TREES CORPORATION 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. TREES Corporation and its subsidiaries are
referred to collectively as "TREES" "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$2,583,833 as ofDecember 31, 2022 is not sufficient to absorb our operating losses and retire our notes payable of$17,802,932 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 in obtaining additional capital and (b) actions presently being taken to further implement our business plan to reduce costs and generate additional revenues provide the opportunity for the Company to continue as a 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.
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Consolidated Results
Year ended December 31, Percent
2022 2021 Change Change
Revenues $ 13,444,542 $ 5,927,199 $ 7,517,343 127 %
Costs and expenses (16,619,467) (8,940,185) (7,679,282) 86 %
Other expense (6,100,703) (5,414,165) (686,538) 13 %
Net loss from continuingoperations before income taxes (9,275,628) (8,427,151) (848,477) 10 % Gain (loss) from discontinued operations 5,478 (442,228) 447,706 (101) % Loss from operations before income taxes$ (9,270,150) $ (8,869,379) $
(400,771) 5 %
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 full year impact of the retail operations acquired in the Trees Acquisition acquired at the end of 2021 resulted in the significant increase in revenues for the year endedDecember 31, 2022 . The increase in retail revenue was partially offset by lower revenue in the Cultivation segment due primarily to a significant decline in the wholesale prices of marijuana flower. See Segment discussions below for further details. Costs and expenses Year ended December 31, Percent 2022 2021 Change Change Cost of sales$ 8,577,487 $ 4,439,478 $ 4,138,009 93 %
Selling, general and administrative 6,557,992 2,764,780
3,793,212 137 %
Stock-based compensation 188,330 307,963 (119,633) (39) %
Professional fees 964,282 927,390 36,892 4 %
Depreciation and amortization 331,376 500,574 (169,198) (34) %
$ 16,619,467 $ 8,940,185 $ 7,679,282 86 %
Cost of sales and selling, general and administrative expenses both increased
year over year primarily due to the full year impact of the retail operations
acquired in the Trees Transaction acquired at the end of 2022. See Segment
discussions below for further details. One-time bonus payments of $767,000 as
part of employment agreements for two former owners of the Green Tree Entities
also contributed to the increase in selling, general and administrative costs.
Stock-based compensation included the following:
Year ended December 31, Percent
2022 2021 Change Change
Stock-based awards $ 188,330 $ 307,963 $ (119,633) (39) %
$ 188,330 $ 307,963 $ (119,633) (39) %
Stock-based awards are issued under our 2020 Omnibus Incentive Plan, which was approved by shareholders onNovember 23, 2020 and our 2014 Equity Incentive Plan, which was approved by shareholders onJune 26, 2015 . Expense varies primarily due to the number of stock awards granted and the share price on the date of grant. The decrease in expense for the year endedDecember 31, 2022 as compared toDecember 31, 2021 is due to the decrease in the number of stock-based awards granted. 28 Table of Contents
Professional fees consist primarily of accounting, consulting and legal expenses and have remained consistent from 2021 to 2022.
Depreciation and amortization expense increased in 2022 due to an impairment of intangible assets in the Cultivation segment in 2021. As a result of the impairment, the depreciable base of the intangible asset was significantly reduced resulting in the lower amortization.
Other Expense
Year ended December 31, Percent
2022 2021 Change ChangeAmortization of debt discount$ 1,817,334 $ 689,348 $ 1,127,986 164 % Interest expense 983,181 622,469 360,712 58 % Loss on extinguishment of debt 310,622 233,374 77,248 33 % Loss on impairment of assets 3,004,319 3,010,420 (6,101) (0) % Gain (loss) on derivative liability (22,809) 990,066
(1,012,875) (102) %
Other expense (income), net 8,056 (131,512) 139,568 (106) %
$ 6,100,703 $ 5,414,165 $ 686,538 13 %
Amortization of debt discount increased during the year endedDecember 31, 2022 as compared toDecember 31, 2021 due to the senior convertible promissory notes with warrants ("12% Notes") issued inSeptember 2022 and the rollover and repayment of the 10% Notes. Interest expense increased during the year endedDecember 31, 2022 as compared toDecember 31, 2021 due to the additional borrowings from the issuance of the 12% Notes. The gain (loss) on warrant derivative liability reflects the change in the fair value of the 2019 Warrants. The loss on extinguishment of debt during 2022 relates to the rollover and repayment of the 10% Notes. The loss on extinguishment of debt for the year endedDecember 31, 2021 was due to the modification of warrants that occurred on the 15% Warrants during the third quarter of 2021. The loss on impairment of assets in 2022 is due primarily to goodwill and intangible impairments at our Trees Oregon locations included in our Retail Segment. The loss on impairment of assets in 2021 is due to goodwill and intangible impairments in our Cultivation Segment. Retail Year ended December 31, Percent 2022 2021 Change Change Revenues$ 12,934,904 $ 3,515,761 $ 9,419,143 268 % Costs and expenses (13,117,039) (3,112,595) (10,004,444) 321 % Segment operating income$ (182,135) $ 403,166 $ (585,301) (145) % With the addition of the Trees Englewood dispensary onSeptember 2, 2021 and the addition of Treees Portland and Trees Waterfront onDecember 30, 2021 , we have established our retail footprint in theColorado andOregon markets and have become a vertically integrated company. We continued to expand our retail footprint inOregon with the addition of the Trees MLK dispensary inJanuary 2022 and inColorado with the Green Man Acquisition and Green Tree Acquisition inDecember 2022 . The dispensaries acquired in the Green Man Acquisition and Green Tree Acquisition did not have a material impact on the Retail segment results in 2022. The increase in revenue in the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 is due to the full year impact of the Trees retail locations. The increased costs and expenses in 2022 include$2.7 million of non-cash goodwill and intangible asset impairment charges. The Retail Segment is expected to provide consistent positive cash flows which will significantly contribute to our working capital position. 29 Table of Contents Cultivation Year ended December 31, Percent 2022 2021 Change Change Revenues$ 1,693,762 $ 2,722,059 $ (1,028,297) (38) % Costs and expenses (2,643,457) (6,273,162) 3,629,705 (58) %$ (949,695) $ (3,551,103) $ 2,601,408 (73) %
This decrease in revenues for the year endedDecember 31, 2022 as compared toDecember 31, 2021 , is due to significant declines in the wholesale price of marijuana flower. The costs and expenses include non-cash goodwill and intangible asset impairment charges of$0.3 million and$3.0 million for the years endedDecember 31, 2022 and 2021, respectively.
