10-Q 1 cann-20220331x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended March 31, 2022.

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from ____________ to ____________.

Commission file number:  000-54457

GENERAL CANNABIS CORP

(Exact name of registrant as specified in its charter)

Colorado

    

90-1072649

(State of incorporation)

(IRS Employer Identification No.)

1901 S Navajo Street
Denver, CO 80223

(Address of principal executive offices) (Zip Code)

(303) 759-1300

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

Ticker symbol

N/A

N/A

N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes þ   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes    No þ

As of May 9, 2022, there were 96,192,184 issued and outstanding shares of the Company's common stock.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2022

December 31, 2021

(unaudited)

Assets

 

  

 

  

Current assets

 

  

 

  

Cash and cash equivalents

$

1,651,063

$

2,054,050

Accounts receivable, net of allowance of $43,000 and $61,000, respectively

 

69,381

 

80,188

Current portion of notes receivable, net of allowance of nil and $43,108, respectively

73,000

Inventories, net

1,182,361

1,123,083

Prepaid expenses and other current assets

 

166,218

 

149,075

Total current assets

 

3,069,023

 

3,479,396

Right-of-use operating lease asset

3,176,007

3,065,152

Property and equipment, net

662,852

680,327

Intangible assets, net

6,819,163

5,999,813

Goodwill

9,758,038

8,799,657

Total assets

$

23,485,083

$

22,024,345

Liabilities and Stockholders' Equity

 

 

Current liabilities

 

 

  

$

1,368,282

$

1,170,708

Interest payable

 

793,585

 

621,085

Operating lease liability, current

745,844

721,809

Accrued stock payable

 

60,900

 

444,894

Warrant derivative liability

 

88,981

 

28,317

Notes payable - current

1,259,449

1,094,398

Total current liabilities

 

4,317,041

 

4,081,211

Operating lease liability, non-current

2,535,492

2,427,762

Notes payable - long-term (net of discount)

5,791,658

5,619,570

Related party long-term notes payable (net of discount)

292,188

288,229

Total liabilities

12,936,379

12,416,772

Commitments and contingencies (Note 9)

Stockholders’ equity

 

  

 

  

Preferred stock, no par value; 5,000,000 shares authorized; 1,180 issued and outstanding, respectively

1,073,446

1,073,446

Common stock, $0.001 par value; 200,000,000 shares authorized; 96,192,184 shares and 89,551,993 shares issued and outstanding, respectively

96,191

89,550

Additional paid-in capital

 

94,060,938

 

92,265,392

Accumulated deficit

 

(84,681,871)

 

(83,820,815)

Total stockholders’ equity

 

10,548,704

 

9,607,573

Total liabilities and stockholders’ equity

$

23,485,083

$

22,024,345

See Notes to condensed consolidated financial statements.

3

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three months ended

March 31, 

2022

2021

Revenue

Retail sales

$

3,297,546

$

Cultivation sales

275,762

649,333

Interest

14,472

Total revenue

3,573,308

663,805

Costs and expenses

Cost of sales

2,074,888

555,205

Selling, general and administrative

1,326,116

598,691

Stock-based compensation

76,117

103,932

Professional fees

281,384

262,315

Depreciation and amortization

231,846

117,681

Total costs and expenses

3,990,351

1,637,824

Operating loss

(417,043)

(974,019)

Other expenses (income)

Amortization of debt discount and equity issuance costs

214,281

68,330

Interest expense

174,351

103,056

Loss on derivative liability

60,664

1,198,744

Other expenses, net

1,467

Total other expenses, net

449,296

1,371,597

Net loss from continuing operations before income taxes

(866,339)

(2,345,616)

Provision for income taxes

Loss from continuing operations

(866,339)

(2,345,616)

Income (loss) from discontinued operations, net of tax

5,283

(13,452)

Net loss

$

(861,056)

$

(2,359,068)

Per share data - basic and diluted

Net loss from continuing operations per share

$

(0.01)

$

(0.04)

Net loss from discontinued operations per share

$

0.00

$

0.00

Net loss attributable to common stockholders per share

$

(0.01)

$

(0.04)

Weighted average number of common shares outstanding

95,749,505

61,563,379

See Notes to condensed consolidated financial statements.

