CANN 10-Q
TREES Corp (Colorado) (CANN)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
for the quarterly period ended
for the transition period from ____________ to ____________.
Commission file number:
(Exact name of registrant as specified in its charter)
| (State of incorporation) | (IRS Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | Ticker symbol | ||
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to the filing requirements for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☑ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of November 8th, 2024, there were
TREES CORPORATION
FORM 10-Q
TABLE OF CONTENTS
| PART I. FINANCIAL INFORMATION | 1 | |
| Item 1. | Financial Statements | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 23 |
| Item 4. | Controls and Procedures | 23 |
| PART II. OTHER INFORMATION | 24 | |
| Item 1. | Legal Proceedings | 24 |
| Item 1A. | Risk Factors | 24 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 24 |
| Item 3. | Defaults Upon Senior Securities | 24 |
| Item 4. | Mine Safety Disclosures | 24 |
| Item 5. | Other Information | 24 |
| Item 6. | Exhibits | 24 |
| Signatures | 25 | |
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TREES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2024 | December 31, 2023 | |||||||
| (unaudited) | (audited) | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowance of $ | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Right-of-use operating lease asset | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders' Equity (Deficit) | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Interest payable | ||||||||
| Income tax payable | ||||||||
| Uncertain tax benefit liability, net | — | |||||||
| Operating lease liability, current | ||||||||
| Finance lease liability, current | ||||||||
| Accrued stock payable | ||||||||
| Accrued dividends | ||||||||
| Warrant derivative liability | ||||||||
| Accrued legal fees | ||||||||
| Notes payable - current | ||||||||
| Contingent earnout liability | ||||||||
| Total current liabilities | ||||||||
| Operating lease liability, non-current | ||||||||
| Finance lease liability, non-current | ||||||||
| Notes payable - non-current (net of unamortized discount) | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 6) | ||||||||
| Stockholders’ equity (deficit) | ||||||||
| Preferred stock, par value; | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ( | ) | ||||||
| Total liabilities and stockholders’ equity (deficit) | $ | $ | ||||||
See Notes to unaudited condensed consolidated financial statements.
1
TREES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenue | ||||||||||||||||
| Retail sales | $ | $ | $ | $ | ||||||||||||
| Cultivation sales | ||||||||||||||||
| 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 income (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses) | ||||||||||||||||
| Amortization of debt discount | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain (loss) on extinguishment of debt | ( | ) | ( | ) | ||||||||||||
| Gain (loss) on derivative liability | ( | ) | ||||||||||||||
| Gain on contingent earnout | ||||||||||||||||
| Gain (loss) on disposal of assets | ( | ) | ( | ) | ||||||||||||
| Gain (loss) on termination of lease | ||||||||||||||||
| Other income | ||||||||||||||||
| Total other income (expenses) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss from operations before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Benefit (provision) for income taxes | ( | ) | ( | ) | ||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Accrued preferred stock dividend | ( | ) | ( | ) | ||||||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted loss per common share | ||||||||||||||||
| Net loss attributable to common stockholders’ per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted weighted average common shares outstanding | ||||||||||||||||
See Notes to unaudited condensed consolidated financial statements.
2
TREES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine months ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Amortization of debt discount and equity issuance costs | ||||||||
| Depreciation and amortization | ||||||||
| Loss on disposal of assets | ||||||||
| Gain on lease termination | ( | ) | ||||||
| Amortization of right of use lease assets | ||||||||
| Non-cash lease expense | ||||||||
| Bad debt expense | ( | ) | ||||||
| (Gain) loss on extinguishment of debt | ( | ) | ||||||
| Loss (gain) on contingent earnout | ( | ) | ||||||
| Loss (gain) on derivative liability | ( | ) | ( | ) | ||||
| Stock-based compensation | ||||||||
| Changes in operating assets and liabilities, net of acquisitions | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Inventories | ||||||||
| Income taxes | ||||||||
| Uncertain tax benefit liability | ||||||||
| Accounts payable, accrued liabilities, and interest payable | ||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Acquisition of Station 2 assets | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Payments on notes payable | ( | ) | ||||||
| Payments on finance lease | ( | ) | ( | ) | ||||
| Proceeds from notes payable | ||||||||
| Net cash (used in) provided by financing activities | ( | ) | ( | ) | ||||
| Net decrease 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 | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Non-cash investing & financing activities | ||||||||
| Operating lease right-of-use asset obtained in exchange for new operating lease liabilities | $ | $ | ||||||
| Non-cash debt issuance for acquisition of Station 2 assets | $ | $ | ||||||
| Non-cash extinguishment of debt for the surrender of Station 2 assets | $ | ( | ) | |||||
| Accrued dividends | $ | $ | ||||||
| Non-cash extinguishment of debt for Trees MLK Assets | $ | $ | ||||||
| Non-cash extinguishment of debt for previous year Accounting Fees | $ | $ | ||||||
See Notes to unaudited condensed consolidated financial statements.
