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TREES Corp (Colorado) - Quarter Report: 2016 September (Form 10-Q)

10-Q



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549


FORM 10-Q


(Mark One)

þ

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

September 30, 2016.

 

 

o

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 CORPORATION

(Exact name of registrant as specified in its charter)


Colorado

 

90-1072649

(State of incorporation)

 

(IRS Employer Identification No.)

 

6565 East Evans Avenue

Denver, CO 80224

(Address of principal executive offices) (Zip Code)


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  o     


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes  þ       No  o


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


Large accelerated filer  o

 

Accelerated filer     o

Non-accelerated filer    o

 

Smaller reporting company     þ


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


As of November 7, 2016, there were 15,607,921 issued and outstanding shares of the Companys common stock.








GENERAL CANNABIS CORPORATION

FORM 10-Q


TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

3

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

26

Item 4.

Controls and Procedures

26

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 3.

Defaults Upon Senior Securities

28

Item 4.

Mine Safety Disclosures

28

Item 5.

Other Information

28

Item 6.

Exhibits

28

 

 

 

 

Signatures

29


2




PART I.  FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS


GENERAL CANNABIS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS


 

 

September 30, 2016

(Unaudited)

 

December 31, 2015

ASSETS

 

 

 

 

Current Assets

 

 

 

 

Cash and cash equivalents

$

1,064,606

$

58,711

Accounts receivable

 

267,694

 

124,553

Prepaid expenses and other current assets

 

59,055

 

46,734

Inventory, net

 

27,145

 

15,518

Total current assets

 

1,418,500

 

245,516

 

 

 

 

 

Property and equipment, net

 

1,700,813

 

1,725,268

Intangible assets, net

 

1,268,668

 

1,524,927

Goodwill

 

187,000

 

187,000

Total Assets

$

4,574,981

$

3,682,711

 

 

 

 

 

LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

Accounts payable and accrued expenses

$

457,526

$

293,532

Interest payable

 

63,032

 

84,720

Line of credit – related party

 

1,297,500

 

800,000

Notes payable (net of debt discount of $279,435 as of December 31, 2015), current portion

 

--

 

986,475

Deferred rental revenue and customer deposits

 

66,138

 

33,146

Accrued stock payable

 

663,000

 

1,532,420

Derivative warrant liability

 

15,386,000

 

--

Total current liabilities

 

17,933,196

 

3,730,293

 

 

 

 

 

Notes payable (net of debt discount of $2,419,800 and $ --, respectively, as of September 30, 2016 and December 31, 2015), less current portion

 

580,200

 

151,397

Tenant deposits

 

8,854

 

9,204

Total Liabilities

 

18,522,250

 

3,890,894

 

 

 

 

 

Commitments and Contingencies

 

--

 

--

 

 

 

 

 

Stockholders’ Equity (Deficit)

 

 

 

 

Preferred stock, no par value; 5,000,000 share authorized; no shares issued and outstanding at September 30, 2016 and December 31, 2015

 

--

 

--

Common Stock, $0.001 par value; 100,000,000 shares authorized; 15,495,421 shares and 14,915,421 shares issued and outstanding on September 30, 2016 and December 31, 2015, respectively

 

15,495

 

14,915

Additional paid-in capital

 

19,436,411

 

16,204,280

Accumulated deficit

 

(33,399,175)

 

(16,427,378)

Total Stockholders’ Deficit

 

(13,947,269)

 

(208,183)

 

 

 

 

 

Total Liabilities & Stockholders’ Deficit

$

4,574,981

$

3,682,711


See Notes to condensed consolidated financial statements.



3




GENERAL CANNABIS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


 

 

Three months ended

September 30,

 

Nine months ended

September 30,

 

 

2016

 

2015

 

2016

 

2015

REVENUES

 

 

 

 

 

 

 

 

Service

$

704,489

$

554,458

$

1,988,584

$

948,561

Tenant

 

25,565

 

29,365

 

93,398

 

93,954

Product Sales

 

80,326

 

9,494

 

122,452

 

34,861

Total revenues

 

810,380

 

593,317

 

2,204,434

 

1,077,376

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES

 

 

 

 

 

 

 

 

Cost of service revenues

 

477,287

 

416,838

 

1,393,445

 

673,926

Cost of goods sold

 

77,252

 

28,144

 

112,649

 

67,786

Selling, general and administrative

 

488,543

 

406,711

 

1,300,051

 

1,027,394

Share-based expense

 

872,217

 

863,709

 

1,974,191

 

4,967,799

Professional fees

 

95,520

 

70,594

 

276,706

 

321,091

Depreciation and amortization

 

97,988

 

54,160

 

292,329

 

130,038

Total costs and expenses

 

2,108,807

 

1,840,156

 

5,349,371

 

7,188,034

 

 

 

 

 

 

 

 

 

OPERATING LOSS

 

(1,298,427)

 

(1,246,839)

 

(3,144,937)

 

(6,110,658)

 

 

 

 

 

 

 

 

 

OTHER EXPENSE (INCOME)

 

 

 

 

 

 

 

 

Amortization of debt discount and deferred
financing costs

 

111,837

 

285,090

 

327,455

 

661,915

Interest expense

 

5,276,550

 

166,306

 

5,381,125

 

314,011

Loss on extinguishment of debt

 

1,728,280

 

--

 

2,086,280

 

--

Net loss (gain) on derivative liability

 

6,032,000

 

--

 

6,032,000

 

(210,634)

Total other expense (income), net

 

13,148,667

 

451,396

 

13,826,860

 

765,292

 

 

 

 

 

 

 

 

 

NET LOSS

$

(14,447,094)

$

(1,698,235)

$

(16,971,797)

$

(6,875,950)

 

 

 

 

 

 

 

 

 

PER SHARE DATA – Basic and diluted

 

 

 

 

 

 

 

 

Net loss per share

$

(0.93)

$

(0.12)

$

(1.11)

$

(0.50)

Weighted average number of common shares outstanding

 

15,495,421

 

14,399,029

 

15,270,968

 

13,847,561


See Notes to condensed consolidated financial statements.



4




GENERAL CANNABIS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


 

 

Nine months ended

September 30,

 

 

2016

 

2015

OPERATING ACTIVITIES

$

(16,971,797)

$

(6,875,950)

Net loss

 

 

 

 

Adjustments to reconcile net loss to net cash (used in) provided by

operating activities:

 

 

 

 

Amortization of debt discount and deferred financing costs

 

327,455

 

663,747

Loss on extinguishment of debt

 

2,086,280

 

--

Initial fair value of derivative warrant liability included as interest expense

 

5,189,000

 

--

Loss (gain) on derivative liability, net

 

6,032,000

 

(210,634)

Depreciation and amortization expense

 

292,329

 

130,038

Equity-based payments

 

1,974,191

 

4,964,218

Changes in operating assets and liabilities (net of amounts acquired):

 

 

 

 

Accounts receivable

 

(143,141)

 

(72,264)

Prepaid expenses and other assets

 

(12,321)

 

(89,405)

Inventory

 

(11,627)

 

40,013

Accounts payable and accrued liabilities

 

174,948

 

335,150

Net cash used in operating activities:

 

(1,062,683)

 

(1,115,087)

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

Purchase of property and equipment

 

(11,615)

 

(54,960)

Net cash used in investing activities

 

(11,615)

 

(54,960)

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

Borrowings under notes payable

 

2,500,000

 

659,000

Increase in line of credit -- related party

 

497,500

 

365,000

Payments on notes payable

 

(917,307)

 

(4,701)

Proceeds from warrant exercises

 

--

 

86,171

Net cash provided by financing activities

 

2,080,193

 

1,105,470

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH

 

1,005,895

 

(64,577)

CASH, BEGINNING OF PERIOD

 

58,711

 

165,536

CASH, END OF PERIOD

$

1,064,606

$

100,959

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION

 

 

 

 

Cash paid for interest

$

213,813

$

173,627

 

 

 

 

 

NON-CASH TRANSACTIONS

 

 

 

 

Issuance of common stock and warrants from accrued stock payable

$

1,069,775

$

114,693

Derivative warrant liability recorded as debt discount

 

2,450,000

 

--

Warrants issued in connection with debt recorded as debt discount

 

31,100

 

297,931

10% Notes and 14% Mortgage Note Payable converted to 12% Notes

 

550,000

 

--

Convertible notes payable settled in common stock

 

--

 

320,000

Issuance of common stock upon cashless conversion of warrants by Full Circle

 

--

 

3,683,270

Acquisition of IPG with common stock payable and warrants

 

--

 

1,887,000

Acquisition of Chiefton with common stock payable

 

--

 

69,400


See Notes to condensed consolidated financial statements.




5



GENERAL CANNABIS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)


NOTE 1.   NATURE OF OPERATIONS, HISTORY AND PRESENTATION


Nature of Operations


General Cannabis Corporation (the “Company,” “we,” “us,” “our,” or “GCC”) (formerly, Advanced Cannabis Solutions, Inc.), was incorporated in Colorado on June 3, 2013, and provides products and services to the regulated cannabis industry.  On April 28, 2015, our common stock was uplisted and resumed quotation on the OTC Market’s OTCQB on May 6, 2015.  Our operations are segregated into the following four reportable segments:


Security and Cash Management Services

 

In March 2015, we acquired substantially all of the assets of Iron Protection Group, LLC, a Colorado limited liability company, which continues to do business as “Iron Protection Group.” Iron Protection Group (“IPG”) provides advanced security, including on-site professionals, video surveillance and cash transport, to licensed cannabis cultivators and retail shops. As of September 30, 2016, IPG had approximately 71 security guards on staff who serve 16 clients throughout Colorado.


