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, par value $0.01 per share (“Common Stock”), on June 30, 2022, was $
As of April 15, 2023, the Registrant had
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 TREES Corporation 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,” “TREES,” and the “Company” in this Report refer to TREES Corporation.
ITEM 1. BUSINESS.
Business Summary
TREES Corporation is a cannabis retailer and cultivator in the States of Colorado and Oregon.
We presently operate eight (8) cannabis dispensaries as follows:
| ● | Englewood, Colorado – 5005 S. Federal Boulevard –Recreational license only |
| ● | Two (2) in Denver, Colorado |
| o | 468 S. Federal Boulevard –Recreational license only |
| o | East Hampden Avenue (formerly Green Man) –Recreational license only |
| ● | Longmont, Colorado |
| o | 12626 N. 107th Street (formerly Green Tree/Ancient Alternatives) – Medical and Recreational licenses |
| ● | Berthoud, Colorado |
| o | 1090 N. 2nd Street (formerly Green Tree/Natural Alternatives for Life) – Medical and Recreational licenses |
| ● | Three (3) in Oregon |
| o | SW Corbett Avenue, Portland, OR – Medical and Recreational licenses |
| o | NE 102nd Avenue, Portland, OR – Medical and Recreational licenses |
| o | 7050 NE MLK, Portland, OR – Medical and Recreational licenses |
We also operate five (5) cultivation facilities in Colorado as follows:
| ● | SevenFive Farm – 3705 N. 75th Street, Boulder – Retail cultivation license only |
| ● | 6859 N. Foothills Highway D-300 (formerly Green Tree/Ancient Alternatives) – Medical and Retail cultivation licenses |
| ● | 6859 N. Foothills Highway C-100 (formerly Green Tree/Mountainside Industries) – Medical and Retail cultivation licenses |
| ● | 6859 N. Foothills Highway E-100 (formerly Green Tree/Hillside Enterprises) – Retail cultivation license only |
| ● | 1090 N. 2nd Street (formerly Green Tree/Natural Alternatives for Life) – Medical cultivation license only |
Our principal business model is to acquire, integrate and optimize cannabis companies in the retail and cultivation segments utilizing the combined experience of entrepreneurs and synergistic operations of our vertically integrated network.
Business Strategy and Recent Transactions
As the cannabis industry becomes more mature, we focus on (1) identifying licensed cannabis assets that we can acquire, (2) executing our business strategy 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 customer loyalty and advocacy. To that end, during the years ended 2022 and 2021, we implemented the following significant actions in support of our continued growth:
| ● | In February 2023, we completed the acquisition of Station 2, LLC, the assets of which consist of a dispensary located in Denver, CO. The consideration paid by the Company consists of cash at closing equal to $256,582 plus an additional $385,873 in twenty-four (24) equal monthly payments commencing May 2023. Timothy |
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| Brown, one of our Board members, was the sole owner of Station 2 and has and will receive all consideration described above. |
| ● | In December 2022, we completed the acquisition of substantially all of the assets of Green Man Cannabis (“Green Man”, the overall transaction is referred to as the “Green Man Acquisition”). Green Man equity holders received cash equal to $1,225,000 together with an aggregate of 4,494,382 shares of the Common Stock. An additional $1,500,000 in cash will be paid out in eighteen (18) equal monthly payments equal to $83,333.33 per month commencing on the 12-month anniversary of the closing. |
| ● | Also in December 2022, we completed 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”, the overall transaction is referred to herein as the “Green Tree Acquisition”). At the closing, the Company delivered to the Green Tree Entities an aggregate of cash equal to $500,000 and delivered to equity holders of the Green Tree Entities an aggregate of 17,977,528 shares of Common Stock. An additional $3,500,000 in cash will be paid by the Company to the Green Tree Entities in fifteen (15) equal monthly payments commencing on the 9-month anniversary of the closing. The number of shares is subject to adjustment based upon a formula specified in the definitive purchase agreement. We assumed certain operating obligations at closing, including certain manufacturing agreements between GT Creations and affiliates of the Green Tree Entities. |
Allyson Feiler, a principal owner of the Green Tree Entities, was elected to our Board of Directors of the effective December 12, 2022.
| ● | In September 2022, we completed a private offering in which we issued and sold to accredited investors senior secured convertible notes (the "2022 Notes”) with an aggregate principal amount of $13,500,000 ("Principal Amount”) to such investors ("2022 Note Offering”), in exchange for payment to the Company by certain of the investors of an aggregate amount of $10,587,250 in cash, as well as cancellation of outstanding indebtedness in the aggregate amount of $2,912,750 represented by certain prior promissory notes we issued in December 2020 and April 2020. In connection with the 2022 Note Offering, Investors received warrants to purchase shares of the Company’s Common Stock equal to 20% coverage of the aggregate principal amount at $0.70 per share, which equals an aggregate of warrants to purchase 3,857,150 shares of the Common Stock. The lead Investor ("Lead Investor”) received an additional 10% warrant coverage on the aggregate principal amount of Notes for total additional warrants to purchase 1,928,571 shares of Common Stock. The Lead Investor also will receive a five percent cash fee on the aggregate principal amount of Notes, payable by the Company; one-half of such fee may be deferred by the Company for up to five months from the closing. |
The Notes will bear interest at an annual rate of 12% and will mature on September 16, 2026 (the "Maturity Date”). 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 fixed conversion price equal to $1.00 per share. The Warrants are exercisable at an exercise price of $0.70 per Warrant, subject to adjustment as provided in the Warrants, at any time prior to the earlier of the Maturity Date and an Acquisition (as defined in the Warrants). Payment on the Notes is secured by substantially all of the assets of the Company pursuant to a Security Agreement by and among the Company and the Investors.
| ● | In December 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. |
| ● | In September 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 to purchase shares of our Common Stock The total number of Units sold |
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| 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. |
| ● | Also in September 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. |
| ● | In July 2021, we entered into an Asset Purchase Agreement with NBC Holdings LLC and Richard Cardinal (“NBC 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 NBC 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 NBC Buyer in the states of Michigan, Mississippi and Massachusetts for a period of twelve months from the Closing. Pursuant to amendment, NBC Buyer paid the additional $75,000 in March 2022, and the 10% profit share described above was eliminated. |
| ● | In April 2021, we completed an offering with accredited investors, pursuant to which the Company issued and sold convertible notes (“2021 Notes”) with an aggregate principal amount of $2.3 million to such Investors (“2021 Note 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 2021 Note 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 2021 Note 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. |
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 TREES and its wholly-owned subsidiary companies, each a Colorado corporation or limited liability company:
| ● | 6565 E. Evans Owner LLC |
| ● | GC Corp |
| ● | GC Capital Corp, LLC |
| ● | GC Security LLC |
| ● | General Cannabis Capital Corporation |
| ● | Standard Cann, Inc. |
| ● | SevenFive Farms Cultivation, LLC |
| ● | SevenFive Farms, LLC |
| ● | Trees Colorado LLC |
| ● | Trees Oregon LLC |
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| ● | Green Tree Colorado LLC |
| ● | GT Cultivation LLC |
| ● | GT Retail LLC |
| ● | GT MIP LLC |
| ● | Green Man Cannabis, LLC |
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.
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.
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Government and Industry Regulation
Cannabis continues to be 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 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.”
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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:
| ● | Capital Lending and Investment for Marijuana Businesses Act (CLIMB Act) – introduced June 2022 – would: |
| ● | Permit public agencies to provide financial support to the cannabis industry; |
| ● | Provide protection to service providers (investment banks, law firms, accounting firms); and |
| ● | Provide access to public capital markets by amending the Exchange Act to create a ‘safe harbor’ for the listing of cannabis businesses on a national securities exchange, such as the NYSE and Nasdaq. |
| ● | SAFE Banking Act. This would protect financial institutions that offer services to state-legal cannabis-related business. |
| ● | 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. |
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.
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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 |
| ● | 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
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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 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.
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Human Capital
As of December 31, 2022, we had approximately 150 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 215 Union Boulevard, Suite 415, Lakewood, Colorado 80228; 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.
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; |
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| ● | 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 $9.5 million and $8.9 million, respectively, in the years ended December 31, 2022 and 2021. As of December 31, 2022, we had an accumulated deficit of approximately $93.4 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.
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
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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 September 30, 2023. 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 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
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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 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
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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 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.
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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.
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
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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 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.
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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.
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
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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 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.
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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 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.
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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, 2022, the closing price of our Common Stock has ranged from a low of $ 0.12 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. |
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.
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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. Accordingly, we continue to be listed on the OTCQB, which as an over-the-counter market, is subject to greater volatility and less stability than would be the case on a national securities exchange. 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 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.
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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, 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.
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ITEM 2. PROPERTIES
The Company’s corporate headquarters are located in Lakewood, Colorado, pursuant to an operating lease. As of April 6, 2023, the Company also leases 8 retail dispensary locations, 5 cultivation facilities, and one production facility.
The following table sets forth the Company’s significant properties within each reporting segment:
Description | Location | Segment | Leased / Owned | Initial lease date | ||||
Corporate Headquarters | 215 Union Boulevard, Suite 415, | NA | Operating lease | January 2023 | ||||
Englewood Dispensary | 5005 S. Federal Blvd., | Retail | Operating lease | September 2021 | ||||
Berthoud Dispensary | 1090 N. 2nd Street, | Retail | Operating lease | December 2022 | ||||
Longmont Dispensary | 12626 N. 107th Street, | Retail | Operating lease | December 2022 | ||||
Hampden Dispensary | 7289 East Hampden Avenue, | Retail | Finance lease | December 2022 | ||||
468 Dispensary | 468 S. Federal Boulevard, | Retail | Operating lease | February 2023 | ||||
102nd Street Dispensary | 1244 NE 102nd Avenue, | Retail | Operating lease | December 2021 | ||||
Waterfront Dispensary | 3605 and 3607 SW Corbett Avenue, | Retail | Operating lease | December 2021 | ||||
MLK Dispensary | 7048 - 7050 NE MLK Blvd., | Retail | Operating lease | January 2022 | ||||
SevenFive Cultivatiion Facility | 3705 75th Street, | Cultivation | Operating lease | May 2020 | ||||
Hillside Cultivation Facility | 6859 North Foothills Highway, Building E, | Cultivation | Operating lease | December 2022 | ||||
Mountainside Cultivation Facility | 6859 North Foothills Highway, Building C, | Cultivation | Operating lease | December 2022 | ||||
Ancient Alternatives Cultivation Facility | 6859 North Foothills Highway, Building D, | Cultivation | Operating lease | December 2022 | ||||
2nd Street Cultivation Facility | 1090 N. 2nd Street, | Cultivation | Operating lease | December 2022 | ||||
Marijuana Infused Products Production | 6859 North Foothills Highway,Building E, | Retail | Operating lease | December 2022 |
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, we were served with a Complaint in the District Court, County of Denver, Colorado, by plaintiff 2353 SB, LLC (“Plaintiff”). We entered into a lease with Plaintiff for the premises at 2353 South Broadway, Denver, CO with a term of three (3) years to commence on November 1, 2020. Monthly lease payments were to be $12,866.66. In 2020, we made initial payments (first month’s rent, last month’s rent, and security deposit) of $39,633.32; but subsequently did not take possession of the premises and have made no further payments in respect thereof, as a direct result of the COVID-19 pandemic. The lease contains a ‘force majeure’ clause which includes a provision that neither party is liable for failure to perform its obligations under the lease which have become practicably impossible because of circumstances beyond the reasonable control of the applicable party, including ‘pandemics or outbreak of communicable disease.
We have taken the position that our failure to take possession and make any further payments under the lease is directly related to the COVID-19 pandemic. We are vigorously defending this action and believe that the above-referenced force majeure clause presents a complete defense to Plaintiff’s claims.
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We filed a motion to dismiss or a motion for summary judgment in the alternative. Plaintiff filed a response and cross-motion for summary judgment thereafter. In October 2022, the court denied the motion to dismiss on the basis that Plaintiff sufficiently pled facts that raise a plausible claim for relief, notwithstanding our possible defenses, but has not specifically made any rulings on either party’s motion for summary judgment. On November 14, 2022, we timely filed a formal answer to the complaint, denying each of Plaintiff’s substantive claims. We also asserted appropriate affirmative defenses, including the force majeure clause of the lease, which provides that we are not liable under the lease in the event of a variety of events outside our control, including “pandemics.” In addition, we have asserted a counterclaim against Plaintiff for breach of contract to recover the initial payments made under the lease as well as attorneys’ fees and costs. The trial is currently scheduled for September 2023.
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
TREES Corporation Common Stock (CANN) is listed for trading on the OTC Market’s OTCQB.
Holders
As of April 15, 2023, we had approximately 81 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 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. RESERVED
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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. 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 of December 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 continuing operations 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 ended December 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 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 awards granted and the share price on the date of grant. The decrease in expense for the year ended December 31, 2022 as compared to December 31, 2021 is due to the decrease in the number of stock-based awards granted.
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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 |
| Change |
| ||||
Amortization 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 ended December 31, 2022 as compared to December 31, 2021 due to the senior convertible promissory notes with warrants (“12% Notes”) issued in September 2022 and the rollover and repayment of the 10% Notes. Interest expense increased during the year ended December 31, 2022 as compared to December 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 ended December 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 on September 2, 2021 and the addition of Treees 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. We continued to expand our retail footprint in Oregon with the addition of the Trees MLK dispensary in January 2022 and in Colorado with the Green Man Acquisition and Green Tree Acquisition in December 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 ended December 31, 2022 compared to the year ended December 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.
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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 ended December 31, 2022 as compared to December 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 ended December 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 December 31, | ||||||
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 |
| 307,963 | ||
Depreciation 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 | 264,312 | ||||
Nonrecurring 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 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 $2,583,833 and 2,054,050, respectively, on December 31, 2022 and 2021. Our cash flows from operating, investing, and financing activities were as follows:
Year ended December 31, | ||||||
2022 | 2021 | |||||
Net cash used in operating activities |
| $ | (2,049,857) |
| $ | (2,651,889) |
Net cash used in investing activities | $ | (1,945,586) | $ | (978,739) | ||
Net cash provided by financing activities | $ | 4,525,226 | $ | 4,928,909 | ||
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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 ended December 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 ended December 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 of December 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 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
32
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.
33
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
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.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of TREES Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of TREES Corporation (the Company) as of December 31, 2022 and 2021, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years ended December 31, 2022 and 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, 2022 and 2021, and the results of its operations and its cash flows for each of the years ended, in conformity with accounting principles generally accepted in the United States of America.
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 a 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.
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 consolidated financial statements, the Company acquired several entities as follows: Trees Englewood on September 2, 2021, Trees Portland, LLC and Trees Waterfront, LLC on December 30, 2021, Trees MLK
35
Inc. on January 5, 2022, Green Tree entities on December 12, 2022, and Green Man Cannabis on December 19, 2022, in separate business combinations. Management of the Company estimated the preliminary allocation of the purchase price to cash, fixed assets, inventory, trade names, and goodwill based on the industry experience and values until the formal third-party valuation is completed. The accounting for the purchase price allocation is complex due to the significant estimation uncertainty in determining the fair values of identified intangibles. The Company’s third-party valuation was completed for Trees Englewood, Trees Portland, LLC, Trees Waterfront, LLC, and Trees MLK Inc. as of the year ended December 31, 2022. The Company’s third-party valuation of the rest of the entities is yet to be completed.
We deem the purchase price allocation as a significant audit matter because of the significant estimates and assumptions made by management to estimate the fair value of trade names and allocation to goodwill. These estimates include the 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 use of valuation specialists.
Addressing the matter involved obtaining the purchase agreements and interpreting the terms are in agreement with the 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. For valuations completed by the third-party specialist, we evaluated the expertise, qualifications, and independence of the management’s specialist engaged to complete the evaluation. 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 goodwill of $18,384,974 on December 31, 2022, after recognizing impairment expense of $2,450,941 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, 2022. 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 the management’s specialist engaged to complete the evaluation. 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.
| |
April 17, 2023 | |
We have served as the Company’s auditor since 2021. (PCAOB ID | |
36
TREES CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2022 | December 31, 2021 | |||||
Assets |
|
|
|
| ||
Current assets |
|
|
|
| ||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net of allowance of $ |
| |
| | ||
Current portion of notes 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 |
|
| ||||
Current liabilities |
|
|
| |||
Accounts payable and accrued expenses | $ | | $ | | ||
Interest payable |
| |
| | ||
Income tax payable | | — | ||||
Operating lease liability, current | | | ||||
Finance lease liability, current | | — | ||||
Accrued stock payable |
| |
| | ||
Accrued dividends | | — | ||||
Warrant derivative liability |
| |
| | ||
Notes payable - current | | | ||||
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 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.