3
TREES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
| For the three months ended September 30, 2024 | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| July 1, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| September 30, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| For the three months ended September 30, 2023 | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| July 1, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Share-based compensation | — | — | ||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| For the nine months ended September 30, 2024 | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| January 1, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Share-based compensation | — | — | ||||||||||||||||||||||||||
| Capital contribution related to the forgiveness of the Trees MLK Note | — | — | ||||||||||||||||||||||||||
| Dividend on Preferred Stock | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| September 30, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| For the nine months ended September 30, 2023 | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| January 1, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Share-based compensation | — | — | ||||||||||||||||||||||||||
| Dividend on Preferred Stock | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
See Notes to unaudited condensed consolidated financial statements.
4
TREES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS, HISTORY, AND PRESENTATION
Nature of Operations
TREES Corporation, a Colorado Corporation (the “Company,” “we,” “us,” or “our,”) is a cannabis retailer and cultivator in the States of Colorado and Oregon.
We presently operate five (5) cannabis dispensaries as follows:
| ● | Englewood, Colorado |
| o | 5005 S Federal Boulevard – Recreational license only |
| ● | Denver, Colorado |
| o | East Hampden Avenue (formerly Green Man) – Recreational license only |
| ● | Longmont, Colorado |
| o | 12626 N. 107th Street (formerly Green Tree/Ancient Alternatives) – Medical and Recreational licenses |
| ● | Two (2) in Oregon |
| o | SW Corbett Avenue, Portland, OR – Medical and Recreational licenses |
| o | NE 102nd Avenue, Portland, OR – Medical and Recreational licenses |
We also operate two (2) cultivation facilities in Colorado as follows:
| ● | SevenFive Farm – 3705 N. 75th Street, Boulder – Retail cultivation license only |
| ● | 6859 N. Foothills Highway E-100 (formerly Green Tree/Hillside Enterprises) – Retail cultivation license only |
Our principal business model is to acquire, integrate and optimize cannabis companies in the retail and cultivation segments utilizing the combined experience of entrepreneurs and synergistic operations of our vertically integrated network.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include all accounts of the Company and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) can be condensed or omitted. The condensed consolidated balance sheet for the year ended December 31, 2023, was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. The information included in this quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto of the Company for the year ended December 31, 2023, which were included in the annual report on Form 10-K filed by the Company on April 10, 2024.
5
In the opinion of management, these unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and notes thereto of the Company and include all adjustments, consisting only of normal recurring adjustments, considered necessary for the fair presentation of the Company’s financial position and operating results. The results for the nine months ended September 30, 2024, are not necessarily indicative of the operating results for the year ending December 31, 2024, or any other interim or future periods. Since the date of the Annual Report, there have been no material changes to the Company’s significant accounting policies.
Reclassifications
Certain prior period amounts have been reclassified for consistency with current period presentation. These reclassifications had no effect on the reported results of operations.
Use of Estimates
The preparation of our unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Furthermore, when testing assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment charges may result.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consisted primarily of cash and accounts receivable.
Customer and Revenue Concentrations – Cultivation Segment
During the three months ended September 30, 2024,
SevenFive had
During the three months ended September 30, 2024
and 2023,
Hillsides Cultivation’s revenue includes
revenue from an external wholesale vendor totaling $
Deferred Revenue from Loyalty Program
For the Company's retail locations, the Company offers a loyalty reward program to its dispensary customers that allows customers to earn reward credits to be used on future purchases. Loyalty reward credits issued as part of a sales transaction results in revenue being deferred until the loyalty reward is redeemed by the customer. The loyalty rewards are recorded as reductions to revenue on the condensed consolidated statements of operations and included as deferred revenue on the condensed consolidated balance sheets. A portion of the revenue generated in a sale must be allocated to the loyalty points earned. The amount allocated to the points earned is deferred until the loyalty points are redeemed.
6
Deferred revenue due to outstanding loyalty points at September 30,
2024 and 2023 was $
Basic and Diluted Loss Per Share
The Company presents basic earnings per share (EPS) on the face of the statements of operation. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including convertible debt, stock options, and warrants, using the treasury stock method, and convertible debt instrument, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares as their effect is anti-dilutive.
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Loss Per Share: | ||||||||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator: | ||||||||||||||||
| Weighted-Average common shares outstanding | ||||||||||||||||
| Basic net loss per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Convertible Debt | ||||||||||||||||
| Warrants to purchase common stock | ||||||||||||||||
| Options to purchase common stock | ||||||||||||||||
Going Concern
The accompanying unaudited condensed consolidated financial statements
have been prepared on the basis of continuity of operations, realization of assets, and the satisfaction of liabilities and commitments
in the ordinary course of business. The Company has incurred recurring losses and negative cash flows from operations since inception
and have primarily funded its operations with proceeds from the issuance of debt and equity. The Company incurred a net loss of $
The Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital to fund operations, support our planned investing activities, and repay its debt obligations as they become due. If the Company is unable to obtain additional funding, the Company would be forced to delay, reduce, or eliminate some or all of our acquisition efforts, which could adversely affect its growth plans.
7
Summary of Significant Accounting Policies
See our Annual Report on Form 10-K for the year ended December 31, 2023, as amended, for discussion of the Company’s significant accounting policies.