Marketing and Products


In September 2015, we acquired substantially all of the assets of Chiefton Supply Co., and established a dba of Chiefton Supply Co., incorporated in Colorado (“Chiefton”).  Chiefton is an apparel and design company.  Chiefton Supply designs, distributes and sells apparel featuring graphic designs.  Our apparel is purchased and screen printed by third parties, for which there are numerous suppliers.  Chiefton Design provides design, branding and marketing strategy consulting services to the cannabis community.


In April 2016, we relaunched GC Supply, dedicated to providing wholesale equipment and supplies to participants in the regulated cannabis industry.  We provide turnkey sourcing and stocking services to cultivation, retail and infused products manufacturing facilities.  Offerings will include infrastructure, equipment, consumables, various delivery technologies (vaporizers and capsules) and compliance packaging.  GC Supply operates out of a leased, 1,800 square-foot warehouse located in Colorado Springs, Colorado.

  

Consulting and Advisory

 

Through Next Big Crop we deliver comprehensive cannabis industry consulting services that include obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and building services, and expansion of existing operations. Next Big Crop’s business plan is based on the future growth of the regulated cannabis market in the United States.


Finance and Real Estate


Real Estate Leasing


We own a cultivation property in a suburb of Pueblo, Colorado, consisting of approximately three acres of land, which currently includes a 5,000 square foot steel building and parking lot. The property is zoned for cultivating cannabis and is leased to a medical cannabis grower until December 31, 2022.


Our real estate leasing business plan includes the potential future acquisition and leasing of cultivation space and related facilities to licensed marijuana growers and dispensary owners for their operations. Management anticipates that these facilities would range in size from 5,000 to 50,000 square feet. These facilities would only be leased to tenants that possess the requisite state licenses to operate cultivation facilities. The leases with the tenants would include certain requirements that permit us to continually evaluate our tenants’ compliance with applicable laws and regulations.


Shared Office Space, Networking and Event Services   

 

In October 2014, we purchased a former retail bank located at 6565 East Evans Avenue, Denver, Colorado 80224, which has been branded as The Greenhouse (“The Greenhouse”).  The building is a 16,056 square-foot facility, which we use as our corporate headquarters and Chiefton’s retail location.


6



The Greenhouse has approximately 10,000 square feet of existing office space and 5,000 square feet on its ground floor that is dedicated to a consumer banking design.  We continue to assess the opportunity to lease shared workspace for entrepreneurs, professionals and others serving the cannabis industry.  Clients would be able to lease space to use as offices, meeting rooms, lecture, educational and networking facilities, and individual workstations.


Industry Finance


Our industry finance strategy includes evaluating opportunities to make direct term loans or to provide revolving lines of credit to businesses involved in the cultivation and sale of cannabis and related products.  These loans would generally be secured to the maximum extent permitted by law.  We believe there is a significant demand for this financing.  We are assessing other finance services including customized finance, capital formation, and banking, for participants in the cannabis industry.


On November 4, 2015, we entered into an agreement (the “DB Option Agreement”) with Infinity Capital, a related party, which was amended on March 29, 2016 (the “Amended DB Option Agreement”) and on September 16, 2016 (the “Second Amended DB Option Agreement”).  Pursuant to the Amended DB Option Agreement, we have the right to purchase all of Infinity Capital’s interest in DB Products Arizona, LLC (“DB”) at Infinity Capital’s actual cost, plus $1.00, or $800,001. The interests for which the option has been granted are Infinity Capital’s 50% equity interest in the membership interests of DB, and any outstanding unpaid principal and interest owed on promissory note(s) issued by DB in favor of Infinity Capital for up to $800,000.  DB is involved in the production and distribution of Dixie Brands, Inc.’s full line of medical cannabis “Dixie Elixirs and Edibles” products in Arizona.  DB expects to begin sales in 2016.  We have no obligation to exercise the option, which expires September 30, 2018.


Basis of Presentation


The accompanying (a) condensed consolidated balance sheet at December 31, 2015, has been derived from audited financial statements and (b) condensed consolidated unaudited financial statements as of September 30, 2016 and 2015, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, and should be read in conjunction with the audited consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on March 25, 2016.  It is management’s opinion, however, that all material adjustments (consisting of normal recurring adjustments), have been made which are necessary for a fair financial statements presentation. The condensed consolidated financial statements include all material adjustments (consisting of normal recurring accruals) necessary to make the condensed consolidated financial statements not misleading as required by Regulation S-X, Rule 10-01. Operating results for the three and nine months ended September 30, 2016, are not necessarily indicative of the results of operations expected for the year ending December 31, 2016.


The condensed consolidated financial statements include the results of GCC and its five wholly-owned subsidiary companies: (a) ACS Colorado Corp., a Colorado corporation formed in 2013; (b) Advanced Cannabis Solutions Corporation, a Colorado corporation formed in 2013; (c) 6565 E. Evans Avenue LLC, a Colorado limited liability company formed in 2014; (d) General Cannabis Capital Corporation, a Colorado corporation formed in 2015; and (e) GC Security LLC (“GCS”), a Colorado limited liability company formed in 2015.  Advanced Cannabis Solutions Corporation has one wholly-owned subsidiary company, ACS Corp., which was formed in Colorado on June 6, 2013.  Intercompany accounts and transactions have been eliminated.


Certain reclassifications have been made to the prior period condensed consolidated financial statements to conform to the current period presentation. The reclassifications had no effect on net loss, total assets, or total stockholders’ equity (deficit).


Going Concern


The condensed 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.  The 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 actions presently being taken to further implement our business plan and generate additional revenues provide 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.


We had an accumulated deficit of $33,399,175 and $16,427,378, respectively, at September 30, 2016 and December 31, 2015, and further losses are anticipated in the development of our business. Accordingly, there is substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.


7



Significant Accounting Policy Updates


Debt and Derivative Liability


If we issue debt with warrants that have certain terms, such as a clause requiring repricing, the warrants are considered to be a derivative that is recorded as a liability at fair value.  If the initial value of the warrant derivative liability is higher than the fair value of the associated debt, the excess is recognized immediately as interest expense.  The warrant derivative liability is adjusted to its fair value at the end of each reporting period, with the change being recorded as expense.  Due to the complexity of such warrant derivatives, we use the binomial model to estimate their fair value.  The derivative warrant liability is a level three fair value measurement.


Modification of Debt Instruments


Modifications or exchanges of debt, which are not considered a troubled debt restructuring, are considered extinguishments if the terms of the new debt and the original instrument are substantially different.  The instruments are considered substantially different when the present value of the cash flows under the terms of the new debt instrument are at least 10% different from the present value of the remaining cash flows under the terms of the original instrument.  The fair value of non-cash consideration associated with the new debt instrument, such as warrants, are included as a day one cash flow in the 10% cash flow test.  If the original and new debt instruments are substantially different, the original debt is derecognized and the new debt is initially recorded at fair value, with the difference recognized as an extinguishment gain or loss.


Recently Issued Accounting Standards


Financial Accounting Standards Board, or FASB, Accounting Standards Update, or FASB ASU 2016-15 “Statement of Cash Flows (Topic 230)” – In August 2016, the FASB issued 2016-15.  Stakeholders indicated that there is a diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.  This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted.  Adoption of this ASU will not have a significant impact on our statement of cash flows.


FASB ASU 2016-12 “Revenue from Contracts with Customers (Topic 606)” – In May 2016, the FASB issued 2016-12.  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU 2016-12 provides clarification on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications.  This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.


FASB ASU 2016-11 “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815)” – In May 2016, the FASB issued 2016-11, which clarifies guidance on assessing whether an entity is a principal or an agent in a revenue transaction.  This conclusion impacts whether an entity reports revenue on a gross or net basis.  This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.


FASB ASU 2016-10 “Revenue from Contracts with Customers (Topic 606)” – In April 2016, the FASB issued ASU 2016-10, clarify identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas.  This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.


FASB ASU 2016-09 “Compensation – Stock Compensation (Topic 718)” – In March 2016, the FASB issued ASU 2016-09, which includes multiple provisions intended to simplify various aspects of accounting for share-based payments.  While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, earnings per share, and the statement of cash flows.  Implementation and administration may present challenges for companies with significant share-based payment activities.  This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.


8



FASB ASU 2016-02 “Leases (Topic 842)” – In February 2016, the FASB issued ASU 2016-02, which will require lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability.  For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance.  Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines.  Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard.  This ASU is effective for fiscal years beginning after December 18, 2018, including interim periods within those fiscal years.  We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.


NOTE 2.   BUSINESS ACQUISITIONS


IPG Acquisition


On March 26, 2015, GCS, our wholly-owned subsidiary, entered into an Asset Purchase Agreement (the “IPG APA”) by and among us, GCS and Iron Protection Group, LLC, a Colorado limited liability company (the “Seller”), whereby GCS agreed to acquire substantially all of the assets of Seller (the “IPG Acquisition”). Pursuant to the terms of the IPG APA, we delivered to Seller 500,000 restricted shares of our common stock, which vested over a one-year period (100,000 shares on October 1, 2015; 200,000 shares on January 1, 2016; and 200,000 shares on April 1, 2016).


