive, because of our involvement in the cannabis industry. There are no guarantees that we will be able to find such insurance in the future, or that the cost will be affordable to us. If we are forced to go without such insurance, it may prevent us from entering certain business sectors, may inhibit our growth, and may expose us to additional risk and financial liabilities. Moreover, insurance against risks such as environmental pollution or other hazards encountered in our operations is not generally available on acceptable terms. We might also become subject to liability for pollution or other hazards which may not be insured against or which we may elect not to insure against because of premium costs or other reasons. Losses from these events may cause us to incur significant costs that could have a material adverse effect upon its financial performance and results of operations.
We may be subject to product liability claims
We face an inherent risk of exposure to product liability claims, regulatory action, and litigation if its products are alleged to have caused significant loss or injury. In addition, the sale of our products would involve the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of marijuana alone or in combination with other medications or substances could occur. We may be subject to various product liability claims, including, among others, that our products caused injury or illness or death, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances. A product liability claim or regulatory action against us could result in increased costs, could adversely affect our reputation with its clients and consumers generally, and could have a material adverse effect on our business, results of operations and financial condition. There can be no assurances that we will be able to obtain or maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of our current or potential products.
A cybersecurity incident and other technology disruptions could result in a violation of law or negatively impact our reputation and relationships, our business operations, and our financial condition.
Information and security risks have generally increased in recent years due to the rise in new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. We use computers in substantially all aspects of our business operations, and we also use mobile devices and other online activities to connect with our employees, customers, tenants, suppliers, and other parties. Such uses give rise to cybersecurity risks, including the risk of security breaches, espionage, system disruption, theft, and inadvertent release of information. Our business involves the storage and transmission of numerous classes of sensitive and/or confidential information and intellectual property, including employees’, customers’, tenants’ and suppliers’ personally identifiable information and financial and strategic information about us.
If we fail to adequately assess and identify cybersecurity risks associated with our business operations, we may become increasingly vulnerable to such risks. Even the most well protected information, networks, systems, and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not
20
recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we, our customers and our suppliers may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us, our customers, and our suppliers to entirely mitigate this risk. Further, in the future we may be required to expend additional resources to continue to enhance information security measures and/or to investigate and remediate any information security vulnerabilities. We can provide no assurances that the measures we have implemented to prevent security breaches and cyber incidents will be effective in the event of a cyber-attack.
The theft, destruction, loss, misappropriation or release of sensitive and/or confidential information or intellectual property, or interference with our information technology systems or the technology systems of third-parties on which we rely, could result in business disruption, negative publicity, violation of privacy laws, loss of tenants, loss of customers, potential liability and competitive disadvantage, any of which could result in a material adverse effect on financial condition or results of operations.
We may be required to recognize impairment charges that could materially affect our results of operations.
We assess our intangible assets, and our other long-lived assets as and when required by GAAP to determine whether they are impaired. If they are impaired, we would record appropriate impairment charges. It is possible that we may be required to record significant impairment charges in the future and, if we do so, our results of operations could be materially adversely affected.
Changes in accounting standards could affect our reported financial results.
Our management uses significant judgment, estimates, and assumptions in applying GAAP. New accounting standards that may be applicable to our financial statements, or changes in the interpretation of existing standards, could have a significant effect on our reported results of operations for the affected periods.
Risks Related to the Securities Markets and Ownership of Our Common Stock
The price of our common stock is volatile and the value of your investment could decline.
The market price of our common stock has been, and may in the future, be volatile. Between January 1, 2015, and December 31, 2021, the closing price of our stock has ranged from a low of $0.22 per share to a high of $10.35 per share. Accordingly, it is difficult to forecast the future performance of our common stock. The market price of our common stock may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:
| ● | regulatory developments at the federal, state or local level; |
| ● | announcements of new products, services, relationships with strategic partners, acquisitions, or other events by us or our competitors; |
| ● | changes in general economic conditions; |
| ● | price and volume fluctuations in the overall stock market from time to time; |
| ● | significant volatility in the market price and trading volume of similar companies in our industry; |
| ● | fluctuations in the trading volume of our shares or the size of our public float; |
| ● | actual or anticipated changes in our operating results or fluctuations in our operating results; |
| ● | major catastrophic events; |
| ● | sales of large blocks of our stock; or |
| ● | changes in senior management or key personnel. |
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In addition, if the market for cannabis company stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results, or financial condition. The trading price of our common stock might decline in reaction to events that affect other companies in our industry, even if these events do not directly affect us. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price continues to be volatile, we may become the target of securities litigation, which could result in substantial costs and divert our management’s attention and resources from our business. This could have a material adverse effect on our business, operating results, and financial condition.
Trading and listing of securities of cannabis related businesses, including our common stock, may be subject to restrictions.
In the United States, many clearing houses for major broker-dealer firms, including Pershing LLC, the largest clearing, custody, and settlement firm in the United States, have refused to handle securities or settle transactions of companies engaged in cannabis related business. This means that certain broker-dealers cannot accept for deposit or settle transactions in the securities of cannabis related businesses. Further, national securities exchanges in the United States, including Nasdaq and the New York Stock Exchange, have historically refused to list cannabis related businesses, including cannabis retailers, that operate primarily in the United States; there is no indication that this proscription will change any time soon. Our existing operations, and any future operations or investments, may become the subject of heightened scrutiny by clearing houses and stock exchanges, in addition to regulators and other authorities in the United States. Any existing or future restrictions imposed by Pershing LLC, or any other applicable clearing house, stock exchange or other authority, on trading in our common stock could have a material adverse effect on the liquidity of our common stock.
We do not intend to pay dividends for the foreseeable future.
We do not currently anticipate paying dividends in the foreseeable future. The payment of dividends on our common stock will depend on our earnings and financial condition, as well as on other business and economic factors affecting our business, as our board of directors may consider relevant. Our current intention in the foreseeable future is to apply net earnings, if any, to increasing our capital base and our development and marketing efforts. There can be no assurance that we will ever have sufficient earnings to declare and pay dividends to the holders of our common stock and, in any event, a decision to declare and pay dividends is at the sole discretion of our board of directors. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases compared to the price at which you purchased our common stock, which may never occur.
Were our common stock to be considered penny stock, and therefore become subject to the penny stock rules, U.S. broker-dealers may be discouraged from effecting transactions in shares of our common stock.
Broker-dealers are generally prohibited from effecting transactions in “penny stocks” unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934 (the “Exchange Act”) and the rules promulgated thereunder. These rules apply to the stock of companies whose shares are not traded on a national stock exchange, trade at less than $5.00 per share or who do not meet certain other financial requirements specified by the Securities and Exchange Commission (the “SEC”). Trades in our common stock are subject to these rules, which include Rule 15g-9 under the Exchange Act, which imposes certain requirements on broker/dealers who sell securities subject to the rule to persons other than established customers and accredited investors. For transactions covered by the rule, brokers/dealers must make a special written determination that the penny stock is a suitable investment for purchasers of the securities and receive the purchaser’s written agreement to the transaction prior to sale.
The penny stock rules also require a broker/dealer, prior to effecting a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. A broker/dealer also must provide the customer with current bid and offer quotations for the relevant penny stock and information on the compensation of the broker/dealer and its salesperson in the transaction. A broker/dealer must also provide monthly account statements showing the market value of each penny stock held in a customer’s account. The bid and offer quotations, and the
22
broker/dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation.
Our securities have in the past constituted “penny stock” within the meaning of the rules. Were our common stock to again be considered penny stock, and therefore become subject to the penny stock rules, the additional sales practice and disclosure requirements imposed upon U.S. broker-dealers may discourage such broker-dealers from effecting transactions in shares of our common stock, which could severely limit the market liquidity of such shares and impede their sale in the secondary market.
Our stockholders may experience significant dilution.
We have a significant number of warrants and options to purchase our common stock outstanding, the exercise of which would be dilutive to stockholders. In certain instances, the exercise prices are subject to adjustment if we issue or sell shares of our common stock or equity-based instruments at a price per share less than the exercise price then in effect. In such case, both the issuance and the adjustment would be dilutive to stockholders.
We may from time to time finance our future operations or acquisitions through the issuance of equity securities, which securities may also have rights and preferences senior to the rights and preferences of our common stock. We may also grant options to purchase shares of our common stock to our directors, employees, and consultants, the exercise of which would also result in dilution to our stockholders.
We have incurred and will continue to incur increased costs due to operating as a public company, and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices.
As a public company we have incurred, and particularly after we are no longer a smaller reporting company, we will continue to incur significant legal, accounting, and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the OTCQB Market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs, particularly as we hire additional financial and accounting employees to meet public company internal control and financial reporting requirements and will make some activities more time-consuming and costly.
We are evaluating these rules and regulations and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
Pursuant to Section 404, we will be required to furnish a report by our management on our internal control over financial reporting. However, while we remain a smaller reporting company with less than $100 million in revenue, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, including through hiring additional financial and accounting personnel, potentially engage outside consultants, and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by Section 404. If we identify one or more material weaknesses in our internal control over financial reporting,
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it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES
The Company’s corporate headquarters are located in Denver, Colorado, and our Cultivation facility is located in Boulder Colorado. We have one dispensary located in Englewood, Colorado, and two dispensaries located in Portland, Oregon. All locations are leased by the Company. For additional information regarding the lease terms and provisions, see Note 10. “Leases” in our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.”
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in various claims and legal actions in the ordinary course of business. Other than as set forth below, we are not currently involved in any material legal proceedings outside the ordinary course of our business.
In July 2021, 2353 SB, LLC (“Plaintiff”) filed an action in the District Court, County of Denver, Colorado, for breach of contract relating to a written lease between the Company and Plaintiff, the term of which is November 1, 2020, to October 31, 2023 (“Lease”). Plaintiff’s action relates to the Company’s alleged failure to remit continuing lease payments under the Lease and sets forth in the complaint that the Company owes approximately $123,000 for unpaid rent and utilities, plus late fees and accrued interest in respect thereof. In August 2021, the Company filed a Motion to Dismiss or, in the Alternative, Motion for Summary Judgment, asserting that as a result of the continuing COVID-19 pandemic, it was practically impossible for the Company to perform under the Lease in accordance with the force majeure clause contained therein; and therefore the Company properly exercised its rights to rent abatement. In October 2021, Plaintiff filed a Cross-Motion for Summary Judgment. All motions are fully briefed, and the court has yet to rule on the motions.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
General Cannabis Corp common stock (CANN) is listed for trading on the OTC Market’s OTCQB.
Holders
As of March 21, 2022, we had approximately 68 holders of record of our common stock. A substantially greater number of holders of the Company’s common stock are “street name” or beneficial holders, whose shares of record are held by banks, brokers, and other financial institutions. In addition, our Articles of Incorporation authorize the Board to issue up to 5,000,000 shares of preferred stock. The provisions in the Articles of Incorporation relating to the preferred stock allow directors to issue preferred stock with multiple votes per share and dividend rights, which would have priority over
24
any dividends paid with respect to the holders of common stock. The issuance of preferred stock with these rights may make the removal of management difficult even if the removal would be considered beneficial to stockholders, generally, and will have the effect of limiting stockholder participation in certain transactions such as mergers or tender offers if these transactions are not favored by management.
Dividend Policy
Holders of our common stock are entitled to receive dividends as may be declared by the Board. The Board is not restricted from paying any dividends but is not obligated to declare a dividend. No cash dividends have ever been declared and it is not anticipated that cash dividends will be paid in the near future. We currently intend to retain any future earnings to finance future growth. Any future determination to pay dividends will be at the discretion of the Board and will depend on our financial condition, results of operations, capital requirements, and other factors the Board considers relevant.