Recently Issued Accounting Standards
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting – Improvements to Reportable Segment Disclosures” (“ASU 2023-07”). ASU 2023-07 requires disclosure of more detailed information about a reportable segment’s expenses. ASU 203-07 is effective for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024. The amendments must be applied retrospectively, and early adoption is permitted. The Company is currently assessing the effects of adoption on its consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09, “Improvements to Income Tax Disclosures” (“ASU 2023-09”). ASU 2023-09 applies to all entities subject to income taxes and requires public business entities such as the Company to provide a tabular rate reconciliation and a separate disclosure for any reconciling items with certain categories that are equal to or greater than a specified quantitative threshold. The new standard is effective for annual periods beginning after December 15, 2024 and is to be applied on a prospective basis with the option to apply the standard retrospectively, early adoption is permitted. The Company is currently assessing the effects of adoption on its consolidated financial statements.
NOTE 2. INVENTORIES
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-progress and finished goods | ||||||||
| Inventories | $ | $ | ||||||
NOTE 3. LEASES
The Company’s leases consist primarily
of real estate leases for retail and cultivation facilities. All but one of the Company’s leases are classified as operating leases.
The lease for the retail dispensary acquired in the Green Man transaction is classified as a finance lease. The current and non-current
portions of the operating lease liabilities and finance lease liabilities are disclosed separately on the accompanying condensed balance
sheets. The finance lease ROU asset is included in property and equipment, net and the operating lease ROU asset is disclosed separately
on the accompanying condensed balance sheets. As the rate implicit in the Company’s leases is not readily determinable, we used
an estimated incremental borrowing rate of
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Straight-line operating lease expense | $ | $ | $ | $ | ||||||||||||
| Variable lease cost | ||||||||||||||||
| Total operating lease expense | $ | $ | $ | $ | ||||||||||||
The finance lease expense for the three months
ended September 30, 2024, and September 30, 2023, was approximately $
Related party leases
As of September 30, 2024, one of the Company’s
operating leases, a cultivation facility lease, is a related party lease as the landlord is a principal shareholder and former board
member of the Company. As of September 30, 2024, the ROU asset, operating lease liability, current, and operating lease liability, non-current
for the related party leases were $
8
MLK Lease Termination
During the nine months ended September 30, 2024, the Company’s lease at the MLK retail location was terminated by the landlord due to lack of payment of rent. The original lease had a term through August 31, 2023 and had continued on a month-to-month basis until July 31, 2024, when the landlord seized and auctioned the remaining assets at the address, applying the auction proceeds against the current outstanding lease balance.
As a result of the termination, the Company removed
the operating lease asset totaling $
Leasehold improvements, furniture and fixtures
related to the seized facility with a net book value of $
Lease Maturities
| Year ending December 31, | Operating leases | Finance lease | ||||||
| 2024 (remaining three months) | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Total | ||||||||
| Less: Present value adjustment | ( | ) | ( | ) | ||||
| Lease liability | ||||||||
| Less: Lease liability, current | ( | ) | ( | ) | ||||
| Lease liability, non-current | $ | $ | ||||||
The total remaining lease payments in the table
above include $
As of September 30, 2024, the weighted average
remaining term of the Company’s operating leases is
None of the Company’s leases contain residual value guarantees or restrictive covenants.
Supplemental cash flow information
| For the nine months ended September 30, | 2024 | 2023 | ||||||
| Supplemental cash flow information | ||||||||
| Cash paid for amounts included in operating lease liability | $ | $ | ||||||
| Cash paid for amounts included in finance lease liability | $ | $ | ||||||
| Supplemental lease disclosures of non-cash transactions: | ||||||||
| ROU assets obtained in exchange for operating lease liabilities | $ | $ | ||||||
9
NOTE 4. ACCRUED STOCK PAYABLE
| Number of | ||||||||
| Amount | Shares | |||||||
| Balance as of December 31, 2022 | $ | |||||||
| Stock issued | ||||||||
| Balance as of December 31, 2023 | $ | |||||||
| Stock issued | ||||||||
| Balance as of September 30, 2024 | $ | |||||||
The outstanding balance of accrued stock payable
as of September 30, 2024 relates to a February 18, 2020 grant of
NOTE 5. NOTES PAYABLE
| September 30, 2024 | December 31, 2023 | |||||||||||||||||||||||
| Third-party | Related-party | Total | Third-party | Related-party | Total | |||||||||||||||||||
| 2022 12% Notes | $ | $ | $ | $ | ||||||||||||||||||||
| Trees Transaction Notes | ||||||||||||||||||||||||
| Green Tree Acquisition Notes | ||||||||||||||||||||||||
| Green Man Acquisition Notes | ||||||||||||||||||||||||
| Working Capital Notes | ||||||||||||||||||||||||
| Centri Promissory Note | ||||||||||||||||||||||||
| Unamortized debt discount | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Total debt | ||||||||||||||||||||||||
| Less: Current portion | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Long-term portion | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Trees Transaction Notes
In January 2022, with the completion of the Trees
MLK acquisition, we are obligated to pay the Seller cash equal to $
Green Man Acquisition Notes
In December 2022, with the completion of the
Green Man Acquisition, we are obligated to pay the Seller cash equal to $
| Dates | Total Payment | |||
| December 2023 | $ | |||
| January 2024 | $ | |||
| February 2024 | $ | |||
| March 2024 – August 2024 | $ | |||
| September 2024 – October 2024 | $ | |||
| November 2024 – December 2024 | $ | |||
| January 2025 – June 2025 | $ | |||
| July 2025 – February 2026 | $ | |||
10
The relative fair value of this obligation resulted
in a debt discount of $
12% Notes – 2023 Modification
On December 15, 2023, the Company entered into
Amended and Restated Senior Secured Convertible Notes with certain accredited investors to modify the original terms of the
In addition to the Amended Notes, the Lead Investor
agreed to provide an additional $
On June 15th, 2024 the Lead Investor
agreed to provide an additional $
Centri Promissory Note
On August 20th, 2024 Centri Business
Consulting, LLC (“Centri”) agreed to exchange amounts due for professional accounting fees incurred during the prior fiscal
year totaling $
NOTE 6. COMMITMENTS AND CONTINGENCIES
Income Tax Payable
To date, the IRS has held that cannabis companies are subject to the limits of Internal Revenue Code (“IRC”) Section 280E for U.S. federal income tax purposes. This position was not held in Oregon or Colorado, where the Company operates. Under the IRS’s interpretation of IRC Section 280E, cannabis companies are only allowed to deduct expenses directly and indirectly related to the production of inventory. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E.