37
TREES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, | |||||||
2022 | 2021 | ||||||
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 | | | |||||
Interest expense | | | |||||
Loss on extinguishment of debt | | | |||||
Loss on impairment of assets | | | |||||
(Gain) loss on derivative liability | ( | | |||||
Other expense (income), net | | ( | |||||
Total other expenses, net | | | |||||
Net loss from continuing operations before income taxes | ( | ( | |||||
Provision for income taxes | | — | |||||
Loss from continuing operations | ( | ( | |||||
Income (loss) from discontinued operations, net of tax | | ( | |||||
Net loss | $ | ( | $ | ( | |||
Accrued preferred stock 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.
38
TREES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, | ||||||
2022 | 2021 | |||||
Cash flows from operating activities |
|
|
| |||
Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
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| |||
Amortization of debt discount and equity issuance costs |
| |
| | ||
Depreciation and amortization |
| |
| | ||
Loss on extinguishment of debt | | | ||||
Lease expense in excess of lease payments | | | ||||
Provision for bad debt | ( | | ||||
Impairment of assets | | | ||||
Loss on disposal of property and equipment | | | ||||
(Gain) loss on warrant derivative liability |
| ( |
| | ||
Stock-based compensation |
| |
| | ||
Gain on investment | — | ( | ||||
Changes in operating assets and liabilities, net of acquisitions |
|
| ||||
Accounts receivable |
| |
| | ||
Prepaid expenses and other assets |
| ( |
| | ||
Inventories |
| |
| | ||
Income taxes | | — | ||||
Accounts payable and accrued liabilities | | ( | ||||
Net cash used in operating activities: |
| ( |
| ( | ||
Cash flows from investing activities |
|
|
|
| ||
Purchase of property and equipment |
| ( |
| ( | ||
Proceeds for sale of equipment | | — | ||||
Lending on note receivable | — | ( | ||||
Proceeds on notes receivable | | | ||||
Acquisition of TDM, LLC | — | ( | ||||
Acquisition of Trees MLK | ( | — | ||||
Acquisition of Trees Portland, net of cash acquired | — | ( | ||||
Acquisition of Trees Waterfront, net of cash acquired | — | ( | ||||
Acquisition of Green Tree Entities, net of cash acquired | ( | — | ||||
Acquisition of Green Man Corp, net of cash acquired | ( | — | ||||
Net proceeds from sale of Next Big Crop | — | | ||||
Proceeds from sale of investment | — | | ||||
Net cash used in investing activities |
| ( |
| ( | ||
Cash flows from financing activities |
|
|
| |||
Proceeds from exercise of stock options | — | | ||||
Proceeds from preferred stock offering | — | | ||||
Proceeds from notes payable | | | ||||
Payments on notes payable and finance lease | ( | ( | ||||
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 |
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| ||
Cash paid for interest | $ | | $ | | ||
Non-cash investing & financing activities |
|
|
|
| ||
Non-cash settlement of notes payable netted against proceeds from new notes issuance | $ | | $ | — | ||
Issuance of accrued stock | $ | | ||||
$ | | $ | — | |||
$ | | $ | — | |||
Accrued dividends on preferred stock | $ | | $ | — | ||
Cashless warrant exercise | $ | — | $ | | ||
Beneficial conversion feature | $ | — | $ | | ||
$ | — | $ | | |||
Issuance of Common Stock to a consultant | $ | — | $ | | ||
The accompanying notes are an integral part of these consolidated financial statements.
39
TREES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Additional | |||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Accumulated | ||||||||||||||||
| Shares | Amount | Shares |
| Amount |
| Capital |
| Deficit |
| Total | ||||||||
January 1, 2021 | — | $ | — | | $ | | $ | | $ | ( | $ | | |||||||
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 | | | | | | ( | | ||||||||||||
Common Stock issued for acquisition of Trees Waterfront LLC |
| — | — | | | | — | | |||||||||||
Common Stock issued for acquisition of Trees MLK LLC | — | — | | | | — | | ||||||||||||
Common Stock issued for Green Tree Acquisition |
| — | — | | | | — |
| | ||||||||||
Common Stock issued Green Man Acquisition | — | — | | | | — | | ||||||||||||
Warrants issued with | — | — | — | — | | — | | ||||||||||||
Share-based compensation | — | — | — | — | | — | | ||||||||||||
Dividends on preferred stock |
| — | — | — | — | — | ( |
| ( | ||||||||||
Net loss |
| — | — | — |
| — |
| — |
| ( |
| ( | |||||||
December 31, 2022 |
| | $ | | | $ | | $ | | $ | ( | $ | | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
40
TREES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS, HISTORY AND PRESENTATION
Nature of Operations
TREES Corporation, a Colorado Corporation (the “Company,” “we,” “us,” “our,” or “TREES”) (formerly, General Cannabis Corp), 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, 2022, our operations are segregated into the following segments:
Retail (“Retail Segment”)
Through a series of acquisitions in 2021 and 2022, we operated four retail dispensaries in Colorado and three retail dispensaries in Oregon as of December 31, 2022. See Note 2 for details of the acquisitions. We acquired the license for an additional dispensary in Colorado in February of 2023, and opened that location in April 2023.
Cultivation (“Cultivation Segment”)
Through our acquisition of SevenFive Farm in May 2020, we operate a licensed
Discontinued Operations
Through Next Big Crop, LLC (“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 TREES and its nine wholly-owned (direct and indirect) subsidiary companies, each a Colorado corporation or limited liability company:
| ● | 6565 E. Evans Owner LLC |
| ● | GC Corp |
| ● | GC Capital Corp, LLC |
| ● | GC Security LLC |
| ● | General Cannabis Capital Corporation |
| ● | Standard Cann, Inc. |
| ● | SevenFive Farms Cultivation, LLC |
| ● | SevenFive Farms, LLC |
| ● | Trees Colorado LLC |
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| ● | Trees Oregon LLC |
| ● | Green Tree Colorado LLC |
| ● | GT Cultivation LLC |
| ● | GT Retail LLC |
| ● | GT MIP LLC |
| ● | Green Man Cannabis, LLC |
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 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, 2022 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. The Company may need additional funding to support its planned investing activities. If the Company is unable to obtain additional funding, it would be forced to delay, reduce, or eliminate some or all of its acquisition efforts, which could adversely affect its business prospects.
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.
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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.
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.
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. We recognize ROU assets and lease liabilities on the balance sheet for leases with a lease term of greater than one year. The Company elected to combine the lease and related non-lease components (common area maintenance and operating costs) and treat them as a single lease component. ROU assets and lease liabilities are recognized at the commencement date of the lease based on the present value of the fixed lease payments over the lease term. The Company’s operating leases include options to extend or terminate the lease, which are not included in the determination of the ROU asset or lease liability unless reasonably certain to be exercised. Payments that are not fixed at the commencement of the lease are considered variable and are excluded from the measurement of the ROU asset and lease liability and are expensed as incurred in the statement of operations. Variable payments typically included payment for common area maintenance and reimbursement of the landlords operating costs as the amounts change from year to year based on actual costs incurred. 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. For the Company’s finance lease, interest expense is recognized on the lease liability using the effective interest method and depreciation of the finance lease ROU asset 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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Land is not depreciated. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations.
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.
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.
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 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-
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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, 2022 and 2021.
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, 2022 and 2021.
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).
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
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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) retail product sales; and (ii) wholesale 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 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.
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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.
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-
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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, 2022 and 2021, determined that there were
In general, the tax returns for the years ending December 31, 2019 through 2021 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.
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 Accounting Standards Update (“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 adopted this ASU in the first quarter of 2022, and the adoption did not have a material effect on our financial statements.
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NOTE 2. ACQUISITIONS
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 final estimates of the acquisition date fair values of the assets acquired:
Cash | $ | | |
Fixed assets |
| | |
Inventory | | ||
Tradename | | ||
Goodwill |
| | |
$ | |
Compared to the estimated purchase price allocation reported in our financial statements included in Item 8 of our Form 10-K for the year ended December 31, 2021 filed with the SEC on March 25, 2022, the final purchase price estimate resulted in a reduction of tradename intangible assets and a corresponding increase to goodwill of $
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, 2021, are as follows:
| Year ended | ||
December 31, | |||
2021 | |||
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 (together “Trees Oregon”), 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 $
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The table below reflects the Company’s final estimates of the acquisition date fair values of the assets acquired:
Cash | $ | | |
Fixed assets |
| | |
Inventory | | ||
Tradename | | ||
Goodwill |
| | |
$ | |
Compared to the estimated purchase price allocation reported in our financial statements included in Item 8 of our Form 10-K for the year ended December 31, 2021 filed with the SEC on March 25, 2022, the final purchase price estimate resulted in a reduction of tradename intangible assets and a corresponding increase to goodwill of $
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 | |||
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 January 5, 2022, we completed the acquisition of substantially all of the assets of Trees MLK Inc. (“MLK”), representing the remaining Oregon dispensary in connection with the overall Trees transaction. We paid cash in the amount of $
The table below reflects the Company’s final estimates of the acquisition date fair values of the assets acquired:
Fixed assets |
| $ | |
Tradename | | ||
Goodwill |
| | |
$ | |
As the MLK dispensary was not operating until the second quarter of 2022, the were no material results of operations prior to the acquisition date. As such, there would be no material proforma impact on the Company’s operating results.
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 $
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such, fair value of the equity consideration is $
The table below reflects the Company’s preliminary estimates of the acquisition date fair values of the assets acquired:
Cash |
| $ | |
Inventory | | ||
Fixed assets | | ||
Tradename | | ||
Goodwill |
| | |
$ | |
We have not completed the allocation of the purchase price for the Green Tree Acquisition. As of December 31, 2022, the consolidated balance sheet includes a preliminary allocation of fixed assets, inventory, intangible assets, and goodwill. Management anticipates completing the purchase price allocation as soon as possible, but no later than one year from the acquisition date.
The accompanying consolidated financial statements include the results of the Green Tree Entities from the date of acquisition for financial reporting purposes, December 12, 2022. The pro forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2021, are as follows:
| Year ended | |||||
December 31, | ||||||
2022 | 2021 | |||||
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 pro-forma results of operations are presented for information purpose only. The unaudited pro-forma results are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2021, or to project potential operating results as of any future date or for any future periods.
On December 19, 2022, we completed the Green Man Acquisition, consisting of the acquisition of substantially all of the assets of Green Man. We paid cash in the amount of $
The table below reflects the Company’s preliminary estimates of the acquisition date fair values of the assets acquired:
Cash |
| $ | |
Inventory | | ||
Fixed assets | | ||
Tradename | | ||
Goodwill |
| | |
$ | |
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We have not completed the allocation of the purchase price for the Green Man Acquisition. As of December 31, 2022, the consolidated balance sheet includes a preliminary allocation of fixed assets, inventory, intangible assets, and goodwill. Management anticipates completing the purchase price allocation as soon as possible, but no later than one year from the acquisition date.
The accompanying consolidated financial statements include the results of Green Man from the date of acquisition for financial reporting purposes, December 19, 2022. The pro forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2021, are as follows:
| Year ended | |||||
December 31, | ||||||
2022 | 2021 | |||||
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 pro-forma results of operations are presented for information purpose only. The unaudited pro-forma results are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2021, or to project potential operating results as of any future date or for any future periods.
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 NBC for a total of $
A breakdown of the results of discontinued operations related to the sale of NBC are presented as follows:
Year ended | ||||||
December 31, | ||||||
2022 | 2021 | |||||
Product revenues |
| $ | |
| $ | |
Service revenues | — | | ||||
Total revenues | | | ||||
Cost of sales | — | | ||||
Selling, general and administrative | ( | | ||||
Professional fees | — | | ||||
Depreciation and amortization | — | | ||||
Total costs and expenses | ( | | ||||
Income (loss) from discontinued operations | $ | | $ | ( | ||
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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 years ended December 31, 2022 and 2021.
Year ended | |||||||
December 31, | |||||||
| 2022 |
| 2021 | ||||
Accounts receivables | $ | — | $ | | |||
Prepaid expenses and other current assets | — | | |||||
Depreciation and amortization | — | | |||||
Capital expenditures | — | — | |||||
Accounts payable and accrued expenses | — | ( | |||||
Customer deposits | — | ( | |||||
NOTE 4. ACCOUNTS RECEIVABLE
Our accounts receivable consisted of the following:
December 31, | ||||||
| 2022 |
| 2021 | |||
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 $
NOTE 5. NOTES RECEIVABLE
On August 2, 2021, as part of the closing of the sale of NBC, we agreed to a note receivable of $
NOTE 6. INVENTORIES, NET
Our inventories consistent of the following:
December 31, | December 31, | |||||
| 2022 |
| 2021 | |||
Raw materials | $ | | $ | | ||
Work-in-progress and finished goods | | | ||||
Inventories | $ | | $ | | ||
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NOTE 7. PREPAIDS AND OTHER CURRENT ASSETS
Our prepaids and other current assets consist of the following:
December 31, | ||||||
| 2022 |
| 2021 | |||
Security deposits | $ | | $ | | ||
Prepaid insurance | | | ||||
Other |
| |
| | ||
Total prepaids and other current assets | $ | | $ | | ||
NOTE 8. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
December 31, | ||||||
| 2022 |
| 2021 | |||
Furniture, fixtures and equipment | $ | | $ | | ||
Finance lease ROU -building | | — | ||||
Software |
| |
| | ||
Biological assets | | | ||||
Total |
| |
| | ||
Less: Accumulated depreciation |
| ( |
| ( | ||
Total property and equipment, net | $ | | $ | | ||
Depreciation expense was $
NOTE 9. INTANGIBLE ASSETS AND GOODWILL
Intangible assets
During the years ended December 31, 2022 and 2021, the Company acquired trade name intangible assets through several acquisitions. See Note 2 for further details of these acquisitions. The amount of trade name intangible assets acquired in each transaction is shown in the table below.
Useful life | |||||||
Transaction | Acquisition Date | Amount | (in years) | ||||
Green Man Acquisition (1) | December 2022 | $ | | ||||
Green Tree Acquisition (1) | December 2022 | $ | | ||||
Trees MLK Acquisition (2) | January 2022 | $ | | ||||
Trees Portland Acquisition | December 2021 | $ | | ||||
Trees Waterfront Acquisition (2) | December 2021 | $ | | ||||
Trees Englewood Acquisition | September 2021 | $ | | ||||
| (1) | The purchase price allocation for this acquisition has not been finalized, therefore this amount could be subsequently adjusted. Note that the useful life takes into account that management plans to re-brand the acquired stores under the TREES tradename. |
| (2) | The trade name intangible asset for these acquisitions was fully impaired in 2022. See discussion of impairment charges below in this footnote. |
54
The following table summarizes the change in the Company’s tradename intangible assets from December 31, 2021 to December 31, 2022:
| Gross | Accumulated Amortization | Net | ||||||
Balance as of December 31, 2021 | $ | | $ | ( | $ | | |||
Purchase price allocation adjustments (see Note 2) | ( | — | ( | ||||||
Tradename intangibles acquired | | — | | ||||||
Amortization | — | ( | ( | ||||||
Impairment | ( | — | ( | ||||||
Balance as of December 31, 2022 | $ | | $ | ( | $ | |
Estimated amortization expense for the next five years is as follows:
Year ending December 31, |
| Amount | |
2023 | $ | | |
2024 | | ||
2025 | | ||
2026 | | ||
2027 | | ||
Thereafter | | ||
Total | $ | | |
Amortization expense was $
Goodwill
The following represents a summary of changes in the carry amount of goodwill for the years ended December 31, 2022 and 2021 on a consolidated basis and by segment:
Consolidated
| Gross Goodwill | Accumulated Impairment | Net Goodwill | ||||||
Balance as of December 31, 2020 | $ | | $ | — | $ | | |||
Goodwill acquired | | — | | ||||||
Impairment | — | ( | ( | ||||||
Balance as of December 31, 2021 | $ | | $ | ( | $ | | |||
Goodwill acquired | | | |||||||
Purchase price allocation adjustment | | — | | ||||||
Impairment | — | ( | ( | ||||||
Balance as of December 31, 2022 | $ | | $ | ( | $ | |
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Retail Segment
| Gross Goodwill | Accumulated Impairment | Net Goodwill | ||||||
Balance as of December 31, 2020 | $ | — | $ | — | $ | — | |||
Goodwill acquired | | — | | ||||||
Balance as of December 31, 2021 | $ | | $ | — | $ | | |||
Goodwill acquired | | — | | ||||||
Purchase price allocation adjustment | | — | | ||||||
Impairment | — | ( | ( | ||||||
Balance as of December 31, 2022 | $ | | $ | ( | $ | |
Cultivation Segment
| Gross Goodwill | Accumulated Impairment | Net Goodwill | ||||||
Balance as of December 31, 2020 | $ | | $ | — | $ | | |||
Goodwill acquired | — | — | — | ||||||
Impairment | — | ( | ( | ||||||
Balance as of December 31, 2021 | $ | | $ | ( | $ | — | |||
Goodwill acquired | — | — | — | ||||||
Balance as of December 31, 2022 | $ | | $ | ( | $ | — |
Cultivation Segment Impairments
As of the annual testing date of December 31, 2021, the Company utilized a third-party valuation firm to estimate the fair value of our Cultivation segment, which consisted of a single reporting unit, using a combination of a discounted cash flow approach and market multiple approach. As a result, the Company determined that the fair value of the Cultivation segment was less than the less than the carrying value and recognized a full impairment of goodwill in the Cultivation segment in the amount of $
As of December 31, 2022, due to the continued declines in the wholesale price of marijuana flower in Colorado, the Company determined that the remaining intangible asset balance in the Cultivation segment was not recoverable based on current cash flow projections and that there was no longer value in the tradename value given the economic conditions in the cultivation sector. Therefore, an impairment of the remaining balance of $
Retail Segment Impairments
As of December 31, 2021, the goodwill balance and intangible assets balances in the Retail segment related to acquisitions completed in the third and fourth quarters of 2021. The final purchase price allocations for these acquisitions had not been completed as of December 31, 2021. Therefore, no impairment testing was required.
