Management's discussion and analysis ("MD&A") should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 8 of this Annual Report on Form 10-K (annual report), which include additional information about our accounting policies, practices, and the transactions underlying our financial results. The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in
the United States of America( U.S.GAAP) requires us to make estimates and assumptions that affect the reported amounts in our consolidated financial statements and the accompanying notes, including various claims and contingencies related to lawsuits, taxes, environmental and other matters arising during the normal course of business. We apply our best judgment, our knowledge of existing facts, circumstances, and actions that we may undertake in the future in determining the estimates that affect our consolidated financial statements. We evaluate our estimates on an ongoing basis using our historical experience, as well as other factors we believe appropriate under the circumstances, such as current economic conditions, and adjust or revise our estimates as circumstances change. As future events and their effects cannot be determined with precision, actual results may differ from these estimates. Our MD&A contains forward-looking statements that discuss, among other things, future expectations and projections regarding future developments, operations, and financial condition. All forward-looking statements are based on management's existing beliefs about present and future events outside of management's control and on assumptions that may prove to be incorrect. If any underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected, or intended. We undertake no obligation to publicly update or revise any forward-looking statements to reflect actual results, changes in expectations, events or circumstances after the date of this Report is filed. General Cannabis Corpand its subsidiaries are referred to collectively as "GCC" "the Company," "we, "us" or "our" in the following discussion and analysis.
Continuity of exploitation
The consolidated financial statements included elsewhere in this Form 10-K, have been prepared on a going concern basis, which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. Our cash of
$2,054,050as of December 31, 2021is not sufficient to absorb our operating losses and retire our debt of $8,913,644and other obligations as they come due. Our ability to continue as a going concern is dependent upon our generating profitable operations in the future and/or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. Management believes that (a) we will be successful obtaining additional capital and (b) actions presently being taken to further implement our business plan and generate additional revenues provide opportunity for the Company to continue as a 25 Table of Contents 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.
The following tables presented, for the periods indicated, are statements of operating data. The tables and discussion below should be read in conjunction with the accompanying consolidated financial statements and accompanying notes in Section 8 of this report.
Consolidated Results Year ended December 31, Percent 2021 2020 Change Change Revenues
$ 5,927,199 $ 2,383,704 $ 3,543,495149 % Costs and expenses (8,940,185) (8,258,346) (681,839) 8 % Other expense (5,414,165) (1,553,043) (3,861,122) 249 % Net loss from continuing operations before income taxes (8,427,151) (7,427,685) (999,466) 13 % Loss from discontinued operations (442,228) (252,007) (190,221) 75 % Loss from operations before income taxes $ (8,869,379) $ (7,679,692) $ (1,189,687)15 % The following discussion of our results of operations relates to our continuing operations. See Note 3 to the consolidated financial statements for information concerning discontinued operations.
The addition of our Retail segment and a full year of our Cultivation segment contributed to the significant increase in revenues for the year ended
December 31, 2021. See Segment discussions below for further details. Costs and expenses Year ended December 31, Percent 2021 2020 Change Change Cost of sales $ 4,439,478 $ 1,388,626 $ 3,050,852220 %
Selling, general and administrative 2,764,780 2,901,931
(137,151) (5) % Stock-based compensation 307,963 1,504,389 (1,196,426) (80) % Professional fees 927,390 2,263,717 (1,336,327) (59) % Depreciation and amortization 500,574 199,683 300,891 151 %
$ 8,940,185 $ 8,258,346 $ 681,8398 % Cost of sales increased year over year due to the addition of our Retail Segment and a full year of expenses in relation to our Cultivation Segment. See Segment discussions below for further details. Selling, general and administrative expense decreased by $0.1 millionto $2.8 millionfor the year ended December 31, 2021from $2.9 millionfor the year ended December 31, 2020, primarily due to management's emphasis on cost controls and decreases in salary expense due to the discontinuation of certain business operations. 26 Table of Contents
Stock-based compensation included the following:
Year ended December 31, Percent 2021 2020 Change Change Employee awards
$ 307,963 $ 1,411,442 $ (1,103,479)(78) % Consulting awards - 92,947 (92,947) (100) % $ 307,963 $ 1,504,389 $ (1,196,426)(80) %
Employee awards are issued under our 2020 Omnibus Incentive Plan, which was approved by shareholders on
November 23, 2020and our 2014 Equity Incentive Plan, which was approved by shareholders on June 26, 2015. Expense varies primarily due to the number of stock options granted and the share price on the date of grant. The decrease in expense for the year ended December 31, 2021as compared to December 31, 2020is due to the decrease in the number of options we grant on a quarterly basis and an increase in forfeitures in 2021 due to the departure of our Chief Executive Officer in May 2021, the departure of our Chief Financial Officer in September 2021and a reduction in workforce in 2020 and 2021. Consulting awards are granted to third parties in lieu of cash for services provided.