As of December 31, 2023
the Company recorded a tax liability totaling $
11
For the period ended
September 30, 2024 the Company has evaluated this tax position in relation to the previously recorded income tax liability of $
Due to this change, the Company has completed the provision for the nine months ended September 30, 2024 considering ASC 740-10. This includes an adjustment to the income tax payable account to return it back to the December 31, 2023 balance and recording an uncertain tax benefit (UTB) liability to reflect the expected tax liability should the Internal Revenue Service reject the uncertain tax position taken by the company regarding 280E, net of the valuation allowance.
As of September 30, 2024, the Income tax liability is $
Legal
From time to time, we may be involved in various claims and legal actions in the ordinary course of business. We are not currently subject to any material legal proceedings outside the ordinary course of our business.
NOTE 7. STOCKHOLDERS’ EQUITY
2021 Preferred stock dividends
The Company’s Series A Preferred is convertible
into
| ● | Authorized Number of Shares – |
| ● | Voting Rights – |
| ● | Dividends – |
| ● | Conversion – Each share of Series A Preferred is mandatorily convertible into |
| ● | Redemption – No rights of redemption by 2021 Investors, nor mandatory redemption |
As of September 30, 2024 and December 31, 2023,
we have recorded accrued dividends of $
Stock-based compensation
Stock-based Awards
As of September 30, 2024, the Company has two
active plans, the 2020 Omnibus Incentive Plan approved by the Board in November 2020 (“2020 Plan”) and the 2014 Equity Incentive
Plan approved by the Board in October 2014 (“2014 Plan” and collectively with the 2020 Plan the “Stock Incentive Plans”)
that allow the Board of Directors to grant stock-based awards to eligible employees, non-employee directors, and consultants of the Company
and its subsidiaries. Under the Stock Incentive Plans, the Board may grant 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 Stock Incentive Plans is
12
Stock Options
| Weighted- | ||||||||||||
| Weighted- | Average | |||||||||||
| Average | Remaining | |||||||||||
| Number of | Exercise Price | Contractual | ||||||||||
| Shares | per Share | Term (in years) | ||||||||||
| Outstanding as of December 31, 2023 | $ | |||||||||||
| Granted | ||||||||||||
| Forfeited or expired | ( | ) | — | |||||||||
| Outstanding as of September 30, 2024 | $ | |||||||||||
| Exercisable as of September 30, 2024 | $ | |||||||||||
The intrinsic value of the exercisable warrants as of September 30, 2024 was negative.
As of September 30, 2024, there was unrecognized compensation expense related to unvested employee awards.
We recorded in compensation expense for the nine months ended September 30, 2024 and 2023, respectively.
Restricted Stock Awards
During the nine months ended September 30, 2024,
the Company granted
The Company recorded $
| Weighted- | ||||||||
| Average | ||||||||
| Number of | Grant | |||||||
| Shares | Date Value | |||||||
| Outstanding as of December 31, 2023 | $ | |||||||
| Granted | ||||||||
| Forfeited or expired | ||||||||
| Outstanding as of September 30, 2024 | $ | |||||||
Contingent Earnout Liability
On December 12, 2022, we completed the Green Tree Acquisition which
consisted of the acquisition of substantially all of the assets of Ancient Alternatives LLC, Natural Alternatives For Life, LLC, Mountainside
Industries, LLC, Hillside Enterprises, LLC, and GT Creations, LLC, each a Colorado limited liability company (collectively, the “Green
Tree Entities”). We paid cash in the amount of $
The fair value of the contingent earnout liability
was and $
13
NOTE 8. RELATED PARTY TRANSACTIONS
On September 16, 2022, the Company entered into
a new consulting agreement with Adam Hershey, its Interim Chief Executive Officer, pursuant to which Mr. Hershey will continue to serve
as the Company’s Interim Chief Executive Officer with compensation equal to $
In February 2023, the Company completed the acquisition of Station 2, LLC’s assets. Station 2, LLC is owned by a board member, who is also a shareholder of the Company. This acquisition was subsequently reversed in Q3 of 2023.