As of annual testing date on December 31, 2022, the Company utilized a third-party valuation firm to estimate the fair value of each reporting unit within the Retail segment using a combination of a discounted cash flow approach and market multiple approach. Each dispensary location is considered a separate reporting unit. As a result, the Company determined that the fair value of each of the dispensary locations in Oregon was less than the less than its carrying value. Therefore, the Company recognized goodwill impairments in the Retail segment in the amount of $
56
the same valuation methodology and assumptions that we used for the goodwill impairment test. The resulting fair value estimates indicated that the fair value of the tradename intangible was less than the carrying value for the Trees MLK and Trees Waterfront dispensaries in Oregon. Therefore, the Company recognized an impairment of $
NOTE 10. LEASES
The Company’s leases consist primarily of real estate leases for retail, cultivation, and manufacturing facilities.
All but
The operating lease expense for the years ended December 31, 2022 and December 31, 2021 is as follows:
For the year ended December 31, |
| 2022 |
| 2021 | ||
Straight-line operating lease expense | $ | | $ | | ||
Variable lease cost | | | ||||
Short-term lease cost | — | | ||||
Total operating lease expense | $ | | $ | | ||
The expense associated with the finance lease cost was not material for the year ended December 31, 2022 as the commencement date of the lease was December 19, 2022.
Related party leases
As of December 31, 2022,
57
Lease Maturities
Future remaining minimum lease payments on our operating leases and finance lease are as follows:
Year ending December 31, |
| Operating leases | Finance lease | |||
2023 | $ | | $ | | ||
2024 |
| |
| | ||
2025 |
| |
| | ||
2026 |
| |
| | ||
2027 | | | ||||
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 $
The total remaining minimum lease payments in the table above exclude $
As of December 31, 2022, 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 year ended December 31, |
| 2022 |
| 2021 | ||
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 | $ | | $ | | ||
ROU assets obtained in exchange for finance lease liabilities | $ | | $ | — | ||
Reduction of operating lease ROU asset and operating lease liabilities from remeasurement (1) | $ | ( | $ | — | ||
| (1) | In April 2022, the lease for Seven-Five Farm, a cultivation facility, was amended and the remaining lease payments were reduced. Upon modification, management reassessed the lease term and concluded that it was not reasonably certain that any of the renewal option periods in the lease would be exercised. This conclusion was different than the conclusion reached at the initial commencement of the lease in 2020. The significant drop in the wholesale cost of marijuana flower and the current economic environment in the cannabis industry, particularly in the cultivation sector, is the primary driver of this change. As a result, the measurement of the ROU asset and operating lease liability no longer includes the payments associated with the renewal option periods. |
58
NOTE 11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Our accounts payable and accrued expenses consist of the following:
December 31, | ||||||
| 2022 |
| 2021 | |||
Accounts payable | $ | | $ | | ||
Accrued payroll, taxes, and vacation |
| |
| | ||
Other |
| |
| | ||
Total accounts payable and accrued expenses | $ | | $ | | ||
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, 2020 | $ | | | |||
Trees Waterfront acquisition stock accrual | | | ||||
Stock issued | ( | ( | ||||
Balance as of December 31, 2021 | $ | | | |||
Stock issued | ( | ( | ||||
Balance as of December 31, 2022 | $ | | | |||
In December 2021, we completed the acquisition of Trees Waterfront. As part of the transaction, we granted
The outstanding balance of accrued stock payable as of December 31, 2022 relates to a February 18, 2020 grant of
NOTE 13. NOTES PAYABLE
Our notes payable consisted of the following:
December 31, 2022 | December 31, 2021 | ||||||||||||||||
Third-party | Related-party | Total | Third-party | Related-party | Total | ||||||||||||
2022 12% Notes | $ | | $ | | $ | | $ | $ | — | $ | — | ||||||
2020 10% Notes | — | — | — | | — | | |||||||||||
Trees Transaction Notes | — | | | — | | | |||||||||||
Green Tree Acquisition Notes | | | | | — | | |||||||||||
Green Man Acquisition Notes | | — | | — | — | — | |||||||||||
Unamortized debt discount | ( | ( | ( | ( | — | ( | |||||||||||
Total debt | | | | | | | |||||||||||
Less: Current portion | ( | ( | ( | — | ( | ( | |||||||||||
Long-term portion | $ | | $ | | $ | | $ | | $ | | $ | | |||||
59
Aggregate Maturities
As of December 31, 2022, aggregate future contractual maturities of long-term debt (excluding issue discounts) are as follows:
Year ending December 31, |
| Amount | |
2023 | $ | | |
2024 |
| | |
2025 | | ||
2026 |
| | |
$ | | ||
Trees Transaction Notes
In September 2021, with the completion of the Englewood acquisition, we are obligated to pay the Seller cash equal to $
In December 2021, with the completion of the Trees Portland and Trees Waterfront acquisitions, we are obligated to pay the Seller cash equal to $
In January 2022, with the completion of the Trees MLK acquisition, we are obligated to pay the Seller cash equal to $
In December 2022, with the completion of the Green Tree Acquisition, we are obligated to pay the Seller cash equal to $
In December 2022, with the completion of the Green Man Acquisition, we are to pay the Seller cash equal to $
On September 15, 2022, we entered into a Securities Purchase Agreement with certain accredited investors (the "
In connection with the
The relative fair value of the new funding on the
60
from the
For purposes of determining the debt discount, the underlying assumptions used in the black-scholes 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 |
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
61
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 |
See Note 17 for a summary of the outstanding warrants issued in conjunction with our debt.
62
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, 2022 and 2021, 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, |
| |||||
| 2022 | 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, | |||||||
| 2022 |
| 2021 | ||||
Beginning balance | $ | | $ | | |||
Warrant exercise | — | ( | |||||
Change in fair value of warrants derivative liability | ( | | |||||
Ending balance | $ | | $ | | |||
NOTE 15. COMMITMENTS AND CONTINGENCIES
Legal
From time to time, the Company is a party to various litigation matters incidental to the conduct of its business. The Company is not presently a party to any legal proceedings that would have a material adverse effect on its business, operating results, financial condition, or cash flows, except as set forth below.
63
In July 2021, we were served with a Complaint in the District Court, County of Denver, Colorado, by plaintiff 2353 SB, LLC (“Plaintiff”). We entered into a lease with Plaintiff for the premises at 2353 South Broadway, Denver, CO with a term of (3) years to commence on November 1, 2020. Monthly lease payments were to be $
We have taken the position that our failure to take possession and make any further payments under the lease is directly related to the COVID-19 pandemic. We are vigorously defending this action and believe that the above-referenced force majeure clause presents a complete defense to Plaintiff’s claims.
We filed a motion to dismiss or a motion for summary judgment in the alternative. Plaintiff filed a response and cross-motion for summary judgment thereafter. In October 2022, the court denied the motion to dismiss on the basis that Plaintiff sufficiently pled facts that raise a plausible claim for relief, notwithstanding our possible defenses, but has not specifically made any rulings on either party’s motion for summary judgment. On November 14, 2022, we timely filed a formal answer to the complaint, denying each of Plaintiff’s substantive claims. We also asserted appropriate affirmative defenses, including the force majeure clause of the lease, which provides that we are not liable under the lease in the event of a variety of events outside our control, including “pandemics.” In addition, we have asserted a counterclaim against Plaintiff for breach of contract to recover the initial payments made under the lease as well as attorneys’ fees and costs. The trial is currently scheduled for September 2023.
NOTE 16. DEFERRED TAXES
Income tax expense was $
Significant components of the Company’s deferred tax assets and liabilities at December 31, 2022 and 2021 are shown below. A valuation allowance has been established as realization of such net 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 net 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, 2022 and 2021, the Company had federal operating loss carryforwards of approximately $
64
The components of net deferred tax assets and liabilities are as follows:
December 31, | ||||||
Deferred tax assets: |
| 2022 |
| 2021 | ||
Net operating loss carryforwards | $ | | $ | | ||
Equity-based instruments |
| |
| | ||
Long-lived assets and other |
| ( |
| | ||
Capital loss carryforward |
| |
| | ||
Total deferred tax assets | $ | | $ | | ||
Deferred tax liabilities: | ||||||
Intangible assets | $ | ( | $ | — | ||
Total deferred tax liabilities | ( | — | ||||
Valuation allowance | ( | ( | ||||
Net deferred tax asset | $ | — | $ | — | ||
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, | ||||||
| 2022 |
| 2021 | |||
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 |
| |
| | ||
Goodwill and intangible impairment | | |||||
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. The total number of Units sold was
| ● | Authorized Number of Shares – |
| ● | Voting Rights – |
65
| ● | Dividends – |
| ● | Conversion – Each share of Series A Preferred is mandatorily convertible into |
| ● | 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 $
In addition to the Preferred Warrants, the Company has outstanding warrants related to prior equity offerings. The table below summarizes the warrants issued in conjunction with our equity offerings:
|
|
| 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 |
| |
| |
|
| ||||
Outstanding as of December 31, 2021 |
| |
| |
| — | ||||
Granted |
| — |
| — |
| |||||
Outstanding and exercisable as of December 31, 2022 | $ | | $ | — | ||||||
Warrants with Debt
The Company has also issued warrants in conjunction with debt issuances. The following summarizes warrants issued in conjunction with our debt issuances:
|
|
| 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 |
| |
| |
|
|
|
| ||
Expired |
| ( |
| |
|
|
|
| ||
Outstanding as of December 31, 2021 |
| |
| |
| $ | — | |||
Granted |
| |
| |
| |||||
Expired |
| ( |
| |
| |||||
Outstanding and exercisable as of December 31, 2022 | $ | | $ | — | ||||||
Stock-based compensation
Stock-based Awards
As of December 31, 2022, 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
66
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
The following summarizes stock option activity for the years ended December 31, 2022 and 2021:
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 | | $ | | $ | | |||||
Granted | | |
|
| ||||||
Forfeited or expired |
| ( |
| |
|
|
|
| ||
Outstanding as of December 31, 2022 |
| |
| $ | |
| $ | | ||
Exercisable as of December 31, 2022 |
| | $ | |
| $ | | |||
The options granted in 2022 and 2021 expire five years from the date of grant and vest over a period of one year. The grant date fair value of the awards granted in 2022 and 2021, totaled $
The following summarizes the Black-Scholes assumptions used to value the Employee Awards granted:
Year ended December 31, |
| ||||||
| 2022 |
| 2021 |
| |||
Exercise price | $ | $ | |||||
Stock price on date of grant | $ | $ | |||||
Volatility |
| % |
| % | |||
Risk-free interest rate |
| % |
| % | |||
Expected life (years) |
|
| |||||
Dividend yield |
| — |
| — | |||
As of December 31, 2022, there was approximately $
Restricted Stock Awards
On April 1, 2022 we entered into a Restricted Stock Unit Agreement with four participants. The Restricted Stock Unit’s (“RSU”) were granted pursuant to our 2020 Omnibus Incentive Plan. separate executives were each granted
67
vest as the market price reaches $
The Company recognized $
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.
The following summarizes equity instruments that may, in the future, have a dilutive effect on earnings per share:
December 31, | ||||
| 2022 |
| 2021 | |
Stock options |
| |
| |
Restricted stock awards | | — | ||
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. We paid Mr. Hershey $
We currently have a lease agreement with Dalton Adventures, LLC in which we rent a greenhouse cultivation facility in Boulder, Colorado. The owner of Dalton Adventures, LLC is a principal shareholder and board member of the Company. We incurred approximately $
We currently have a lease agreement with JLA Enterprises, LLC in which we rent a retail dispensary in Longmont, Colorado. A board member and an executive level employee of the Company are owners of JLA Enterprises, LLC. We also have a lease agreement with ALJ 1090, LLC in which we rent a building that has a retail dispensary and cultivation facility in Berthoud, Colorado. The same board member is an owner of ALJ 1090, LLC. These leases were assumed as part of the Green Tree Acquisition on December 12, 2022, and as such, the expense related to these leases was not
68
material for the year ended December 31, 2022. See Note 10 for further discussion of the Company’s obligations associated with related-party leases.
We previously had a lease agreement with Bellewood Holdings, LLC in which we leased the retail space for the Trees Englewood dispensary in Englewood, Colorado. The owner of Bellewood Holdings, LLC is a principal shareholder and board member of the Company. This lease was assigned to a new landlord (unaffiliated with the Company or such principal shareholder and board member) when the building was sold in June 2022. We incurred approximately $
As of December 31, 2022,
One of the sellers in the Trees Transaction is a principal shareholder and board member of the Company and another seller is an executive level employee of the Company. As of December 31, 2022, the Company has outstanding debt related to the Trees Transaction payable to these individuals. See Note 13 for disclosure of the Trees Transaction Notes.
One former owner of the Green Tree Entities is a current board member and another former owner is currently an executive level employee of the Company. As of December 31, 2022, the Company has outstanding debt related to the Green Tree Acquisition that is payable to these individuals. See Note 13 for disclosure of the Green Tree Acquisition Notes. In addition, the Company made one-item bonus payments of approximately $
NOTE 20. SEGMENT INFORMATION
Our operations are organized into
Year ended December 31
2022 |
| Retail |
| Cultivation |
| Eliminations | Total | |||||
Revenues | $ | | $ | | $ | ( | $ | | ||||
Costs and expenses | ( | ( | | ( | ||||||||
Segment operating income | $ | ( | $ | ( | $ | — | ( | |||||
Corporate expenses | ( | |||||||||||
Net loss from continuing operations before income taxes |
| $ | ( | |||||||||
2021 |
| Retail |
| Cultivation | Eliminations |
| Total | |||||
Revenues | $ | | $ | | $ | ( | $ | | ||||
Costs and expenses | ( | ( | | ( | ||||||||
Segment operating income | $ | | $ | ( | $ | — | ( | |||||
Corporate expenses |
|
|
|
| ( | |||||||
Net loss from continuing operations before income taxes |
| $ | ( | |||||||||
69
December 31, | December 31, | |||||
Total assets |
| 2022 |
| 2021 | ||
Retail | $ | | $ | | ||
Cultivation | | | ||||
Corporate |
| |
| | ||
Total assets - segments | | | ||||
Intercompany eliminations | ( | ( | ||||
Total assets - consolidated | $ | | $ | | ||
NOTE 21. SUBSEQUENT EVENTS
In February 2023, we completed the acquisition of Station 2, LLC, the assets of which consist of a dispensary located in Denver, CO. The consideration paid by the Company consists of cash at closing equal to $
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
Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. As of December 31, 2022, the Company's management, including the Company's Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Accounting Officer), has evaluated the effectiveness of the Company's disclosure controls and procedures as defined in Rules 13a-15 and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must necessarily reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on the foregoing evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2022.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, and effected by the board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of
70
financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP including those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate.
The management of TREES Corporation, with participation of the Chief Executive Officer and the Chief Financial Officer, assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2022. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the Internal Control -- Integrated Framework (2013). Based on the assessment under COSO, management determined that our internal control over financial reporting was effective as of December 31, 2022.
This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.