ITEM 6. SELECTED FINANCIAL DATA
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, we are not required to provide the information required by this Item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis (“MD&A”) should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 8 of this Annual Report on Form 10-K (annual report), which include additional information about our accounting policies, practices, and the transactions underlying our financial results. The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires us to make estimates and assumptions that affect the reported amounts in our consolidated financial statements and the accompanying notes, including various claims and contingencies related to lawsuits, taxes, environmental and other matters arising during the normal course of business. We apply our best judgment, our knowledge of existing facts, circumstances, and actions that we may undertake in the future in determining the estimates that affect our consolidated financial statements. We evaluate our estimates on an ongoing basis using our historical experience, as well as other factors we believe appropriate under the circumstances, such as current economic conditions, and adjust or revise our estimates as circumstances change. As future events and their effects cannot be determined with precision, actual results may differ from these estimates. Our MD&A contains forward-looking statements that discuss, among other things, future expectations and projections regarding future developments, operations, and financial condition. 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, events or circumstances after the date of this Report is filed. General Cannabis Corp and its subsidiaries are referred to collectively as “GCC” “the Company,” “we, “us” or “our” in the following discussion and analysis.
Going Concern
The consolidated financial statements included elsewhere in this Form 10-K, have been prepared on a going concern basis, which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. Our cash of $2,054,050 as of December 31, 2021 is not sufficient to absorb our operating losses and retire our debt of $8,913,644 and other obligations as they come due. Our ability to continue as a going concern is dependent upon our generating profitable operations in the future and/or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. Management believes that (a) we will be successful obtaining additional capital and (b) actions presently being taken to further implement our business plan and generate additional revenues provide opportunity for the Company to continue as a
25
going concern. While we believe in the viability of our strategy to generate additional revenues and our ability to raise additional funds, there can be no assurances to that effect. Accordingly, there is substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Results of Operations
The following tables set forth, for the periods indicated, are statements of operations data. The tables and the discussion below should be read in conjunction with the accompanying consolidated financial statements and the notes thereto appearing in Item 8 in this Report.
Consolidated Results
| | Year ended December 31, | | | | | Percent |
| ||||
| | 2021 | | 2020 | | Change | | Change |
| |||
Revenues |
| $ | 5,927,199 |
| $ | 2,383,704 |
| $ | 3,543,495 |
| 149 | % |
Costs and expenses | |
| (8,940,185) | |
| (8,258,346) | |
| (681,839) | | 8 | % |
Other expense | |
| (5,414,165) | |
| (1,553,043) | |
| (3,861,122) | | 249 | % |
Net loss from continuing operations before income taxes | |
| (8,427,151) | |
| (7,427,685) | |
| (999,466) | | 13 | % |
Loss from discontinued operations | |
| (442,228) | |
| (252,007) | |
| (190,221) | | 75 | % |
Loss from operations before income taxes | | $ | (8,869,379) | | $ | (7,679,692) | | $ | (1,189,687) | | 15 | % |
The following discussion of our results of operations relates to our continuing operations. See Note 3 to the consolidated financial statements for information concerning discontinued operations.
Revenues
The addition of our Retail segment and a full year of our Cultivation segment contributed to the significant increase in revenues for the year ended December 31, 2021. See Segment discussions below for further details.
Costs and expenses
| | Year ended December 31, | | | | | Percent |
| ||||
|
| 2021 |
| 2020 |
| Change |
| Change |
| |||
Cost of sales | | $ | 4,439,478 | | $ | 1,388,626 | | $ | 3,050,852 | | 220 | % |
Selling, general and administrative | |
| 2,764,780 | |
| 2,901,931 | |
| (137,151) |
| (5) | % |
Stock-based compensation | |
| 307,963 | |
| 1,504,389 | |
| (1,196,426) |
| (80) | % |
Professional fees | |
| 927,390 | |
| 2,263,717 | |
| (1,336,327) |
| (59) | % |
Depreciation and amortization | |
| 500,574 | |
| 199,683 | |
| 300,891 |
| 151 | % |
| | $ | 8,940,185 | | $ | 8,258,346 | | $ | 681,839 |
| 8 | % |
Cost of sales increased year over year due to the addition of our Retail Segment and a full year of expenses in relation to our Cultivation Segment. See Segment discussions below for further details.
Selling, general and administrative expense decreased by $0.1 million to $2.8 million for the year ended December 31, 2021 from $2.9 million for the year ended December 31, 2020, primarily due to management’s emphasis on cost controls and decreases in salary expense due to the discontinuation of certain business operations.
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Stock-based compensation included the following:
| | Year ended December 31, | | | | | Percent |
| ||||
| | 2021 | | 2020 | | Change | | Change |
| |||
Employee awards |
| $ | 307,963 |
| $ | 1,411,442 |
| $ | (1,103,479) |
| (78) | % |
Consulting awards | |
| — | |
| 92,947 | |
| (92,947) |
| (100) | % |
| | $ | 307,963 | | $ | 1,504,389 | | $ | (1,196,426) |
| (80) | % |
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 year ended December 31, 2021 as compared to December 31, 2020 is due to the decrease in the number of options we grant on a quarterly basis and an increase in forfeitures in 2021 due to the departure of our Chief Executive Officer in May 2021, the departure of our Chief Financial Officer in September 2021 and a reduction in workforce in 2020 and 2021. Consulting awards are granted to third parties in lieu of cash for services provided.
Professional fees consist primarily of accounting and legal expenses and have decreased from 2020 due to the addition of internal counsel.
Depreciation and amortization expense increased in 2021 due to the acquisition of TREES Englewood, TREES Portland and TREES Waterfront. We also recognized a full year of depreciation and amortization expense in 2021, in relation to our acquisition of SevenFive Farm in May of 2020.
Other Expense
| | Year ended December 31, | | | | | Percent |
| ||||
|
| 2021 |
| 2020 |
| Change |
| Change |
| |||
Amortization of debt discount | | $ | 689,348 | | $ | 295,256 | | $ | 394,092 | | 133 | % |
Interest expense | |
| 622,469 | |
| 453,522 | |
| 168,947 | | 37 | % |
Loss on extinguishment of debt | |
| 233,374 | |
| 1,638,009 | |
| (1,404,635) | | (86) | % |
Loss on impairment of assets | | | 3,010,420 | | | — | | | 3,010,420 | | 100 | % |
Loss (gain) on derivative liability | |
| 990,066 | |
| (735,796) | |
| 1,725,862 | | (235) | % |
Other expense (income), net | |
| (131,512) | |
| (139,187) | |
| 7,675 | | (6) | % |
Loss on investment | | | — | | | 41,239 | | | (41,239) | | 100 | % |
| | $ | 5,414,165 | | $ | 1,553,043 | | $ | 3,861,122 | | 249 | % |
Amortization of debt discount increased during the year ended December 31, 2021 as compared to December 31, 2020 due to the senior convertible promissory notes with warrants (“10% Notes”) issued in December 2020, February 2021 and April 2021. Interest expense increased during the year ended December 31, 2021 as compared to December 31, 2020 due to the addition of the 10% Notes with an interest rate of 10%. The loss on warrant derivative liability reflects the change in the fair value of the 2019 Warrants. The loss on extinguishment of debt for the year ended December 31, 2021 was due to the modification of warrants that occurred on the 15% Warrants during the third quarter. The loss on extinguishment of debt during 2020 is due to the conversion and extension of the SBI debt, and the exchange of the 12% Notes into the 15% Notes that occurred during the first quarter of 2020. See Note 13 of the accompanying audited consolidated financial statements for further information. The loss on impairment of assets is due to a goodwill impairment and intangible impairment adjustment on our Cultivation Segment. The other expense (income) in 2020 relates to the gain on the sale of the building we recognized as a result of the sale of our corporate office building in March 2020.
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Retail
| | Year ended December 31, | | | | | Percent |
| ||||
| | 2021 | | 2020 | | Change | | Change |
| |||
Revenues |
| $ | 3,515,761 |
| $ | — |
| $ | 3,515,761 |
| 100 | % |
Costs and expenses | |
| (3,112,595) | |
| — | |
| (3,112,595) |
| 100 | % |
Segment operating income | | $ | 403,166 | | $ | — | | $ | 403,166 |
| 100 | % |
With the addition of the TREES Englewood dispensary on September 2, 2021 and the addition of TREES Portland and TREES Waterfront on December 30, 2021, 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.
Cultivation
| | Year ended December 31, | | | | | Percent |
| ||||
|
| 2021 |
| 2020 |
| Change |
| Change |
| |||
Revenues | | $ | 2,722,059 | | $ | 2,279,867 | | $ | 442,192 |
| 19 | % |
Costs and expenses | |
| (6,273,162) | |
| (1,865,399) | |
| (4,407,763) |
| 236 | % |
| | $ | (3,551,103) | | $ | 414,468 | | $ | (3,965,571) |
| (957) | % |
This increase in revenues for the year ended December 31, 2021 as compared to December 31, 2020, is due to owning SevenFive Farm for a full year. We also started selling premium cannabis blunts that command a higher price than the traditional wholesale cannabis. The decrease in gross margin is due to lower yields caused by several environmental factors. The additional increase in costs and expenses is due to a goodwill impairment and intangible impairment adjustment.
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 related expenses, 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
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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 consolidated financial statements.
| | Year ended December 31, | ||||
| | 2021 | | 2020 | ||
Loss from operations before income taxes |
| $ | (8,427,151) |
| $ | (8,510,186) |
Adjustment for loss from discontinued operations | |
| 442,228 | |
| 252,007 |
Net loss from continuing operations before income taxes | |
| (7,984,923) | |
| (8,258,179) |
Adjustments: | |
|
| |
|
|
Deemed dividend | | | — | | | 830,494 |
Stock-based compensation | |
| 307,963 | |
| 1,504,389 |
Depreciation and amortization | | | 500,574 | | | 199,683 |
Amortization of debt discount and equity issuance costs | |
| 689,348 | |
| 295,256 |
Loss on extinguishment of debt | |
| 233,374 | |
| 1,638,009 |
Loss on impairment of assets | | | 3,010,420 | | | — |
Interest expense | |
| 622,469 | |
| 453,522 |
Gain on sale of assets | | | (131,512) | | | (139,187) |
Loss on investment | | | — | | | 41,239 |
(Gain) loss on derivative liability | |
| 990,066 | |
| (735,796) |
Severance | | | 40,962 | | | 103,302 |
Acquisition related expenses | | | 264,312 | | | 326,095 |
Nonrecurring professional services | | | 115,054 | | | 1,348,598 |
Total adjustments | |
| 6,643,030 | |
| 5,865,604 |
Adjusted EBITDA | | $ | (1,341,893) | | $ | (2,392,575) |
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 more significant uses of resources will include funding operations, developing infrastructure, and business acquisitions.
In September 2021, we received $1,180,000 in cash by issuing 1,180 shares of our preferred stock and 354,000 warrants to purchase common stock.
In February and April 2021, we received $3,960,000 in cash in a private placement with certain accredited investors pursuant to which we issued and sold 10% senior convertible promissory notes.
Sources and uses of cash
We had cash of approximately $2,054,050 and $750,218, respectively, on December 31, 2021 and 2020. Our cash flows from operating, investing, and financing activities were as follows:
| | Year ended December 31, | ||||
| | 2021 | | 2020 | ||
Net cash used in operating activities |
| $ | (2,651,889) |
| $ | (5,000,388) |
Net cash provided by investing activities | | $ | (978,739) | | $ | 1,107,163 |
Net cash provided by financing activities | | $ | 4,928,909 | | $ | 4,424,000 |
Net cash used in operating activities decreased in 2021 due to an increase in revenue as well as the acquisition of three dispensaries which provides positive operating cash flows.
29
Net cash used by investing activities for the year ended December 31, 2021 consisted of $1,439,027 from the purchase of the three dispensaries and purchase of equipment of $331,834. This is offset by the sale of our investment for $208,761, the sale of Next Big Crop in the amount of $150,000 and collection of notes receivables in the amount of $591,717.
Net cash provided by financing activities are primarily related to the sale of common stock and warrants and proceeds from notes payable. This is offset by paying off debt.
Capital Resources
We have no material commitments for capital expenditures as of December 31, 2021. Part of our growth strategy, however, is to acquire businesses. We would anticipate funding such activity through cash on hand, the issuance of debt, common stock, warrants for our common stock or a combination thereof.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses. Critical accounting policies are those that require the application of management’s most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates. Actual results may differ from these estimates.
We define critical accounting policies as those that are reflective of significant judgments and uncertainties, and which may potentially result in materially different results under different assumptions and conditions. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates. These estimates are subject to an inherent degree of uncertainty.