In addition, we delivered to Seller three-year warrants (the “IPG Warrants”) to purchase an aggregate of 500,000 shares of our common stock at an exercise price of: (i) $4.50 for warrants to purchase 250,000 shares, and (ii) $5.00 for warrants to purchase another 250,000 shares. The IPG APA contains certain provisions that require Seller to forfeit a portion of the stock consideration in the event that Seller violates its obligations under the IPG APA relating to non-competition and non-disclosure. The closing date of the IPG Acquisition was March 26, 2015, and we calculated the purchase price of the IPG Acquisition to be approximately $1,887,000. At the acquisition date and pursuant to the IPG APA, we did not assume any of the Seller’s liabilities and there were no tangible assets of significance.


The aggregate consideration was as follows:


Common stock payable

$

1,054,000

Warrants issued with $4.50 exercise price

 

421,000

Warrants issued with $5.00 exercise price

 

412,000

 

$

1,887,000


The 500,000 shares of common stock were valued based on the closing price per share on March 26, 2015, or $2.48, reduced by a discount of 15% due to restrictions in the ability to trade our common stock.  The $1,054,000 value of stock consideration was originally recorded as accrued stock payable on the condensed consolidated balance sheet, which was then reduced as we issued common stock according to the vesting schedule.  As of September 30, 2016, all common stock has been issued.


The purchase price allocation was as follows:


Intangible assets:

 

 

Customer relationship intangible

$

1,000,000

Marketing-related intangibles

 

200,000

Non-compete agreements

 

500,000

Goodwill

 

187,000

 

$

1,887,000


We finalized the purchase price allocation in the fourth quarter of the year ended December 31, 2015. 


In connection with our acquisition of IPG, we agreed to issue to the sole shareholder of the Seller 100,000 fully vested warrants to purchase shares of our common stock if revenues of the Security segment exceeded $3,000,000 for the year ended December 31, 2015, with an exercise price of $2.48.  This condition was not met during the year ended December 31, 2015, so no value was recorded for these warrants.


9



The accompanying condensed consolidated financial statements include the results of IPG from the date of acquisition, March 26, 2015.  The pro forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2015, are as follows:


 

 

Nine months ended

September 30, 2015

(Unaudited)

Total net revenues

$

1,447,122

Net loss

 

(6,822,689)

Net loss per common share:

 

 

Basic and diluted

$

(0.48)


Chiefton Acquisition


On September 25, 2015, we closed an asset purchase agreement for the purchase of substantially all the assets of Chiefton Supply Co., a Colorado corporation, and established a dba within GCC of Chiefton.  This acquisition expands our service offerings in the cannabis industry and provides a new revenue stream.


We acquired the Chiefton assets for consideration of 80,000 restricted shares of our common stock.  The aggregate consideration was as follows:


Cash

$

12,249

Common stock

 

69,400

Aggregate consideration

$

81,649


The value of the common stock consideration was estimated based on our closing common stock price on September 25, 2015, or $1.02 per share, reduced by a discount of 15% due to restrictions in the ability to trade our shares.  The $69,400 value of stock consideration was originally included in accrued stock payable on the condensed consolidated balance sheet.  As of September 30, 2016, all common stock has been issued.


The purchase price allocation is as follows:


Inventory

$

12,249

Intangible assets – intellectual property

 

69,400

 

$

81,649


We finalized the purchase price allocation in the fourth quarter of the year ended December 31, 2015. 


NOTE 3.   LONG-LIVED ASSETS


Property and Equipment


Depreciation expense was $11,944 and $5,574, respectively, for the three months ended September 30, 2016 and 2015, and $36,070 and $16,723, respectively, for the nine months ended September 30, 2016 and 2015.  We have not recognized any impairment as of September 30, 2016.


Intangible Assets


Intangible assets consisted of the following as of September 30, 2016:


 

 

Gross

 

Accumulated Amortization

 

Net

 

Estimated Life

(in years)

Customer relationship intangible

$

1,000,000

$

151,782

$

848,218

 

10

Marketing-related intangibles

 

200,000

 

60,712

 

139,288

 

5

Non-compete agreements

 

500,000

 

252,968

 

247,032

 

3

Chiefton brand and graphic designs

 

69,400

 

35,270

 

34,130

 

2

Intangible assets, net

$

1,769,400

$

500,732

$

1,268,668

 

 


10



Amortization expense was $86,044 and $55,452, respectively, for the three months ended September 30, 2016 and 2015, and $256,259 and $113,315, respectively, for the nine months ended September 30, 2016 and 2015.  We have not recognized any impairment as of September 30, 2016.


Goodwill


In connection with our purchase of IPG, we recorded goodwill of $187,000. We have not recognized any impairment as of September 30, 2016.


NOTE 4.    DEBT


Line of Credit – Related Party


In February 2015, we issued a senior secured note to Infinity Capital, LLC (“Infinity Capital”), as amended in April 2015, bearing 5% interest payable monthly in arrears commencing June 30, 2015 (the “Infinity Note”).   Infinity Capital, an investment management company, was founded and is controlled by our chairman of the board, Michael Feinsod, a related party.  On July 1, 2015, the outstanding principal and interest of $309,000 was settled by our issuing a 10% private placement note.  Subsequent to the settlement on July 1, 2015, we continued to borrow under the Infinity Note.  Interest expense for the Infinity Note for the nine months ended September 30, 2016, was approximately $26,540, and approximately $38,268 was accrued as of September 30, 2016.  The maturity date of the Infinity Note was August 31, 2015, however, under the terms of the 12% Notes no payments may be made before those notes are retired.


Notes Payable


 

 

September 30,

2016

 

December 31,

2015

12% September 2016 notes

$

3,000,000

$

--

10% private placement notes

 

--

 

659,000

14% mortgage note payable (The Greenhouse)

 

--

 

600,000

8.5% convertible note payable (Pueblo West Property)

 

--

 

158,307

 

 

3,000,000

 

1,417,307

Unamortized debt discount

 

(2,419,800)

 

(279,435)

 

 

580,200

 

1,137,872

Less: Current portion

 

--

 

(986,475)

Long-term portion

$

580,200

$

151,397


12% September 2016 Notes


In September 2016, we completed a $3,000,000 private placement pursuant to a promissory note and warrant purchase agreement (the “12% Agreement”) with certain accredited investors, bearing interest at 12%, with interest and principal due September 21, 2018 (each such note, a “12% Note,” and collectively, the “12% Notes”).  In the event of default, the interest rate increases to 18%.  The 12% Notes are collateralized by a security interest in substantially all of our assets.  We may prepay the 12% Notes at any time, but in any event must pay at least one year of interest.  


Subject to the terms and conditions of the 12% Agreement, each investor was granted fully-vested warrants equal to their note principal times three (the “12% Warrants”), or nine million warrants, with a life of three years.  4.5 million warrants have an exercise price of $0.35 per share and the other 4.5 million warrants have an exercise price of $0.70 per share.  Should we issue any equity-based instruments at a price lower than the exercise price(s) of the 12% Warrants, other than under our Incentive Plan, the exercise price(s) of the 12% Warrants will be adjusted to the lower price.  The 12% Warrants may be exercised at the option of the holder (a) by paying cash, (b) by applying the amount due under the 12% Notes as consideration, or (c) if there is no effective registration statement for the 12% Warrants within six months of being granted, the holder may exercise on a cashless basis.  Since the 12% Warrants include a clause requiring repricing, the warrants are considered to be a derivative that is recorded as a liability at fair value.


We received $2,450,000 of cash for issuing the 12% Notes.  $300,000 of 10% Notes and $250,000 of the 14% Mortgage Note Payable were converted into 12% Notes.  We concluded that these conversions met the criteria for a debt extinguishment and, accordingly, recorded a loss on extinguishment of $1,728,280 for the three and nine months ended September 30, 2016.  The loss on extinguishment represents the fair value of the 12% Warrants issued to the previous 10% Note holders and the 14% Mortgage Note Payable lender.  The fair value of the 12% Warrants not associated with the conversions was recorded as a debt discount of $2,450,000 and interest expense of $5,189,000.  The 12% Notes are otherwise treated as conventional debt.


11



8% August 2016 Notes


In August 2016, we completed a private placement pursuant to a promissory note and warrant purchase agreement (the “8% Notes”) with two accredited investors, bearing interest at 8%, payable on demand by the lenders.  Subject to the terms of the 8% Notes, we issued 100,000 warrants having an exercise price of $0.78 per share, with a life of three years.  We received cash of $50,000.  The debt is treated as conventional debt and the fair value of the warrants is included in additional paid-in capital.  Since the 8% Notes are payable on demand, the $31,100 fair value of the warrants was expensed immediately, included in amortization of debt discount on the condensed statements of operations for the three and nine months ended September 30, 2016.  One of the 8% Notes was with one of our board members.  Both 8% Notes were paid off with proceeds from the 12% Notes in September 2016.


10% Private Placement Notes


In September 2016, we extinguished the 10% Notes by paying cash of $359,000 and converting $300,000 into 12% Notes.


In 2015, we completed a private placement pursuant to a promissory note and warrant purchase agreement (the “10% Agreement”) with certain accredited investors, bearing interest at 10% payable quarterly (each such note, a “10% Note,” and collectively, the “10% Notes”).  Subject to the terms and conditions of the 10% Agreement, each investor is granted fully-vested warrants equal to their note principal divided by two (the “10% Warrants”) (with standard dilution clauses).  The 10% Warrants are exercisable for a period of eighteen months after grant date and have an exercise price of $1.08 per share.  The debt is treated as conventional debt.  The 10% Notes are collateralized by a security interest in substantially all of our assets.


$309,000 of the 10% Notes were due to a related party, Infinity Capital.  For the nine months ended September 30, 2016, approximately $22,500 of interest expense under the 10% Notes relates to Infinity Capital.  The Infinity Capital portion of the principle and accrued interest of the 10% Notes was settled for cash of $347,000, in September 2016.