Non-GAAP Financial Measures
Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA
as net loss calculated in accordance with GAAP, adjusted for discontinued
operations, the impact of stock-based compensation expense, acquisition related
expenses, non-recurring professional fees in relation to litigation and other
non-recurring expenses, depreciation and amortization, amortization of debt
discounts and equity issuance costs, loss on extinguishment of debt, interest
expense, income taxes and certain other non-cash items. Below we have provided a
reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure,
which is net loss.
We believe that the disclosure of Adjusted EBITDA provides investors with a
better comparison of our period-to-period operating results. We exclude the
effects of certain items when we evaluate key measures of our performance
internally and in assessing the impact of known trends and uncertainties on our
business. We also believe that excluding the effects of these items provides a
more comparable view of the underlying dynamics of our operations. We believe
such information provides additional meaningful methods of evaluating certain
aspects of our operating performance from
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period to period on a basis that may not be otherwise apparent on a GAAP basis.
This supplemental financial information should be considered in addition to, not
in lieu of, our consolidated financial statements.
Year ended
2022 2021
Net loss from continuing operations$ (9,480,545) $ (8,427,151) Adjustment for loss from discontinued operations 5,478
(442,228)
Net loss (9,475,067) (8,869,379)
Adjustments:
Stock-based compensation 188,330 307,963Depreciation and amortization 331,376
500,574
Amortization of debt discount and equity issuance costs 1,817,334
689,348
Loss on extinguishment of debt 310,622
233,374
Loss on impairment of assets 3,004,319 3,010,420
Interest expense 983,181 622,469
Gain on sale of assets 8,056 (131,512)(Gain) loss on derivative liability (22,809)
990,066
Severance 4,731 40,962
Acquisition related expenses 1,027,099 264,312Nonrecurring professional services -
115,054
Provision for income taxes 204,917 -
Total adjustments 7,857,156 6,643,030
Adjusted EBITDA $ (1,617,911) $ (2,226,349)
Liquidity
Sources of liquidity
Our primary sources of liquidity include cash proceeds from debt, cash generated
from operations, the cash exercise of Common Stock options and warrants, and the
issuance of Common Stock or other equity-based instruments. We anticipate our
more significant uses of resources will include funding operations and
additional business acquisitions.
In September 2022 , we received $9,912,250 in cash, net of debt issue costs. We
received the cash in a private placement with certain accredited investors
pursuant to the 12% Notes and was used to repay a portion of the 10% Notes, and
to fund the acquisition of the Green Tree Entities and Green Man, and to fund
operations.
In
In February and
Sources and uses of cash
We had cash of approximately
Year ended December 31,
2022 2021
Net cash used in operating activities
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Net cash used in operating activities decreased in 2022 due to due cash generated from the full year operations of the dispensaries acquired in the Trees Transaction. The decrease was partially offset by additional costs associated with the completion of the Green Man Acquisition and Green Tree Acquisition.
Net cash used in investing activities for the year endedDecember 31, 2022 consisted primarily of$1,971,975 for the purchase Trees MLK, Green Man, and the Green Tree Entities. Net cash used in investing activities for the year endedDecember 31, 2021 consisted primarily of$1,439,027 for the acquisition of the first three dispensaries of the Trees Transaction. 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 issuance of the 12% Notes, partially offset by repayment of a portion of the 10% Notes and payments on the notes payable to the sellers in the Trees Transaction.
Capital Resources
We have no material commitments for capital expenditures as ofDecember 31, 2022 . 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, and 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 inthe 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.
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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 December, unless an event occurs that would cause 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.
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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.
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
OnJanuary 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 existingU.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.
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