4

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Three months ended March 31, 

2022

2021

Cash flows from operating activities

  

 

  

Net loss

$

(861,056)

$

(2,359,068)

Adjustments to reconcile net loss to net cash used in operating activities:

 

  

 

  

Amortization of debt discount and equity issuance costs

 

214,281

 

68,330

Depreciation and amortization

 

231,846

 

121,941

Non-cash lease expense

298,484

103,450

Bad debt expense

(5,085)

(39,463)

Loss on disposal of property and equipment

2,964

Loss on warrant derivative liability

 

60,664

 

1,198,744

Stock-based compensation

 

76,117

 

103,932

Changes in operating assets and liabilities, net of acquisitions

 

 

Accounts receivable

 

13,892

 

157,369

Prepaid expenses and other assets

 

(17,142)

 

367,486

Inventories

 

(59,278)

 

(48,026)

Accounts payable and accrued liabilities

370,074

(1,034,883)

Operating lease liabilities

(277,574)

(92,701)

Net cash provided by (used) in operating activities:

 

45,223

 

(1,449,925)

Cash flows from investing activities

 

  

 

  

Purchase of property and equipment

 

(8,571)

 

(264,114)

Proceeds on notes receivable

75,000

Acquisition of TREES MLK

(256,582)

Proceeds from sale of investment

208,761

Net cash used in investing activities

 

(190,153)

 

(55,353)

Cash flows from financing activities

 

  

 

Proceeds from exercise of stock options

135,002

Proceeds from notes payable

1,660,000

Payments on notes payable

(258,057)

(200,000)

Net cash provided by (used in) financing activities

 

(258,057)

 

1,595,002

Net increase (decrease) in cash and cash equivalents

 

(402,987)

 

89,724

Cash and cash equivalents, beginning of period

 

2,054,050

 

755,769

Cash and cash equivalents, end of period

$

1,651,063

$

845,493

Supplemental schedule of cash flow information

 

  

 

  

Cash paid for interest

$

1,851

$

13,705

Non-cash investing & financing activities

 

  

 

  

Operating lease right-of-use asset/Operating lease liability

$

172,053

$

Issuance of accrued stock

$

383,994

$

Cashless warrant exercise

$

$

1,557,078

Beneficial conversion feature

$

$

417,539

10% Warrants recorded as a loss on extinguishment of debt and additional paid-in capital

$

$

429,300

Issuance of common stock to a consultant

$

$

100,000

See Notes to condensed consolidated financial statements.

5

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY (DEFICIT)

For the three months ended March 31, 2022

Preferred Stock

Common Stock

Additional

Accumulated

Shares

    

Amount

Shares

Amount

Paid-in Capital

Deficit

Total

January 1, 2022

    

1,180

$

1,073,446

89,551,993

    

$

89,550

    

$

92,265,392

    

$

(83,820,815)

    

$

9,607,573

Common stock issued for acquisition of Trees Waterfront LLC

1,669,537

1,670

382,324

383,994

Common stock issued for acquisition of Trees MLK LLC

4,970,654

4,971

1,337,105

1,342,076

Share-based compensation

76,117

76,117

Net loss

 

 

 

 

(861,056)

 

(861,056)

March 31, 2022

 

1,180

$

1,073,446

96,192,184

$

96,191

$

94,060,938

$

(84,681,871)

$

10,548,704

For the three months ended March 31, 2021

Preferred Stock

Common Stock

Additional

Accumulated

Shares

    

Amount

Shares

Amount

Paid-in Capital

Deficit

Total

January 1, 2021

$

60,813,673

    

$

60,813

    

$

75,891,414

    

$

(74,951,436)

    

$

1,000,791

Common stock issued to a consultant

112,359

 

112

 

99,888

 

 

100,000

Common stock issued upon exercise of stock options

213,860

214

134,788

135,002

Warrants issued with 10% Notes

429,300

429,300

Beneficial conversion feature

417,539

417,539

Cashless exercise of warrants

1,006,623

1,005

1,556,073

1,557,078

Share-based compensation

103,932

103,932

Net loss

 

 

 

(2,359,068)

 

(2,359,068)

March 31, 2021

$

62,146,515

$

62,144

$

78,632,934

$

(77,310,504)

$

1,384,574

See Notes to condensed consolidated financial statements.