On June 3, 2016, we reached an agreement with the 10% Note holders to extend the maturity date from May 1, 2016 to January 31, 2017.  In exchange for the extension, we issued the holders an aggregate of 659,000 additional warrants to purchase our common stock at $1.07 per share for a period of five years, with an aggregate fair value of $358,000, determined using Black-Scholes, a risk-free rate of 1.2% and volatility of 151%.  We concluded that this modification of the debt instruments met the criteria for a debt extinguishment and, accordingly, recorded additional paid-in capital and a loss on extinguishment of debt of $358,000 during the three months ended June 30, 2016, .  Absent the warrants, the fair value of the new debt remained the same as the fair value of the original debt.


14% Mortgage Note Payable (The Greenhouse)


In September 2016, we extinguished the Greenhouse Mortgage by paying cash of $350,000 and converting $250,000 into 12% Notes.  The remaining unamortized debt discount of $13,280 was included in loss on extinguishment of debt in the condensed statements of operations during the three and nine months ended September 30, 2016.


In October 2014, we executed a mortgage on The Greenhouse in the amount of $600,000, bearing 14.0% interest payable monthly, with a maturity date of October 21, 2016 (the “Greenhouse Mortgage”).  The debt is treated as conventional debt.


In addition, we granted warrants to Evans Street Lendco LLC (“Evans Lendco”), the note holder of the Greenhouse Mortgage, which expire on October 21, 2016.  The warrants vested immediately and allowed for Evans Lendco to purchase 600,000 shares of our common stock at a price of $4.40 per share, (with standard dilution clauses).  Due to the drop in our stock price, on July 29, 2015, we agreed with Evans Lendco to replace the warrants previously issued to Evans Lendco with warrants to purchase 225,000 shares of our stock at $1.20 per share with a term of two years.  The estimated fair value of the replacement warrants is less than the fair value of the original warrants on their date of grant.  Accordingly, we continued to amortize the remaining fair value of the original warrants over the remaining life of the underlying debt until the debt was extinguished in September 2016.


8.5% Convertible Note Payable (Pueblo West Property)


In September 2016, we extinguished the Pueblo Mortgage by paying cash of $153,189.


In December 2013, we executed a mortgage on our Pueblo West Property in the amount of $170,000, bearing 8.5% interest with monthly principal and interest payments totaling $1,674, with the balance due on December 31, 2018 (the “Pueblo Mortgage”). This note is convertible at any time at $5.00 per share.


Derivative treatment is not required, as the conversion feature meets the scope exception. The conversion feature is not beneficial, because the conversion price was higher than the stock price on the commitment date.  Accordingly, we treated the Pueblo Mortgage as conventional debt.



12



12% Convertible Notes


Conversion of 12% Convertible Notes


During the year ended December 31, 2015, lenders converted $321,123 of 12% Convertible Notes for 64,225 shares of our common stock.  The December 2013 Issuance and the January 2014 Issuance (collectively, the “12% Convertible Notes”) included a provision that if the trading stock price exceeded $10 for twenty consecutive trading days and the daily volume for those twenty consecutive trading days exceeds 25,000 shares, then the 12% Convertible Notes convert into shares of our common stock on or after December 1, 2015.  As of April 24, 2014, these parameters were met.  On December 1, 2015, the remaining $1,330,000 of convertible notes was automatically converted to 266,000 shares of our common stock.


December 2013 Issuance


In December 2013, we entered into convertible promissory notes with various third parties totaling $530,000 (the “December 2013 Issuance”). The principal amounts of these notes ranged between $10,000 and $150,000. The notes required quarterly interest payments at 12%, and were convertible into shares of our common stock at a conversion rate of $5.00 per share (with standard dilution clauses).


Derivative treatment was not required, as the conversion feature met the scope exception. The conversion feature was not beneficial, because the conversion price was higher than the stock price on the commitment date.  Accordingly, we treated the December 2013 Issuance as conventional debt.


January 2014 Issuance


In January 2014, we entered into convertible promissory notes with various third parties totaling $1,605,000 (the “January 2014 Issuance”). The principal amounts of these notes ranged between $10,000 and $200,000. The notes required quarterly interest payments at 12%, and were convertible into shares of our common stock at a conversion rate of $5.00 per share (with standard dilution clauses).


Derivative treatment was not required, as the conversion feature met the scope exception.  Since the initial conversion price was less than the market value of the common stock at the time of issuance, it was determined that a beneficial conversion feature existed. The intrinsic value of the beneficial conversion feature and the combined value of the debt discount resulted in a value greater than the value of the debt and, as such, the total discount was limited to the value of the debt balance of $1,605,000.


Annual maturities of long-term debt (excluding unamortized discount) for the next three years, consist of:


Year ending December 31,

 

 

2016

$

--

2017

 

--

2018

 

3,000,000

 

$

3,000,000


NOTE 5.  ACCRUED STOCK PAYABLE


The following tables summarize the changes in accrued common stock payable during the nine months ended September 30, 2016:


 

 

Amount

 

Number of Shares

December 31, 2015

$

1,532,420

$

730,000

IPG acquisition -- issued

 

(843,200)

 

(400,000)

Chiefton acquisition -- issued

 

(69,400)

 

(80,000)

Feinsod Agreement -- accrual

 

192,800

 

--

Consulting services -- accrual

 

6,988

 

--

Consulting services -- issued

 

(25,000)

 

(50,000)

Employment agreements -- accrual

 

567

 

--

Employment agreements -- issued

 

(132,175)

 

(50,000)

September 30, 2016

$

663,000

$

150,000


13



Feinsod Agreement


On August 4, 2014, we entered into an agreement with Michael Feinsod in consideration for serving as Executive Chairman of the Board and as a member of our Board of Directors (the “Board”) and pursuant to the terms of the Executive Board and Director Agreement (the “Feinsod Agreement”).  The Board approved the issuance to Infinity Capital of (a) 200,000 shares of our common stock on August 4, 2014; (b) 1,000,000 shares of our common stock upon the uplisting of our common stock to the OTC Market’s OTCQB; (c) 150,000 shares of our common stock on August 4, 2015; and (d) 150,000 shares of our common stock on August 4, 2016.  All shares, except the final tranche of 150,000 shares, have been issued as of September 30, 2016.  Mr. Feinsod must remain a member of the Board in order for the common stock to be issued.  In addition, the Feinsod Agreement requires the issuance of a number of shares of our common stock to Infinity Capital equal to 10% of any new issuances not to exceed 600,000 shares of our common stock in the aggregate during the time that Mr. Feinsod remains a member of the Board (the “New Issuance Allowance”).  Under the terms of the Feinsod Agreement, the New Issuance Allowance will not be triggered upon issuances relating to convertible securities existing as of the date of the Feinsod Agreement.  For illustrative purposes, if we issue 7,000,000 new shares of common stock, then the New Issuance Allowance issued to Infinity Capital would be capped at 600,000 shares of our common stock.  No shares have been issued under the New Issuance Allowance.


The 1,000,000 shares of our common stock were valued at $2.97 per share, based on the closing price of our common stock of $3.49 on April 27, 2015, and then reduced by 15% due to restrictions on the ability to trade our shares.  The other shares under the Feinsod Agreement were valued at $4.42 per share, based on the closing price of our common stock of $5.20 on August 4, 2014, and then reduced by 15% due to restriction on the ability to trade our common stock.  We are recognizing expense for the unissued shares ratably over the vesting period.


Employment Agreements


On May 13, 2015, we hired two individuals from Next Big Crop, an unaffiliated entity serving the cannabis industry, to service our new and existing clients. We did not purchase any existing client base from Next Big Crop and upon execution of employment agreements, granted these persons a total of 100,000 shares of our common stock with a vesting date of January 1, 2016. On the date of grant, the 100,000 shares had an initial fair value of $311,000, based on a closing price per share of our common stock of $3.11 on May 13, 2015. Due to restrictions in the ability to trade our shares, a discount of fifteen percent (15%) was applied to the fair value of the shares. After taking into consideration the illiquidity of the shares, the fair value was determined to be $264,350.  One individual forfeited his shares, so expense was only recognized for 50,000 shares.  These shares were issued in April 2016.


Consulting Agreement


On July 15, 2015, we entered into an agreement with an individual to provide consulting services to customers in exchange for 50,000 shares of our common stock to be delivered on March 15, 2016.  The fair value of the common stock is determined at the end of each reporting period and the pro rata amount earned is recognized as accrued stock payable over the term of the agreement.  These shares were issued in March 2016.


NOTE 6.  DERIVATIVE WARRANT LIABILITY


On September 21, 2016, in connection with the 12% Notes, we issued the 12% Warrants, which are treated as a derivative liability and adjusted to fair value at the end of each period.  The underlying assumptions used in the binomial model to determine the fair value of the derivative warrant liability were:


 

 

September 21, 2016

 

September 30, 2016

Current stock price

$

1.20

$

1.91

Risk-free interest rate

 

0.92 %

 

0.77%

Expected dividend yield

 

--

 

--

Expected term (in years)

 

3.0

 

3.0

Expected volatility

 

146 %

 

146 %

Number of iterations

 

5

 

5


The initial fair value of the derivative warrant liability was recorded as follows:


Extinguishment of debt

$

1,715,000

Interest expense

 

5,189,000

Debt discount

 

2,450,000

Initial fair value of warrants issued

$

9,354,000


14



Changes in the derivative warrant liability were as follows:


January 1, 2016

$

--

Initial fair value of warrants issued

 

9,354,000

Increase in fair value

 

6,032,000

September 30, 2016

$

15,386,000


NOTE 7.   COMMITMENTS AND CONTINGENCIES


Legal


To the best of the Company’s knowledge and belief, no legal proceedings of merit are currently pending or threatened against the Company.