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, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
71
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this Item 10 will be incorporated by reference from our definitive proxy statement or included in an amendment to this Annual Report on Form 10-K in reliance on General Instruction G(3) to Form 10-K, in either case to be filed not later than 120 days following the end of our fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be incorporated by reference from our definitive proxy statement or included in an amendment to this Annual Report on Form 10-K in reliance on General Instruction G(3) to Form 10-K, in either case to be filed not later than 120 days following the end of our fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12 will be incorporated by reference from our definitive proxy statement or included in an amendment to this Annual Report on Form 10-K in reliance on General Instruction G(3) to Form 10-K, in either case to be filed not later than 120 days following the end of our fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item 13 will be incorporated by reference from our definitive proxy statement or included in an amendment to this Annual Report on Form 10-K in reliance on General Instruction G(3) to Form 10-K, in either case to be filed not later than 120 days following the end of our fiscal year.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 will be incorporated by reference from our definitive proxy statement or included in an amendment to this Annual Report on Form 10-K in reliance on General Instruction G(3) to Form 10-K, in either case to be filed not later than 120 days following the end of our fiscal year.
.
72
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following Exhibits are filed with this Report:
Exhibit |
| Exhibit Name |
|---|---|---|
3.5 | ||
10.8† | ||
73
Exhibit |
| Exhibit Name |
|---|---|---|
Form of Warrant (Incorporated by reference to Exhibit 10.2 to our Form 8-K filed June 1, 2020) | ||
74
Exhibit |
| Exhibit Name |
|---|---|---|
Form of Warrant (incorporated by reference to Exhibit 10.2 to our Form 8-K filed September 14, 2021) | ||
10.40 | ||
75
Exhibit |
| Exhibit Name |
|---|---|---|
Code of Ethics (Incorporated by reference to Exhibit 14.1 to our Form 10-K filed March 31, 2017) | ||
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
76
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 |
| April 17, 2023 |
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 |
| April 17, 2023 |
Adam Hershey |
|
|
|
|
/s/ Edward Myers |
| Interim Chief Financial Officer (Principal Financial and Accounting Officer) |
| April 17, 2023 |
Edward Myers |
|
|
|
|
|
|
|
|
|
/s/ Carl J. Williams |
| Director |
| April 17, 2023 |
Carl J. Williams |
|
|
| |
| ||||
/s/ Richard C. Travia | Director | April 17, 2023 | ||
Richard C. Travia | ||||
/s/ Timothy Brown | Director | April 17, 2023 | ||
Timothy Brown | ||||
/s/ Allyson Feiler Downing Allyson Feiler Downing | Director | April 17, 2023 | ||
77
TREES CORPORATION
DESCRIPTION OF SECURITIES
TREES Corporation, a Colorado corporation (referred to as we, us and our), has two classes of securities that are outstanding: common stock, par value $0.001 per share (common stock) and series A convertible preferred stock, no par value (series A preferred stock).
The following description of our common stock is a summary and does not purport to be complete. It is subject to and qualified in its entirety by reference to our Amended and Restated Articles of Incorporation, as amended (Charter), and our Amended and Restated Bylaws (Bylaws), which are filed as exhibits to our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and are incorporated by reference herein. We encourage you to read our Charter, our Bylaws and the applicable provisions of the Colorado Business Corporations Act for additional information.
Authorized Shares
Our authorized capital consists of 200 million shares of common stock, par value $0.001 per share, and five (5) million shares of preferred stock, no par value. As of April 15, 2023, we had 118,664,094 outstanding shares of common stock and 1,180 outstanding shares of series A preferred stock.
Common Stock
Holders of shares of common stock have the right to cast one vote for each share of common stock in their name on the books of our company, whether represented in person or by proxy, on all matters submitted to a vote of holders of common stock, including election of directors. There is no right to cumulative voting in election of directors. Except where a greater requirement is provided by statute, by our Charter, or by our Bylaws, the presence, in person or by proxy duly authorized, of one or more holders of a majority of the outstanding shares of our common stock constitutes a quorum for the transaction of business. The vote by the holders of a majority of outstanding shares is required to effect certain fundamental corporate changes such as liquidation, merger, or amendment of our articles of incorporation. Directors are elected by a plurality of votes in accordance with the Colorado Business Corporations Act.
There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Colorado Business Corporations Act does, however, prohibit us from declaring dividends where, after giving effect to the distribution of the dividend (1) we would not be able to pay our debts as they become due in the usual course of business or (2) our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.
We have not declared any dividends, and we do not plan to declare any dividends in the foreseeable future.
Holders of shares of our common stock are not entitled to preemptive or subscription or conversion rights, and no redemption or sinking fund provisions are applicable to our common stock. All outstanding shares of common stock are, or when issued pursuant to the terms of any convertible securities or warrants will be, fully paid and non-assessable.
The transfer agent and registrar for our common stock is Equiniti.
Preferred Stock
Under the terms of the Charter, our board of directors is authorized to direct us to issue shares of preferred stock in one or more series without stockholder approval. Our board of directors has the discretion to determine the rights, preferences, privileges, and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.
The purpose of authorizing our board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with stockholder vote on specific issuances. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions, future financings and other corporate purposes, could have the effect of making it more difficult for third-party to acquire, or could discourage a third-party from seeking to acquire, a majority of our outstanding voting stock.
Exhibit 21.1
List of Subsidiaries
Name of Entity | | Jurisdiction |
6565 E. Evans Owner LLC | | Colorado |
GC Corp | | Colorado |
GC Capital Corp, LLC | | Colorado |
GC Security LLC | | Colorado |
General Cannabis Capital Corporation | | Colorado |
Standard Cann, Inc. | | Colorado |
SevenFive Farm Cultivation, LLC | | Colorado |
SevenFive Farm, LLC | | Colorado |
Trees Colorado LLC | | Colorado |
Trees Oregon LLC | | Colorado |
Green Tree Colorado LLC | | Colorado |
GT Cultivation LLC | | Colorado |
GT Retail LLC | | Colorado |
GT MIP LLC | | Colorado |
Green Man Cannabis, LLC | | Colorado |
| | |
Exhibit 23.1
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in this Registration Statement of Trees Corporation. on Form S-8 (File Nos. 333-225413 and 333-210910) of our report dated April 17, 2023, with respect to our audit of the consolidated financial statements of Trees Corporation as of December 31, 2022, and for the period ended December 31, 2022, appearing in the Annual Report on Form 10-K of Trees Corporation for the year ended December 31, 2022.
/s/ Haynie & Company
Salt Lake City, Utah
April 17, 2023
Exhibit 31.1
CERTIFICATIONS
Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002
(Subsections (A) And (B) Of Section 1350, Chapter 63 of Title 18, United States Code)
I, Adam Hershey, certify that:
1. I have reviewed this annual report on Form 10-K of TREES Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or cause such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have significant role in the registrant's internal control over financial reporting.
April 17, 2023 | /s/ Adam Hershey |
| Adam Hershey, Interim Chief Executive Officer, |
Exhibit 31.2
CERTIFICATIONS
Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002
(Subsections (A) And (B) Of Section 1350, Chapter 63 of Title 18, United States Code)
I, Edward Myers, certify that:
1. I have reviewed this annual report on Form 10-K of TREES Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or cause such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have significant role in the registrant's internal control over financial reporting.
April 17, 2023 | /s/ Edward Myers |
| Edward Myers, Interim Chief Financial Officer |
Exhibit 32.1
In connection with the Annual Report of TREES Corporation (the "Company") on Form 10-K for the period ended December 31, 2022, as filed with the Securities and Exchange Commission (the "Report"), Adam Hershey, the Company’s Principal Executive Officer, and Edward Meyers, the Company’s Principal Financial and Accounting Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of their knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of the Company. |
April 17, 2023 | /s/ Adam Hershey |
| Adam Hershey, Interim Chief Executive Officer, |
April 17, 2023 | /s/ Edward Myers |
| Edward Myers, Interim Chief Financial Officer |
CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| CONSOLIDATED BALANCE SHEETS | ||
| Accounts receivable, net of allowance | $ 42,000 | $ 61,000 |
| Notes receivable, net of allowance | $ 0 | $ 43,108 |
| Preferred stock, par value (in dollars per share) | $ 0 | $ 0 |
| Preferred stock, shares authorized | 5,000,000 | 5,000,000 |
| Preferred stock, shares issued | 1,180 | 1,180 |
| Preferred stock, shares outstanding | 1,180 | 1,180 |
| Common stock, par value (in dollars per share) | $ 0.001 | $ 0.001 |
| Common stock, shares authorized | 200,000,000 | 200,000,000 |
| Common stock, shares issued | 118,664,094 | 89,551,993 |
| Common stock, shares outstanding | 118,664,094 | 89,551,993 |
CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical) |
Dec. 31, 2022 |
Sep. 15, 2022 |
Dec. 31, 2021 |
Apr. 20, 2021 |
Feb. 08, 2021 |
Dec. 31, 2020 |
|---|---|---|---|---|---|---|
| 12% Warrants | ||||||
| Interest rate (as a percent) | 12.00% | 12.00% | ||||
| 10% Warrants | ||||||
| Interest rate (as a percent) | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - USD ($) |
Preferred Stock
10% Warrants
|
Preferred Stock |
Common Stock
TREES Englewood
|
Common Stock
Trees Waterfront LLC
|
Common Stock
Trees Portland LLC
|
Common Stock
Trees MLK LLC
|
Common Stock
Green Tree LLC
|
Common Stock
Green Man Corp
|
Common Stock |
Additional Paid-in Capital
TREES Englewood
|
Additional Paid-in Capital
Trees Waterfront LLC
|
Additional Paid-in Capital
Trees Portland LLC
|
Additional Paid-in Capital
Trees MLK LLC
|
Additional Paid-in Capital
Green Tree LLC
|
Additional Paid-in Capital
Green Man Corp
|
Additional Paid-in Capital
10% Warrants
|
Additional Paid-in Capital
15% Warrants
|
Additional Paid-in Capital
12% Warrants
|
Additional Paid-in Capital |
Accumulated Deficit
10% Warrants
|
Accumulated Deficit |
TREES Englewood |
Trees Waterfront LLC |
Trees Portland LLC |
Trees MLK LLC |
Green Tree LLC |
Green Man Corp |
10% Warrants |
15% Warrants |
12% Warrants |
Total |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at the beginning of the year at Dec. 31, 2020 | $ 60,813 | $ 75,891,414 | $ (74,951,436) | $ 1,000,791 | |||||||||||||||||||||||||||
| Balance at the beginning of the year (in Shares) at Dec. 31, 2020 | 60,813,673 | ||||||||||||||||||||||||||||||
| Sale of common stock, net of issuance costs | $ 1,073,446 | $ 203 | 142,412 | $ 1,073,446 | 142,615 | ||||||||||||||||||||||||||
| Sale of common stock, net of issuance costs (in shares) | 1,180 | ||||||||||||||||||||||||||||||
| Common Stock issued to consultants (in Shares) | 202,679 | ||||||||||||||||||||||||||||||
| Common Stock issued upon exercise of stock options | $ 395 | 205,124 | 205,519 | ||||||||||||||||||||||||||||
| Common Stock issued upon exercise of stock options (in shares) | 394,670 | ||||||||||||||||||||||||||||||
| Common Stock issued for acquisition | $ 22,380 | $ 4,754 | $ 10,384,464 | $ 1,088,675 | $ 10,406,844 | $ 1,093,429 | |||||||||||||||||||||||||
| Common Stock issued for acquisition (in shares) | 22,380,310 | 4,754,038 | |||||||||||||||||||||||||||||
| Beneficial conversion feature | 1,110,039 | 1,110,039 | |||||||||||||||||||||||||||||
| Warrants issued | $ 1,239,300 | 106,554 | 1,239,300 | 106,554 | |||||||||||||||||||||||||||
| Modification of warrants | 233,374 | 233,374 | |||||||||||||||||||||||||||||
| Cashless exercise of warrants | $ 1,005 | 1,556,073 | 1,557,078 | ||||||||||||||||||||||||||||
| Cashless exercise of warrants (in shares) | 1,006,623 | ||||||||||||||||||||||||||||||
| Stock-based compensation | $ 286,438 | $ 286,438 | |||||||||||||||||||||||||||||
| Modification of Options | 21,525 | 21,525 | |||||||||||||||||||||||||||||
| Net loss | (8,869,379) | (8,869,379) | |||||||||||||||||||||||||||||
| Balance at the end of the year at Dec. 31, 2021 | $ 1,073,446 | $ 89,550 | 92,265,392 | (83,820,815) | 9,607,573 | ||||||||||||||||||||||||||
| Balance at the end of the year(in Shares) at Dec. 31, 2021 | 1,180 | 89,551,993 | |||||||||||||||||||||||||||||
| Common Stock issued for acquisition | $ 1,670 | $ 4,971 | $ 17,978 | $ 4,495 | $ 382,324 | $ 1,337,105 | $ 2,948,314 | $ 804,495 | $ 383,994 | $ 1,342,076 | $ 2,966,292 | $ 808,990 | |||||||||||||||||||
| Common Stock issued for acquisition (in shares) | 1,669,537 | 4,970,654 | 17,977,528 | 4,494,382 | |||||||||||||||||||||||||||
| Warrants issued | $ 672,801 | $ 672,801 | |||||||||||||||||||||||||||||
| Stock-based compensation | $ 188,330 | $ 188,330 | |||||||||||||||||||||||||||||
| Dividends on preferred stock | $ (88,500) | $ (88,500) | |||||||||||||||||||||||||||||
| Net loss | (9,475,067) | (9,475,067) | |||||||||||||||||||||||||||||
| Balance at the end of the year at Dec. 31, 2022 | $ 1,073,446 | $ 118,664 | $ 98,598,761 | $ (93,384,382) | $ 6,406,489 | ||||||||||||||||||||||||||
| Balance at the end of the year(in Shares) at Dec. 31, 2022 | 1,180 | 118,664,094 |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Parenthetical) |
Dec. 31, 2022 |
Sep. 15, 2022 |
Dec. 31, 2021 |
Apr. 20, 2021 |
Feb. 08, 2021 |
Dec. 31, 2020 |
|---|---|---|---|---|---|---|
| 12% Warrants | ||||||
| Interest rate (as a percent) | 12.00% | 12.00% | ||||
| 10% Warrants | ||||||
| Interest rate (as a percent) | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% |
NATURE OF OPERATIONS, HISTORY AND PRESENTATION |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| NATURE OF OPERATIONS, HISTORY AND PRESENTATION | ||||||||||||||||||||||||||||||||||||||||||||||
| NATURE OF OPERATIONS, HISTORY AND PRESENTATION | NOTE 1. NATURE OF OPERATIONS, HISTORY AND PRESENTATION Nature of Operations TREES Corporation, a Colorado Corporation (the “Company,” “we,” “us,” “our,” or “TREES”) (formerly, General Cannabis Corp), 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, 2022, our operations are segregated into the following segments: Retail (“Retail Segment”) Through a series of acquisitions in 2021 and 2022, we operated four retail dispensaries in Colorado and three retail dispensaries in Oregon as of December 31, 2022. See Note 2 for details of the acquisitions. We acquired the license for an additional dispensary in Colorado in February of 2023, and opened that location in April 2023. Cultivation (“Cultivation Segment”) Through our acquisition of SevenFive Farm in May 2020, we operate a licensed 17,000 square foot light deprivation greenhouse cultivation facility. We acquired additional cultivation facilities in December 2022 through the Green Tree acquisition. During 2022, there was one customer that accounted for over 10% of our third-party cultivation revenue, and during 2021 there were two customers that each accounted for over 10% of , of third -party cultivation revenue. Discontinued Operations Through Next Big Crop, LLC (“NBC”), we delivered comprehensive consulting services to the cannabis industry that included obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and construction, and expansion of existing operations. NBC oversaw our wholesale equipment and supply business, operating under the name “GC Supply,” which provided turnkey sourcing and stocking services to cultivation, retail, and infused products manufacturing facilities. Our products included building materials, equipment, consumables, and compliance packaging. NBC also provided operational support for our internal cultivation. On July 16, 2021, we entered into an Asset Purchase Agreement with an individual to sell substantially all the assets of NBC for a total of $150,000 and 10% of profits generated by the buyer in the states of Michigan, Mississippi, and Massachusetts for a period of twelve months from the closing. On August 2, 2021, the sale of NBC was completed. Basis of Presentation The accompanying consolidated financial statements include the results of TREES and its nine wholly-owned (direct and indirect) subsidiary companies, each a Colorado corporation or limited liability company:
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 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 $2,583,833 as of December 31, 2022 is not sufficient to absorb our operating losses and retire our debt and lease obligations of $22,540,136 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 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. Liquidity The Company incurred net losses of $9.5 million and $8.9 million in the years ended December 31, 2022 and 2021, respectively, and had an accumulated deficit of $93.4 million as of December 31, 2022. The Company had cash and cash equivalents of $2.6 million and $2.1 million as of December 31, 2022 and 2021, respectively. 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, 2022 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. The Company may need additional funding to support its planned investing activities. If the Company is unable to obtain additional funding, it would be forced to delay, reduce, or eliminate some or all of its acquisition efforts, which could adversely affect its business prospects. 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. 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. 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. We recognize ROU assets and lease liabilities on the balance sheet for leases with a lease term of greater than one year. The Company elected to combine the lease and related non-lease components (common area maintenance and operating costs) and treat them as a single lease component. ROU assets and lease liabilities are recognized at the commencement date of the lease based on the present value of the fixed lease payments over the lease term. The Company’s operating leases include options to extend or terminate the lease, which are not included in the determination of the ROU asset or lease liability unless reasonably certain to be exercised. Payments that are not fixed at the commencement of the lease are considered variable and are excluded from the measurement of the ROU asset and lease liability and are expensed as incurred in the statement of operations. Variable payments typically included payment for common area maintenance and reimbursement of the landlords operating costs as the amounts change from year to year based on actual costs incurred. 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. For the Company’s finance lease, interest expense is recognized on the lease liability using the effective interest method and depreciation of the finance lease ROU asset 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: thirty years for buildings, the lesser of ten years or the life of the lease for leasehold improvements, and to fifteen years for furniture, fixtures and equipment, software, vehicles, and biological assets. Land is not depreciated. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations. 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. 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. 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 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, 2022 and 2021. 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, 2022 and 2021. 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). 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) retail product sales; and (ii) wholesale 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 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. 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, 2022 and 2021, determined that there were no material uncertain tax positions. In general, the tax returns for the years ending December 31, 2019 through 2021 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. 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 Accounting Standards Update (“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 adopted this ASU in the first quarter of 2022, and the adoption did not have a material effect on our financial statements. |
ACQUISITIONS |
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| ACQUISITIONS | NOTE 2. ACQUISITIONS 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 $1,155,256 in cash in connection with the Englewood Closing and stock consideration of 22,380,310 shares of our Common Stock. The closing price of our Common Stock on September 2, 2021, the date of license transfer, was $0.47 per share, as such, fair value of the equity consideration is $10,518,746. Further, cash equal to $1,732,884 will be paid to the seller in equal monthly installments over a period of 24 months from the Englewood Closing. The table below reflects the Company’s final estimates of the acquisition date fair values of the assets acquired:
Compared to the estimated purchase price allocation reported in our financial statements included in Item 8 of our Form 10-K for the year ended December 31, 2021 filed with the SEC on March 25, 2022, the final purchase price estimate resulted in a reduction of tradename intangible assets and a corresponding increase to goodwill of $3.6 million. 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, 2021, are as follows:
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 (together “Trees Oregon”), 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 $331,581 in connection with the Oregon Closing and stock consideration of 6,423,575 shares of our Common Stock. The closing price of our Common Stock on December 30, 2021, the date of license transfer, was $0.23 per share, as such, the fair value of the equity consideration is $1,477,422. Further, cash equal to $497,371 will be paid to the sellers in equal monthly installments over a period of 24 months from the Oregon Closing. The table below reflects the Company’s final estimates of the acquisition date fair values of the assets acquired:
Compared to the estimated purchase price allocation reported in our financial statements included in Item 8 of our Form 10-K for the year ended December 31, 2021 filed with the SEC on March 25, 2022, the final purchase price estimate resulted in a reduction of tradename intangible assets and a corresponding increase to goodwill of $341,000. 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:
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 January 5, 2022, we completed the acquisition of substantially all of the assets of Trees MLK Inc. (“MLK”), representing the remaining Oregon dispensary in connection with the overall Trees transaction. We paid cash in the amount of $256,582 and stock consideration of 4,970,654 shares of our Common Stock. The closing price of our Common Stock on January 5, 2022, the date of license transfer, was $0.27 per share, as such, fair value of the equity consideration is $1,346,076. Further, cash equal to $384,873 will be paid to the sellers in equal monthly installments over a period of 24 months beginning on June 15, 2022. When we closed on MLK it was a non-operating dispensary. We opened the dispensary in the second quarter of 2022. The table below reflects the Company’s final estimates of the acquisition date fair values of the assets acquired:
As the MLK dispensary was not operating until the second quarter of 2022, the were no material results of operations prior to the acquisition date. As such, there would be no material proforma impact on the Company’s operating results. 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 $500,000 and stock consideration of 17,977,528 shares of our Common Stock. The closing price of our Common Stock on December 12, 2022, the date of license transfer, was $0.165 per share, as such, fair value of the equity consideration is $2,966,292. An additional $3,500,000 in cash will be paid to the sellers in fifteen (15) equal monthly payments commencing on the 9-month anniversary of the closing. Based on a discount rate of 12%, the fair value of these additional monthly payments is approximately $3,017,510. This liability is included in Notes payable- current and Notes payable- non-current in the accompanying consolidated balance sheets. See Note 13 for additional details. The table below reflects the Company’s preliminary estimates of the acquisition date fair values of the assets acquired:
We have not completed the allocation of the purchase price for the Green Tree Acquisition. As of December 31, 2022, the consolidated balance sheet includes a preliminary allocation of fixed assets, inventory, intangible assets, and goodwill. Management anticipates completing the purchase price allocation as soon as possible, but no later than one year from the acquisition date. The accompanying consolidated financial statements include the results of the Green Tree Entities from the date of acquisition for financial reporting purposes, December 12, 2022. The pro forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2021, are as follows:
The unaudited pro-forma results of operations are presented for information purpose only. The unaudited pro-forma results are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2021, or to project potential operating results as of any future date or for any future periods. On December 19, 2022, we completed the Green Man Acquisition, consisting of the acquisition of substantially all of the assets of Green Man. We paid cash in the amount of $1,225,000 and stock consideration of 4,494,382 shares of Common Stock. The closing price of our Common Stock on December 19, 2022, the date of license transfer, was $0.18 per share, as such, fair value of the equity consideration is $808,989. An additional $1,500,000 in cash will be paid to the sellers in eighteen (18) equal monthly payments commencing on the 12-month anniversary of the closing. Based on a discount rate of 12%, the fair value of these additional monthly payments is approximately $1,224,846. This liability is included in Notes payable-current and Notes payable-non-current in the accompanying consolidated balance sheets. See Note 13 for additional details. The table below reflects the Company’s preliminary estimates of the acquisition date fair values of the assets acquired:
We have not completed the allocation of the purchase price for the Green Man Acquisition. As of December 31, 2022, the consolidated balance sheet includes a preliminary allocation of fixed assets, inventory, intangible assets, and goodwill. Management anticipates completing the purchase price allocation as soon as possible, but no later than one year from the acquisition date. The accompanying consolidated financial statements include the results of Green Man from the date of acquisition for financial reporting purposes, December 19, 2022. The pro forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2021, are as follows:
The unaudited pro-forma results of operations are presented for information purpose only. The unaudited pro-forma results are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2021, or to project potential operating results as of any future date or for any future periods. |
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DISCONTINUED OPERATIONS |
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| DISCONTINUED OPERATIONS | 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 NBC for a total of $150,000 and 10% of profits generated by the buyer in the states of Michigan, Mississippi, and Massachusetts for a period of twelve months from the closing. On August 2, 2021, the sale of the NBC was completed. Pursuant to amendment, the buyer paid the additional $75,000 in March 2022, and the 10% profit share described above was eliminated. A breakdown of the results of discontinued operations related to the sale of NBC are presented as follows:
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 years ended December 31, 2022 and 2021.
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ACCOUNTS RECEIVABLE |
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| ACCOUNTS RECEIVABLE | NOTE 4. ACCOUNTS RECEIVABLE Our accounts receivable consisted of the following:
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 $6,280 and $53,386 during the years ended December 31, 2022 and 2021, respectively. |
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NOTES RECEIVABLE |
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| NOTES RECEIVABLE | NOTE 5. NOTES RECEIVABLE On August 2, 2021, as part of the closing of the sale of NBC, we agreed to a note receivable of $75,000 due August 2, 2022. This note receivable was collected in full in 2022. |
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| INVENTORIES, NET | NOTE 6. INVENTORIES, NET Our inventories consistent of the following:
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| PREPAIDS AND OTHER CURRENT ASSETS | NOTE 7. PREPAIDS AND OTHER CURRENT ASSETS Our prepaids and other current assets consist of the following:
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| PROPERTY AND EQUIPMENT, NET | NOTE 8. PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following:
Depreciation expense was $182,838 and $192,232, respectively, for the years ended December 31, 2022 and 2021. |
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INTANGIBLE ASSETS AND GOODWILL |
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| INTANGIBLE ASSETS AND GOODWILL | NOTE 9. INTANGIBLE ASSETS AND GOODWILL Intangible assets During the years ended December 31, 2022 and 2021, the Company acquired trade name intangible assets through several acquisitions. See Note 2 for further details of these acquisitions. The amount of trade name intangible assets acquired in each transaction is shown in the table below.
The following table summarizes the change in the Company’s tradename intangible assets from December 31, 2021 to December 31, 2022:
Estimated amortization expense for the next five years is as follows:
Amortization expense was $148,538 and $308,342 for the years ended December 31, 2022 and 2021, respectively. Goodwill The following represents a summary of changes in the carry amount of goodwill for the years ended December 31, 2022 and 2021 on a consolidated basis and by segment: Consolidated
Retail Segment
Cultivation Segment
Cultivation Segment Impairments As of the annual testing date of December 31, 2021, the Company utilized a third-party valuation firm to estimate the fair value of our Cultivation segment, which consisted of a single reporting unit, using a combination of a discounted cash flow approach and market multiple approach. As a result, the Company determined that the fair value of the Cultivation segment was less than the less than the carrying value and recognized a full impairment of goodwill in the Cultivation segment in the amount of $2,484,200 during the year ended December 31, 2021. Due to the impairment of the goodwill and the price declines of marijuana flower in 2021, the Company also tested its intangible assets with finite lives for impairment using the same valuation methodology and assumptions that we used for the goodwill impairment test. As a result, the Company recorded an impairment of $526,220 during the year ended December 31, 2021. As of December 31, 2022, due to the continued declines in the wholesale price of marijuana flower in Colorado, the Company determined that the remaining intangible asset balance in the Cultivation segment was not recoverable based on current cash flow projections and that there was no longer value in the tradename value given the economic conditions in the cultivation sector. Therefore, an impairment of the remaining balance of $278,878 was recorded during the year ended December 31, 2022. Retail Segment Impairments As of December 31, 2021, the goodwill balance and intangible assets balances in the Retail segment related to acquisitions completed in the third and fourth quarters of 2021. The final purchase price allocations for these acquisitions had not been completed as of December 31, 2021. Therefore, no impairment testing was required. As of annual testing date on December 31, 2022, the Company utilized a third-party valuation firm to estimate the fair value of each reporting unit within the Retail segment using a combination of a discounted cash flow approach and market multiple approach. Each dispensary location is considered a separate reporting unit. As a result, the Company determined that the fair value of each of the dispensary locations in Oregon was less than the less than its carrying value. Therefore, the Company recognized goodwill impairments in the Retail segment in the amount of $2,450,941 during the year ended December 31, 2022. Due to the impairment of the goodwill in the Retail segment and sales levels that were below management’s expectations, the Company also tested its intangible assets with finite lives for impairment using the same valuation methodology and assumptions that we used for the goodwill impairment test. The resulting fair value estimates indicated that the fair value of the tradename intangible was less than the carrying value for the Trees MLK and Trees Waterfront dispensaries in Oregon. Therefore, the Company recognized an impairment of $274,500 during the year ended December 31, 2022. |
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LEASES |
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| LEASES | NOTE 10. LEASES The Company’s leases consist primarily of real estate leases for retail, cultivation, and manufacturing facilities. All but one of the Company’s leases are classified as operating leases. The lease for the retail dispensary acquired in the Green Man Transaction is classified as a finance lease. The current and non-current portions of the operating lease liabilities and finance lease liabilities are disclosed separately on the accompanying consolidated balance sheets. The finance lease ROU asset is included in property and equipment, net (see Note 8) and the operating lease ROU asset is disclosed separately on the accompanying consolidated balance sheets. As the rate implicit in the Company’s leases is not readily determinable, we used an estimated incremental borrowing rate of 20% in determining the present value of lease payments. The operating lease expense for the years ended December 31, 2022 and December 31, 2021 is as follows:
The expense associated with the finance lease cost was not material for the year ended December 31, 2022 as the commencement date of the lease was December 19, 2022. Related party leases As of December 31, 2022, three of the Company’s operating leases, one retail dispensary lease, one cultivation facility lease, and one lease that includes both cultivation and retail, are related party leases as the landlords are current board members or employees. Another retail dispensary lease was with a related party through May 2022 when the building was sold to an unaffiliated third-party. During the year ended December 31, 2021, the related party operating leases consisted of one dispensary lease and one cultivation facility. As of December 31, 2022, the ROU asset, operating lease liability, current, and operating lease liability, non-current for the related party leases are $1,074,958, $526,378, and $618,617, respectively. For the years ended December 31, 2022 and December 31, 2021, the total lease expense for related party leases was $434,437 and $516,383, respectively. Lease Maturities Future remaining minimum lease payments on our operating leases and finance lease are as follows:
The total remaining lease payments in the table above include $2,995,100 related to renewal option periods that management is reasonably certain will be exercised. The majority of this amount relates to the flagship Trees location in Englewood, Colorado and the retail and certain cultivation facilities that were acquired in the Green Tree Acquisition and are eligible for renewal in 2023. The total remaining minimum lease payments in the table above exclude $474,574 related to leases that are fully executed but have not yet commenced as of December 31, 2022. As of December 31, 2022, the weighted average remaining term of the Company’s operating leases is 5 years and the remaining term on the finance lease is 10 years. None of the Company’s leases contain residual value guarantees or restrictive covenants. Supplemental cash flow information
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| ACCOUNTS PAYABLE AND ACCRUED EXPENSES | NOTE 11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Our accounts payable and accrued expenses consist of the following:
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| ACCRUED STOCK PAYABLE | NOTE 12. ACCRUED STOCK PAYABLE The following tables summarize the changes in accrued Common Stock payable:
In December 2021, we completed the acquisition of Trees Waterfront. As part of the transaction, we granted 1,669,537 shares of our Common Stock. As of December 31, 2021 this stock had not been issued. The stock was subsequently issued on January 6, 2022. The outstanding balance of accrued stock payable as of December 31, 2022 relates to a February 18, 2020 grant of 100,000 fully vested shares for consulting services. Based on a stock price of $0.61 on the date of grant, the consultant will receive $60,900 worth of our Common Stock. As of December 31, 2022, none of the stock had been issued.