6

GENERAL CANNABIS CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1.  NATURE OF OPERATIONS, HISTORY, AND PRESENTATION

Nature of Operations

General Cannabis Corp, a Colorado Corporation (the “Company,” “we,” “us,” or “our,”) (formerly, Advanced Cannabis Solutions, Inc.), was incorporated on June 3, 2013, and provides services and products to the regulated cannabis industry. We currently trade on the OTCQB® Market under the trading symbol CANN. As of March 31, 2022, our operations are segregated into the following segments:

Retail (“Retail Segment”)

Through our acquisition of TDM, LLC (“TREES Englewood”) in September 2021, our acquisition of Trees Portland, LLC, Trees Waterfront, LLC in December 2021 and our acquisition of Trees MLK, LLC in January 2022, we operate a retail dispensary store in Englewood, Colorado and three retail stores in Portland, Oregon. The Trees MLK location, located in Portland, Oregon, is currently not in operation. This location should be operational in the second quarter of 2022.

Cultivation (“Cultivation Segment”)

Through our acquisition of SevenFive Farm ("SevenFive") in May 2020, we operate a 17,000 square foot licensed light deprivation greenhouse cultivation facility.

During the three months ended March 31, 2022 and 2021, 45% and 18% of SevenFive’s revenue was with one customer, respectively.

Discontinued Operations - Operations Consulting and Products (“Operations Segment”)

Through Next Big Crop (“NBC”), we delivered comprehensive consulting services to the cannabis industry that included obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and construction, and expansion of existing operations.

NBC oversaw our wholesale equipment and supply business, operating under the name “GC Supply,” which provided turnkey sourcing and stocking services to cultivation, retail, and infused products manufacturing facilities. Our products included building materials, equipment, consumables, and compliance packaging. NBC also provided operational support for our internal cultivation. On July 16, 2021, we entered into an Asset Purchase Agreement with an individual to sell substantially all the assets of NBC for a total of $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. Pursuant to amendment, the buyer paid the additional $75,000 in March 2022, and the 10% profit share described above was eliminated.

Basis of Presentation

The accompanying condensed consolidated financial statements include all accounts of the Company and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States of America ("U.S. GAAP") can be condensed or omitted. The condensed consolidated balance sheet for the year ended December 31, 2021, was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated

7

financial statements and notes thereto of the Company for the year ended December 31, 2021, which were included in the annual report on Form 10-K filed by the Company on March 25, 2022.

In the opinion of management, these condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and notes thereto of the Company and include all adjustments, consisting only of normal recurring adjustments, considered necessary for the fair presentation of the Company's financial position and operating results. The results for the three months ended March 31, 2022, are not necessarily indicative of the operating results for the year ending December 31, 2022, or any other interim or future periods. Since the date of the Annual Report, there have been no material changes to the Company’s significant accounting policies.

Reclassifications

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

Use of Estimates

The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Furthermore, when testing assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment charges may result. In particular, the COVID-19 pandemic has adversely impacted and is likely to further adversely impact the Company's business and markets. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company's business, results of operations, and financial condition, including revenues, expenses, reserves and allowances, fair value measurements and asset impairment charges, will depend on future developments that are highly uncertain and difficult to predict. These developments include, but are not limited to, the duration and spread of the pandemic, its severity in our markets and elsewhere, governmental actions to contain the spread of the pandemic and respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.

Discontinued Operations

On July 16, 2021, we entered into an Asset Purchase Agreement with an individual to sell substantially all of 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. Pursuant to amendment, the buyer paid the additional $75,000 in March 2022, and the 10% profit share described above was eliminated.

On January 1, 2021, we discontinued our investments segment. As this is not a materially significant segment, we have not shown the effects of the discontinued segment in the financial statements.

The cash flows related to discontinued operations have not been segregated and are included in the consolidated statements of cash flows.

Going Concern

We incurred net losses of $861,056 and $2,359,068 during the three months ended March 31, 2022, and 2021, respectively, and had an accumulated deficit of $84,681,871 as of March 31, 2022. We had cash and cash equivalents of $1,651,063 and $2,054,050 as of March 31, 2022, and December 31, 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. We have incurred recurring losses and negative cash flows from operations since inception and have primarily funded our

8

operations with proceeds from the issuance of convertible debt. We expect our operating losses to continue into the foreseeable future as we continue to execute our acquisition and growth strategy.