NOTE 8.   STOCKHOLDERS’ EQUITY


Share-based expense consisted of the following:


 

 

Three months ended

September 30,

 

Nine months ended

September 30,

 

 

2016

 

2015

 

2016

 

2015

Employee Awards

$

740,844

$

695,788

$

1,574,906

$

1,319,355

Consulting Awards

 

103,869

 

24,196

 

151,385

 

41,650

Feinsod Agreement

 

27,504

 

143,725

 

192,800

 

3,606,794

DB Option Agreement

 

--

 

--

 

55,100

 

--

 

$

872,217

$

863,709

$

1,974,191

$

4,967,799


Employee Stock Options


On October 29, 2014, the Board authorized the adoption of and on June 26, 2015, our stockholders ratified our 2014 Equity Incentive Plan (the “Incentive Plan”).  The Incentive Plan provides for the issuance of up to 10 million shares of our common stock, and is designed to provide an additional incentive to executives, employees, directors and key consultants, aligning our long term interests with participants.  In April 2016, we filed a Registration Statement on Form S-8 (the “Registration Statement”), which automatically became effective in May 2016.  The Registration Statement relates to 10,000,000 shares of our common stock, which are issuable pursuant to, or upon exercise of, options that have been granted or may be granted under our Incentive Plan.


Share-based compensation costs for award grants to employees and directors (“Employee Awards”) are recognized on a straight-line basis over the service period for the entire award, with the amount of compensation cost recognized at any date equaling at least the portion of the award that is vested.  The following summarizes the Black-Scholes assumptions used for Employee Awards granted during the nine months ended September 30, 2016:


Exercise price

 

$ 0.61 -- 1.01

Stock price on date of grant

 

$ 0.63 -- 1.01

Volatility

 

146 -- 153 %

Risk-free interest rate

 

0.71 – 0.90 %

Expected life (years)

 

3.0

Dividend yield

 

--


The following summarizes Employee Awards activity:


 

 

Number of Shares

 

Weighted-average Exercise Price per Share

 

Weighted-average Remaining Contractual Term (in years)

 

Aggregate Intrinsic Value

Outstanding at December 31, 2015

 

2,509,000

$

1.49

 

 

 

 

Granted

 

6,440,800

 

0.76

 

 

 

 

Forfeited

 

(263,350)

 

0.75

 

 

 

 

Outstanding at September 30, 2016

 

8,686,450

 

0.97

 

2.8

$

8,918,000

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2016

 

 

$

1.65

 

2.3

$

883,960


15



As of September 30, 2016, there was approximately $3,658,000 of total unrecognized compensation expense related to unvested Employee Awards, which is expected to be recognized over a weighted-average period of eight months.


Warrants for Consulting Services


As needed, we may issue warrants to third parties in exchange for consulting services.  Stock-based compensation costs for award grants to third parties for consulting services (“Consulting Awards”) are recognized on a straight-line basis over the service period for the entire award, with the amount of compensation cost recognized at any date equaling at least the portion of the award that is vested.  Consulting Awards are revalued at each reporting date until fully vested, which may generate an expense or benefit.


The following summarizes the Black-Scholes assumptions used for Consulting Awards granted during the nine months ended September 30, 2016:


Exercise price

 

$ 0.60 -- 1.20

Stock price on valuation date

 

$ 1.91

Volatility

 

146 -- 150 %

Risk-free interest rate

 

0.77 – 1.14 %

Expected life (years)

 

2.2 – 4.8

Dividend yield

 

--


The following summarizes Consulting Awards:


 

 

Number of Shares

 

Weighted-average Exercise Price per Share

 

Weighted-average Remaining Contractual Term (in years)

 

Aggregate Intrinsic Value

Outstanding at December 31, 2015

 

252,500

$

3.62

 

 

 

 

Granted

 

55,000

 

1.01

 

 

 

 

Outstanding at September 30, 2016

 

307,500

 

3.15

 

1.3

$

64,525

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2016

 

300,000

$

3.22

 

1.2

$

54,700


As of September 30, 2016, there was approximately $2,600 of total unrecognized expense related to unvested Consulting Awards, which is expected to be recognized over a weighted-average period of three months.


IPG Acquisition Warrants


In connection with the IPG APA, we issued to IPG 500,000 fully-vested warrants to purchase a) 250,000 shares of our common stock at $4.50 per share, (the “IPG $4.50 Warrants”), and b) 250,000 shares of our common stock at $5.00 per share (the “IPG $5.00 Warrants”) (collectively, the “IPG Warrants”). The IPG Warrants are subject to customary adjustments in the event of our reclassification, consolidation, merger, subdivision of shares of our common stock, combination of shares of our common stock or payment of dividends in the form of the our common stock. The IPG Warrants expire three years after their initial issuance date.


As of September 30, 2016, all of the IPG Warrants are outstanding and exercisable.


Warrants with Debt


The following summarizes warrants issued with debt:


 

 

Number of Shares

 

Weighted-average Exercise Price per Share

 

Weighted-average Remaining Contractual Term (in years)

 

Aggregate Intrinsic Value

Outstanding at December 31, 2015

 

597,200

$

1.41

 

 

 

 

Granted

 

9,759,000

 

0.56

 

 

 

 

Outstanding at September 30, 2016

 

10,356,200

 

0.61

 

3.0

$

13,564,795

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2016

 

10,356,200

$

0.61

 

3.0

$

13,564,795


16



DB Option Agreement warrants


In order to extend the DB Option Agreement with Infinity Capital, in March 2016 we granted Infinity Capital warrants to purchase 100,000 shares of our common stock at an exercise price of $0.67 per share with a five year life.  The fair value of $55,100 is included in equity-based expense.  The following summarizes the Black-Scholes assumptions used to estimate the fair value of the DB Option Agreement warrants:


Stock price on date of grant

 

$ 0.61

Volatility

 

150 %

Risk-free interest rate

 

1.2 %

Expected life (years)

 

5.0

Dividend yield

 

--


2013 Warrants


Between July 11, 2013 and September 19, 2013, we issued 973,000 shares of our common stock and 973,000 fully-vested warrants (the “2013 Warrants”) for cash consideration of $1.00 per share. Each 2013 Warrant entitled the holder to purchase one share of our common stock at a price of $10.00 per share. The 2013 Warrants expired unexercised on August 1, 2016.


NOTE 9.  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.

 

NOTE 10.   SUBSEQUENT EVENTS


As described in Note 1, as of September 30, 2016, Infinity Capital, a related party, had a 50% equity interest in DB and an $800,000 loan to DB. We have an option to purchase all of Infinity Capital’s interest in DB. In October 2016, we loaned $75,000 to DB, which bears interest at 14% and is payable in May 2017. Infinity Capital has agreed to subordinate its right to repayment and security interest to our rights under our loan to DB.


NOTE 11.   SEGMENT INFORMATION


Our operations are organized into four segments: Security and Cash Management Services; Marketing and Products; Consulting and Advisory; and Finance and Real Estate.  All revenue originates and all assets are located in the United States.  We have revised our disclosure to correspond to the information provided to the chief operating decision maker.


Three months ended September 30


2016

 

Security and Cash Management

 

Marketing and Products

 

Consulting and Advisory

 

Finance and Real Estate

 

Total

Revenues, net

$

560,713

$

106,402

$

117,700

$

25,565

$

810,380

Costs and expenses

 

(528,916)

 

(164,543)

 

(162,404)

 

(13,352)

 

(869,215)

Other expense

 

--

 

--

 

--

 

(6,414)

 

(6,414)

 

$

31,797

$

(58,141)

$

(44,704)

$

5,799

 

(65,249)

Corporate expenses

 

 

 

 

 

 

 

 

 

(14,381,845)

 

 

 

 

 

 

 

 

Net loss

$

(14,447,094)


2015

 

Security and Cash Management

 

Marketing and Products

 

Consulting and Advisory

 

Finance and Real Estate

 

Total

Revenues, net

$

503,703

$

9,494

$

52,295

$

27,825

$

593,317

Costs and expenses

 

(521,099)

 

(28,328)

 

(63,519)

 

(3,157)

 

(616,103)

Other expense

 

--

 

--

 

--

 

(3,385)

 

(3,385)

 

$

(17,396)

$

(18,834)

$

(11,224)

$

21,283

 

(26,171)

Corporate expenses

 

 

 

 

 

 

 

 

 

(1,672,064)

 

 

 

 

 

 

 

 

Net loss

$

(1,698,235)


17



Nine months ended September 30


2016

 

Security and Cash Management

 

Marketing and Products

 

Consulting and Advisory

 

Finance and Real Estate

 

Total

Revenues, net

$

1,599,907

$

222,541

$

288,588

$

93,398

$

2,204,434

Costs and expenses

 

(1,604,932)

 

(325,640)

 

(345,967)

 

(36,731)

 

(2,313,270)

Other expense

 

--

 

--

 

--

 

(10,876)

 

(10,876)

 

$

(5,025)

$

(103,099)

$

(57,379)

$

45,791

 

(119,712)

Corporate expenses

 

 

 

 

 

 

 

 

 

(16,852,085)

 

 

 

 

 

 

 

 

Net loss

$

(16,971,797)


2015

 

Security and Cash Management

 

Marketing and Products

 

Consulting and Advisory

 

Finance and Real Estate

 

Total

Revenues, net

$

897,807

$

34,861

$

52,295

$

92,413

$

1,077,376

Costs and expenses

 

(929,421)

 

(112,919)

 

(63,519)

 

(24,880)

 

(1,130,739)

Other expense

 

--

 

--

 

--

 

(9,200)

 

(9,200)

 

$

(31,614)

$

(78,058)

$

(11,224)

$

58,333

 

(62,563)

Corporate expenses

 

 

 

 

 

 

 

 

 

(6,813,387)

 

 

 

 

 

 

 

 

Net loss

$

(6,875,950)


Total assets

 

September 30, 2016

 

December 31, 2015

Security and Cash Management

$

110,127

$

132,314

Marketing and Products

 

57,999

 

127,345

Consulting and Advisory

 

125,497

 

22,268

Finance and Real Estate

 

1,247,281

 

431,639

Corporate

 

3,034,077

 

2,969,145

 

$

4,574,981

$

3,682,711


All assets are located in the United States.