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NOTES PAYABLE |
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| NOTES PAYABLE | NOTE 13. NOTES PAYABLE Our notes payable consisted of the following:
Aggregate Maturities As of December 31, 2022, aggregate future contractual maturities of long-term debt (excluding issue discounts) are as follows:
Trees Transaction Notes In September 2021, with the completion of the Englewood acquisition, we are obligated to pay the Seller cash equal to $1,732,884 in equal monthly installments over a period of 24 months. The monthly payments began on October 15, 2021, and the payment is equal to $72,204 per month. In December 2021, with the completion of the Trees Portland and Trees Waterfront acquisitions, we are obligated to pay the Seller cash equal to $497,371 in equal monthly installments over a period of 24 months. The payments began on February 15, 2022, and the payment is equal to $20,724 per month. In January 2022, with the completion of the Trees MLK acquisition, we are obligated to pay the Seller cash equal to $384,873 in equal monthly installments over a period of 24 months. The payments began on June 15, 2022, and the payment is equal to $16,036 per month. In December 2022, with the completion of the Green Tree Acquisition, we are obligated to pay the Seller cash equal to $3,500,000 in equal monthly installments over a period of 15 months. The payments begin in September 2023, and the payment is equal to $233,333 per month. In December 2022, with the completion of the Green Man Acquisition, we are to pay the Seller cash equal to $1,500,000 in equal monthly installments over a period of 18 months. The payments begin in December 2023, and the payment is equal to $83,333 per month. 12% Notes On September 15, 2022, we entered into a Securities Purchase Agreement with certain accredited investors (the "12% Investors”), pursuant to which we agreed to issue and sell senior secured convertible notes (the "12% Notes”) with an aggregate principal amount of $13,500,000 to such 12% Investors, in exchange for payment by certain 12% Investors of an aggregate amount of $10,587,250 in cash, as well as cancellation of outstanding indebtedness in the aggregate amount of $2,912,750 represented by the 10% Notes discussed below. In connection with the 12% Notes, the 12% Investors received warrants (the "12% Warrants”) to purchase shares of our Common Stock equal to 20% coverage of the aggregate principal amount with an exercise price of $0.70 per share, which equals an aggregate of warrants to purchase 3,857,150 shares of Common Stock. The lead 12% Investor received an additional 10% warrant coverage on the aggregate principal amount of 12% Notes for total additional warrants to purchase 1,928,571 shares of our Common Stock. The lead 12% Investor also will receive a five percent fee on the aggregate principal amount of the 12% Notes. This total fee in the amount of $675,000 was recorded as a debt discount and will be amortized over the life of the loan. The 12% Notes bear interest at an annual rate of 12% and will mature on September 16, 2026. The 12% Investors have the option to convert up to 50% of the outstanding unpaid principal and accrued interest of the 12% Notes into Common Stock at a fixed conversion price equal to $1.00 per share. The relative fair value of the new funding on the 12% Warrants was recorded as a debt discount and additional paid-in capital of $569,223. The relative fair value of the cancellation of the outstanding indebtedness was recorded as an extinguishment of debt and additional paid-in capital of $103,577. We recorded amortization of debt discount expense from the 12% Notes of $90,334 and nil for the year ended December 31, 2022 and 2021, respectively. We determined there was no beneficial conversion feature on the 12% Notes issued. The 12% Notes are treated as conventional debt. For purposes of determining the debt discount, the underlying assumptions used in the black-scholes model to determine the fair value of the 12% Warrants as of September 15, 2022, were:
10% Notes In December 2020, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement’) with certain accredited investors (the “10% Investors”), pursuant to which we issued and sold senior convertible promissory notes (the “10% Notes”) with an aggregate principal amount of $2,940,000 in exchange for payment to us by certain 10% Investors of an aggregate amount of $1,940,000 in cash, as well as cancellation of outstanding indebtedness of the 15% Notes (defined below) in the aggregate amount of $1,000,000. In connection with the issuance of the 10% Notes, the holders of the 10% notes received warrants (the “10% Warrants”) to purchase shares of our Common Stock equal to 20% coverage of the aggregate principal amount at $0.56 per share. In the aggregate, this equals 1,050,011 shares of our Common Stock. The 10% Notes will bear interest at an annual rate of 10% and will mature on December 23, 2023. The 10% Investors have the option at any time to convert up to 50% of the outstanding unpaid principal and accrued interest of the Notes into Common Stock at a variable price of 80% of the market price but no less than $0.65 per share and no more than $1.00 per share. The 10% Warrants are exercisable at an exercise price of $0.56 per 10% Warrant. The relative fair value of the new funding on the 10% Warrants was recorded as a debt discount and additional paid-in capital of $254,400. The relative fair value of the cancellation of the outstanding indebtedness was recorded as an extinguishment of debt and additional paid-in capital of $131,000. For the years ended December 31, 2022 and 2021, amortization of debt discount expense was $84,375 and $86,759, respectively, from the 10% Notes. We determined there was no beneficial conversion feature on the 10% Notes. The 10% Notes are treated as conventional debt. For purposes of determining the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the 10% Warrants as of December 31, 2020, were:
On February 8, 2021, we entered into a Securities Purchase Agreement with an accredited 10% Investor, pursuant to which we issued and sold 10% Notes with an aggregate principal amount of $1,660,000 to such 10% Investor. The 10% Notes are part of an over-allotment option exercised by us in connection with the convertible note offering consummated on December 23, 2020, as discussed above. In connection with the issuance of the 10% Notes, the holder received warrants to purchase shares of our Common Stock equal to 20% coverage of the aggregate principal amount at $0.56 per share. In the aggregate, this equals 592,858 shares of our Common Stock. The 10% Notes bear interest at an annual rate of 10% and will mature on February 8, 2024. The 10% Investor has the option to convert up to 50% of the outstanding unpaid principal and accrued interest of the 10% Notes into Common Stock at a variable price of 80% of the market price but no less than $0.65 per share and no more than $1.00 per share. The 10% Warrants are exercisable at an exercise price of $0.56 per warrant. The relative fair value of the new funding on the 10% Warrants was recorded as a debt discount and additional paid-in capital of $429,300. We determined that this 10% Note had a beneficial conversion feature and is calculated at its intrinsic value (that is, the difference between the effective conversion price of $0.66 at the date of the note issuance and the fair value of the Common Stock into which the debt is convertible at the commitment date, per share being $0.90, multiplied by the number of shares into which the debt is convertible). The valuation of the beneficial conversion feature recorded cannot be greater than the face value of the note issued. For the years ended December 31, 2022 and 2021, amortization of debt discount expense was $594,721 and $252,118, respectively. The 10% Notes are treated as conventional debt. For purposes of determining the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the 10% Warrants as of February 8, 2021, were:
On April 20, 2021, we entered into a Securities Purchase Agreement with accredited 10% Investors, pursuant to which we issued and sold 10% Notes with an aggregate principal amount of $2,300,000 to such 10% Investors. The 10% Notes are part of an over-allotment approved by the existing noteholders in connection with the original convertible note offering of $4,600,000 consummated on December 23, 2020 and February 8, 2021. In connection with the issuance of the 10% Notes, each holder received warrants to purchase shares of our Common Stock equal to 20% coverage of the aggregate principal amount at $0.56 per share, except that the warrants coverage to one Investor acting as lead investor in the raise received approximately 35.5% of the aggregate principal amount invested. The 10% Notes bear interest at an annual rate of 10% and will mature on April 20, 2024. The 10% Investors have the option to convert up to 50% of the outstanding unpaid principal and accrued interest of the 10% Notes into Common Stock at a variable price of 80% of the market price but no less than $0.65 per share and no more than $1.00 per share. The 10% Warrants are exercisable at an exercise price of $0.56 per warrant. The relative fair value of the new funding on the 10% Warrants was recorded as a debt discount and additional paid-in capital of $810,000. We determined that these 10% Notes had a beneficial conversion feature and is calculated at its intrinsic value (that is, the difference between the effective conversion price of $0.49 at the date of the note issuance and the fair value of the Common Stock into which the debt is convertible at the commitment date, per share being $0.83, multiplied by the number of shares into which the debt is convertible). The valuation of the beneficial conversion feature recorded cannot be greater than the face value of the note issued. We recorded $692,500 as additional paid in capital and a debt discount and included in our consolidated statement of operations. For the years ended December 31, 2022 and 2021, amortization of debt discount expense was $1,024,442 and $350,471, respectively. The 10% Notes are treated as conventional debt. For purposes of determining the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the 10% Warrants as of April 20, 2021, were:
See Note 17 for a summary of the outstanding warrants issued in conjunction with our debt. |
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WARRANT DERIVATIVE LIABILITY |
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| WARRANT DERIVATIVE LIABILITY | NOTE 14. WARRANT DERIVATIVE LIABILITY On May 31, 2019, we received gross proceeds of $3 million by issuing three million shares of our Common Stock and three million warrants (“2019 Warrants”) to purchase shares of our Common Stock (“2019 Units”) in a registered direct offering for $1.00 per 2019 Unit (collectively defined as the “2019 Capital Raise”). The 2019 Warrants, issued with the 2019 Capital Raise, are accounted for as a derivative liability. The 2019 Warrant agreements contain a cash settlement provision whereby the holders could settle the warrants for cash based on the Black-Scholes value, upon certain fundamental transactions, as defined in the 2019 Warrant agreement, that are considered outside of the control of management, such as a change of control. The original exercise price of the 2019 Warrants was $1.30 per share. The 2019 Warrants contain certain anti-dilution adjustment provisions with respect to subsequent issuances of securities by the Company at a price below the exercise price of such warrants. As a result of such subsequent issuances of securities by the Company through 2020, at a price lower than the original exercise price, the exercise price of the 2019 Warrants had decreased to $0.40 per share and the number of shares subject to the 2019 Warrants increased to 9,591,614 shares of Common Stock as of December 31, 2020. In February 2020, one of the warrant holders exercised 200,000 warrants. We received $90,000 in cash for the exercise and booked an adjustment to the derivative liability of $82,241 as a result of the transaction. During the year ended December 31, 2020 the warrant holders exercised 7,945,807 warrants into 2,443,641 shares of our Common Stock through cashless exercise. We booked an adjustment to the derivative liability of $3,241,188 as a result. During the first quarter of 2021 the warrant holders exercised 1,323,000 warrants into 747,208 shares of our Common Stock through cashless exercise. We recorded an adjustment to the derivative liability of $1,523,117 as a result. During the year ended December 31, 2022 and 2021, we recognized a $22,809 gain and a $990,066 loss on the change in fair value of the derivative liability, respectively. As of December 31, 2022, there were 322,807 of the 2019 Warrants outstanding. The following are the key assumptions that were used to determine the fair value of the 2019 Warrants:
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:
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COMMITMENTS AND CONTINGENCIES |
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| COMMITMENTS AND CONTINGENCIES | NOTE 15. COMMITMENTS AND CONTINGENCIES Legal From time to time, the Company is a party to various litigation matters incidental to the conduct of its business. The Company is not presently a party to any legal proceedings that would have a material adverse effect on its business, operating results, financial condition, or cash flows, except as set forth below. In July 2021, we were served with a Complaint in the District Court, County of Denver, Colorado, by plaintiff 2353 SB, LLC (“Plaintiff”). We entered into a lease with Plaintiff for the premises at 2353 South Broadway, Denver, CO with a term of (3) years to commence on November 1, 2020. Monthly lease payments were to be $12,866.66. In 2020, we made initial payments (first month’s rent, last month’s rent, and security deposit) of $39,633.32; but subsequently did not take possession of the premises and have made no further payments in respect thereof, as a direct result of the COVID-19 pandemic. The lease contains a ‘force majeure’ clause which includes a provision that neither party is liable for failure to perform its obligations under the lease which have become practicably impossible because of circumstances beyond the reasonable control of the applicable party, including ‘pandemics or outbreak of communicable disease.’ We have taken the position that our failure to take possession and make any further payments under the lease is directly related to the COVID-19 pandemic. We are vigorously defending this action and believe that the above-referenced force majeure clause presents a complete defense to Plaintiff’s claims. We filed a motion to dismiss or a motion for summary judgment in the alternative. Plaintiff filed a response and cross-motion for summary judgment thereafter. In October 2022, the court denied the motion to dismiss on the basis that Plaintiff sufficiently pled facts that raise a plausible claim for relief, notwithstanding our possible defenses, but has not specifically made any rulings on either party’s motion for summary judgment. On November 14, 2022, we timely filed a formal answer to the complaint, denying each of Plaintiff’s substantive claims. We also asserted appropriate affirmative defenses, including the force majeure clause of the lease, which provides that we are not liable under the lease in the event of a variety of events outside our control, including “pandemics.” In addition, we have asserted a counterclaim against Plaintiff for breach of contract to recover the initial payments made under the lease as well as attorneys’ fees and costs. The trial is currently scheduled for September 2023. |
DEFERRED TAXES |
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| DEFERRED TAXES | NOTE 16. DEFERRED TAXES Income tax expense was $204,917 and nil for the years ended December 31, 2022 and 2021, respectively. Significant components of the Company’s deferred tax assets and liabilities at December 31, 2022 and 2021 are shown below. A valuation allowance has been established as realization of such net 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 net 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, 2022 and 2021, the Company had federal operating loss carryforwards of approximately $32.1 million and $36.0 million, respectively, and $41.1 and $41.4 million of state net operating loss carryforwards, respectively. Of the current net operating loss carryforwards, $24.1 million expire starting in 2033 through 2037, $3.1 million will expire starting in 2041, $3.7 million will expire in 2042, and $42.3 million do not expire. The Company has evaluated ownership changes pursuant to IRC Sections 382 and 383. The annual Section 382 base limit is approximately $461 thousand. The additional deemed RBIG pursuant to Notice 2003-65 is approximately $2 million per year for a 5-year recognition period through December 31, 2026. The components of net deferred tax assets and liabilities are as follows:
A reconciliation of our income tax provision and the amounts computed by applying statutory rates to income before income taxes is as follows:
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STOCKHOLDERS' EQUITY |
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| STOCKHOLDERS' EQUITY | 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. The total number of Units sold was 1,180. Each Unit consists of one share of Series A Preferred and 354,000 Preferred Warrants. The purchase price of each Unit was $1,000, 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 not less than $5,000,000. The Certificate of Designation of the Series A Preferred Stock (“Certificate of Designation”) was filed with the Secretary of the State of Colorado on September 14, 2021. The Certificate of Designations established the new preferred series entitled “Series A Convertible Preferred Stock” with no par value per share, and sets forth the rights, restrictions, preferences, and privileges of the Series A Preferred, summarized as follows:
The Preferred Warrants have a five-year term and an exercise price per Preferred Warrant share of $1.05. The warrants contain an anti-dilution provision pursuant to which upon we do a future capital raise at less than $1.00 per shares, each Preferred Investor will be granted additional Preferred Warrants on a ‘full-ratchet’ basis. The proceeds received in the sale of the Series A Preferred totaled $1,180,000, for the issuance of 1,180 Series A Preferred, plus 354,000 warrants. The warrants were valued using a Black Scholes model, at $117,131 and per the relative fair value allocation, $1,073,446 was allocated to the Series A proceeds. In addition to the Preferred Warrants, the Company has outstanding warrants related to prior equity offerings. The table below summarizes the warrants issued in conjunction with our equity offerings:
Warrants with Debt The Company has also issued warrants in conjunction with debt issuances. The following summarizes warrants issued in conjunction with our debt issuances:
Stock-based compensation Stock-based Awards As of December 31, 2022, 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 25 million shares. As of December 31, 2022, stock-based awards for approximately 17.5 million shares are available to be issued under the Stock Incentive Plans. Stock Options The following summarizes stock option activity for the years ended December 31, 2022 and 2021:
The options granted in 2022 and 2021 expire five years from the date of grant and vest over a period of one year. The grant date fair value of the awards granted in 2022 and 2021, totaled $56,348 and $628,496, respectively. The following summarizes the Black-Scholes assumptions used to value the Employee Awards granted:
As of December 31, 2022, there was approximately $13,172 of total unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of four months. Restricted Stock Awards On April 1, 2022 we entered into a Restricted Stock Unit Agreement with four participants. The Restricted Stock Unit’s (“RSU”) were granted pursuant to our 2020 Omnibus Incentive Plan. separate executives were each granted 300,000 RSU’s, for a total grant of 1,200,000 RSU’s. The 300,000 RSU’s are divided into equal tranches of 100,000 RSU’s. Each tranche of RSU will vest immediately if and upon the market price reaching a certain minimum market price of our Common Stock as reported on the OTCQB market. Each tranche will vest as the market price reaches $1.00, $2.00 and $3.00. Upon the RSU’s vesting, the participant will be promptly issued shares of our Common Stock. If there is a change in control, all unvested RSU’s granted under this agreement will become fully vested and the vested RSU’s will be paid out or settled. The grant date fair value of these instruments is $535,976 and was calculated using the Monte Carlo model. The fair value of the RSU’s is recognized over the requisite service period. As these RSU’s do not have a service period, we used the requisite service period derived from the valuation of 10 years. As of December 31, 2022, none of the RSU’s have vested. The Company recognized $188,330 and $307,963 of expense related to stock-based awards during the years ended December 31, 2022 and December 31, 2021, respectively. |
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| NET LOSS PER SHARE | 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. The following summarizes equity instruments that may, in the future, have a dilutive effect on earnings per share:
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RELATED PARTY TRANSACTIONS |
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| RELATED PARTY TRANSACTIONS | 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. We paid Mr. Hershey $125,000 and $99,996 during the years ended December 31, 2022 and 2021, respectively. We currently have a lease agreement with Dalton Adventures, LLC in which we rent a greenhouse cultivation facility in Boulder, Colorado. The owner of Dalton Adventures, LLC is a principal shareholder and board member of the Company. We incurred approximately $362,000 and $458,000 of rent expense related to this lease for the years ended December 31, 2022 and 2021, respectively. See Note 10 for further discussion of the Company’s obligations associated with related-party leases. We currently have a lease agreement with JLA Enterprises, LLC in which we rent a retail dispensary in Longmont, Colorado. A board member and an executive level employee of the Company are owners of JLA Enterprises, LLC. We also have a lease agreement with ALJ 1090, LLC in which we rent a building that has a retail dispensary and cultivation facility in Berthoud, Colorado. The same board member is an owner of ALJ 1090, LLC. These leases were assumed as part of the Green Tree Acquisition on December 12, 2022, and as such, the expense related to these leases was not material for the year ended December 31, 2022. See Note 10 for further discussion of the Company’s obligations associated with related-party leases. We previously had a lease agreement with Bellewood Holdings, LLC in which we leased the retail space for the Trees Englewood dispensary in Englewood, Colorado. The owner of Bellewood Holdings, LLC is a principal shareholder and board member of the Company. This lease was assigned to a new landlord (unaffiliated with the Company or such principal shareholder and board member) when the building was sold in June 2022. We incurred approximately $66,000 and $47,000 of related-party lease expense for this lease for the years ended December 31, 2022 and December 31, 2021, respectively. See Note 10 for further discussion of the Company’s obligations associated with related-party leases. As of December 31, 2022, four of our current board members hold senior convertible promissory notes from the Company for an aggregate amount of $320,000. These notes are included in the 12% Notes discussed in Note 13. Accrued interest earned and owed to the board members was $11,738 as of December 31, 2022. One of the sellers in the Trees Transaction is a principal shareholder and board member of the Company and another seller is an executive level employee of the Company. As of December 31, 2022, the Company has outstanding debt related to the Trees Transaction payable to these individuals. See Note 13 for disclosure of the Trees Transaction Notes. One former owner of the Green Tree Entities is a current board member and another former owner is currently an executive level employee of the Company. As of December 31, 2022, the Company has outstanding debt related to the Green Tree Acquisition that is payable to these individuals. See Note 13 for disclosure of the Green Tree Acquisition Notes. In addition, the Company made one-item bonus payments of approximately $383,000 to each former owner as part of employment agreements to remain with the Company. These payments are included in selling, general, and administrative expenses in the accompanying consolidated statements of operations. |
SEGMENT INFORMATION |
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| SEGMENT INFORMATION | NOTE 20. SEGMENT INFORMATION Our operations are organized into two segments: Retail and Cultivation. All revenue originates in, and all assets are located in the United States. Segment information is presented in accordance with ASC 280, Segments Reporting. This standard is based on a management approach that requires segmentation based upon the Company’s internal organization and disclosure of revenue and certain expenses based upon internal accounting methods. The Company’s financial reporting systems present various data for management to run the business, including internal profit and loss statements prepared on a basis not consistent with GAAP. The following information is presented net of discontinued operations. For more information see Note 3. Year ended December 31
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SUBSEQUENT EVENTS |
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| SUBSEQUENT EVENTS | NOTE 21. SUBSEQUENT EVENTS In February 2023, we completed the acquisition of Station 2, LLC, the assets of which consist of a dispensary located in Denver, CO. The consideration paid by the Company consists of cash at closing equal to $256,582 plus an additional $385,873 in (24) equal monthly payments commencing May 2023. Timothy Brown, one of our Board members, was the sole owner of Station 2 and has and will receive all consideration described above.