The Company currently has a lease agreement with
Dalton Adventures, LLC in which the Company leases
NOTE 9. SEGMENT INFORMATION
Our operations are organized into
Three months ended September 30,
| 2024 | Retail | Cultivation | Eliminations | Total | ||||||||||||
| Revenues | $ | ( | ) | |||||||||||||
| Costs and expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Segment operating income | $ | $ | ( | ) | $ | |||||||||||
| Corporate expenses | ( | ) | ||||||||||||||
| ERC Credits | ||||||||||||||||
| Net loss from continuing operations before income taxes | $ | ( | ) | |||||||||||||
| 2023 | Retail | Cultivation | Eliminations | Total | ||||||||||||
| Revenues | $ | $ | $ | ( | ) | $ | ||||||||||
| Costs and expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Segment operating income | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Corporate expenses | ( | ) | ||||||||||||||
| ERC Credits | ||||||||||||||||
| Net loss from continuing operations before income taxes | $ | ( | ) | |||||||||||||
14
Nine months ended September 30,
| 2024 | Retail | Cultivation | Eliminations | Total | ||||||||||||
| Revenues | $ | ( | ) | |||||||||||||
| Costs and expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Segment operating income | $ | $ | ( | ) | $ | |||||||||||
| Corporate expenses | ( | ) | ||||||||||||||
| ERC Credits | ||||||||||||||||
| Net loss from continuing operations before income taxes | $ | ( | ) | |||||||||||||
| 2023 | Retail | Cultivation | Eliminations | Total | ||||||||||||
| Revenues | $ | $ | $ | ( | ) | $ | ||||||||||
| Costs and expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Segment operating income | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Corporate expenses | ( | ) | ||||||||||||||
| ERC Credits | ||||||||||||||||
| Net loss from continuing operations before income taxes | $ | ( | ) | |||||||||||||
| September 30, | December 31, | |||||||
| Total assets | 2024 | 2023 | ||||||
| Retail | $ | $ | ||||||
| Cultivation | ||||||||
| Corporate | ||||||||
| Total assets – segments | ||||||||
| Intercompany eliminations | ||||||||
| Total assets – consolidated | $ | $ | ||||||
15
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis (“MD&A”) is intended to provide an understanding of our financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. This discussion should be read in conjunction with the Condensed Consolidated Unaudited Financial Statements contained in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and related notes and MD&A appearing in our Annual Report on Form 10-K as of and for the year ended December 31, 2023. The results of operations for an interim period may not give a true indication of results for future interim periods or for the year.
Cautionary Statement Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q, including the financial statements and related notes, contains forward-looking statements that discuss, among other things, future expectations and projections regarding future developments, operations and financial conditions. All forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control and on assumptions that may prove to be incorrect. If any underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or intended. We undertake no obligation to publicly update or revise any forward-looking statements to reflect actual results, changes in expectations or events or circumstances after the date of this Quarterly Report on Form 10-Q.
When this report uses the words “we,” “us,” or “our,” and the “Company,” they refer to TREES Corporation (formerly, “General Cannabis Corp”).
Our Products, Services, and Customers
TREES Corporation is a cannabis retailer and cultivator in the States of Colorado and Oregon.
We presently operate five (5) cannabis dispensaries as follows:
| ● | Englewood, Colorado |
| o | 5005 S. Federal Boulevard – Recreational license only |
| ● | Denver, Colorado |
| o | East Hampden Avenue (formerly Green Man) –Recreational license only |
| ● | Longmont, Colorado |
| o | 12626 N. 107th Street (formerly Green Tree/Ancient Alternatives) – Medical and Recreational licenses |
| ● | Two (2) in Oregon |
| o | SW Corbett Avenue, Portland, OR – Medical and Recreational licenses |
| o | NE 102nd Avenue, Portland, OR – Medical and Recreational licenses |
We also operate two (2) cultivation facilities in Colorado as follows:
| ● | SevenFive Farm – 3705 N. 75th Street, Boulder – Retail cultivation license only |
| ● | 6859 N. Foothills Highway E-100 (formerly Green Tree/Hillside Enterprises) – Retail cultivation license only |
16
Our principal business model is to acquire, integrate and optimize cannabis companies in the retail and cultivation segments utilizing the combined experience of entrepreneurs and synergistic operations of our vertically integrated network. During the three months ended September 30, 2024, SevenFive had zero dollars in revenue and during the three months ended September 30, 2023, 89% of SevenFive’s revenue was with five customers, respectively. During the nine months ended September 30, 2024 and 2023, 100% of SevenFive’s revenue was with three customers and 50% of SevenFive’s revenue was with one customer, respectively. The customers in 2024 are related party dispensaries and the revenues associated with these customers are eliminated in consolidation.