18




ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


This Management’s Discussion and Analysis (“MD&A”) is intended to provide an understanding of our financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year.  This discussion should be read in conjunction with the Condensed Consolidated Unaudited Financial Statements contained in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and related notes and MD&A of Financial Condition and Results of operations appearing in our Annual Report on Form 10-K as of and for the years ended December 31, 2015 and 2014. The results of operations for an interim period may not give a true indication of results for future interim periods or for the year.


Cautionary Statement Regarding Forward Looking Statements


This Quarterly Report on Form 10-Q, Financial Statements and Notes to Financial Statements contain forward-looking statements that discuss, among other things, future expectations and projections regarding future developments, operations and financial conditions. All forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control and on assumptions that may prove to be incorrect. If any underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or intended.  We undertake no obligation to publicly update or revise any forward-looking statements to reflect actual results, changes in expectations or events or circumstances after the date this Quarterly Report on Form 10-Q is filed.


When this report uses the words “we,” “us,” “our,” or “GCC” and the “Company,” they refer to General Cannabis Corporation (formerly, “Advanced Cannabis Solutions, Inc.”).


Our Products, Services and Customers


We operate in a rapidly evolving and highly regulated industry that, as has been estimated by some, will exceed $30 billion by the year 2020.  We have been and will continue to be aggressive in executing acquisitions and other opportunities that it believes will benefit us in the long-term.


Through our reporting segments we provide services and products to the regulated cannabis industry, which include the following:


Security and Cash Management Services

 

In March 2015, we acquired substantially all of the assets of Iron Protection Group, LLC, a Colorado limited liability company, which continues to do business as “Iron Protection Group.” Iron Protection Group (“IPG”) provides advanced security, including on-site professionals, video surveillance and cash transport, to licensed cannabis cultivators and retail shops. As of September 30, 2016, IPG had approximately 71 security guards on staff who serve 16 clients throughout Colorado.


Marketing and Products


In September 2015, we acquired substantially all of the assets of Chiefton Supply Co., and established a dba of Chiefton Supply Co., incorporated in Colorado (“Chiefton”).  Chiefton is an apparel and design company.  Chiefton Supply designs, distributes and sells apparel featuring graphic designs.  Our apparel is purchased and screen printed by third parties, for which there are numerous suppliers.  Chiefton Design provides design, branding and marketing strategy consulting services to the cannabis community.


In April 2016, we relaunched GC Supply, dedicated to providing wholesale equipment and supplies to participants in the regulated cannabis industry.  We provide turnkey sourcing and stocking services to cultivation, retail and infused products manufacturing facilities.  Offerings will include infrastructure, equipment, consumables, various delivery technologies (vaporizers and capsules) and compliance packaging.  GC Supply operates out of a leased, 1,800 square-foot warehouse located in Colorado Springs, Colorado.

  

Consulting and Advisory

 

Through Next Big Crop we deliver comprehensive cannabis industry consulting services that include obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and building services, and expansion of existing operations.  Next Big Crop’s business plan is based on the future growth of the regulated cannabis market in the United States.


19



Finance and Real Estate


Real Estate Leasing


We own a cultivation property in a suburb of Pueblo, Colorado, consisting of approximately three acres of land, which currently includes a 5,000 square foot steel building, and parking lot. The property is zoned for cultivating cannabis and is leased to a medical cannabis grower until December 31, 2022.


Our real estate leasing business plan includes the potential future acquisition and leasing of cultivation space and related facilities to licensed marijuana growers and dispensary owners for their operations. Management anticipates that these facilities would range in size from 5,000 to 50,000 square feet. These facilities would only be leased to tenants that possess the requisite state licenses to operate cultivation facilities. The leases with the tenants would include certain requirements that permit us to continually evaluate our tenants’ compliance with applicable laws and regulations.


Shared Office Space, Networking and Event Services   

 

In October 2014, we purchased a former retail bank located at 6565 East Evans Avenue, Denver, Colorado 80224, which has been branded as The Greenhouse (“The Greenhouse”).  The building is a 16,056 square-foot facility, which we use as our corporate headquarters and Chiefton’s retail location.


The Greenhouse has approximately 10,000 square feet of existing office space and 5,000 square feet on its ground floor that is dedicated to a consumer banking design.  We continue to assess the opportunity to lease shared workspace for entrepreneurs, professionals and others serving the cannabis industry.  Clients would be able to lease space to use as offices, meeting rooms, lecture, educational and networking facilities, and individual workstations.


Industry Finance


Our industry finance strategy includes evaluating opportunities to make direct term loans or to provide revolving lines of credit to businesses involved in the cultivation and sale of cannabis and related products.  These loans would generally be secured to the maximum extent permitted by law.  We believe there is a significant demand for this financing.  We are assessing other finance services including customized finance, capital formation, and banking, for participants in the cannabis industry.


On November 4, 2015, we entered into an agreement (the “DB Option Agreement”) with Infinity Capital, a related party, which was amended on March 29, 2016 (the “Amended DB Option Agreement”) and on September 16, 2016 (the “Second Amended DB Option Agreement”).  Pursuant to the Amended DB Option Agreement, we have the right to purchase all of Infinity Capital’s interest in DB Products Arizona, LLC (“DB”) at Infinity Capital’s actual cost, plus $1.00, or $800,001. The interests for which the option has been granted are Infinity Capital’s 50% equity interest in the membership interests of DB, and any outstanding unpaid principal and interest owed on promissory note(s) issued by DB in favor of Infinity Capital for up to $800,000.  DB is involved in the production and distribution of Dixie Brands, Inc.’s full line of medical cannabis “Dixie Elixirs and Edibles” products in Arizona.  DB expects to begin sales in 2016.  We have no obligation to exercise the option, which expires September 30, 2018.


Subsidiary Structure


General Cannabis Corporation has five wholly-owned subsidiary companies: (a) ACS Colorado Corp., a Colorado corporation formed in 2013; (b) Advanced Cannabis Solutions Corporation, a Colorado corporation formed in 2013; (c) 6565 E. Evans Avenue LLC, a Colorado limited liability company formed in 2014; (d) General Cannabis Capital Corporation, a Colorado corporation formed in 2015; and (e) GC Security LLC, a Colorado limited liability company formed in 2015.  Advanced Cannabis Solutions Corporation has one wholly-owned subsidiary company, ACS Corp., which was formed in Colorado on June 6, 2013.  Intercompany accounts and transactions have been eliminated.


Results of Operations


The following table sets forth, for the periods indicated, condensed statements of operations data.  The table and the discussion below should be read in conjunction with the accompanying condensed financial statements and the notes thereto appearing elsewhere in this report.


20



Consolidated Results


 

 

Three months ended September 30,

 

 

 

Percent

 

 

2016

 

2015

 

Change

 

Change

Revenues

$

810,380

$

593,317

$

217,063

 

37 %

Costs and expenses

 

(2,108,807)

 

(1,840,156)

 

(268,651)

 

15 %

Other expense

 

(13,148,667)

 

(451,396)

 

(12,697,271)

 

2,813 %

Net loss

$

(14,447,094)

$

(1,698,235)

$

(12,748,859)

 

751 %


 

 

Nine months ended September 30,

 

 

 

Percent

 

 

2016

 

2015

 

Change

 

Change

Revenues

$

2,204,434

$

1,077,376

$

1,127,058

 

105 %

Costs and expenses

 

(5,349,371)

 

(7,188,034)

 

1,838,663

 

(26) %

Other expense

 

(13,826,860)

 

(765,292)

 

(13,061,568)

 

1,707 %

Net loss

$

(16,971,797)

$

(6,875,950)

$

(10,095,847)

 

147 %


Revenues


Revenue for the three and nine months ended September 30, 2016 compared to 2015, increased primarily due to (a) the acquisition of IPG, which occurred in late March 2015; (b) the acquisition of Chiefton, which occurred in late September 2015; (c) the relaunch of our consulting practice as Next Big Crop in July 2015; and (d) the relaunch of GC Supply in April 2016, which is dedicated to providing wholesale equipment and supplies to companies in the regulated cannabis space.