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NATURE OF OPERATIONS, HISTORY AND PRESENTATION (Policies) |
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| NATURE OF OPERATIONS, HISTORY AND PRESENTATION | ||||||||||||||||||||||||||||||||||||||||||||||
| Nature of Operations | Nature of Operations TREES Corporation, a Colorado Corporation (the “Company,” “we,” “us,” “our,” or “TREES”) (formerly, General Cannabis Corp), 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, 2022, our operations are segregated into the following segments: Retail (“Retail Segment”) Through a series of acquisitions in 2021 and 2022, we operated four retail dispensaries in Colorado and three retail dispensaries in Oregon as of December 31, 2022. See Note 2 for details of the acquisitions. We acquired the license for an additional dispensary in Colorado in February of 2023, and opened that location in April 2023. Cultivation (“Cultivation Segment”) Through our acquisition of SevenFive Farm in May 2020, we operate a licensed 17,000 square foot light deprivation greenhouse cultivation facility. We acquired additional cultivation facilities in December 2022 through the Green Tree acquisition. During 2022, there was one customer that accounted for over 10% of our third-party cultivation revenue, and during 2021 there were two customers that each accounted for over 10% of , of third -party cultivation revenue. |
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| Discontinued Operations | Discontinued Operations Through Next Big Crop, LLC (“NBC”), we delivered comprehensive consulting services to the cannabis industry that included obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and construction, and expansion of existing operations. NBC oversaw our wholesale equipment and supply business, operating under the name “GC Supply,” which provided turnkey sourcing and stocking services to cultivation, retail, and infused products manufacturing facilities. Our products included building materials, equipment, consumables, and compliance packaging. NBC also provided operational support for our internal cultivation. On July 16, 2021, we entered into an Asset Purchase Agreement with an individual to sell substantially all the assets of NBC for a total of $150,000 and 10% of profits generated by the buyer in the states of Michigan, Mississippi, and Massachusetts for a period of twelve months from the closing. On August 2, 2021, the sale of NBC was completed. |
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| Basis of Presentation | Basis of Presentation The accompanying consolidated financial statements include the results of TREES and its nine wholly-owned (direct and indirect) subsidiary companies, each a Colorado corporation or limited liability company:
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 assumptions. Furthermore, when testing assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment charges may result. |
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| Going Concern | 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 $2,583,833 as of December 31, 2022 is not sufficient to absorb our operating losses and retire our debt and lease obligations of $22,540,136 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 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.
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| Liquidity | Liquidity The Company incurred net losses of $9.5 million and $8.9 million in the years ended December 31, 2022 and 2021, respectively, and had an accumulated deficit of $93.4 million as of December 31, 2022. The Company had cash and cash equivalents of $2.6 million and $2.1 million as of December 31, 2022 and 2021, respectively. 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, 2022 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. The Company may need additional funding to support its planned investing activities. If the Company is unable to obtain additional funding, it would be forced to delay, reduce, or eliminate some or all of its acquisition efforts, which could adversely affect its business prospects. |
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| Reclassifications | 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. |
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| Cash and Cash Equivalents | 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. |
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| Inventories | 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. |
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| Accounts Receivable, net | 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. |
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| Right-of-use Asset / Lease Liability | 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. We recognize ROU assets and lease liabilities on the balance sheet for leases with a lease term of greater than one year. The Company elected to combine the lease and related non-lease components (common area maintenance and operating costs) and treat them as a single lease component. ROU assets and lease liabilities are recognized at the commencement date of the lease based on the present value of the fixed lease payments over the lease term. The Company’s operating leases include options to extend or terminate the lease, which are not included in the determination of the ROU asset or lease liability unless reasonably certain to be exercised. Payments that are not fixed at the commencement of the lease are considered variable and are excluded from the measurement of the ROU asset and lease liability and are expensed as incurred in the statement of operations. Variable payments typically included payment for common area maintenance and reimbursement of the landlords operating costs as the amounts change from year to year based on actual costs incurred. 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. For the Company’s finance lease, interest expense is recognized on the lease liability using the effective interest method and depreciation of the finance lease ROU asset is recognized on a straight-line basis over the lease term. |
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| Property and Equipment, net | 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: thirty years for buildings, the lesser of ten years or the life of the lease for leasehold improvements, and to fifteen years for furniture, fixtures and equipment, software, vehicles, and biological assets. Land is not depreciated. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations. |
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| Business Combinations | 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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| Goodwill and Intangibles | 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. 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. |
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| Debt | 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 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. |
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| Fair Value of Financial Instruments | 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, 2022 and 2021. 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, 2022 and 2021. 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). 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. |
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| Warrant Instruments | 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. |
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| Revenue Recognition | Revenue Recognition We have two main revenue streams: (i) retail product sales; and (ii) wholesale 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 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. 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. |
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| Stock-based Payments | 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. |
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| Shipping and Handling | 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. |
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| Income Taxes | 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, 2022 and 2021, determined that there were no material uncertain tax positions. In general, the tax returns for the years ending December 31, 2019 through 2021 are open to examination by federal and state authorities. |
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| Reportable Segments | 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 | 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 Accounting Standards Update (“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 adopted this ASU in the first quarter of 2022, and the adoption did not have a material effect on our financial statements. |
ACQUISITIONS (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TREES Englewood | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of purchase price allocation |
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| Schedule of pro forma results of operations |
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| Trees Oregon | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of purchase price allocation |
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| Schedule of pro forma results of operations |
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| Trees MLK, Inc. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of purchase price allocation |
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| Green Tree LLC | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of purchase price allocation |
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| Schedule of pro forma results of operations |
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| Green Man Corp | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of purchase price allocation |
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| Schedule of pro forma results of operations |
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DISCONTINUED OPERATIONS (Tables) |
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Dec. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| DISCONTINUED OPERATIONS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of net income (loss) from discontinued operations |
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| Schedule of selected information on cash flows related to discontinued operations |
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ACCOUNTS RECEIVABLE (Tables) |
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Dec. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||
| ACCOUNTS RECEIVABLE | |||||||||||||||||||||||||||||||||||||||||||
| Schedule of accounts receivable |
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INVENTORIES, NET (Tables) |
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Dec. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||
| INVENTORIES, NET | |||||||||||||||||||||||||||||||||||||||||||
| Schedule of inventories |
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PREPAIDS AND OTHER CURRENT ASSETS (Tables) |
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Dec. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| PREPAIDS AND OTHER CURRENT ASSETS | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of prepaids and other current assets |
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PROPERTY AND EQUIPMENT, NET (Tables) |
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Dec. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PROPERTY AND EQUIPMENT, NET | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of property and equipment |
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INTANGIBLE ASSETS AND GOODWILL (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INTANGIBLE ASSETS AND GOODWILL | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of intangible assets |
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| Schedule of Intangible Assets Other than Goodwill Roll forward |
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| Schedule of estimated amortization expense of intangible assets |
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| Summary of changes in amount of goodwill |
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LEASES (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LEASES | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Operating lease expense |
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| Schedule of Lease maturities Operating |
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| Supplemental cash flow information |
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ACCOUNTS PAYABLE AND ACCRUED EXPENSES (Tables) |
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Dec. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| ACCOUNTS PAYABLE AND ACCRUED EXPENSES | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of accounts payable and accrued expenses |
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ACCRUED STOCK PAYABLE (Tables) |
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Dec. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ACCRUED STOCK PAYABLE | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of accrued common stock payable |
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NOTES PAYABLE (Tables) |
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Dec. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class of Warrant or Right [Line Items] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of notes payable |
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| Schedule of maturities of long-term debt |
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| 10% Warrants | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class of Warrant or Right [Line Items] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of underlying assumptions used in the binomial lattice model to determine the fair value of Warrants | For purposes of determining the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the 10% Warrants as of December 31, 2020, were:
For purposes of determining the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the 10% Warrants as of February 8, 2021, were:
For purposes of determining the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the 10% Warrants as of April 20, 2021, were:
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| 12% Warrants | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class of Warrant or Right [Line Items] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of underlying assumptions used in the binomial lattice model to determine the fair value of Warrants | For purposes of determining the debt discount, the underlying assumptions used in the black-scholes model to determine the fair value of the 12% Warrants as of September 15, 2022, were:
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WARRANT DERIVATIVE LIABILITY (Tables) |
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Dec. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| WARRANT DERIVATIVE LIABILITY. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of key assumptions used to determine fair value of warrants | The following are the key assumptions that were used to determine the fair value of the 2019 Warrants:
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| Summary of the changes in the fair value of the warrant derivative liability | 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:
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DEFERRED TAXES (Tables) |
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Dec. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| DEFERRED TAXES | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of components of net deferred tax |
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| Schedule of reconciliation of income tax provision and the amounts computed by applying statutory rates to income before income taxes |
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STOCKHOLDERS' EQUITY (Tables) |
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Dec. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders Equity [Line Items] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of defined benefit plan, assumptions |
|
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| Schedule of stockholders' equity note, warrants or rights |
|
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| Employee Awards [Member] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders Equity [Line Items] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Employee Awards activity |
|
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| Warrants with Debt [Member] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders Equity [Line Items] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of stockholders' equity note, warrants or rights |
|
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NET LOSS PER SHARE (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| NET LOSS PER SHARE | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of potentially dilutive securities |
|
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SEGMENT INFORMATION (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SEGMENT INFORMATION | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of segment reporting information, by segment | Year ended December 31
|
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| Reconciliation of assets from segment to consolidated |
|
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DISCONTINUED OPERATIONS (Details) - Discontinued Operations, Held-for-sale - Next Big Crop [Member] - USD ($) |
Jul. 16, 2021 |
Aug. 02, 2016 |
Jul. 16, 2016 |
|---|---|---|---|
| DISCONTINUED OPERATIONS | |||
| Total of consideration | $ 150,000 | $ 150,000 | |
| Percentage of profits generated | 10.00% | 10.00% | |
| Period for percentage of profit | twelve months | twelve months | |
| Additional consideration | $ 75,000 | ||
| Percentage of profit eliminated | 10.00% |