Business Combinations
Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions provided by management, including expected future cash flows. We allocate any excess purchase price over the fair value of the net assets and liabilities acquired to goodwill. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs, including advisory, legal, accounting, valuation, and other costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
Goodwill and Intangibles
Goodwill represents the excess of purchase price over the fair value of identifiable net assets acquired in a business combination. Goodwill and long-lived intangible assets are tested for impairment at least annually in accordance with the provisions of ASC No. 350, Intangibles-Goodwill and Other (“ASC No. 350”). ASC No. 350 requires that goodwill be tested for impairment at the reporting unit level (operating segment or on level below an operating segment) on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carry value. Application of the goodwill impairment test requires judgement, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. We test goodwill annually in
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December, unless an event occurs that would cause the us to believe the value is impaired at an interim date. See Notes 1 and 9 to our consolidated financial statements for a description of our goodwill and intangible asset valuation and impairment policies and associated impacts for the reported periods.
Intangible assets with finite useful lives are amortized over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
Impairment of Long-lived Assets
We periodically evaluate whether the carrying value of property and equipment has been impaired when circumstances indicate the carrying value of those assets may not be recoverable. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is not recoverable, the impairment loss is measured as the excess of the asset’s carrying value over its fair value.
Our impairment analyses require management to apply judgment in estimating future cash flows as well as asset fair values, including forecasting useful lives of the assets, assessing the probability of different outcomes, and selecting the discount rate that reflects the risk inherent in future cash flows. If the carrying value is not recoverable, we assess the fair value of long-lived assets using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third-party comparable sales and undiscounted cash flow models. If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future.
Accounting for Discontinued Operations
We regularly review underperforming assets to determine if a sale or disposal might be a better way to monetize the assets. When an asset group is considered for sale or disposal, we review the transaction to determine if or when the entity qualifies as a discontinued operation in accordance with the criteria of FASB ASC Topic 205-20, Discontinued Operations. The FASB has issued authoritative guidance that raises the threshold for disposals to qualify as discontinued operations. Under this guidance, a discontinued operation is (1) a component of an entity or group of components that have been disposed of or are classified as held for sale and represent a strategic shift that has or will have a major effect on an entity’s operations and financial results, or (2) an acquired business that is classified as held for sale on the acquisition date.
Debt with Equity-linked Features
We may issue debt that has separate warrants, conversion features, or no equity-linked attributes.
Debt with warrants – When we issue debt with warrants, we treat the warrants as a debt discount, record as a contra-liability against the debt, and amortize the balance over the life of the underlying debt as amortization of debt discount expense in the consolidated statements of operations. The offset to the contra-liability is recorded as additional paid in capital in our consolidated balance sheets. If the debt is retired early, the associated debt discount is then recognized immediately as amortization of debt discount expense in the consolidated statement of operations. The debt is treated as conventional debt.
We determine the value of the non-complex warrants using the Black-Scholes Option Pricing Model (“Black-Scholes”) using the stock price on the date of issuance, the risk-free interest rate associated with the life of the debt, and the volatility of our stock. For warrants with complex terms, we use the binomial lattice model to estimate their fair value.
Modification of Debt - When we change the terms of existing notes payable, we evaluate the amendments under ASC 470-50, Debt Modification and Extinguishment to determine whether the change should be treated as a modification or as a debt extinguishment. This evaluation includes analyzing whether there are significant and consequential changes to
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the economic substance of the note. If the change is deemed insignificant then the change is considered a debt modification, whereas if the change is substantial the change is reflected as a debt extinguishment.
Convertible Debt - When we issue debt with a conversion feature, we must first assess whether the conversion feature meets the requirements to be treated as a derivative. If the conversion feature within convertible debt meets the requirements to be treated as a derivative, we estimate the fair value of the convertible debt derivative using Black-Scholes upon the date of issuance, using the stock price on the date of issuance, the risk-free interest rate associated with the life of the debt, and the estimated volatility of our stock. If the conversion feature is not treated as a derivative, we assess whether it is a beneficial conversion feature (“BCF”). A BCF exists if the effective conversion price of the convertible debt instrument is less than the stock price on the commitment date. This typically occurs when the effective conversion price is less than the fair value of the stock on the date the instrument was issued. The value of a BCF is equal to the intrinsic value of the feature, the difference between the effective conversion price and the fair value of the common stock into which it is convertible.
Equity-based Payments
We estimate the fair value of equity-based instruments issued to employees or to third parties for services or goods using Black-Scholes or the Binomial Model, which requires us to estimate the volatility of our stock and forfeiture rate.
Revenue Recognition
On January 1, 2018, we adopted ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
The following five steps are applied to achieve that core principle:
| ● | Step 1: Identify the contract with the customer; |
| ● | Step 2: Identify the performance obligations in the contract; |
| ● | Step 3: Determine the transaction price; |
| ● | Step 4: Allocate the transaction price to the performance obligations in the contract; and |
| ● | Step 5: Recognize revenue when the company satisfies a performance obligation. |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
General Cannabis Corp.
Opinion on the Financial Statements
We have audited, before the effects of the adjustments to retrospectively apply the change in accounting described in Note 3 – Discontinued Operations, the accompanying consolidated balance sheet of General Cannabis Corp. (the “Company”) as of December 31, 2020, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the 2020 financial statements, before the effects of the adjustments to retrospectively apply the change in accounting described in Note 3 – Discontinued Operations, present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the change in accounting described in Note 3 – Discontinued Operations and accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by Haynie & Company. The 2020 financial statements before the effects of the adjustments discussed in Note 3 are not presented herein.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Incremental Borrowing Rate (Leases)
Description of the Matter
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As discussed in Note 10 to the consolidated financial statements, the Company’s reported right-of-use assets, current lease liabilities and long-term lease liabilities, utilize discount rates to calculate the estimated present value of future lease payments for all leases under ASC Topic 842 at the lease commencement date, and the lessee is required to remeasure its lease liability and adjust the related right-of-use asset upon any lease modifications not accounted for as a separate contract. Since the Company’s lease does not provide an implicit rate, management utilized a third-party valuation specialist to assist in estimating the incremental borrowing rates used in its present value calculation, which required subjectivity. The incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company’s current operating lease had a lease commencement date in May 2020, and a lease modification in December 2020. As of the lease commencement date on May 2020, the incremental borrowing rate used to determine the operating lease liability was 22.8%. As of the lease modification date in December 2020, the incremental borrowing rate was 20.0%.
Auditing management’s assessment of its incremental borrowing rate is highly subjective and judgmental as the Company has no collateralized outstanding debt nor committed credit facilities, secured or otherwise, that would have comparable collateral or similar terms as their underlying lease. Based on the level of management judgment, we have determined the incremental borrowing rate to be a critical audit matter. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our valuation specialists, when performing audit procedures to evaluate the reasonableness of management’s estimation of the incremental borrowing rate.
How we Addressed the Matter in Our Audit
With the assistance of our valuation specialists, our audit procedures included, amongst others:
| ● | We obtained an understanding of management’s process in regards to the methodology used and the factors considered around the inputs, sources of data used and assumptions and estimates made in determining the Company’s incremental borrowing rates, including those over management’s review of its third-party specialist valuation report. |
| ● | We reviewed the contractual terms of the original lease agreement and the modified lease agreement to ensure the commencement date and modification date, any lease term extensions and/or early termination clauses were properly considered in determining the appropriate lease term for calculating the incremental borrowing rates. |
| ● | We evaluated the reasonableness of the valuation methods and assumptions used by management and the Company’s valuation specialist to estimate the incremental borrowing rates for borrowing amounts and terms comparable to their outstanding leases. |
| ● | We performed a sensitivity analysis on incremental borrowing rates used to determine the impact rate changes could have on the present value calculation of the Company’s operating lease right-of-use asset and operating lease liability. |
Acquisition Date Fair Value of Trade Name Intangible Asset
Description of the Matter
As discussed in Note 2 to the consolidated financial statements, on May 13, 2020, the Company acquired Dalton Adventures, LLC in a business combination. As part of the transaction, the Company acquired fixed assets, inventory, a cultivation license and the trade name of the business, SevenFive Farm. Due to the complexity in determining fair value, management utilized a third-party valuation specialist to assist in calculating the acquisition date fair value of the trade name intangible asset. The acquisition date fair value of $1.0 million, which was determined using the relief from royalty method, was allocated to the acquired trade name intangible asset.
Auditing management’s assessment of the acquisition date fair value of the trade name intangible asset is highly subjective and judgmental. Based on the level of management judgment, we have determined the evaluation of the acquisition date fair value of the trade name intangible asset to be a critical audit matter. Testing the assumptions regarding future revenue growth rates and discount rate, which were used to determine the fair value, involved a high degree of subjectivity, auditor judgment and an increased extent of effort, including the need to involve our valuation specialist, when performing audit procedures to evaluate the reasonableness of management’s estimation of the acquisition date fair value of the trade name intangible asset.
34
How we Addressed the Matter in Our Audit
With the assistance of our valuation specialists, our audit procedures included, amongst others:
| ● | We obtained an understanding of management’s process with regards to the methodology used, and the factors considered around the inputs, sources of data used, assumptions and estimates used in the relief from royalty method to determine the acquisition date fair value of the trade name intangible asset, including those over management’s review of its third-party specialist valuation report. |
| ● | We tested the mathematical accuracy of the underlying schedules used in the valuation report to ensure the completeness and accuracy of the reports. |
| ● | We evaluated the Company’s future revenue growth rates by comparing them to historical results to ensure the reasonableness of these forecasts. |
| ● | We assessed the appropriateness of the overall approach and use of the relief from royalty method as the overall approach to determining the fair value of the trade name. |
| ● | We evaluated the reasonableness of the methodology and assumptions used by the specialist to determine the discount and royalty rates utilized to value the trade name intangible asset. |
/s/ Marcum llp
We served as the Company’s auditor from 2019 to 2021.
April 1, 2021
(PCAOB ID
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of General Cannabis Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of General Cannabis Corp. (the Company) as of December 31, 2021, and the related consolidated statements of operations, stockholders’ equity, and cash flows for year ended December 31, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. As part of our audit of the financial statements for the ended December 31, 2021, we have also audited the retrospective adjustments to the financial statements of the Company for the presentation of discontinued operations as of December 31, 2020. In our opinion, the retrospective adjustments have been fairly applied to present discontinued operations.
As described in Note 3, the sale of the Company’s Operations segment closed on August 2, 2021. As a result, the business revenues and expenses were classified as discontinued operations and the related assets and liabilities were classified as available for sale in the financial statements as of December 31, 2020, which are shown comparatively. Except for the effects of the retrospective presentation for discontinued operations, we were not engaged to audit, review, or apply any procedures to the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year then ended, other than stated above and, accordingly, we do not express an opinion or any other form of assurance about whether such financial position have been fairly stated as of December 31, 2020. Those balances were audited by Marcum LLP.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has negative working capital that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
36
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Business Combination – Refer to Note 2 to the financial statements
As discussed in Note 2 to the financial statements, on September 2, 2021, the Company acquired TREES Englewood and on December 30, 2021, the Company acquired Trees Portland, LLC and Trees Waterfront, LLC in a business combination. Management of the Company allocated the purchase price to cash, fixed assets, inventory, licenses, trade names, and goodwill. The accounting for the purchase price allocation is complex due to the significant estimation uncertainty in determining the fair values of identified intangibles and the Company’s third-party valuation is yet to be completed.
We considered the purchase price allocation as a significant audit matter because of the significant estimates and assumptions made by management to estimate fair value of trade names and allocation to goodwill. These estimates include impact of forecasted growth and the consideration of comparable transactions in their industry. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve the expertise of our in-house valuation professionals.
Addressing the matter involved obtaining the purchase agreements and interpreting the terms are in agreement with the estimate assumptions used by the Company. We obtained the Company’s purchase price allocation and tested the inputs used in their calculation. In evaluating the Company’s assumptions, we compared them to other similar transactions in their industry. Finally, we used professionals inside our firm with specialized skills and knowledge to assess the Company’s methodology.