Professional fees consist primarily of accounting and legal fees and decreased from 2020 due to the addition of in-house legal counsel.
Depreciation and amortization expense increased in 2021 due to the acquisition of TREES Englewood, TREES Portland and TREES Waterfront. We also recognized a full year of depreciation and amortization expense in 2021, in relation to our acquisition of
SevenFive Farmin May of 2020. Other Expense Year ended December 31, Percent 2021 2020 Change Change
Amortization of debt discount
$ 689,348 $ 295,256 $ 394,092133 % Interest expense 622,469 453,522 168,947 37 % Loss on extinguishment of debt 233,374 1,638,009 (1,404,635) (86) % Loss on impairment of assets 3,010,420 - 3,010,420 100 % Loss (gain) on derivative liability 990,066 (735,796)
1,725,862 (235) % Other expense (income), net (131,512) (139,187) 7,675 (6) % Loss on investment - 41,239 (41,239) 100 %
$ 5,414,165 $ 1,553,043 $ 3,861,122249 %
Amortization of debt discount increased during the year ended
December 31, 2021as compared to December 31, 2020due to the senior convertible promissory notes with warrants ("10% Notes") issued in December 2020, February 2021and April 2021. Interest expense increased during the year ended December 31, 2021as compared to December 31, 2020due to the addition of the 10% Notes with an interest rate of 10%. The loss on warrant derivative liability reflects the change in the fair value of the 2019 Warrants. The loss on extinguishment of debt for the year ended December 31, 2021was due to the modification of warrants that occurred on the 15% Warrants during the third quarter. The loss on extinguishment of debt during 2020 is due to the conversion and extension of the SBI debt, and the exchange of the 12% Notes into the 15% Notes that occurred during the first quarter of 2020. See Note 13 of the accompanying audited consolidated financial statements for further information. The loss on impairment of assets is due to a goodwill impairment and intangible impairment adjustment on our Cultivation Segment. The other expense (income) in 2020 relates to the gain on the sale of the building we recognized as a result of the sale of our corporate office building in March 2020. 27 Table of Contents Retail Year ended December 31, Percent 2021 2020 Change Change Revenues $ 3,515,761 $ - $ 3,515,761100 % Costs and expenses (3,112,595) - (3,112,595) 100 % Segment operating income $ 403,166 $ - $ 403,166100 % With the addition of the TREES Englewood dispensary on September 2, 2021and the addition of TREES Portland and TREES Waterfront on December 30, 2021, we have established our retail footprint in the Coloradoand Oregonmarkets and have become a vertically integrated company. The Retail Segment will provide consistent positive cash flows which will significantly contribute to our working capital position. Cultivation Year ended December 31, Percent 2021 2020 Change Change Revenues $ 2,722,059 $ 2,279,867 $ 442,19219 % Costs and expenses (6,273,162) (1,865,399) (4,407,763) 236 % $ (3,551,103) $ 414,468 $ (3,965,571)(957) %
This increase in revenues for the year ended
December 31, 2021as compared to December 31, 2020, is due to owning SevenFive Farmfor a full year. We also started selling premium cannabis blunts that command a higher price than the traditional wholesale cannabis. The decrease in gross margin is due to lower yields caused by several environmental factors. The additional increase in costs and expenses is due to a goodwill impairment and intangible impairment adjustment.
Non-GAAP Financial Measures
Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss) attributable to common stockholders calculated in accordance with GAAP, adjusted for the impact of stock-based compensation expense, acquisition related expenses, non-recurring professional fees in relation to litigation and other non-recurring expenses, depreciation and amortization, amortization of debt discounts and equity issuance costs, loss on extinguishment of debt, interest expense, income taxes and certain other non-cash items. Below we have provided a reconciliation of Adjusted EBITDA per share to the most directly comparable GAAP measure, which is net income (loss) per share. We believe that the disclosure of Adjusted EBITDA provides investors with a better comparison of our period-to-period operating results. We exclude the effects of certain items when we evaluate key measures of our performance internally and in assessing the impact of known trends and uncertainties on our business. We also believe that excluding the effects of these items provides a more comparable view of the underlying dynamics of our operations. We believe such information provides additional meaningful methods of evaluating certain aspects of our operating performance from 28
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
Loss from operations before income taxes
$ (8,427,151) $ (8,510,186)Adjustment for loss from discontinued operations 442,228
Net loss from continuing operations before income taxes (7,984,923)
(8,258,179) Adjustments: Deemed dividend - 830,494 Stock-based compensation 307,963 1,504,389
Depreciation and amortization 500,574
Amortization of debt discount and share issue costs 689,348
Loss on extinguishment of debt 233,374
1,638,009 Loss on impairment of assets 3,010,420 - Interest expense 622,469 453,522 Gain on sale of assets (131,512) (139,187) Loss on investment - 41,239
(Gain) loss on derivative liability 990,066
(735,796) Severance 40,962 103,302 Acquisition related expenses 264,312 326,095
Nonrecurring professional services 115,054
1,348,598 Total adjustments 6,643,030 5,865,604 Adjusted EBITDA
$ (1,341,893) $ (2,392,575)Liquidity Sources of liquidity Our sources of liquidity include cash generated from operations, the cash exercise of common stock options and warrants, debt, and the issuance of common stock or other equity-based instruments. We anticipate our more significant uses of resources will include funding operations, developing infrastructure, and business acquisitions.