We believe that our cash and cash equivalents as of March 31, 2022, will be sufficient to fund our operating expenses and capital expenditure requirements for at least twelve months from the date of filing this Quarterly Report on Form 10-Q due to the receipt of an additional $1.2 million of cash in September 2021 from the issuance of preferred stock and the acquisition of three dispensaries (See Note 2 for further information). We may need additional funding to support our planned investing activities. If we are unable to obtain additional funding, we would be forced to delay, reduce, or eliminate some or all of our acquisition efforts, which could adversely affect our growth plans.

Summary of Significant Accounting Policies

See our Annual Report on Form 10-K for the year ended December 31, 2021, for discussion of the Company's significant accounting policies.

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. Accounting Standards Updates (“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. This ASU did not have a material effect on our condensed consolidated financial statements.

FASB ASU 2019-12 – “Income Taxes (Topic 740)” – In December 2019, the FASB issued guidance which simplifies certain aspects of accounting for income taxes. The guidance is effective for interim and annual reporting periods beginning after December 15, 2020, and early adoption is permitted. We adopted this ASU in the first quarter of 2021. This ASU did not have a material effect on our condensed consolidated financial statements.

NOTE 2. BUSINESS ACQUISITION

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 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 estimates of the acquisition date fair values of the assets acquired:

Cash

$

32,941

Fixed assets

    

59,335

Inventory

586,495

Tradename

5,000,000

Goodwill

 

7,615,913

$

13,294,684

9

The accompanying condensed consolidated financial statements include the results of Trees Englewood from the date of acquisition for financial reporting purposes, September 2, 2021. The pro-forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2020, are as follows:

    

Three months ended

March 31, 

2021

Total revenues

$

3,135,130

Net income (loss) attributable to common stockholders

$

410,591

Net income (loss) per common share

$

0.00

Weighted average number of basic and diluted common shares outstanding

83,943,689

The unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2020, or to project potential operating results as of any future date or for any future periods.

On December 30, 2021, we completed the acquisition of substantially all the assets of Trees Portland, LLC and Trees Waterfront, LLC, representing a portion of the overall Trees Transaction, which 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, fair value of 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 estimates of the acquisition date fair values of the assets acquired:

Cash

$

14,568

Fixed assets

    

56,015

Inventory

202,046

Tradename

850,000

Goodwill

 

1,183,744

$

2,306,373

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:

    

Three months ended

March 31, 

2021

Total revenues

$

1,255,095

Net income (loss) attributable to common stockholders

$

50,622

Net income (loss) per common share

$

0.00

Weighted average number of basic and diluted common shares outstanding

67,986,954

The unaudited pro-forma 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

10

common stock on January 5, 2022, the date of license transfer, was $0.27 per share, as such, fair value of consideration is $1,342,076. Further, cash equal to $384,873 will be paid to the sellers in equal monthly installments over a period of 24 months from the MLK closing. The dispensary is a non-operating dispensary. We will be opening the store in the second quarter of 2022.

The table below reflects the Company’s estimates of the acquisition date fair values of the assets acquired:

Fixed assets

    

$

25,150

Tradename

1,000,000

Goodwill

 

958,381

$

1,983,531

The accompanying consolidated financial statements include the results of Trees MLK from the date of acquisition for financial reporting purposes, January 5, 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:

    

Three months ended

March 31, 

2022

2021

Total revenues

$

$

Net income (loss) attributable to common stockholders

$

(45,587)

$

(31,332)

Net income (loss) per common share

$

(0.00)

$

(0.00)

Weighted average number of basic and diluted common shares outstanding

96,080,882

66,534,033

The unaudited pro-forma 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, 2021, or to project potential operating results as of any future date or for any future periods.

We have not completed the allocation of the purchase price for the Trees acquisition. As of March 31, 2022, the consolidated balance sheets include a preliminary allocation of fixed assets, inventory, intangible assets, and goodwill. Management anticipates completing the purchase price allocation as soon as possible, but no later than one year from the acquisition dates.

NOTE 3. DISCONTINUED OPERATIONS

On July 16, 2021, we entered into an Asset Purchase Agreement with an individual to sell substantially all of 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. Pursuant to amendment, the buyer paid the additional $75,000 in March 2022, and the 10% profit share described above was eliminated.