Goodwill — Refer to Note 9 to the consolidated financial statements
As discussed in Note 9 to the financial statements, the Company has recognized goodwill of $8,799,657 as of December 31, 2021, after recognizing impairment expense of $2,484,200 during the year then ended. The Company evaluates its goodwill at least annually or more frequently when events or changes in circumstances indicate the carrying value may not be recoverable. The Company performed a goodwill analysis by calculating the fair value by operating segment, using primarily an income approach, and comparing it to the carrying amount of its goodwill. The income approach employed a discounted cash flow using a forecast developed by management. This valuation method requires management to make significant estimates and assumptions related to projected cash flows.
We identified goodwill as a critical audit matter because of the significant estimates and assumptions made by management to estimate fair value, including the impact of forecasted growth, and the difference between the fair values and the carrying values as of December 31, 2021. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialist, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to certain assumptions within the projected cash flows.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included, among others, gaining an understanding of management's process for developing the fair value estimate. We also evaluated the expertise, qualifications, and independence of management’s specialist engaged to complete the evaluation.
37
We used professionals inside our firm with specialized skills and knowledge to assess the Company’s methodology and assumptions used such as discount rate used. In evaluating the Company’s assumptions, we compared them to historical results.
/s/
We have served as the Company’s auditor since 2021.
March 25, 2022
(PCAOB ID
38
GENERAL CANNABIS CORP
CONSOLIDATED BALANCE SHEETS
| | | | | | |
| | December 31, | ||||
| | | 2021 | 2020 | ||
Assets |
| |
|
| |
|
Current assets |
| |
|
| |
|
Cash and cash equivalents | | $ | | | $ | |
Accounts receivable, net of allowance of $ | |
| | |
| |
Current portion of notes receivable, net of allowance of $ | | | | | | |
Inventories, net | | | | | | |
Prepaid expenses and other current assets | |
| | |
| |
Assets of discontinued operations - current portion | |
| — | |
| |
Total current assets | |
| | |
| |
| | | | | | |
Right-of-use operating lease asset | | | | | | |
Property and equipment, net | | | | | | |
Investment, held for sale | |
| — | |
| |
Intangible assets, net | | | | | | |
Goodwill | | | | | | |
Assets of discontinued operations | | | — | | | |
Total assets | | $ | | | $ | |
| | | | | | |
Liabilities and Stockholders' Equity | |
| | |
| |
| | | | | | |
Current liabilities | |
| | |
|
|
Accounts payable and accrued expenses | | $ | | | $ | |
Interest payable | |
| | |
| |
Operating lease liability, current | | | | | | |
Accrued stock payable | |
| | |
| |
Warrant derivative liability | |
| | |
| |
Notes payable - current | | | | | | — |
Liabilities of discontinued operations | |
| — | |
| |
Total current liabilities | |
| | |
| |
| | | | | | |
Operating lease liability, non-current | | | | | | |
Notes payable - long term (net of discount) | | | | | | |
Related party long-term notes payable (net of discount) | | | | | | |
Total liabilities | | | | | | |
Commitments and contingencies (Note 9) | | | | | ||
| | | | | | |
Stockholders’ equity | |
|
| |
|
|
Preferred stock, | | | | | | |
Common stock, $ | | | | | | |
Additional paid-in capital | |
| | |
| |
Accumulated deficit | |
| ( | |
| ( |
Total stockholders’ equity | |
| | |
| |
Total liabilities and stockholders’ equity | | $ | | | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
39
GENERAL CANNABIS CORP
CONSOLIDATED STATEMENTS OF OPERATIONS
| | Year ended | | ||||
| | December 31, | | ||||
| | 2021 | | 2020 | | ||
Revenue | | | | | | | |
Retail sales | | $ | | | $ | — | |
Cultivation sales | | | | | | | |
Interest | | | | | | | |
Total revenue | | | | | | | |
| | | | | | | |
Costs and expenses | | | | | | | |
Cost of sales | | | | | | | |
Selling, general and administrative | | | | | | | |
Stock-based compensation | | | | | | | |
Professional fees | | | | | | | |
Depreciation and amortization | | | | | | | |
Total costs and expenses | | | | | | | |
| | | | | | | |
Operating loss | | | ( | | | ( | |
| | | | | | | |
Other expenses (income) | | | | | | | |
Amortization of debt discount and equity issuance costs | | | | | | | |
Interest expense | | | | | | | |
Loss on extinguishment of debt | | | | | | | |
Loss on impairment of assets | | | | | | — | |
(Gain) loss on derivative liability | | | | | | ( | |
Other expense (income), net | | | ( | | | ( | |
Total other expenses (income), net | | | | | | | |
| | | | | | | |
Net loss from continuing operations before income taxes | | | ( | | | ( | |
| | | | | | | |
Provision for income taxes | | | — | | | — | |
Loss from continuing operations | | | ( | | | ( | |
| | | | | | | |
Loss from discontinued operations, net of tax | | | ( | | | ( | |
Net loss | | | ( | | | ( | |
| | | | | | | |
Deemed dividend | | | — | | | ( | |
| | | | | | | |
Net loss attributable to common stockholders | | $ | ( | | $ | ( | |
| | | | | | | |
| | | | | | | |
Per share data - basic and diluted | | | | | | | |
Net loss from continuing operations per share | | $ | ( | | $ | ( | |
Net loss from discontinued operations per share | | $ | ( | | $ | | |
Net loss attributable to common stockholders per share | | $ | ( | | $ | ( | |
Weighted average number of common shares outstanding | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
40
GENERAL CANNABIS CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | Year ended December 31, | ||||
| | 2021 | | 2020 | ||
Cash flows from operating activities | | |
|
| |
|
Net loss | | $ | ( | | $ | ( |
Adjustments to reconcile net loss to net cash used in operating activities: | |
|
| |
|
|
Amortization of debt discount and equity issuance costs | |
| | |
| |
Depreciation and amortization | |
| | |
| |
Amortization of loan origination fees | | | — | | | ( |
Loss on extinguishment of debt | | | | | | |
Non-cash lease expense | | | | | | |
Bad debt expense | | | | | | |
Impairment of assets | | | | | | — |
Loss on disposal of property and equipment | | | | | | |
(Gain) loss on warrant derivative liability | |
| | |
| ( |
Stock-based compensation | |
| | |
| |
Loss on investment | | | ( | | | |
Gain on sale of building | | | — | | | ( |
Changes in operating assets and liabilities, net of acquisitions | |
| | |
| |
Accounts receivable | |
| | |
| |
Prepaid expenses and other assets | |
| | |
| ( |
Inventories | |
| | |
| ( |
Accounts payable and accrued liabilities | | | ( | | | ( |
Operating lease liabilities | | | ( | | | ( |
Net cash used in operating activities: | |
| ( | |
| ( |
| | | | | | |
Cash flows from investing activities | |
|
| |
|
|
Purchase of property and equipment | |
| ( | |
| ( |
Lending on note receivable | | | ( | | | — |
Proceeds on notes receivable | | | | | | — |
Acquisition of TREES Englewood, net of cash acquired | | | ( | | | — |
Acquisition of TREES Portland, net of cash acquired | | | ( | | | — |
Acquisition of TREES Waterfront, net of cash acquired | | | ( | | | — |
Net proceeds from sale of Next Big Crop | | | | | | — |
Proceeds from sale of building | | | — | | | |
Proceeds from sale of investment | | | | | | — |
Net cash (used in) provided by investing activities | |
| ( | |
| |
| | | | | | |
Cash flows from financing activities | |
|
| |
| |
Proceeds from the sale of common stock and warrants - accrued stock payable | | | — | | | |
Proceeds from the exercise of warrants | | | — | | | |
Proceeds from exercise of stock options | | | | | | — |
Proceeds from preferred stock offering | | | | | | — |
Proceeds from notes payable | | | | | | |
Payments on notes payable | | | ( | | | ( |
Net cash provided by financing activities | |
| | |
| |
| | | | | | |
Net increase in cash and cash equivalents | |
| | |
| |
Cash and cash equivalents, beginning of period | |
| | |
| |
Cash and cash equivalents, end of period | | $ | | | $ | |
| | | | | | |
Supplemental schedule of cash flow information | |
|
| |
|
|
Cash paid for interest | | $ | | | $ | |
| | | | | | |
Non-cash investing & financing activities | |
|
| |
|
|
Operating lease right-of-use asset/Operating lease liability | | $ | | | $ | |
| $ | | | $ | | |
Beneficial conversion feature | | $ | | | $ | |
Cashless warrant and option exercises | | $ | | | $ | |
Issuance of common stock to a consultant | | $ | | | $ | — |
Deemed dividend from warrant repricing | | $ | — | | $ | |
| $ | — | | $ | | |
| $ | — | | $ | | |
| $ | — | | $ | | |
Modification of warrants associated with debt | | $ | — | | $ | |
Debt converted to equity | | $ | — | | $ | |
Issuance of common stock to an employee | | $ | — | | $ | |
Stock issued in connection with SevenFive Farm acquisition | | $ | — | | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
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GENERAL CANNABIS CORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
| | | | | | | | | Additional | | | | | | |||||
| | Preferred Stock | | Common Stock | | Paid-in | | Accumulated | | | | ||||||||
|
| Shares | | Amount | | Shares |
| Amount |
| Capital |
| Deficit |
| Total | |||||
January 1, 2020 | | — | | $ | — | | | | $ | | | $ | | | $ | ( | | $ | ( |
Sale of common stock, net of issuance costs | | — | | | — | | | | | | | | | | | — | | | |
Common stock issued to employees |
| — | | | — | | | |
| | |
| | |
| — | |
| |
Common stock issued upon conversion of debt | | — | | | — | | | | | | | | | | | — | | | |
Common stock issued for acquisition of SevenFive Farm |
| — | | | — | | | |
| | |
| | |
| — | |
| |
Stock options granted to employees and consultants | | — | | | — | | — | | | — | | | | | | — | | | |
Beneficial conversion feature | | — | | | — | | — | | | — | | | | | | — | | | |
Warrants exercised | | — | | | — | | | | | | | | | | | — | | | |
Warrants issued with the | | — | | | — | | — | | | — | | | | | | — | | | |
Warrants issued with the | | — | | | — | | — | | | — | | | | | | — | | | |
Modification of warrants | | — | | | — | | — | | | — | | | | | | — | | | |
Cashless exercise of warrants | | — | | | — | | | | | | | | | | | — | | | |
Net loss | | — | | | — | | — | | | — | | | — | | | ( | | | ( |
December 31, 2020 | | — | | | — | | | | | | | | | | | ( | | | |
Common stock issued to consultants |
| — | | | — | | | | | | | | | | | — | | | |
Common stock issued upon exercise of stock options | | — | | | — | | | | | | | | | | | — | | | |
Common stock issued for acquisition of TREES Englewood |
| — | | | — | | | | | | | | | |
| — | |
| |
Common stock issued for acquisition of TREES Portland | | — | | | — | | | | | | | | | | | — | | | |
Warrants issued with |
| — | | | — | | — | | | — | | | | |
| — | |
| |
Beneficial conversion feature | | — | | | — | | — | | | — | | | | | | — | | | |
Cashless exercise of warrants | | — | | | — | | | | | | | | | | | — | | | |
Stock-based compensation | | — | | | — | | — | | | — | | | | | | — | | | |
Preferred shares issued | | | | | | | — | | | — | | | — | | | — | | | |
Warrants issued with preferred stock | | — | | | — | | — | | | — | | | | | | — | | | |
Modification of Warrants | | — | | | — | | — | | | — | | | | | | — | | | |
Modification of Options | | — | | | — | | — | | | — | | | | | | — | | | |
Net loss |
| — | | | — | | — | |
| — | |
| — | |
| ( | |
| ( |
December 31, 2021 |
| | | $ | | | | | $ | | | $ | | | $ | ( | | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
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GENERAL CANNABIS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS, HISTORY AND PRESENTATION
Nature of Operations
General Cannabis Corp, a Colorado Corporation (the “Company,” “we,” “us,” “our,” or “GCC”) (formerly, Advanced Cannabis Solutions, Inc.), was incorporated on June 3, 2013, and provides services and products to the regulated cannabis industry. We currently trade on the OTCQB® Market under the trading symbol CANN. As of December 31, 2021, our operations are segregated into the following segments:
Retail (“Retail Segment”)
Through our acquisition of TREES Englewood in September 2021 and our acquisition of TREES Portland and TREES Waterfront in December 2021, we operate a retail dispensary store in Englewood, Colorado and
Cultivation (“Cultivation Segment”)
Through our acquisition of SevenFive Farm in May 2020, we operate a licensed
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 $
Basis of Presentation
The accompanying consolidated financial statements include the results of GCC and its nine wholly-owned subsidiary companies: (a) 6565 E. Evans Owner LLC, a Colorado limited liability company formed in 2014; (b) General Cannabis Capital Corporation, a Colorado corporation formed in 2015; (c) GC Security LLC (“GCS”), a Colorado limited liability company formed in 2015; (d) Standard Cann, Inc., a Colorado corporation formed in 2019; (e) SevenFive Farm LLC, a Colorado limited liability company formed in 2020; (f) SevenFive Farm Cultivation LLC, a Colorado limited liability company formed in 2020; (g) Trees Colorado LLC, a Colorado limited liability company formed in 2021; (h) Trees Oregon LLC, a Colorado limited liability company formed in 2021; (i) GC Corp., a Colorado corporation, originally formed in 2013 under the name ACS Corp. In 2015, the name was changed to GC Corp. Intercompany accounts and transactions have been eliminated.