During the three months ended September 30, 2024 and 2023, 92% of Hillside Cultivation’s (formerly noted as Green Tree) revenue was with three customers, and 84% of Hillside Cultivation’s (formerly noted as Green Tree) revenue was with four customers, respectively. During the nine months ended September 30, 2024 and 2023, 98% of Hillside Cultivation’s (formerly noted as Green Tree) revenue was with three customers, and 78% of Hillside Cultivation’s (formerly noted as Green Tree) revenue was with three customers, respectively. The customers in 2024 are related party dispensaries and the revenues associated with these customers are eliminated in consolidation.
Hillsides Cultivation’s revenue includes revenue from an external wholesale vendor totaling $5,084 which has been applied to open accounts payable for the retail segment of the Company for the same vendor. Accounts payable and the associated cost of goods sold expense have been increased for the retail segment to account for this adjustment.
Results of Operations
The following tables set forth, for the periods indicated, statements of operations data. The tables and the discussion below should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto in this report.
| Three
months ended September 30, | Percent | |||||||||||||||
| 2024 | 2023 | Change | Change | |||||||||||||
| Revenues | $ | 3,310,259 | $ | 4,111,583 | $ | (801,324 | ) | (19 | )% | |||||||
| Costs and expenses | (3,581,898 | ) | (4,718,791 | ) | 1,136,893 | (24 | )% | |||||||||
| Other expense | (573,709 | ) | (207,915 | ) | (365,794 | ) | 176 | % | ||||||||
| Net Gain (Loss) before income taxes | $ | (845,348 | ) | $ | (815,123 | ) | $ | (30,225 | ) | 4 | % | |||||
| Nine
months ended September 30, | Percent | |||||||||||||||
| 2024 | 2023 | Change | Change | |||||||||||||
| Revenues | $ | 10,685,262 | $ | 14,320,196 | $ | (3,634,934 | ) | (25 | )% | |||||||
| Costs and expenses | (11,220,447 | ) | (17,569,254 | ) | (6,348,807 | ) | (36 | )% | ||||||||
| Other expense | (1,507,487 | ) | (1,403,018 | ) | (104,469 | ) | 7 | % | ||||||||
| Net Loss before income taxes | $ | (2,042,672 | ) | $ | (4,652,076 | ) | $ | 2,609,404 | (56 | )% | ||||||
Revenues
The reversal of the acquisition of a portion of the Green Tree assets, which were returned in Q3 2023, contributed to the decrease in revenues and expenses for the three months ended September 30, 2024 compared to September 30, 2023, and for the nine months ended September 30, 2024 and 2023, respectively.
17
Costs and expenses
| Three
months ended September 30, | Percent | |||||||||||||||
| 2024 | 2023 | Change | Change | |||||||||||||
| Cost of sales | $ | 1,957,455 | $ | 2,442,541 | $ | (485,086 | ) | (20 | )% | |||||||
| Selling, general and administrative | 1,271,696 | 1,962,641 | (690,945 | ) | (35 | )% | ||||||||||
| Stock-based compensation | — | 8,745 | (8,745 | ) | (100 | )% | ||||||||||
| Professional fees | 173,262 | 53,259 | 120,003 | 225 | % | |||||||||||
| Depreciation and amortization | 179,485 | 251,605 | (72,120 | ) | (29 | )% | ||||||||||
| $ | 3,581,898 | $ | 4,718,791 | $ | (1,136,893 | ) | (24 | )% | ||||||||
| Nine
months ended September 30, | Percent | |||||||||||||||
| 2024 | 2023 | Change | Change | |||||||||||||
| Cost of sales | $ | 5,833,992 | $ | 8,731,032 | $ | (2,897,040 | ) | (33 | )% | |||||||
| Selling, general and administrative | 4,050,784 | 6,744,632 | (2,693,848 | ) | (40 | )% | ||||||||||
| Stock-based compensation | 14,968 | 54,195 | (39,227 | ) | (72 | )% | ||||||||||
| Professional fees | 733,970 | 1,204,369 | (470,399 | ) | (39 | )% | ||||||||||
| Depreciation and amortization | 586,733 | 835,026 | (248,293 | ) | (30 | )% | ||||||||||
| $ | 11,220,447 | $ | 17,569,254 | $ | (6,348,807 | ) | (36 | )% | ||||||||
Cost of sales decreased for three and nine months ended September 30, 2024, as compared to September 30, 2023 due to the reversal of the acquisition of a portion of the Green Tree assets.
Selling, general and administrative expense decreased for the three and nine months ended September 30, 2024, as compared to September 30, 2023 due to the decreased expenses resulting from the reversal of the acquisition of one dispensary and one cultivation facility in the third quarter of 2023 and one additional dispensary license in the first quarter of 2023, resulting in a decrease in employees and rent expense.