Costs and expenses


 

 

Three months ended September 30,

 

 

 

Percent

 

 

2016

 

2015

 

Change

 

Change

Cost of service revenues

$

477,287

$

416,838

$

60,449

 

15 %

Cost of goods sold

 

77,252

 

28,144

 

49,108

 

174 %

Selling, general and administrative

 

488,543

 

406,711

 

81,832

 

20 %

Share-based expense

 

872,217

 

863,709

 

8,508

 

1 %

Professional fees

 

95,520

 

70,594

 

24,926

 

35 %

Depreciation and amortization

 

97,988

 

54,160

 

43,828

 

81 %

 

$

2,108,807

$

1,840,156

$

268,651

 

15 %


 

 

Nine months ended September 30,

 

 

 

Percent

 

 

2016

 

2015

 

Change

 

Change

Cost of service revenues

$

1,393,445

$

673,926

$

719,519

 

107 %

Cost of goods sold

 

112,649

 

67,786

 

44,863

 

66 %

Selling, general and administrative

 

1,300,051

 

1,027,394

 

272,657

 

27 %

Share-based expense

 

1,974,191

 

4,967,799

 

(2,993,608)

 

(60) %

Professional fees

 

276,706

 

321,091

 

(44,385)

 

(14) %

Depreciation and amortization

 

292,329

 

130,038

 

162,291

 

125 %

 

$

5,349,371

$

7,188,034

$

(1,838,663)

 

(26) %


The increase in cost of service revenues for the three and nine months ended September 30, 2016 compared to 2015, relates primarily to the IPG acquisition.  The changes in cost of goods sold were due primarily to the Chiefton acquisition in September 2015, the relaunch of GC Supply in April 2016, and a write-off of inventory from our wholesale supply business during the three months and nine months ended September 30, 2015, of $27,459 and $54,959, respectively.


Selling, general and administrative expense increased in 2016 due to the IPG and Chiefton acquisitions, and our hiring of individuals from Next Big Crop in July 2015 for our consulting segment.  A reduction in management headcount for IPG in May 2016 resulted in a decrease in management salaries.


21



Share-based expense included the following:


 

 

Three months ended

September 30,

 

Nine months ended

September 30,

 

 

2016

 

2015

 

2016

 

2015

Feinsod agreement

$

27,504

$

143,725

$

192,800

$

3,606,794

Consulting Awards

 

103,869

 

24,196

 

151,385

 

41,650

Employee Awards

 

740,844

 

695,788

 

1,574,906

 

1,319,355

DB Option Agreement warrants

 

--

 

--

 

55,100

 

--

 

$

872,217

$

863,709

$

1,974,191

$

4,967,799


On August 4, 2014, pursuant to an agreement with Michael Feinsod (“Feinsod”), our Board of Directors (the “Board”) appointed Feinsod Chairman of the Board and approved a compensatory agreement with Infinity Capital, LLC (“Infinity Capital”), an investment management company founded and controlled by him.  Under the agreement, we issued 200,000 shares of our common stock in 2014 and committed to issuing an additional 150,000 shares in 2015 and 150,000 shares in 2016.  The 200,000 shares were expensed immediately, while the additional shares are being expensed ratably through their issue date.  Additionally, when our common stock was uplisted to the OTC Market’s OTCQB in May 2015, we issued 1,000,000 shares of our common stock to Infinity Capital and recorded expense of $2,966,500.  Employee awards are issued under our 2014 Equity Incentive Plan, which was approved by shareholders on June 26, 2015.  In March 2016, we extended the DB Option Agreement and issued 100,000 warrants for our common stock.


Professional fees consist primarily of accounting and legal expenses.  Legal fees are typically incurred for acquisitions and other corporate matters.  Accounting fees are incurred for annual audits and quarterly reviews.  Professional fees generally fluctuate depending on the timing of the delivery of service.


Depreciation and amortization expense increased due to the amortization of the intangibles from the IPG and Chiefton acquisitions.


Other Expense


 

 

Three months ended

September 30,

 

Nine months ended

September 30,

 

 

2016

 

2015

 

2016

 

2015

Amortization of debt discount and deferred
financing costs

$

111,837

$

285,090

$

327,455

$

661,915

Interest expense

 

5,276,550

 

166,306

 

5,381,125

 

314,011

Loss on extinguishment of debt

 

1,728,280

 

--

 

2,086,280

 

--

Net (gain) loss on derivative liability

 

6,032,000

 

--

 

6,032,000

 

(210,634)

 

$

13,148,667

$

451,396

$

13,826,860

$

765,292


Amortization of debt discount and deferred financing costs are lower in 2016 compared to 2015, due to (a) the settlement of the 12% Convertible Notes in December 2015; (b) the write-off of the deferred financing costs for the Full Circle financing in 2015; and (c) additional borrowings in 2015 under the 10% convertible notes payable, which were fully amortized in April 2016.  Interest expense is higher in 2016 compared to 2015 due to (a) immediately expensing $5,189,000 of the fair value of the derivative warrant liability in September 2016; offset by (b) the settlement of the 12% Convertible Notes in December 2015.  Loss on extinguishment of debt includes (a) $1,715,000 of the fair value of the derivative warrant liability associated with converting a portion of the 10% Notes and 14% Mortgage Note Payable into 12% Notes in September 2016, and (b) in June 2016 expensing warrants issued to extend the maturity date of the 10% Notes from April 2016 to January 2017.  The net loss (gain) on derivative liability relates to (a) in 2016, the change in fair value of the warrants issued with the 12% Notes from September 2016; and (b) in 2015, the Full Circle warrants that generated a derivative liability were fully exercised in May 2015.


22



Security and Cash Management


We launched this segment with the IPG acquisition on March 26, 2015.


 

 

Three months ended September 30,

 

 

 

Percent

 

 

2016

 

2015

 

Change

 

Change

Revenues

$

560,713

$

503,703

$

57,010

 

11 %

Costs and expenses

 

(528,916)

 

(521,099)

 

(7,817)

 

2 %

 

$

31,797

$

(17,396)

$

49,193

 

N/A


 

 

Nine months ended September 30,

 

 

 

Percent

 

 

2016

 

2015

 

Change

 

Change

Revenues

$

1,599,907

$

897,807

$

702,100

 

78 %

Costs and expenses

 

(1,604,932)

 

(929,421)

 

(675,511)

 

73 %

 

$

(5,025)

$

(31,614)

$

26,589

 

(84) %


Results in 2016 include nine months of activity, whereas 2015 includes only results subsequent to the acquisition of IPG in late March 2015.  During the growth and integration of IPG, expenses increased as we added management positions, which were subsequently eliminated in June 2016, allowing us to return to a nearly break even position.


Marketing and Products


 

 

Three months ended September 30,

 

 

 

Percent

 

 

2016

 

2015

 

Change

 

Change

Revenues

$

106,402

$

9,494

$

96,908

 

1,021 %

Costs and expenses

 

(164,543)

 

(28,328)

 

(136,215)

 

481 %

 

$

(58,141)

$

(18,834)

$

(39,307)

 

209 %


 

 

Nine months ended September 30,

 

 

 

Percent

 

 

2016

 

2015

 

Change

 

Change

Revenues

$

222,541

$

34,861

$

187,680

 

538 %

Costs and expenses

 

(325,640)

 

(112,919)

 

(212,721)

 

188 %

 

$

(103,099)

$

(78,058)

$

(25,041)

 

32 %


Activity in 2016 was from Chiefton, acquired in late September 2015, and from the relaunch of GC Supply, in April 2016.  Revenues in 2015 were from our wholesale supply business, which decreased to minimal levels by September 2015.  During the three and nine months ended September 30, 2015, we wrote off $27,459 and $54,959, respectively, of inventory from our wholesale supply business.


Consulting and Advisory


 

 

Three months ended September 30,

 

 

 

Percent

 

 

2016

 

2015

 

Change

 

Change

Revenues

$

117,700

$

52,295

$

65,405

 

125 %

Costs and expenses

 

(162,404)

 

(63,519)

 

(98,885)

 

156 %

 

$

(44,704)

$

(11,224)

$

(33,480)

 

298 %


 

 

Nine months ended September 30,

 

 

 

Percent

 

 

2016

 

2015

 

Change

 

Change

Revenues

$

288,588

$

52,295

$

236,293

 

452 %

Costs and expenses

 

(345,967)

 

(63,519)

 

(282,448)

 

445 %

 

$

(57,379)

$

(11,224)

$

(46,155)

 

411 %


We relaunched our consulting business under the tradename Next Big Crop in July 2015, by hiring two individuals with expertise in the cannabis consulting industry, including obtaining licenses, compliance, cultivation, logistical support, facility design and building services.  Costs and expenses consist primarily of payroll and external consulting fees.  During the three months ended September 30, 2016, we hired four new consultants in anticipation of continued growth in consulting revenue in future periods, which increased expense but has not yet impacted revenue.


23



Finance and Real Estate



 

 

Three months ended September 30,

 

 

 

Percent

 

 

2016

 

2015

 

Change

 

Change

Revenues

$

25,565

$

27,825

$

(2,260)

 

(8) %

Costs and expenses

 

(13,352)

 

(3,157)

 

(10,195)

 

323 %

Interest expense

 

(6,414)

 

(3,385)

 

(3,029)

 

89 %

 

$

5,799

$

21,283

$

(15,484)

 

(73) %


 

 

Nine months ended September 30,

 

 

 

Percent

 

 

2016

 

2015

 

Change

 

Change

Revenues

$

93,398

$

92,413

$

985

 

1 %

Costs and expenses

 

(36,731)

 

(24,880)

 

(11,851)

 

48 %

Interest expense

 

(10,876)

 

(9,200)

 

(1,676)

 

18 %

 

$

45,791

$

58,333

$

(12,542)

 

(22) %


Revenue from leasing our Pueblo facility remained steady between 2016 and 2015.  Revenue fluctuates in 2016 compared to 2015, due to lease revenue for The Greenhouse.  We continue to renovate The Greenhouse and are pursuing new tenants in anticipation of being able to generate additional revenue from currently available space.  Costs and expenses increased in 2016 compared to 2015, associated with The Greenhouse.  Interest expense represents the interest for the mortgage on our Pueblo facility.