The preparation of our consolidated financial statements requires us 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
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assumptions. Furthermore, when testing assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment charges may result.
Going Concern
The consolidated financial statements have been prepared on a going concern basis, which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. Our cash of $
Liquidity
The Company incurred net losses of $
The accompanying 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. The Company has incurred recurring losses and negative cash flows from operations since inception and has primarily funded its operations with proceeds from the issuance of convertible debt. The Company expects its operating losses and negative operating cash flows to continue into the foreseeable future as it continues to execute its acquisition and growth strategy.
The Company believes that its cash and cash equivalents as of December 31, 2021 will be sufficient to fund its operating expenses and capital expenditure requirements for at least twelve months from the date of filing this Annual Report on Form 10-K due to the receipt of an additional $
Reclassifications
Certain prior year amounts have been reclassified for consistency with current year presentation. These reclassifications had no effect on the reported results of operations.
Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, deposits with banks, and investments that are highly liquid and have maturities of three months or less at the date of purchase. As of December 31, 2021 and 2020 there are
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Inventories
Inventories consist of raw materials, supplies, growing and harvested plants (work-in-process), and finished goods, and are stated at the lower of cost or net realizable value. All direct and indirect costs of growing plants are accumulated until the time of harvest and allocated to the plants during the growing process. All direct and indirect costs of finished goods are accumulated and allocated to the products between the harvest and completion stages. The Company uses an average costing method to allocate costs.
Net realizable value is determined as the estimated selling price in the ordinary course of business less the estimated costs of completion and estimated costs necessary to make the sale. The Company periodically reviews physical inventory for excess, obsolete, and potentially impaired items. Write-downs and write-offs are charged to cost of sales.
Accounts Receivable, net
Accounts receivable are recorded at the original invoiced amount due from our customers less an allowance for any potential uncollectible amounts. We control credit risk related to accounts receivable through credit approvals, credit limits, and monitoring processes. In making the determination of the appropriate allowance for doubtful accounts, management considers prior experience with customers, analysis of accounts receivable aging reports, changes in customer payment patterns, and historical write-offs.
Notes Receivable
Notes receivable consist primarily of amounts due to us related to the financing of different business ventures. Direct loan origination costs we incur are netted with loan origination fees we receive and the net amount, loan origination fees, or costs, is included in notes receivable on the consolidated balance sheets. The loan origination fees or costs are amortized over the term of the underlying note receivable and included in interest income in the consolidated statements of operations. We report notes receivable at the principal balance outstanding less an allowance for losses. We monitor the financial condition of the notes receivable and record provisions for estimated losses when we believe it is probable that the holders of the notes receivable will be unable to make their required payments. We charge interest at a fixed rate and interest income is calculated by applying the effective rate to the outstanding principal balance.
Right-of-use Asset / Lease Liability
Right of use (“ROU”) assets represent our right to use an underlying asset in which we obtain substantially all the economic benefits and the right to direct the use of the asset during the lease term. Lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. We recognize ROU assets and lease liabilities on the balance sheet for leases with a lease term of greater than one year. Payments that are not fixed at the commencement of the lease are considered variable and are excluded from the ROU asset and lease liability calculations. In the measurement of our ROU assets and lease liabilities, the fixed lease payments in the agreement are discounted using a secured incremental borrowing rate for a term similar to the duration of the lease, as our leases do not provide implicit rates. Operating lease expense is recognized on a straight-line basis over the lease term.
Property and Equipment, net
Property and equipment are recorded at historical cost, less accumulated depreciation. Major additions and improvements are capitalized, while replacements, maintenance, and repairs, which do not improve or extend the life of the respective assets, are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets:
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Business Combinations
Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions provided by management, including expected future cash flows. We allocate any excess purchase price over the fair value of the net assets and liabilities acquired to goodwill. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs, including advisory, legal, accounting, valuation, and other costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
Goodwill and Intangibles
Goodwill represents the excess of purchase price over the fair value of identifiable net assets acquired in a business combination. Goodwill and long-lived intangible assets are tested for impairment at least annually in accordance with the provisions of ASC No. 350, Intangibles-Goodwill and Other (“ASC No. 350”). ASC No. 350 requires that goodwill be tested for impairment at the reporting unit level (operating segment or on level below an operating segment) on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carry value. Application of the goodwill impairment test requires judgement, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. We test goodwill and long-lived intangible assets annually in December, unless an event occurs that would cause us to believe the value is impaired at an interim date. The price of flower has substantially decreased over the year ending December 31, 2021, as a result we tested for impairment of the Cultivation Segment’s goodwill on December 31, 2021. We recognized a full impairment of goodwill in the amount of $
Intangible assets with finite useful lives are amortized over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. As a result of the full impairment of goodwill above, we tested for impairment on intangibles with finite useful lives under our Cultivation Segment. We recognized an impairment of $
Impairment of Long-lived Assets
We periodically evaluate whether the carrying value of property and equipment has been impaired when circumstances indicate the carrying value of those assets may not be recoverable. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is not recoverable, the impairment loss is measured as the excess of the asset’s carrying value over its fair value.
Our impairment analyses require management to apply judgment in estimating future cash flows as well as asset fair values, including forecasting useful lives of the assets, assessing the probability of different outcomes, and selecting the discount rate that reflects the risk inherent in future cash flows. If the carrying value is not recoverable, we assess the fair value of long-lived assets using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third-party comparable sales and undiscounted cash flow models. If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future.
Debt
We issue debt that may have separate warrants, conversion features, or no equity-linked attributes.
Debt with warrants – When we issue debt with warrants, we treat the warrants as a debt discount, record as a contra-liability against the debt, and amortize the balance over the life of the underlying debt as amortization of debt discount expense in the consolidated statements of operations. The offset to the contra-liability is recorded as additional paid in
46
capital in our consolidated balance sheets. If the debt is retired early, the associated debt discount is then recognized immediately as amortization of debt discount expense in the consolidated statement of operations. The debt is treated as conventional debt.
We determine the value of the non-complex warrants using the Black-Scholes Option Pricing Model (“Black-Scholes”) using the stock price on the date of issuance, the risk-free interest rate associated with the life of the debt, and the volatility of our stock. For warrants with complex terms, we use the binomial lattice model to estimate their fair value.
Modification and Extinguishment of Debt - When we change the terms of existing notes payable, we evaluate the amendments under ASC 470-50, Debt Modification and Extinguishment to determine whether the change should be treated as a modification or as a debt extinguishment. This evaluation includes analyzing whether there are significant and consequential changes to the economic substance of the note. If the change is deemed insignificant then the change is considered a debt modification, whereas if the change is substantial the change is reflected as a debt extinguishment.
Convertible Debt - When we issue debt with a conversion feature, we must first assess whether the conversion feature meets the requirements to be treated as a derivative. If the conversion feature within convertible debt meets the requirements to be treated as a derivative, we estimate the fair value of the convertible debt derivative using Black-Scholes upon the date of issuance, using the stock price on the date of issuance, the risk-free interest rate associated with the life of the debt, and the estimated volatility of our stock. If the conversion feature is not treated as a derivative, we assess whether it is a beneficial conversion feature (“BCF”). A BCF exists if the effective conversion price of the convertible debt instrument is less than the stock price on the commitment date. This typically occurs when the effective conversion price is less than the fair value of the stock on the date the instrument was issued. The value of a BCF is equal to the intrinsic value of the feature, the difference between the effective conversion price and the fair value of the common stock into which it is convertible.
Fair Value of Financial Instruments
U.S. generally accepted accounting principles (“GAAP”) requires disclosing the fair value of financial instruments to the extent practicable for financial instruments which are recognized or unrecognized in the consolidated balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.
In assessing the fair value of financial instruments, the Company uses a variety of methods and assumptions, which are based on estimates of market conditions and risks existing at the time. For certain instruments, including accounts receivable and accounts payable, the Company estimated that the carrying amount approximated fair value because of the short maturities of these instruments. All debt is based on current rates at which the Company could borrow funds with similar remaining maturities and approximates fair value.
GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use on unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs consist of items that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is described below:
Level 1 – Quoted prices in active markets for identical assets or liabilities. There are no fair valued assets or liabilities classified under Level 1 as of December 31, 2021 and 2020.
Level 2 – Observable prices that are based on inputs not quoted on active markets but corroborated by market data. There are no fair valued assets or liabilities classified under Level 2 as of December 31, 2021 and 2020.
Level 3 – Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs (see Note 14).
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Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting, and finance department, which reports to the Chief Financial Officer, determines its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance department and are approved by the Chief Financial Officer.
Level 3 Valuation Techniques
Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate. The Company deems financial instruments which do not have fixed settlement provisions to be derivative instruments. In accordance with GAAP the fair value of these warrants is classified as a liability on the Company’s consolidated balance sheets because, according to the terms of the warrants, a fundamental transaction could give rise to an obligation of the Company to pay cash to its warrant holders. Such instruments do not have fixed settlement provisions and have also been recorded as derivative liabilities. Corresponding changes in the fair value of the derivative liabilities are recognized in earnings on the Company’s consolidated statements of operations in each subsequent period.
The Company’s derivative liabilities are carried at fair value and were classified as Level 3 in the fair value hierarchy due to the use of significant unobservable inputs.
Warrant Instruments
Warrants with derivative features – When we raise capital by issuing warrants that do not have complex terms, they are recorded as additional paid in capital in our consolidated balance sheet. When we issue warrants that have complex terms, such as a clause in which the warrant agreements contain a cash settlement provision whereby the holders could settle the warrants for cash upon a fundamental transaction that is considered outside of the control of management, such as a change of control, the warrants are considered to be a derivative that are recorded as a liability at fair value. The warrant derivative liability is adjusted to its fair value at the end of each reporting period, with the change being recorded as other expense or gain.
Revenue Recognition
We have two main revenue streams: (i) product sales; and (ii) cultivation sales.
Product sales are recorded at the time that control of the product is transferred to customers. In evaluating the timing of the transfer of control of products to customers, we consider several indicators, including significant risks and rewards of products, our right to payment, and the legal title of the products. Based on the assessment of control indicators, sales are generally recognized when products are delivered to customers.
Revenue from cultivation sales is recognized when the products are delivered to the customer.
ASU 2014-09, Revenue from Contracts with Customers (“ASC Topic 606”) is a comprehensive revenue recognition model that requires revenue to be recognized when control of the promised goods or services are transferred to our customers at an amount that reflects the consideration that we expect to receive. Application of ASC Topic 606 requires us to use more judgment and make more estimates than under former guidance. Application of ASC Topic 606 requires a five-step model applicable to all product offerings revenue streams as follows:
Identification of the contract, or contracts, with a customer
A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or
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services, (ii) the contract has commercial substance, and (iii) we determine that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.
We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit or financial information pertaining to the customer.
Identification of the performance obligations in the contract
Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract.
When a contract includes multiple promised goods or services, we apply judgment to determine whether the promised goods or services are capable of being distinct and are distinct within the context of the contract. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation.
Determination of the transaction price
The transaction price is determined based on the consideration to which we will be entitled to receive in exchange for transferring goods or services to our customer. We estimate any variable consideration included in the transaction price using the expected value method that requires the use of significant estimates for discounts, cancellation periods, refunds and returns. Variable consideration is described in detail below.