DISCONTINUED OPERATIONS - Summary of the Discontinued Operations (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| DISCONTINUED OPERATIONS | ||
| Total revenues | $ 3,438 | $ 1,138,758 |
| Cost of sales | 1,157,035 | |
| Selling, general and administrative | (2,040) | 407,648 |
| Professional fees | 4,944 | |
| Depreciation and amortization | 11,359 | |
| Total costs and expenses | (2,040) | 1,580,986 |
| Income (loss) from discontinued operations | 5,478 | (442,228) |
| Service revenues | ||
| DISCONTINUED OPERATIONS | ||
| Total revenues | 523,994 | |
| Product revenues | ||
| DISCONTINUED OPERATIONS | ||
| Total revenues | $ 3,438 | $ 614,764 |
DISCONTINUED OPERATIONS - Cash Flows Related to Discontinued Operations (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| DISCONTINUED OPERATIONS | ||
| Accounts receivable | $ 43,095 | $ 45,402 |
| Prepaid expenses and other assets | (16,523) | 595,324 |
| Accounts payable and accrued expenses | $ 785,405 | (168,716) |
| Discontinued Operations. | ||
| DISCONTINUED OPERATIONS | ||
| Accounts receivable | 187,185 | |
| Prepaid expenses and other assets | 519,274 | |
| Depreciation and amortization | 11,359 | |
| Accounts payable and accrued expenses | (169,492) | |
| Customer deposits | $ (517,931) | |
ACCOUNTS RECEIVABLE (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| ACCOUNTS RECEIVABLE | ||
| Bad debt expense | $ 6,280 | $ 53,386 |
ACCOUNTS RECEIVABLE - Schedule of Accounts Receivable (Details) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| ACCOUNTS RECEIVABLE. | ||
| Accounts receivable | $ 83,373 | $ 141,188 |
| Less: Allowance for doubtful accounts | (42,000) | (61,000) |
| Total | $ 41,373 | $ 80,188 |
NOTES RECEIVABLE (Details) - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
Aug. 02, 2021 |
|
| NOTES RECEIVABLE | |||
| Proceeds on notes receivable | $ 75,000 | $ 591,717 | |
| NBC Note | |||
| NOTES RECEIVABLE | |||
| Notes receivable | $ 75,000 | ||
NOTES RECEIVABLE - Schedule of Notes Receivable (Details) |
Aug. 02, 2021
USD ($)
|
|---|---|
| NBC Note | |
| Accounts, Notes, Loans and Financing Receivable [Line Items] | |
| Notes receivable | $ 75,000 |
INVENTORIES, NET (Details) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| INVENTORIES, NET | ||
| Raw materials | $ 8,883 | $ 13,343 |
| Work-in-progress and finished goods | 2,057,779 | 1,109,740 |
| Inventories | $ 2,066,662 | $ 1,123,083 |
PREPAIDS AND OTHER CURRENT ASSETS (Details) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| PREPAIDS AND OTHER CURRENT ASSETS | ||
| Security Deposits | $ 140,628 | $ 45,000 |
| Prepaid insurance | 86,071 | 79,897 |
| Other | 32,899 | 24,178 |
| Total prepaids and other current assets | $ 259,598 | $ 149,075 |
PROPERTY AND EQUIPMENT, NET - Depreciation Expense (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| PROPERTY AND EQUIPMENT, NET | ||
| Depreciation expense | $ 182,838 | $ 192,232 |
PROPERTY AND EQUIPMENT, NET - Schedule of Property and Equipment (Details) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| PROPERTY AND EQUIPMENT, NET | ||
| Furniture, fixtures and equipment | $ 1,484,432 | $ 950,380 |
| Finance lease ROU - building | 766,623 | |
| Software | 103,817 | 103,817 |
| Biological assets | 13,000 | 13,000 |
| Total | 2,367,872 | 1,067,197 |
| Less: Accumulated depreciation | (419,903) | (386,870) |
| Total property and equipment, net | $ 1,947,969 | $ 680,327 |
INTANGIBLE ASSETS AND GOODWILL - Schedule of Intangible Assets (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| INTANGIBLE ASSETS | ||
| Intangible Assets, net | $ 2,543,898 | |
| Green Man Corp | ||
| INTANGIBLE ASSETS | ||
| Intangible Assets, net | $ 150,000 | |
| Estimated Life (in years) | 1 year | |
| Green Tree LLC | ||
| INTANGIBLE ASSETS | ||
| Intangible Assets, net | $ 950,000 | |
| Estimated Life (in years) | 2 years | |
| Trees MLK, Inc. | ||
| INTANGIBLE ASSETS | ||
| Intangible Assets, net | $ 88,000 | |
| Estimated Life (in years) | 10 years | |
| Trees Portland LLC | ||
| INTANGIBLE ASSETS | ||
| Intangible Assets, net | $ 292,000 | |
| Estimated Life (in years) | 10 years | |
| Trees Waterfront LLC | ||
| INTANGIBLE ASSETS | ||
| Intangible Assets, net | $ 217,000 | |
| Estimated Life (in years) | 10 years | |
| TREES Englewood | ||
| INTANGIBLE ASSETS | ||
| Intangible Assets, net | $ 1,399,000 | |
| Estimated Life (in years) | 10 years | |
| Tradename | ||
| INTANGIBLE ASSETS | ||
| Intangible Assets, Gross | $ 3,016,403 | $ 6,323,780 |
| Accumulated Amortization | (472,505) | (323,967) |
| Intangible Assets, net | $ 2,543,898 | $ 5,999,813 |
INTANGIBLE ASSETS AND GOODWILL - Estimated Amortization Expense (Details) |
Dec. 31, 2022
USD ($)
|
|---|---|
| Estimated amortization expense | |
| 2022 | $ 788,758 |
| 2023 | 618,073 |
| 2024 | 169,100 |
| 2025 | 169,100 |
| 2026 | 169,100 |
| Thereafter | 629,767 |
| Intangible Assets, net | $ 2,543,898 |
INTANGIBLE ASSETS AND GOODWILL - Rollforward (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| Accumulated Amortization | ||
| Amortization expense | $ 148,538 | $ 308,342 |
| Net Tradename | ||
| Finite-Lived Intangible Assets, Net, Ending Balance | 2,543,898 | |
| Trade name | ||
| Gross Tradename | ||
| Balance as of Beginning of period | 6,323,780 | |
| Purchase price allocation adjustments | (3,942,000) | |
| Tradename intangibles acquired | 1,188,000 | |
| Impairment of finite lived intangibles | (553,377) | |
| Balance as of End of period | 3,016,403 | 6,323,780 |
| Accumulated Amortization | ||
| Balance as of Beginning of period | (323,967) | |
| Amortization expense | (148,538) | |
| Balance as of End of period | (472,505) | (323,967) |
| Net Tradename | ||
| Finite-Lived Intangible Assets, Net, Beginning Balance | 5,999,813 | |
| Finite-Lived Intangible Assets, Net, Ending Balance | $ 2,543,898 | $ 5,999,813 |
INTANGIBLE ASSETS AND GOODWILL - Amortization Expense (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| INTANGIBLE ASSETS AND GOODWILL | ||
| Amortization expense | $ 148,538 | $ 308,342 |
INTANGIBLE ASSETS AND GOODWILL - Impairment (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| Impairment of goodwill | $ 2,450,941 | $ 2,484,200 |
| Retail | ||
| Impairment of goodwill | 2,450,941 | |
| Impairment of finite lived intangibles | 274,500 | |
| Cultivation | ||
| Impairment of goodwill | 2,484,200 | |
| Impairment of finite lived intangibles | $ 278,878 | $ 526,220 |
LEASES (Details) |
12 Months Ended |
|---|---|
|
Dec. 31, 2022
lease
| |
| LEASES | |
| Number of finance leases | 1 |
| Discount rate | 20.00% |
LEASES - Operating lease expense (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| LEASES | ||
| Straight-line operating lease expense | $ 743,156 | $ 495,988 |
| Variable lease cost | 133,689 | 50,197 |
| Short-term lease cost | 68,768 | |
| Total operating lease expense | $ 876,845 | $ 614,953 |
LEASES - Related party leases (Details) |
12 Months Ended | |
|---|---|---|
|
Dec. 31, 2022
USD ($)
lease
|
Dec. 31, 2021
USD ($)
|
|
| OPERATING LEASE RIGHT-OF-USE ASSET / OPERATING LEASE LIABILITY | ||
| Right-of-use operating lease asset | $ 3,866,406 | $ 3,065,152 |
| Operating lease liability, current | 1,433,184 | 721,809 |
| Operating lease liability, non-current | 2,541,590 | 2,427,762 |
| Rent expense | 876,845 | 614,953 |
| Lease, Renewal Options Exercise, Remaining Minimum Lease Payments Due | 2,995,100 | |
| Lease, Lease Not yet Commenced, Remaining Minimum Lease Payments Due | $ 474,574 | |
| Operating Lease, Weighted Average Remaining Lease Term | 5 years | |
| Finance Lease, Weighted Average Remaining Lease Term | 10 years | |
| Related party leases | ||
| OPERATING LEASE RIGHT-OF-USE ASSET / OPERATING LEASE LIABILITY | ||
| Number of operating lease | lease | 3 | |
| Right-of-use operating lease asset | $ 1,074,958 | |
| Operating lease liability, current | 526,378 | |
| Operating lease liability, non-current | 618,617 | |
| Rent expense | $ 434,437 | $ 516,383 |
LEASES - Lease maturities (Details) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Future remaining minimum lease payments | ||
| 2023 | $ 1,433,188 | |
| 2024 | 1,458,810 | |
| 2025 | 1,146,340 | |
| 2026 | 820,391 | |
| 2027 | 507,871 | |
| Thereafter | 965,356 | |
| Total | 6,331,956 | |
| Less: Present value adjustment | (2,357,182) | |
| Operating lease liability | 3,974,774 | |
| Operating lease liability, current | (1,433,184) | $ (721,809) |
| Operating lease liability, non-current | 2,541,590 | $ 2,427,762 |
| Finance lease liability | ||
| 2023 | 200,000 | |
| 2024 | 205,400 | |
| 2025 | 171,043 | |
| 2026 | 136,940 | |
| 2027 | 143,102 | |
| Thereafter | 818,100 | |
| Total | 1,674,585 | |
| Less: Present value adjustment | (912,155) | |
| Lease liability | 762,430 | |
| Less: Lease liability, current | (55,777) | |
| Finance lease liability, non-current | $ 706,653 |
LEASES - Supplemental cash flow information (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| LEASES | ||
| Cash paid for amounts included in operating lease liability | $ 685,214 | $ 439,826 |
| Cash paid for amounts included in finance lease liability | 4,194 | |
| ROU assets obtained in exchange for operating lease liabilities | 2,235,798 | $ 1,311,124 |
| ROU assets obtained in exchange for finance lease liabilities | 766,623 | |
| Reduction of operating lease ROU asset and operating lease liabilities from remeasurement | $ (1,097,651) | |
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (Details) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| ACCOUNTS PAYABLE AND ACCRUED EXPENSES | ||
| Accounts payable | $ 1,108,956 | $ 621,603 |
| Accrued payroll, taxes, and vacation | 683,134 | 403,136 |
| Other | 107,360 | 145,969 |
| Total accounts payable and accrued expenses | $ 1,899,450 | $ 1,170,708 |
NOTES PAYABLE - Aggregate Future Contractual Maturities of Long-Term Debt (Details) |
Dec. 31, 2022
USD ($)
|
|---|---|
| Aggregate maturities of long-term debt | |
| 2023 | $ 2,340,960 |
| 2024 | 3,434,238 |
| 2025 | 416,667 |
| 2026 | 13,500,000 |
| Total | $ 19,691,865 |
WARRANT DERIVATIVE LIABILITY - Schedule of Level 3 Financial Liabilities (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| Changes in the fair value of the warrant derivative liability | ||
| Beginning balance | $ 28,317 | $ 561,368 |
| Warrant exercise | (1,523,117) | |
| Change in fair value of warrants derivative liability | (22,809) | 990,066 |
| Ending balance | $ 5,508 | $ 28,317 |
COMMITMENTS AND CONTINGENCIES (Details) - USD ($) |
12 Months Ended | |||
|---|---|---|---|---|
Nov. 01, 2020 |
Dec. 31, 2022 |
Dec. 31, 2021 |
Dec. 31, 2020 |
|
| COMMITMENTS AND CONTINGENCIES | ||||
| Initial payment (including security deposit) | $ 685,214 | $ 439,826 | ||
| Number of unvested options | 7,956,814 | 7,602,814 | ||
| 2353 SB, LLC | ||||
| COMMITMENTS AND CONTINGENCIES | ||||
| Lease agreement terms | 3 years | |||
| Monthly lease payments | $ 12,866.66 | |||
| Initial payment (including security deposit) | $ 39,633.32 | |||
DEFERRED TAXES (Details) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Tax Credit Carryforward [Line Items] | ||
| Deferred tax asset net | $ 204,917 | $ 0 |
| Net operating loss carryforwards, domestic | 32,100,000 | 36,000,000.0 |
| Deferred Tax Assets, Operating Loss Carryforwards, State and Local | 41,100,000 | $ 41,400,000 |
| Net operating loss carryforward amount, subject to expiration | 3,700,000 | |
| Net operating loss carryforward amount, not subject to expiration | 42,300,000 | |
| Operating Loss Carryforwards | 461,000 | |
| Threshold recognized built in gain limit of operating loss carryforward per year | 2,000,000 | |
| Tax Credit Carryforward, Expire starting 2033 through 2037 [Member] | ||
| Tax Credit Carryforward [Line Items] | ||
| Net operating loss carryforward amount, subject to expiration | 24,100,000 | |
| Tax Credit Carryforward, Expire starting 2041 [Member] | ||
| Tax Credit Carryforward [Line Items] | ||
| Net operating loss carryforward amount, subject to expiration | $ 3,100,000 |
DEFERRED TAXES - Schedule of Deferred Tax Assets and Liabilities (Details) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| DEFERRED TAXES | ||
| Net operating loss carryforwards | $ 8,563,430 | $ 9,113,554 |
| Equity-based instruments | 366,007 | 1,991,225 |
| Long-lived assets and other | (46,324) | 192,201 |
| Capital loss carryforward | 97,868 | 93,218 |
| Total deferred tax assets | 8,980,981 | 11,390,198 |
| Total | 204,917 | 0 |
| Intangible assets | (566,853) | |
| Total deferred tax liabilities | (566,853) | |
| Deferred tax asset valuation allowance | $ (8,414,128) | $ (11,390,198) |
DEFERRED TAXES - Schedule of Income Tax Reconciliation (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| DEFERRED TAXES | ||
| Income tax benefit at statutory rate | $ (1,946,731) | $ (1,862,570) |
| State income tax benefit, net of Federal benefit | (88,898) | |
| 280E Disallowance | 1,834,141 | 946,481 |
| Equity-based instruments | 14,180 | 64,735 |
| Fair market value adjustment/loss on extinguishment derivative liabilities | 65,231 | 312,590 |
| Amortization of debt discount | 376,895 | 176,128 |
| Goodwill and intangible impairment | 573,262 | |
| Other | 107,608 | 706,270 |
| Valuation allowance | $ (819,669) | $ (254,736) |
| Total | 204917.00% | |
STOCKHOLDERS' EQUITY - Schedule of Stock-Based Compensation Expense (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| Schedule of Share-based Compensation Expense [Abstract] | ||
| Stock-based compensation expense | $ 188,330 | $ 307,963 |
STOCKHOLDERS' EQUITY - Employee Stock Options (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| STOCKHOLDERS' EQUITY (Details) - Employee Stock Options [Line Items] | ||
| Stock-based compensation expense | $ 188,330 | $ 307,963 |
| Number of shares, granted | 354,000 | |
| Unrecognized compensation expense | $ 13,172 | |
| Recognition period related to unvested Employee Awards | 4 months | |
| Employee Awards [Member] | ||
| STOCKHOLDERS' EQUITY (Details) - Employee Stock Options [Line Items] | ||
| Number of shares, granted | 250,000 | 1,158,000 |
| Incentive Plan | ||
| STOCKHOLDERS' EQUITY (Details) - Employee Stock Options [Line Items] | ||
| Share-based compensation arrangement. Description | Stock Options | |
STOCKHOLDERS' EQUITY - Schedule of Stock-Based Compensation Assumptions Employee Awards (Details) - $ / shares |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| Minimum | ||
| Schedule Of Share-based Compensation Assumptions Employee Awards [Line Items] | ||
| Exercise price | $ 0.22 | $ 0.31 |
| Stock price | $ 0.22 | $ 0.27 |
| Volatility | 100.00% | 111.00% |
| Risk-free interest rate | 0.29% | 0.16% |
| Maximum | ||
| Schedule Of Share-based Compensation Assumptions Employee Awards [Line Items] | ||
| Exercise price | $ 0.95 | $ 0.67 |
| Stock price | $ 0.95 | $ 0.67 |
| Volatility | 111.00% | 114.00% |
| Risk-free interest rate | 0.97% | 1.53% |
| Employee Awards [Member] | ||
| Schedule Of Share-based Compensation Assumptions Employee Awards [Line Items] | ||
| Expected life (years) | 3 years | 3 years |
STOCKHOLDERS' EQUITY - Feinsod Employment Agreement (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| STOCKHOLDERS' EQUITY | ||
| Number of shares, granted | 354,000 | |
| Fair value of awards, grant date | $ 56,348 | $ 628,496 |
| Stock-based compensation expense | $ 188,330 | $ 307,963 |
NET LOSS PER SHARE (Details) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| NET LOSS PER SHARE | ||
| Stock options | 4,936,825 | 4,963,545 |
| Restricted stock awards | $ 1,200,000 | |
| Warrants | 20,072,064 | 16,117,343 |
| Accrued stock payable | 100,000 | 1,769,537 |
| Convertible notes | 6,750,000 | 5,785,450 |
| Preferred stock | 1,180,000 | 1,180,000 |
| Possibly dilutive equity instruments | 34,238,889 | 29,815,875 |
RELATED PARTY TRANSACTIONS (Details) |
12 Months Ended | |||||
|---|---|---|---|---|---|---|
|
Dec. 23, 2020
USD ($)
item
|
Dec. 31, 2022
USD ($)
|
Dec. 31, 2021
USD ($)
|
Sep. 15, 2022 |
Feb. 08, 2021 |
Dec. 31, 2020 |
|
| RELATED PARTY TRANSACTIONS | ||||||
| Aggregate rent expense | $ 685,214 | $ 439,826 | ||||
| Number of board members | item | 4 | |||||
| Accrued interest earned and owed | 11,738 | |||||
| Payment of bonus to each former owner | 383,000 | |||||
| Related party note payable | ||||||
| RELATED PARTY TRANSACTIONS | ||||||
| Aggregate amount | $ 320,000 | |||||
| 10% Notes | ||||||
| RELATED PARTY TRANSACTIONS | ||||||
| Aggregate amount | 6,580,000 | |||||
| Interest rate (as a percent) | 12.00% | 10.00% | 10.00% | 10.00% | ||
| Consulting agreement | ||||||
| RELATED PARTY TRANSACTIONS | ||||||
| Aggregate amount of consulting fees paid | 125,000 | 99,996 | ||||
| Consulting agreement | Bellewood Holdings, LLC | ||||||
| RELATED PARTY TRANSACTIONS | ||||||
| Aggregate rent expense | 66,000 | 47,000 | ||||
| Lease agreement | ||||||
| RELATED PARTY TRANSACTIONS | ||||||
| Aggregate rent expense | $ 362,000 | $ 458,000 | ||||
SEGMENT INFORMATION - Total Assets by Segment (Details) - USD ($) |
Dec. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| SEGMENT INFORMATION | ||
| Total assets | $ 31,694,713 | $ 22,024,345 |
| Corporate | ||
| SEGMENT INFORMATION | ||
| Total assets | 1,985,455 | 1,709,496 |
| Operating segments | ||
| SEGMENT INFORMATION | ||
| Total assets | 31,826,152 | 22,175,482 |
| Operating segments | Retail | ||
| SEGMENT INFORMATION | ||
| Total assets | 25,212,245 | 16,831,580 |
| Operating segments | Cultivation | ||
| SEGMENT INFORMATION | ||
| Total assets | 4,628,452 | 3,634,406 |
| Eliminations | ||
| SEGMENT INFORMATION | ||
| Total assets | $ (131,439) | $ (151,137) |
SUBSEQUENT EVENTS (Details) - USD ($) |
1 Months Ended | |
|---|---|---|
Jan. 05, 2022 |
Feb. 28, 2023 |
|
| Subsequent Event | ||
| SUBSEQUENT EVENTS | ||
| Cash paid for acquisition | $ 256,582 | |
| Consideration payable in equal monthly installments | $ 385,873 | |
| Term of consideration payable in equal monthly installments | 24 months | |
| Trees MLK, Inc. | ||
| SUBSEQUENT EVENTS | ||
| Stock issued in exchange for purchase of assets (in shares) | 4,970,654 | |
| Cash paid for acquisition | $ 256,582 | |
| Consideration payable in equal monthly installments | $ 384,873 | |
| Term of consideration payable in equal monthly installments | 24 months |