Stock-based compensation included the following:
| Three months
ended September 30, | Percent | |||||||||||||||
| 2024 | 2023 | Change | Change | |||||||||||||
| Restricted Stock Awards | $ | — | $ | 8,745 | $ | (8,745 | ) | (100 | )% | |||||||
| $ | — | $ | 8,745 | $ | (8,745 | ) | (100 | )% | ||||||||
| Nine months
ended September 30, | Percent | |||||||||||||||
| 2024 | 2023 | Change | Change | |||||||||||||
| Restricted Stock Awards | $ | 14,968 | $ | 54,195 | $ | (39,227 | ) | (72 | )% | |||||||
| $ | 14,968 | $ | 54,195 | $ | (39,227 | ) | (72 | )% | ||||||||
Employee awards are issued under our 2020 Omnibus Incentive Plan, which was approved by shareholders on November 23, 2020. Expense varies primarily due to the number of stock options and restricted stock awards granted and the share price on the date of grant. The decrease in expense for the three and nine months ended September 30, 2024, as compared to September 30, 2023, is due to issuing less restricted stock awards at a higher per unit grant date value in the second quarter of 2024.
Professional fees consist primarily of accounting and legal expenses. Professional fees increased for the three months ended September 30, 2024 due to increased accounting and legal fees related to our 2023 tax return and the related tax position therein (See Note 6 Income Tax Payable for details). Professional fees decreased for the nine months ended September 30, 2024 as compared to September 30, 2023 due to the lack of unusual accounting activity in the first and second quarters of 2024 as compared to the 2023 periods.
Depreciation and amortization decreased due to the reversal of the acquisition of a portion of the Green Tree assets and a revaluation of the Green Tree and Green Man acquisitions as of the three and nine months ended September 30, 2024, as compared to September 30, 2023.
18
Other Expense
| Three months
ended September 30, | Percent | |||||||||||||||
| 2024 | 2023 | Change | Change | |||||||||||||
| Amortization of debt discount | $ | 123,888 | $ | 219,785 | $ | (95,897 | ) | (44 | )% | |||||||
| Interest expense | 467,651 | 296,242 | 171,409 | 58 | % | |||||||||||
| (Gain) loss on termination of lease | (6,770 | ) | — | (6,770 | ) | 100 | % | |||||||||
| (Gain) loss on extinguishment of debt | (34,876 | ) | 218,237 | (253,113 | ) | (116 | )% | |||||||||
| (Gain) loss on derivative liability | — | 2,860 | (2,860 | ) | (100 | )% | ||||||||||
| (Gain) loss on sale/disposal of assets | 23,816 | (2,400 | ) | (26,216 | ) | (1,092 | )% | |||||||||
| Other (income) | — | (526,809 | ) | 526,809 | (100 | )% | ||||||||||
| Gain on contingent earnout | — | — | — | 0 | % | |||||||||||
| $ | 573,709 | $ | 207,915 | $ | 365,794 | 176 | % | |||||||||
Other Expense
| Nine months
ended September 30, | Percent | |||||||||||||||
| 2024 | 2023 | Change | Change | |||||||||||||
| Amortization of debt discount | $ | 418,523 | $ | 621,539 | $ | (203,016 | ) | (33 | )% | |||||||
| Interest expense | 1,478,566 | 1,462,281 | 16,285 | 1 | % | |||||||||||
| (Gain) loss on termination of lease | (6,770 | ) | — | (6,770 | ) | 100 | % | |||||||||
| (Gain) loss on extinguishment of debt | (34,876 | ) | 218,237 | (253,113 | ) | (116 | )% | |||||||||
| (Gain) loss on derivative liability | (4,716 | ) | (2,359 | ) | (2,357 | ) | 100 | % | ||||||||
| (Gain) loss on sale/disposal of assets | 23,816 | — | 23,816 | 100 | % | |||||||||||
| Other (income) | — | (896,680 | ) | 896,680 | 100 | % | ||||||||||
| Gain on contingent earnout | (367,056 | ) | — | (367,056 | ) | 100 | % | |||||||||
| $ | 1,507,487 | $ | 1,403,018 | $ | 104,469 | 7 | % | |||||||||
Amortization of debt discount decreased during the three and nine months ended September 30, 2024, as compared to September 30, 2023 due to the change in outstanding debt related to the Green Tree acquisition reversal. Interest expense increased during the three and nine months ended September 30, 2024, as compared to September 30, 2023, due to the resumption of interest in Q3 2023 of the 12% Notes. The gain on warrant derivative liability reflects the change in the fair value of the 2019 Warrants which expired in Q2 2024. The loss on contingent earnout reflects the change in the fair value of the Green Tree Contingent Earnout liability which expired in Q2 2024.
Retail
| Three months
ended September 30, | Percent | |||||||||||||||
| 2024 | 2023 | Change | Change | |||||||||||||
| Revenues | $ | 3,298,839 | $ | 4,038,019 | $ | (739,180 | ) | (18 | )% | |||||||
| Costs and expenses | (2,750,610 | ) | (3,403,102 | ) | 652,492 | (19 | )% | |||||||||
| Segment operating income | $ | 548,229 | $ | 634,917 | $ | (86,688 | ) | 14 | % | |||||||
| Nine months
ended September 30, | Percent | |||||||||||||||
| 2024 | 2023 | Change | Change | |||||||||||||
| Revenues | $ | 10,673,842 | $ | 14,228,202 | $ | (3,554,360 | ) | (25 | )% | |||||||
| Costs and expenses | (8,848,802 | ) | (13,285,938 | ) | 4,437,136 | (33 | )% | |||||||||
| Segment operating income | $ | 1,825,040 | $ | 942,264 | $ | 882,776 | 94 | % | ||||||||
With the partial reversal of the acquisition of Green Tree in Q3 2023, retail revenue decreased for the three and nine months ended September 30, 2024, compared to September 30, 2023. Costs and expenses also decreased as a result of the partial acquisition reversal.