Allocation of the transaction price to the performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative Stand-Alone Selling Price (“SSP,”) basis. We determine SSP based on the price at which the performance obligation would be sold separately. If the SSP is not observable, we estimate the SSP based on available information, including market conditions and any applicable internally approved pricing guidelines.
Recognition of revenue when, or as, we satisfy a performance obligation
We recognize revenue at the point in time that the related performance obligation is satisfied by transferring the promised goods or services to our customer.
Principal versus Agent Considerations
When another party is involved in providing goods or services to our customer, we apply the principal versus agent guidance in ASC Topic 606 to determine if we are the principal or an agent to the transaction. When we control the specified goods or services before they are transferred to our customer, we report revenue gross, as principal. If we do not control the goods or services before they are transferred to our customer, revenue is reported net of the fees paid to the other party, as agent. Our evaluation to determine if we control the goods or services within ASC Topic 606 includes the following indicators:
We are primarily responsible for fulfilling the promise to provide the specified good or service.
When we are primarily responsible for providing the goods and services, such as when the other party is acting on our behalf, we have indication that we are the principal to the transaction. We consider if we may terminate our relationship with the other party at any time without penalty or without permission from our customer.
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We have risk before the specified good or service have been transferred to a customer or after transfer of control to the customer.
We may commit to obtaining the services of another party with or without an existing contract with our customer. In these situations, we have risk of loss as principal for any amount due to the other party regardless of the amount(s) we earn as revenue from our customer.
The entity has discretion in establishing the price for the specified good or service.
We have discretion in establishing the price our customer pays for the specified goods or services.
Stock-based Payments
Employee and non-employee awards – We account for stock-based compensation in accordance with the fair value recognition provisions of ASC 718, Compensation – Stock Compensation, and ASC 505, Equity, which require all stock-based compensation to employees and non-employees, including grants of employee stock options, to be recognized as an expense in the consolidated financial statements based on their fair values. The fair value of stock options is estimated using the Black-Scholes option pricing formula that requires assumptions for expected volatility, expected dividends, the risk-free interest rate, and the expected term of the option. The Company accounts for forfeitures of stock-based grants as they occur. If any of the assumptions used in the Black-Scholes model or the anticipated number of shares to be awarded change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.
Market price-based awards – We may issue stock-based payments that vest when certain market conditions are met, such as our common stock trading above a certain value for a specific number of days. We recognize expense for market price-based options at the estimated fair value of the options using the binomial lattice model over the estimated life of the options used in the model, or immediately upon the market conditions being met. We use historical data to estimate the expected price volatility, the expected stock option life and expected forfeiture rate. The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of grant for the estimated life of the stock option.
Shipping and Handling
Payments by customers to us for shipping and handling costs are included in revenue on the consolidated statements of operations, while our expense is included in cost of sales. Shipping and handling for inventory are included as a component of inventory on the consolidated balance sheets, and in cost of sales in the consolidated statements of operations when the product is sold.
Income Taxes
We recognize deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the income tax and financial reporting carrying amount of our assets and liabilities. We monitor our deferred tax assets and evaluate the need for a valuation allowance based on the estimate of the amount of such deferred tax assets that we believe do not meet the more-likely-than-not recognition criteria. We also evaluate whether we have any uncertain tax positions and would record a reserve if we believe it is more-likely-than-not our position would not prevail with the applicable tax authorities and would be recorded in income tax expense. Our assessment of tax positions as of December 31, 2021 and 2020, determined that there were
In general, the tax returns for the years ending December 31, 2018 through 2020 are open to examination by federal and state authorities.
Reportable Segments
Our reporting segments consist of: a) Retail; and b) Cultivation. Our Chief Executive Officer has been identified as the chief decision maker. Our operations are conducted within the United States of America.
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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. This 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, 2021, although early adoption is permitted. We are in the process of evaluating the impact of this new guidance on our consolidated financial statements.
NOTE 2. ACQUISITIONS
SevenFive Farm
On May 13, 2020, we received approval of the transaction and transfer of the Dalton Adventures, LLC license from the Colorado Marijuana Enforcement Division. On May 25, 2020, we finalized the acquisition, pursuant to which we acquired the assets of the seller that constitute the business of SevenFive Farm, a cultivation facility in Boulder, Colorado, whereby we acquired fixed assets, inventory, a cultivation license, and the tradename. The purchase price paid by the Company to the seller was
The purchase price allocation is as follows:
Inventories | | $ | |
Fixed assets |
| | |
Tradename | |
| |
Goodwill | |
| |
| | $ | |
The accompanying consolidated financial statements include the results of SevenFive Farm from the date of acquisition for financial reporting purposes, May 13, 2020. 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:
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| | |
| | | |
| | 2020 | |
Total revenues | | $ | |
Net loss attributable to common stockholders | | $ | ( |
Net loss per common share: | | $ | ( |
Weighted average number of basic and diluted common shares outstanding | | | |
51
The unaudited proforma results of operations are presented for information purposes only. The unaudited pro-forma results are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2020, or to project potential operating results as of any future date or for any future periods.
Trees
On September 2, 2021, we completed the acquisition of substantially all of the assets of TREES Englewood, representing a portion of the overall Trees transaction (“Trees Transaction”) previously disclosed pursuant to that certain First Amended and Restated Agreement and Plan of Reorganization and Liquidation dated May 28, 2021 by and among the Company, seller and certain other sellers party thereto, that consists of the assets relating to the Trees dispensary located in Englewood, Colorado (“Englewood Closing”). We paid $
The table below reflects the Company’s estimates of the acquisition date fair values of the assets acquired:
Cash | | $ | |
Fixed assets |
| | |
Inventory | | | |
Tradename | | | |
Goodwill | |
| |
| | $ | |
The accompanying 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:
|
| Year ended | ||||
| | December 31, | ||||
| | 2021 | | 2020 | ||
Total revenues | | $ | | | $ | |
Net income (loss) attributable to common stockholders | | $ | ( | | $ | ( |
Net income (loss) per common share | | $ | ( | | $ | ( |
Weighted average number of basic and diluted common shares outstanding | | | | | | |
The unaudited proforma results of operations are presented for information purposes only. The unaudited pro-forma results are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2020, or to project potential operating results as of any future date or for any future periods.
On December 30, 2021, we completed the acquisition of substantially all the assets of Trees Portland, LLC and Trees Waterfront, LLC, representing a portion of the overall Trees Transaction, that consists of the assets relating to certain Trees dispensaries located in Portland, Oregon ("Oregon Closing”). We paid cash in the amount of $
52
The table below reflects the Company’s estimates of the acquisition date fair values of the assets acquired:
Cash | | $ | |
Fixed assets |
| | |
Inventory | | | |
Tradename | | | |
Goodwill | |
| |
| | $ | |
The accompanying consolidated financial statements include the results of Trees Oregon from the date of acquisition for financial reporting purposes, December 30, 2021. The pro forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2020, are as follows:
|
| Year ended | ||||
| | December 31, | ||||
| | 2021 | | 2020 | ||
Total revenues | | $ | | | $ | |
Net income (loss) attributable to common stockholders | | $ | ( | | $ | ( |
Net income (loss) per common share | | $ | ( | | $ | ( |
Weighted average number of basic and diluted common shares outstanding | | | | | | |
The unaudited proforma results of operations are presented for information purposes only. The unaudited pro-forma results are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2020, or to project potential operating results as of any future date or for any future periods.
We have not completed the allocation of the purchase price for the Trees acquisition. As of December 31, 2021, 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 dates.
NOTE 3. DISCONTINUED OPERATIONS
On July 16, 2021, we entered into an Asset Purchase Agreement with an individual to sell substantially all the assets of our Operations Segment for a total of $
Assets and liabilities of discontinued operations for the Operations Segment included the following:
53
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
Accounts receivable, net | | $ | — | | $ | |
Prepaid expenses and other current assets | |
| — | |
| |
Current assets discontinued operations | | | — | | | |
| | | | | | |
Property and equipment, net | | | — | | | |
Noncurrent assets discontinued operations | | | — | | | |
| | | | | | |
Accounts payable and accrued expenses | | | — | | | |
Customer deposits | | | — | | | |
Current liabilities discontinued operations | | $ | — | | $ | |
A breakdown of the discontinued operations for the Operations Segment is presented as follows:
| | Year ended | | ||||
| | December 31, | | ||||
|
| 2021 |
| 2020 | | ||
Product revenues | | $ | | | $ | |
|
Service revenues | | | | | | | |
Total revenues | | | | | | | |
| | | | | | | |
Cost of sales | |
| | |
| | |
Selling, general and administrative | |
| | |
| | |
Professional fees | |
| | |
| | |
Depreciation and amortization | | | | | | | |
Total costs and expenses | |
| | |
| | |
Loss from discontinued operations | | $ | ( | | $ | ( | |
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 years ended December 31, 2021 and 2020.
| | Year ended | | ||||
| | December 31, | | ||||
|
| 2021 |
| 2020 | | ||
Accounts receivables | | $ | | | $ | ( | |
Prepaid expenses and other current assets | | | | | | ( | |
Depreciation and amortization | | | | | | | |
Capital expenditures | | | — | | | ( | |
Accounts payable and accrued expenses | | | ( | | | | |
Customer deposits | | | ( | | | ( | |
Security Segment
On December 26, 2019, the board of directors and management made the strategic decision to investigate a possible buyer for the Security Segment and if no buyer could be found, cease operations of the Security Segment. We transferred all our Colorado security contracts and employees to a company on January 16, 2020. On February 6, 2020 we cancelled all our security contracts in California. The assets and liabilities classified as discontinued operations for the Security Segment are presented separately in the balance sheet and the operating results for the years ended December 31, 2021 and 2020 are presented as discontinued operations.
Assets and liabilities of discontinued operations for the Security Segment included the following:
54
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
Cash and cash equivalents | | $ | — | | $ | |
Current assets discontinued operations | | | — | | | |
| | | | | | |
Accounts payable and accrued expenses | | | — | | | |
Current liabilities discontinued operations | | $ | — | | $ | |
A breakdown of the discontinued operations for the Security Segment is presented as follows:
| | Year ended | ||||
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
Service revenues | | | — | | | |
Total revenues | | | — | | | |
| | | | | | |
Cost of sales | |
| — | |
| |
Selling, general and administrative | |
| — | |
| |
Depreciation and amortization | | | — | | | |
Total costs and expenses | |
| — | |
| |
Loss from discontinued operations | | $ | — | | $ | ( |
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 Security Segment for the years ended December 31, 2021 and 2020.
| | Year ended | ||||
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
Accounts receivables | | $ | — | | $ | |
Prepaid expenses and other current assets | | | — | | | |
Depreciation and amortization | | | — | | | |
Accounts payable and accrued expenses | | | — | | | ( |
Customer deposits | | | — | | | ( |
Consumer Goods Segment
On December 26, 2019, the board of directors and management made the strategic move to cease operations of Chiefton. On December 26, 2019, the board of directors committed to a plan to cease operations of STOA Wellness. We transferred all assets of STOA Wellness to an individual on January 10, 2020, in exchange for the release on the outstanding lease. The assets and liabilities classified as discontinued operations for the Consumer Goods Segment are presented separately in the balance sheet and the operating results for the years ended December 31, 2021 and 2020 are presented as discontinued operations.