11

Assets and liabilities of discontinued operations for the Operations Segment included the following:

March 31, 

December 31, 

    

2022

    

2021

Accounts receivable, net

$

$

Prepaid expenses and other current assets

 

 

Current assets discontinued operations

Property and equipment, net

Noncurrent assets discontinued operations

Accounts payable and accrued expenses

Customer deposits

Current liabilities discontinued operations

$

$

A summary of the discontinued operations for the Operations Segment is presented as follows:

Three months ended March 31, 

2022

2021

Product revenues

    

$

3,438

    

$

984,185

Service revenues

Total revenues

Cost of sales

840,892

Selling, general and administrative

(1,845)

151,886

Professional fees

599

Depreciation and amortization

4,260

Total costs and expenses

(1,845)

997,637

Income (loss) from discontinued operations

$

5,283

$

(13,452)

The cash flows related to discontinued operations have not been segregated and are included in the consolidated statements of cash flows. The following table provides selected information on cash flows related to discontinued operations for the Operations Segment for the three months ended March 31, 2022 and 2021.

Three months ended

March 31, 

    

2022

    

2021

Accounts receivables

$

$

(204,044)

Prepaid expenses and other current assets

487,415

Depreciation and amortization

4,260

Capital expenditures

(32,108)

Accounts payable and accrued expenses

(56,410)

Customer deposits

(35,906)

12

NOTE 4. INVENTORIES, NET

Our inventories consisted of the following:

March 31, 

December 31, 

    

2022

    

2021

Raw materials

$

11,096

$

13,343

Work-in-progress and finished goods

1,171,265

1,109,740

Less: Inventory reserves

Inventories, net

$

1,182,361

$

1,123,083

NOTE 5. LEASES

On September 2, 2021, we entered into a commercial real estate lease with a related party (see Note 11) for retail space for our dispensary in Englewood, CO, with an initial term of five years and, at our option, two additional terms of three years each. Rent is $10,000 per month with 3% annual escalations during the initial term and 4% annual escalations during the option term. We also pay our portion of real estate taxes. We determined the present value of the future lease payments using a discount rate of 20% over a 11 year term, resulting in a right-of-use asset and lease liability of $602,140 which are being applied ratably over the term of the lease. As of March 31, 2022, the balance of the right-of-use asset and lease liability was $578,227 and $591,321, respectively.

Through the acquisition of Trees Englewood, we entered into a commercial real estate lease for office space in Denver, CO. This office space is our corporate office. The lease expires in November 2022. Rent is $7,150 per month with a 3% escalation beginning in November 2021. We also pay our portion of real estate taxes. We determined the present value of the future lease payments using a discount rate of 20% over a 15-month term, resulting in a right-of-use asset and lease liability of $98,211 which are being applied ratably over the term of the lease. As of March 31, 2022, the balance of the right-of-use asset and lease liability was $54,496 and $54,724, respectively.

Through the acquisition of Trees Portland, we entered into a commercial real estate lease in Portland, OR. The lease expires in April 2027. Rent is $5,124 per month with a 5% annual escalation beginning in May 2022. The rent includes payment of property taxes. We determined the present value of the future lease payments using a discount of 20% over a 5.5-year term, resulting in a right-of-use asset and lease liability of $229,501. As of March 31, 2022, the balance of the right-of-use asset and lease liability was $219,275 and $221,586, respectively.

Through the acquisition of Trees Waterfront, we entered into a commercial real estate lease in Portland, OR. The lease has an initial term of 5 years and, at our option an additional term of 5 years. The lease expires in March 2031. Rent is $6,683 per month with a 3% annual escalation. The rent includes payment of property taxes. We determined the present value of the future lease payments using a discount rate of 20% over a 10-year term, resulting in a right-of-use asset and lease liability of $381,272. As of March 31, 2022, the balance of the right-of-use asset and lease liability was $370,529 and $373,702, respectively.

Through the acquisition of Trees MLK, we entered into a commercial real estate lease in Portland, OR. The lease has an initial term of 3 years and at our option two additional terms of 3 years each. The lease expires in July 2029. Rent is $3,150 per month with a 5% annual escalation. The rent includes payment of property taxes. We determined the present value of the future lease payments using a discount rate of 20% over a 10-year term, resulting in a right-of-use asset and lease liability of $172,053. As of March 31, 2022, the balance of the right-of-use asset and lease liability was $166,297 and $168,227, respectively.