19
Cultivation
| Three months
ended September 30, | Percent | |||||||||||||||
| 2024 | 2023 | Change | Change | |||||||||||||
| Revenues | $ | 185,318 | $ | 415,963 | $ | (230,645 | ) | (55 | )% | |||||||
| Costs and expenses | (549,407 | ) | (1,272,117 | ) | 722,710 | (57 | )% | |||||||||
| Segment operating gain (loss) | $ | (364,089 | ) | $ | (856,154 | ) | $ | 492,065 | (57 | )% | ||||||
| Nine months
ended September 30, | Percent | |||||||||||||||
| 2024 | 2023 | Change | Change | |||||||||||||
| Revenues | $ | 778,109 | $ | 2,044,810 | $ | (1,266,701 | ) | (62 | )% | |||||||
| Costs and expenses | (1,369,489 | ) | (3,457,964 | ) | 2,088,475 | (60 | )% | |||||||||
| Segment operating loss | $ | (591,380 | ) | $ | (1,413,154 | ) | $ | 821,774 | (58 | )% | ||||||
The decrease in revenues for the three and nine months ended September 30, 2024 compared to September 30, 2023, is due to the closure of three cultivations during Q2 2023 and a reduction in grow operations at one of the remaining cultivations facilities in Q1 2023. The decrease in cost and expenses for the three and nine months ended September 30, 2024 compared to September 30, 2023 is attributed to the closure of three cultivations during Q2 2023 and a reduction in grow operations at one of the remaining cultivations facilities in Q1 2023. The costs and expense incurred between our dispensaries and cultivation locations are eliminated in consolidation.
Liquidity
Sources of liquidity
Our sources of liquidity historically have included the cash exercise of common stock options and warrants, debt, and the issuance of common stock or other equity-based instruments. We anticipate our significant uses of resources will include funding operations.
Sources and uses of cash
We had cash of $245,367 and $969,676 as of September 30, 2024 and December 31, 2023, respectively. Our cash flows from operating, investing and financing activities were as follows:
| Nine months ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Net cash used in operating activities | $ | (481,939 | ) | $ | (1,147,432 | ) | ||
| Net cash used in investing activities | $ | (45,631 | ) | $ | (265,858 | ) | ||
| Net cash (used in) provided by financing activities | $ | (196,739 | ) | $ | (918,852 | ) | ||
Net cash used in operating activities increased in 2024 due to the expiration and subsequent gain of the Green Tree contingent earnout and gain on extinguishment of debt due to the Centri promissory note.
Net cash used in investing activities for the nine months ended September 30, 2024 from September 30, 2023 decreased as a result of a lack of acquisition activity in 2024.
Net cash used in financing activities for the nine months ended September 30, 2024 decreased from September 30, 2023 due to the partial reversal of the acquisition of a portion of the Green Tree assets and the issuance of the 2024 Working Capital Note.
Capital Resources
We had no material commitments for capital expenditures as of September 30, 2024. Part of our growth strategy, however, is to acquire operating businesses. We expect to fund such activity through cash on hand, the issuance of debt, common stock, warrants for our common stock or a combination thereof.
20
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 one 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 judgment, 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 December, unless an event occurs that would cause us to believe the value is impaired at an interim date. See our Annual Report on Form 10-K for the year ended December 31, 2023, for discussion of the Company’s significant accounting policies.
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.
21
Debt with Equity-linked Features
We may issue debt that has separate warrants, conversion features, or other 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.
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.
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 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.
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
ASC Topic 606, “Revenue from Contracts with Customers” (“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, judgment and estimates may be required within the revenue recognition process 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. |
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial and Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.
We carried out an evaluation under the supervision and with the participation of management, including our Principal Executive Officer and Principal Financial and Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2024, the end of the period covered by this report. Based on that evaluation, our Principal Executive Officer and Principal Financial and Accounting Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2024.
Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by the Board, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
| ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| ● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures of are being made only in accordance with authorizations of our management and directors; and |
| ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. |
Because of inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during the third quarter of 2024, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, which have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in various claims and legal actions in the ordinary course of business. We are not currently subject to any material legal proceedings outside the ordinary course of our business.
ITEM 1A. RISK FACTORS
As of the date of this report, there have been no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
| Exhibits | ||
| 31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101 INS | Inline XBRL Instance Document. | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TREES CORPORATION | |
| Date: November 8, 2024 | /s/ Adam Hershey |
| Adam Hershey, Interim Chief Executive Officer | |
| Principal Executive Officer | |
| /s/ Edward Myers | |
| Edward Myers, Interim Chief Financial Officer | |
| Principal Financial and Accounting Officer |
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