Assets and liabilities of discontinued operations for the Consumer Goods Segment included the following:
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
| | | | | | |
Accounts payable and accrued expenses | | $ | — | | $ | |
Current liabilities discontinued operations | | $ | — | | $ | |
A breakdown of the discontinued operations for the Consumer Goods Segment is presented as follows:
55
| | Year ended | ||||
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
Product revenues | | | — | | | |
Total revenues | | | — | | | |
| | | | | | |
Selling, general and administrative | |
| — | |
| |
Total costs and expenses | |
| — | |
| |
Loss from discontinued operations | | $ | — | | $ | ( |
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 2021 and 2020.
| | Year ended | ||||
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
Accounts receivables | | $ | — | | $ | |
Prepaid expenses and other current assets | | | — | | | |
Accounts payable and accrued expenses | | | — | | | ( |
NOTE 4. ACCOUNTS RECEIVABLE
Our accounts receivable consisted of the following:
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
Accounts receivable | | $ | | | $ | |
Less: Allowance for doubtful accounts | | | ( | | | ( |
Total | | $ | | | $ | |
We record bad debt expense when we conclude the credit risk of a customer indicates the amount due under the contract is not collectible. We recorded bad debt expense of $
56
NOTE 5. NOTES RECEIVABLE
Our notes receivable consisted of the following:
|
| December 31, | ||||
| | 2021 | | 2020 | ||
CCR Note | | $ | | | $ | |
BB Note | |
| | |
| |
NBC Note | | | | | | — |
Total Principal | | | | | | |
Allowance for doubtful accounts | | | ( | | | ( |
Unamortized loan origination fee | |
| — | |
| — |
| |
| | |
| |
Less: Current portion | |
| ( | |
| ( |
Long-term portion | | $ | — | | $ | — |
On August 2, 2021, as part of the closing of the sale of NBC, we agreed to a note receivable of $
In March 2019, we agreed to loan an aggregate of up to $
On January 3, 2019, the Company authorized an unsecured loan of $
NOTE 6. INVENTORIES, NET
Our inventories consistent of the following:
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
Raw materials | | $ | | | $ | |
Work-in-progress and finished goods | | | | | | |
Less: Inventory reserves | | | — | | | — |
Inventories, net | | $ | | | $ | |
57
NOTE 7. PREPAIDS AND OTHER CURRENT ASSETS
Our prepaids and other current assets consist of the following:
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
Prepaid insurance | | $ | | | $ | |
Other | |
| | |
| |
| | $ | | | $ | |
NOTE 8. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
Furniture, fixtures and equipment | | $ | | | $ | |
Software | |
| | |
| |
Biological assets | | | | | | |
Total | |
| | |
| |
Less: Accumulated depreciation | |
| ( | |
| ( |
| | $ | | | $ | |
Depreciation expense was $
NOTE 9. INTANGIBLE ASSETS AND GOODWILL
Intangible assets
Intangible assets as of December 31 consist of:
| 2021 | | 2020 | ||||||||||||||||||||
| | | | | | | | | | Estimated | | | | | | | | | | | Estimated | ||
| | | | Accumulated | | | | | Life | | | | | Accumulated | | | | | Life | ||||
|
| Gross |
| Amortization | |
| Net |
| (in years) | | | Gross |
| Amortization | |
| Net |
| (in years) | ||||
Tradename | $ | | | $ | | | $ | | | | | $ | | | $ | | | $ | | | | ||
Estimated amortization expense for the next five years is as follows:
Year ending December 31, |
| Amount | |
2022 | | $ | |
2023 | | | |
2024 | | | |
2025 | | | |
2026 | | | |
Thereafter | | | |
Total | | $ | |
Amortization expense was $
Goodwill
58
The following represents a summary of changes in the carry amount of goodwill for the years ended December 31, 2021 and 2020:
Balance as of December 31, 2019 | | $ | — |
Goodwill acquired | | | |
Balance as of December 31, 2020 | | $ | |
Goodwill acquired | | | |
Impairment | | | ( |
Balance as of December 31, 2021 | | $ | |
NOTE 10. LEASES
On May 13, 2020, we entered into a commercial real estate lease with a related party (see Note 19) for
On September 2, 2021, we entered into a commercial real estate lease with a related party (see Note 19) for retail space in Englewood, CO, with an initial term of
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 new principal business office. The lease has
59
Through the acquisition of TREES Portland, we entered into a commercial real estate lease in Portland, OR. The lease has
Through the acquisition of TREES Waterfront, we entered into a commercial real estate lease in Portland, OR. The lease has an initial term of
Future remaining minimum lease payments were as follows:
Year ending December 31, |
| Amount | |
2022 | | $ | |
2023 | |
| |
2024 | |
| |
2025 | |
| |
2026 | |
| |
Thereafter | |
| |
Total | |
| |
Less: Present value adjustment | |
| ( |
Operating lease liability | | $ | |
Rent expense was approximately $
NOTE 11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Our accounts payable and accrued expenses consist of the following:
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
Accounts payable | | $ | | | $ | |
Accrued payroll, taxes, and vacation | |
| | |
| |
Other | |
| | |
| |
| | $ | | | $ | |
60
NOTE 12. ACCRUED STOCK PAYABLE
The following tables summarize the changes in accrued common stock payable:
| | | | | Number of | |
|
| Amount |
| Shares | ||
Balance as of December 31, 2019 | | $ | | | | |
Employee stock award accrual | | | | | | |
Consultant stock award | | | | | | |
Investor stock award accrual | | | | | | |
Warrant cashless exercises | | | | | | |
Stock issued | | | ( | | | ( |
Balance as of December 31, 2020 | | $ | | | | |
TREES Waterfront acquisition stock accrual | | | | | | |
Stock issued | | | ( | | | ( |
Balance as of December 31, 2021 | | $ | | | | |
On February 18, 2020 we granted a consultant
In December 2020, several warrant holders exercised their 2020 A warrants through cashless exercises, and we issued
In December 2021, we completed the acquisition of TREES Waterfront. As part of the transaction, we granted
NOTE 13. NOTES PAYABLE
Our notes payable consisted of the following:
|
| December 31, |
| December 31, | ||
| | 2021 | | 2020 | ||
2020 10% Notes | | $ | | | $ | |
2019 15% Notes | | | — | | | |
Related party note payable | | | | | | |
Trees Acquisition Notes | | | | | | — |
Unamortized debt discount | | | ( | | | ( |
| | | | | | |
Less: Current portion | | | ( | | | — |
Long-term portion | | $ | | | $ | |
Aggregate Maturities
As of December 31, 2021, aggregate future contractual maturities of long-term debt (excluding issue discounts) are as follows:
Year ending December 31, |
| Amount | |
2022 | | $ | |
2023 | |
| |
2024 | |
| |
| | $ | |
61
TREES Notes
In September 2021, with the completion of the Englewood acquisition, we are to pay the Seller cash equal to $
In December 2021, with the completion of the TREES Portland and TREES Waterfront acquisitions, we are to pay the Seller cash equal to $
In December 2020, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement’) with certain accredited investors (the “
The relative fair value of the new funding on the
For purposes of determining the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the
Current stock price |
| $ | |
Exercise price | | $ | |
Risk-free interest rate | | | |
Expected dividend yield | | | — |
Expected term (in years) | | | |
Expected volatility | | |
On February 8, 2021, we entered into a Securities Purchase Agreement with an accredited
62
The relative fair value of the new funding on the
For purposes of determining the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the
Current stock price |
| $ | |
Exercise price | | $ | |
Risk-free interest rate | | | |
Expected dividend yield | | | — |
Expected term (in years) | | | |
Expected volatility | | |
On April 20, 2021, we entered into a Securities Purchase Agreement with accredited
The relative fair value of the new funding on the
For purposes of determining the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the
Current stock price |
| $ | |
Exercise price | | $ | |
Risk-free interest rate | | | |
Expected dividend yield | | | — |
Expected term (in years) | | | |
Expected volatility | | |
63
SBI Debt
On February 18, 2020, we entered into a promissory note exchange agreement with SBI pursuant to which the original SBI Note was exchanged for a new convertible promissory note (the “Convertible Note”). The Convertible Note has a principal amount of $
In December 2019, we completed a private placement with certain accredited investors pursuant to an unsecured promissory note (the “
We received $
64
For purposes of determining the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the
Current stock price |
| $ | |
Exercise price | | $ | |
Risk-free interest rate | | | |
Expected dividend yield | | | — |
Expected term (in years) | | | |
Expected volatility | | |
On September 17, 2021, we entered into warrant amendments with certain ‘A’ and ‘B’ warrant holders from the
Loan on Building
On January 8, 2020 we entered into a $
2019
In September 2019, we completed a private placement with certain accredited investors pursuant to (a) a senior unsecured promissory note, bearing interest at
We issued an aggregate of $
The relative fair value of the 2019
In February 2020, we issued $
For purposes of determining the loss on extinguishment of debt and the debt discount, the underlying assumptions used in the Black-Scholes model to determine the fair value of the 2019
Current stock price |
| $ | | |
Exercise price | | $ | | |
Risk-free interest rate | |
| % | |
Expected dividend yield | |
| — | |
Expected term (in years) | |
| | |
Expected volatility | |
| | % |
65
NOTE 14. WARRANT DERIVATIVE LIABILITY
On May 31, 2019, we received gross proceeds of $
In February 2020,
During the first quarter of 2021 the warrant holders exercised
During the year ended December 31, 2021 and 2020, we recognized a $
The following are the key assumptions that were used to determine the fair value of the 2019 Warrants:
|
| | December 31, | | December 31, |
| ||
|
| | 2020 | | 2021 |
| ||
Number of shares underlying the warrants |
| | | | | | | |
Fair market value of stock | | | $ | | | $ | | |
Exercise price | | | $ | | | $ | | |
Volatility | | | | | % |
| | % |
Risk-free interest rate | | | | | % |
| | % |
Warrant life (years) | | | | | |
| | |
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:
| | December 31, | ||||
| | 2021 |
| 2020 | ||
Beginning balance | | $ | | | $ | |
Warrant exercise | | | ( | | | ( |
Change in fair value of warrants derivative liability | | | | | | ( |
Ending balance | | $ | | | $ | |
66
NOTE 15. COMMITMENTS AND CONTINGENCIES
Legal
In July 2021, the Company was served with a Complaint in the District Court, County of Denver, Colorado, by plaintiff 2353 SB, LLC (“Plaintiff”). Plaintiff and the Company entered into a lease for the premises at 2353 South Broadway, Denver, CO with a term of (3) years to commence on November 1, 2020. Monthly lease payments were to be $
The Company has taken the position that its failure to take possession and make any further payments under the lease is directly related to the COVID-19 pandemic. The Company intends to vigorously defend this action and believes that the above-referenced force majeure clause presents a complete defense to Plaintiff’s claims. Both parties have filed motions for summary judgment, and the parties are currently awaiting the decision of the court in respect thereof.
In June 2020, Michael Feinsod resigned as our Executive Chairman, claiming that his resignation was for "Good Reason" under the terms of his employment agreement. If it is ultimately determined that his resignation was, in fact, for "Good Reason", rather than a voluntary act absent "Good Reason", it could enable certain potential claims for benefits under his employment agreement, including potential claims for severance, for the vesting of his unvested options and/or for the extension of the term within which he can exercise his options in the future. We do not believe that Mr. Feinsod's resignation was for "Good Reason." Accordingly, we believe that Mr. Feinsod's resignation was voluntary, and 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 made by Mr. Feinsod alleging a "Good Reason" resignation.
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.
NOTE 16. DEFERRED TAXES
The income tax was $
Significant components of the Company’s deferred tax assets at December 31, 2021 and 2020 are shown below. A valuation allowance has been established as realization of such deferred tax assets has not met the more likely-than-not threshold requirement. The Company has determined it is not more likely than not that its deferred tax assets will be recovered. If the Company’s judgment changes and it is determined that the Company will be able to realize these deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be accounted for as a reduction to income tax expense.