13

Future remaining minimum lease payments were as follows:

Year ending December 31, 

    

Amount

2022 (remaining nine months)

$

575,503

2023

 

703,868

2024

 

721,314

2025

 

739,303

2026

 

758,193

Thereafter

 

5,121,992

Total

 

8,620,173

Less: Present value adjustment

 

(5,338,837)

Operating lease liability

$

3,281,336

NOTE 6. ACCRUED STOCK PAYABLE

The following tables summarize the changes in accrued common stock payable:

Number of

    

Amount

    

Shares

Balance as of December 31, 2020

$

94,861

359,415

Trees Waterfront acquisition stock accrual

383,994

1,669,537

Stock issued

(33,961)

(259,415)

Balance as of December 31, 2021

$

444,894

1,769,537

Stock issued

(383,994)

(1,669,537)

Balance as of March 31, 2022

$

60,900

100,000

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. The stock was issued on January 6, 2022.

NOTE 7.   NOTES PAYABLE

Our notes payable consisted of the following:

    

March 31, 

    

December 31, 

2022

2021

2020 10% Notes

$

6,580,000

$

6,580,000

Related party note payable

320,000

320,000

Trees Acquisition Notes

2,140,461

2,013,644

Unamortized debt discount

(1,697,166)

(1,911,447)

7,343,295

7,002,197

Less: Current portion

(1,259,449)

(1,094,398)

Long-term portion

$

6,083,846

$

5,907,799

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 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

14

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 $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. We recorded amortization of debt discount expense from the 10% Notes of $21,393 for the three months ended March 31, 2022 and 2021, respectively. We determined there was no beneficial conversion feature on the 10% Notes issued in December 2020. 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 23, 2020, were:

Current stock price

    

$

0.53

Exercise price

$

0.56

Risk-free interest rate

0.38 %

Expected dividend yield

Expected term (in years)

5.0

Expected volatility

115%

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 with a par value $0.001 per share. 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.  We recorded $417,539 as additional paid in capital and a debt discount and included in our consolidated statement of operations. We recorded amortization of debt discount expense from the 10% Notes issued in February 2021 of $69,603 and $28,531 for the three months ended March 31, 2022 and 2021, 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:

Current stock price

    

$

1.12

Exercise price

$

0.56

Risk-free interest rate

0.48 %

Expected dividend yield

Expected term (in years)

5.0

Expected volatility

118%

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

15

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. We recorded amortization of debt discount expense from the 10% Notes issued in April 2021 of $123,285 and nil for the three months ended March 31, 2022 and 2021, 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:

Current stock price

    

$

0.83

Exercise price

$

0.56

Risk-free interest rate

0.81%

Expected dividend yield

Expected term (in years)

5.0

Expected volatility

115%

NOTE 8. 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, which 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 during the fourth quarter 2019, the exercise price of the 2019 Warrants decreased to $0.45 per share and the number of shares subject to the 2019 Warrants increased to 8,666,666 shares of common stock as of December 31, 2019. In May 2020, we issued securities at a price lower than the $0.45 per share above. As a result, the exercise price of the 2019 Warrants decreased to $0.3983 per share and the number of shares subject to the 2019 Warrants increased to 9,591,614 shares of common stock.

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 booked an adjustment to the derivative liability of $1,523,117 as a result. As of March 31, 2022, there were 322,807 of the 2019 Warrants outstanding.

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The following are the key assumptions that were used to determine the fair value of the 2019 Warrants

    

December 31,

March 31,

 

    

2021

2022

 

Number of shares underlying the warrants

 

322,807

322,807

Fair market value of stock

$

0.22

$

0.46

Exercise price

$

0.3983

$

0.3983

Volatility

94

%  

103

%

Risk-free interest rate

1.26

%  

2.42

%

Warrant life (years)

2.41

 

2.16

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:

Three months ended March 31, 

    

2022

    

2021

Beginning balance

$

28,317

$

561,368

Warrant exercise

(1,539,981)

Change in fair value of warrants derivative liability

60,664

1,198,744

Ending balance

$