In February and
Sources and uses of cash
We had about
December 31, 20212020
Net cash used in operating activities
Net cash provided by investing activities
Net cash provided by financing activities
Net cash used in operating activities decreased in 2021 due to an increase in revenue as well as the acquisition of three dispensaries which provides positive operating cash flows. 29 Table of Contents
Net cash used by investing activities for the year ended
December 31, 2021consisted of $1,439,027from the purchase of the three dispensaries and purchase of equipment of $331,834. This is offset by the sale of our investment for $208,761, the sale of Next Big Crop in the amount of $150,000and collection of notes receivables in the amount of $591,717. Net cash provided by financing activities are primarily related to the sale of common stock and warrants and proceeds from notes payable. This is offset by paying off debt. Capital Resources
We have no material commitments for capital expenditures as of
December 31, 2021. Part of our growth strategy, however, is to acquire businesses. We would anticipate funding such activity through cash on hand, the issuance of debt, common stock, warrants for our common stock or a combination thereof.
Off-balance sheet arrangements
We currently have no off-balance sheet arrangements.
Critical accounting policies
The preparation of financial statements in conformity with accounting principles generally accepted in
the United States of Americarequires 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.
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.
Goodwillrepresents the excess of purchase price over the fair value of identifiable net assets acquired in a business combination. Goodwilland long-lived intangible assets are tested for impairment at least annually in accordance with the provisions of ASC No. 350, Intangibles-Goodwill and Other ("ASC No. 350"). ASC No. 350 requires that goodwill be tested for impairment at the reporting unit level (operating segment or on level below an operating segment) on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carry value. Application of the goodwill impairment test requires judgement, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. We test goodwill annually in 30 Table of Contents December, unless an event occurs that would cause the us to believe the value is impaired at an interim date. See Notes 1 and 9 to our consolidated financial statements for a description of our goodwill and intangible asset valuation and impairment policies and associated impacts for the reported periods. Intangible assets with finite useful lives are amortized over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
Impairment of long-lived assets
We periodically evaluate whether the carrying value of property and equipment has been impaired when circumstances indicate the carrying value of those assets may not be recoverable. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is not recoverable, the impairment loss is measured as the excess of the asset's carrying value over its fair value. Our impairment analyses require management to apply judgment in estimating future cash flows as well as asset fair values, including forecasting useful lives of the assets, assessing the probability of different outcomes, and selecting the discount rate that reflects the risk inherent in future cash flows. If the carrying value is not recoverable, we assess the fair value of long-lived assets using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third-party comparable sales and undiscounted cash flow models. If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future.
Accounting for discontinued operations
We regularly review underperforming assets to determine if a sale or disposal might be a better way to monetize the assets. When an asset group is considered for sale or disposal, we review the transaction to determine if or when the entity qualifies as a discontinued operation in accordance with the criteria of FASB ASC Topic 205-20, Discontinued Operations. The FASB has issued authoritative guidance that raises the threshold for disposals to qualify as discontinued operations. Under this guidance, a discontinued operation is (1) a component of an entity or group of components that have been disposed of or are classified as held for sale and represent a strategic shift that has or will have a major effect on an entity's operations and financial results, or (2) an acquired business that is classified as held for sale on the acquisition date.
Debt with features related to equity
We may issue debt securities that 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 non-complex warrants using the Black-Scholes (“Black-Scholes”) option pricing model using the share price on the date of issue, the risk-free interest associated with the life of the debt, and the volatility of our shares. For warrants with complex terms, we use the binomial lattice model to estimate their fair value.
Modification of Debt - When we change the terms of existing notes payable, we evaluate the amendments under ASC 470-50, Debt Modification and Extinguishment to determine whether the change should be treated as a modification or as a debt extinguishment. This evaluation includes analyzing whether there are significant and consequential changes to 31
the economic substance of the note. If the change is deemed insignificant, the change is considered as a modification of the debt, while if the change is substantial, the change is reflected as an extinguishment of the debt.
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.
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.
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 this fundamental principle:
? Step 1: Identify the contract with the customer;
? Step 2: Identify performance obligations in the contract;
? Step 3: Determine the price of the transaction;
? Step 4: Assign the transaction price to the performance obligations in the
? Step 5: Recognize revenue when the business meets a performance obligation.
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