As of December 31, 2021 and 2020, the Company had federal and state net operating loss carryforwards of approximately $
67
The components of net deferred tax assets are as follows:
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
Net operating loss carryforwards | | $ | | | $ | |
Equity-based instruments | |
| | |
| |
Long-lived assets and other | |
| | |
| |
Capital loss carryforward | |
| | |
| |
Deferred tax asset valuation allowance | |
| ( | |
| ( |
| | $ | — | | $ | — |
A reconciliation of our income tax provision and the amounts computed by applying statutory rates to income before income taxes is as follows:
| | Year ended December 31, | ||||
|
| 2021 |
| 2020 | ||
Income tax benefit at statutory rate | | $ | ( | | $ | ( |
State income tax benefit, net of Federal benefit | |
| ( | |
| ( |
280E Disallowance | | | | | | |
Equity-based instruments | |
| | |
| |
Fair market value adjustment/loss on extinguishment – derivative liabilities | |
| | |
| ( |
Amortization of debt discount | |
| | |
| |
Other | |
| | |
| |
Valuation allowance | |
| ( | |
| |
| | $ | — | | $ | — |
NOTE 17. 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 $
| ● | Authorized Number of Shares – |
| ● | Voting Rights – |
| ● | Dividends – |
| ● | Conversion – Each share of Series A Preferred is mandatorily convertible into |
68
| ● | Redemption – No rights of redemption by 2021 Investors, nor mandatory redemption |
The Preferred Warrants have a
The proceeds received in the sale of the Series A Preferred totaled $
2020 Capital Raise
On May 29, 2020, we entered into a subscription agreement, as amended with Hershey Strategic Capital, LP and Shore Ventures III, LP with respect to the sale of shares of common stock and warrants to purchase common stock (collectively, the “securities”). The sales of the securities to the Hershey Investor consists of a minimum of $
The Hershey Subscription Agreement also provides the Hershey Investor with certain participation rights in future financings of the Company until the one-year anniversary of the second closing. The Hershey Subscription Agreement further provides that the Company shall, during a negotiation period ending October 4, 2020, endeavor to cause the existing holders of the promissory notes of the Company having an outstanding balance in the amount of approximately $
69
Stock-based compensation
Stock-based compensation expense consisted of the following:
| | Year ended December 31, | ||||
|
| 2021 |
| 2020 | ||
Employee Awards | | $ | | | $ | |
Consulting Awards | |
| — | |
| |
| | $ | | | $ | |
Employee Stock Options
In November 2020, the Board authorized the adoption of and, on November 23, 2020, our stockholders ratified our 2020 Omnibus Incentive Plan (the “2020 Plan”). The 2020 Plan became effective immediately and will expire on November 23, 2030, unless terminated earlier by the Board of Directors. The 2020 Plan will permit the Board of Directors, or a committee or subcommittee thereof, to grant to eligible employees, non-employee directors, and consultants of the Company and its subsidiaries non-statutory and incentive stock options, stock appreciation rights, restricted stock awards, restricted stock units, deferred stock units, performance awards, non-employee director awards, and other stock-based awards. Subject to adjustment, the maximum number of shares of our common stock to be authorized for issuance under the 2020 Plan is
Stock-based compensation costs for award grants to employees and directors (“Employee Awards”) are recognized on a straight-line basis over the service period for the entire award, with the amount of compensation cost recognized at any date equaling at least the portion of the award that is vested. The following summarizes the Black-Scholes assumptions used to value the Employee Awards granted:
| | Year ended December 31, |
| ||||
|
| 2021 |
| 2020 |
| ||
Exercise price | | $ | | $ | | ||
Stock price on date of grant | | $ | | $ | | ||
Volatility | |
| % |
| % | ||
Risk-free interest rate | |
| % |
| % | ||
Expected life (years) | |
| |
| | ||
Dividend yield | |
| — | |
| — | |
On September 3, 2021 we modified
70
During the year ended December 31, 2021 we granted options to purchase
The following summarizes Employee Awards activity:
| | | | | | | Weighted- | | | |
| | | | Weighted- | | Average | | | | |
| | | | Average | | Remaining | | | | |
| | Number of | | Exercise Price | | Contractual | | Aggregate | ||
|
| Shares |
| per Share |
| Term (in years) |
| Intrinsic Value | ||
Outstanding as of December 31, 2020 | | | | $ | | | | $ | | |
Granted | | | | | | |
| |
| |
Exercised |
| ( |
| | |
|
|
| |
|
Forfeited or expired |
| ( |
| | |
|
|
| |
|
Outstanding as of December 31, 2021 |
| |
| $ | |
| | $ | | |
| | | | | | | | | | |
Exercisable as of December 31, 2021 |
| | | $ | |
| | $ | | |
As of December 31, 2021, there was approximately $
Consulting Services
As needed, we may issue warrants and options to third parties in exchange for consulting services. Stock-based compensation costs for award grants to third parties for consulting services (“Consulting Awards”) are recognized on a straight-line basis over the contractual term.
The fair value of each warrant grant is estimated using Black-Scholes. We use historical data to estimate the expected price volatility. The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of valuation for the estimated life of the option. The following summarizes the Black-Scholes assumptions to value the Consulting Awards granted:
| | Year ended December 31, |
| ||||
|
| 2021 |
| 2020 |
| ||
Exercise price | | $ | — | | $ | | |
Stock price, date of valuation | | $ | — | | $ | | |
Volatility | |
| — | % |
| | % |
Risk-free interest rate | |
| — | % |
| | % |
Expected life (years) | |
| — | |
| | |
Dividend yield | |
| — | |
| — | |
The following summarizes Consulting Awards activity:
| | | | | | Weighted- | | | |
| | | | Weighted- | | average | | | |
| | | | average | | Remaining | | | |
| | Number of | | Exercise Price | | Contractual | | Aggregate | |
|
| Shares |
| per Share |
| Term (in years) |
| Intrinsic Value | |
Outstanding as of December 31, 2020 |
| | $ | |
| | |
| |
Granted |
| — |
| |
|
|
| |
|
Exercised |
| — |
| |
|
|
| |
|
Forfeited or expired |
| ( |
| |
|
|
| |
|
Outstanding and exercisable as of December 31, 2021 | | $ | |
| | $ | — | ||
71
Feinsod Employment Agreement
On August 6, 2019, we entered into an agreement (the “Feinsod Agreement”) with Michael Feinsod for his permanent service as our Chief Executive Officer. Pursuant to the agreement, Mr. Feinsod received
Warrants with Debt
The following summarizes warrants issued with debt activity:
|
| |
| | |
| Weighted- |
| | |
| | | | Weighted- | | average | | | | |
| | | | average | | Remaining | | | | |
| | Number of | | Exercise Price | | Contractual | | Aggregate | ||
| | Shares | | per Share | | Term (in years) | | Intrinsic Value | ||
Outstanding as of December 31, 2019 |
| | | $ | |
|
|
| |
|
Granted |
| | |
| |
|
|
| |
|
Exercised |
| ( | |
| |
|
|
| |
|
Expired |
| ( | |
| |
|
|
| |
|
Outstanding as of December 31, 2020 |
| | |
| |
|
| $ | | |
Granted |
| | |
| |
|
|
| |
|
Exercised |
| — | |
| — |
|
|
| |
|
Expired |
| ( | |
| |
|
|
| |
|
Outstanding and exercisable as of December 31, 2021 | | | $ | |
| | $ | — | ||
In May 2020, we issued common stock at a price $
NOTE 18. NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the reporting period. Diluted net loss per share is computed similarly to basic loss per share, except that it includes the potential dilution that could occur if dilutive securities are exercised.
Outstanding stock options and common stock warrants are considered anti-dilutive because we are in a net loss position. Accordingly, the number of weighted average shares outstanding for basic and fully diluted net loss per share are the same.
72
The following summarizes equity instruments that may, in the future, have a dilutive effect on earnings per share:
| | December 31, | ||
|
| 2021 |
| 2020 |
Stock options |
| |
| |
Warrants |
| |
| |
Accrued stock payable |
| |
| |
Convertible notes | | | | |
Preferred stock | | | | — |
|
| |
| |
NOTE 19. RELATED PARTY TRANSACTIONS
On June 3, 2020, the Company entered into a consulting agreement with Adam Hershey, a board member and investor, pursuant to which he would act as a strategic consultant for the Company, including aiding 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 $
We currently have a lease agreement with Dalton Adventures, LLC in which we rent
We currently have a lease agreement with Bellewood Holdings, LLC in which we rent retail space for the TREES Englewood retail store in Englewood, Colorado, for $
On December 23, 2020,
NOTE 20. SEGMENT INFORMATION
Our operations are organized into
73
Year ended December 31
2021 |
| Retail |
| Cultivation |
| Eliminations | | Total | ||||
Revenues | | $ | | | $ | | | $ | ( | | $ | |
Costs and expenses | | | ( | | | ( | | | | | | ( |
Segment operating income | | $ | | | $ | ( | | $ | — | | | ( |
Corporate expenses | | | | | | | | | | | | ( |
Net loss from continuing operations before income taxes | | | | |
| | | | | | $ | ( |
2020 |
| Cultivation | | Eliminations |
| Total | |||
Revenues | | $ | | | $ | — | | $ | |
Costs and expenses | | | ( | | | | | | ( |
Segment operating income | | $ | | | $ | | | | |
Corporate expenses | |
|
| | | | | | ( |
Net loss from continuing operations before income taxes | |
| | | | | | $ | ( |
| | December 31, | ||||
Total assets |
| 2021 |
| 2020 | ||
Retail | | $ | | | $ | — |
Cultivation | | | | | | |
Corporate | |
| | |
| |
Discontinued operations | | | — | | | |
Total assets - segments | | | | | | |
Intercompany eliminations | | | — | | | ( |
Total assets - consolidated | | $ | | | $ | |
NOTE 21. SUBSEQUENT EVENTS
On January 5, 2022, the Company completed the acquisition of substantially all the assets of Trees MLK Inc. (“MLK”), representing the remaining Oregon dispensary in connection with the overall Trees transaction (“MLK Closing”). The cash paid by the Company in connection with the MLK Closing consisted of $
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of December 31, 2021. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2021, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized, and reported as and when required, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding its required disclosure.
74
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are
detected. The inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. Also, 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.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this Item 10 is incorporated by reference to the sections entitled “Proposal One. Election of Directors,” “Corporate Governance and Board Matters,” “Executive Officers,” and “Delinquent Section 16(a) Reports” in our definitive proxy statement for the 2022 Annual Meeting of Stockholders to be filed with the SEC.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to the sections entitled “Executive Compensation” in our definitive proxy statement for the 2022 Annual Meeting of Stockholders to be filed with the SEC.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12 is incorporated by reference to the sections entitled “Security Ownership of Certain Beneficial Owners and Management” in our definitive proxy statement for the 2022 Annual Meeting of Stockholders to be filed with the SEC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item 13 is incorporated by reference to the sections entitled “Certain Relationships and Related Party Transactions” and “Corporate Governance and Board Matters” in our definitive proxy statement for the 2022 Annual Meeting of Stockholders to be filed with the SEC.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 is incorporated by reference to the section entitled “Proposal Two. Ratification of Appointment of Independent Auditors” in our definitive proxy statement for the 2022 Annual Meeting of Stockholders to be filed with the SEC.
76
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following Exhibits are filed with this Report:
Exhibit |
| Exhibit Name |
|---|---|---|
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
|
77
Exhibit |
| Exhibit Name |
|---|---|---|
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| Form of Warrant (Incorporated by reference to Exhibit 10.2 to our Form 8-K filed June 1, 2020) | |
| ||
| ||
| ||
|
78
Exhibit |
| Exhibit Name |
|---|---|---|
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| Form of Warrant (incorporated by reference to Exhibit 10.2 to our Form 8-K filed September 14, 2021) | |
| ||
| ||
| ||
| Code of Ethics (Incorporated by reference to Exhibit 14.1 to our Form 10-K filed March 31, 2017) | |
| ||
21.1** | | |
23.1** | | |
| ||
| ||
| ||
| ||
101.INS | | Inline XBRL Instance Document |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
(**) Filed herewith.
(†) Denotes management contract, or compensatory plan, contract or arrangement
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Signature |
| Title |
| Date |
|
|
|
|
|
/s/ Adam Hershey |
| Interim Chief Executive Officer |
| March 25, 2022 |
Adam Hershey |
|
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
|
|
|
|
|
| | | | |
/s/ Adam Hershey |
| Principal Executive Officer and Director |
| March 25, 2022 |
Adam Hershey |
|
|
|
|
| | | | |
/s/ Jessica Bast |
| Chief Financial Officer (Principal Financial and Accounting Officer) |
| March 25, 2022 |
Jessica Bast |
|
|
|
|
|
|
|
|
|
/s/ Carl J. Williams |
| Director |
| March 25, 2022 |
Carl J. Williams |
|
|
|
|
|
|
|
|
|
/s/ John Barker Dalton |
| Director |
| March 25, 2022 |
John Barker Dalton |
|
|
|
|
| | | | |
/s/ Richard C. Travia | | Director | | March 25, 2022 |
Richard C. Travia | | | | |
| | | | |
/s/ Tim Brown | | Director | | March 25, 2022 |
Tim Brown | | | | |
| | | | |
80