Liquidity and Capital Resources


We had cash of $1,064,606 and $58,711, respectively, as of September 30, 2016 and December 31, 2015.  Our cash flows from operating, investing and financing activities were as follows:


 

 

Nine months ended

September 30,

 

 

2016

 

2015

Net cash used in operating activities

$

(1,062,683)

$

(1,115,087)

Net cash used in investing activities

 

(11,615)

 

(54,960)

Net cash provided by financing activities

 

2,080,193

 

1,105,470


Net cash used in operating activities decreased in 2016 by $52,404 compared to 2015, primarily due to our management of working capital and a reduction in discretionary expenses.  Our operations expanded significantly in 2015, with the launch of our Security and Cash Management segment through the acquisition of IPG and Chiefton, as well as the relaunch of our Consulting segment, with the hiring of two employees with expertise in the cannabis industry.  We have also expanded our infrastructure ahead of anticipated revenue growth in all of our segments.  Where possible, we continue to use non-cash equity-based instruments to obtain consulting services and compensate employees.


Net cash used in investing activities relates primarily to renovating The Greenhouse for use as corporate offices and future revenue generating activities through leasing available space.


Net cash provided by financing activities in 2016 and 2015 was from our short-term financing with Infinity Capital, which carries an interest rate of 5%, offset by payments on our Pueblo mortgage.  In 2016, we received cash of $2,500,000 from new debt instruments, and used a portion of the proceeds to retire all of our other long-term debt by paying $912,189.  In 2015, we also issued the 10% Notes for $325,000 and received $87,616 when a third party exercised warrants.


In September 2016, we completed a $3,000,000 private placement pursuant to a promissory note and warrant purchase agreement (the “12% Agreement”) with certain accredited investors, bearing interest at 12%, with interest and principal due September 21, 2018 (each such note, a “12% Note,” and collectively, the “12% Notes”).  Subject to the terms and conditions of the 12% Agreement, each investor was granted fully-vested warrants equal to their note principal times three (the “12% Warrants”), or nine million warrants, with a life of three years.  4.5 million warrants have an exercise price of $0.35 per share and the other 4.5 million warrants have an exercise price of $0.70 per share.  We received $2,450,000 of cash for issuing the 12% Notes.  $300,000 of our 10% Notes and $250,000 of the 14% Mortgage Note Payable were converted into 12% Notes.  The 12% Agreement also had a stipulation that our Line of Credit – Related Party of $1,297,500, as of September 30, 2016, cannot be paid until the 12% Notes are paid off.  We used the proceeds from the 12% Notes to retire all of our other long-term debt, or $912,189.  The remaining proceeds from the 12% Notes of approximately $1,400,000 was available for general working capital purposes and acquisitions.


24



Non-GAAP Financial Measures


For the non-GAAP Adjusted EBITDA (Earnings (loss) Before Interest, Taxes, Depreciation and Amortization) per share-basic and diluted measures presented above, we have provided (1) the most directly comparable GAAP measure; (2) a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure; (3) an explanation of why our management believes this non-GAAP measure provides useful information to investors; and (4) additional purposes for which we use this non-GAAP measure.


We believe that the disclosure of Adjusted EBITDA per share-basic and diluted provides investors with a better comparison of our period-to-period operating results. We exclude the effects of certain items from net loss per share-basic and diluted 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 balanced view of the underlying dynamics of our business. Adjusted EBITDA per share-diluted excludes the impacts of interest expense, tax expense, depreciation and amortization, gain (loss) on its derivative liability, and share-based compensation. Weighted average number of common shares outstanding - basic and diluted (adjusted) excludes the impact of shares issued in connection with share-based compensation.


Tabular reconciliations of this supplemental non-GAAP financial information to our most comparable GAAP information are contained in this Quarterly Report on Form 10-Q. We present such non-GAAP supplemental financial information, as we believe such information provides additional meaningful methods of evaluating certain aspects of our operating performance from period-to-period on a basis that may not be otherwise apparent on a non-GAAP basis. This supplemental financial information should be considered in addition to, not in lieu of, our Condensed Consolidated Financial Statements.


 

 

Three months ended

September 30,

 

Nine months ended

September 30,

 

 

2016

 

2015

 

2016

 

2015

Net loss

$

(14,447,094)

$

(1,698,235)

$

(16,971,797)

$

(6,875,950)

Adjustments:

 

 

 

 

 

 

 

 

Share-based expense

 

872,217

 

863,709

 

1,974,191

 

4,967,799

Depreciation and amortization

 

97,988

 

54,160

 

292,329

 

130,038

Inventory write-off

 

--

 

27,459

 

--

 

54,959

Amortization of debt discount and debt
financing costs

 

111,837

 

285,090

 

327,455

 

661,915

Interest expense

 

5,276,550

 

166,306

 

5,381,125

 

314,011

Loss on extinguishment of debt

 

1,728,280

 

--

 

2,086,280

 

--

Net (gain) loss on derivative liability

 

6,032,000

 

--

 

6,032,000

 

(210,634)

Total adjustments

 

14,118,872

 

1,396,724

 

16,093,380

 

5,918,088

Adjusted EBITDA

$

(328,222)

$

(301,511)

$

(878,417)

$

(957,862)

 

 

 

 

 

 

 

 

 

Per share – basic and diluted:

 

 

 

 

 

 

 

 

Net loss

$

(0.93)

$

(0.12)

$

(1.11)

$

(0.50)

Adjusted EBITDA

 

(0.02)

 

(0.02)

 

(0.06)

 

(0.07)

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

Net loss

 

15,495,421

 

14,399,029

 

15,270,968

 

13,847,561

Adjusted EBITDA

 

15,584,981

 

13,349,029

 

15,323,166

 

13,231,444


Critical Accounting Policies


Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates used to prepare the condensed financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended December 31, 2015, and Note 1 to the Condensed Consolidated Financial Statements in this Form 10-Q.


Off-Balance Sheet Arrangements


We did not have any off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.



25



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.


ITEM 4.  CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures


We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.


We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2016, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses discussed below.


Internal Control over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by the Board, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:


·

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

·

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures of are being made only in accordance with authorizations of our management and directors; and

·

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.


Because of our inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


Management identified the following material weaknesses:


·

We have not performed a risk assessment and mapped our processes to control objectives;

·

We have not implemented comprehensive entity-level internal controls;

·

We have not implemented adequate system and manual controls; and

·

We do not have sufficient segregation of duties.


Assessment of Internal Control over Financial Reporting


Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013). Based on management’s assessment, management concluded that the above material weaknesses have not been remediated and, accordingly, our internal control over financial reporting is not effective as of September 30, 2016.


26



Remediation of Material Weaknesses


We have designed and plan to implement, or in some cases have already implemented, the specific remediation initiatives described below:


·

We intend to allocate resources to perform a risk assessment and map processes to control objectives and, where necessary, implement and document internal controls in accordance with COSO.

·

Our entity-level controls are, generally, informal and we intend to evaluate current processes, supplement where necessary, and document requirements.

·

While we have implemented procedures to identify, evaluate and record significant transactions, we need to formally document these procedures and evidence the performance of the related controls.

·

We plan to evaluate system and manual controls, identify specific weaknesses, and implement a comprehensive system of internal controls.

·

We are assessing our current staffing and evaluating our personnel requirements to improve our segregation of duties.


Management understands that in order to remediate the material weaknesses, additional segregation of duties, changes in personnel, and technologies are necessary. We do not expect to have fully remediated these material weaknesses until management has tested those internal controls and found them to have been remediated.


Our Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to such attestation pursuant to rules of the SEC that permits us to provide only management’s report in our Annual Report on Form 10-K.


Changes in Internal Control over Financial Reporting


We have implemented an informal process of preparation and review of balance sheet reconciliations, as well as informal procedures to identify, evaluate and record significant transactions; however, these changes do not meet the strict requirements to overcome the material weaknesses identified above.




27



PART II.  OTHER INFORMATION


ITEM 1.    LEGAL PROCEEDINGS


In July 2016, we reached a legal settlement with former employees for approximately $24,000.


ITEM 1A.  RISK FACTORS


As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide the information required regarding market risk factors.


ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


On September 21, 2016, we issued entered into our $3,000,000 12% Notes, which included (a) 4.500,000 warrants to purchase our common stock, with an exercise price of $0.35 per share and a three year life, and (b) 4,500,000 warrants to purchase our common stock, at an exercise price of $0.70 per share with a three year life.


On September 21, 2016, we issued to a consultant for services rendered, fully-vested warrants to purchase 20,000 shares of our common stock at an exercise price of $1.20 per share with a three year life.


On August 15, 2016, we entered into the 8% Notes for $50,000, which included warrants to purchase 100,000 shares of our common stock at an exercise price of $0.78 per share with a three year life.


On July 1, 2016, we issued to four consultants for services rendered, fully-vested warrants to purchase 35,000 shares of our common stock at an exercise price of $0.90 per share with a five year life.


On June 3, 2016, we issued to our 10% Note holders 659,000 warrants to purchase our common stock, with an exercise price of $1.07 per share and a life of five years, as consideration for extending the due date of the 10% Notes to January 2017.


On April 19, 2016, we issued 400,000 shares of our common stock for the IPG Acquisition.


On April 19, 2016, we issued 80,000 shares of our common stock for the Chiefton Acquisition.


On March 31, 2016, we issued to Infinity Capital warrants to purchase 100,000 shares of our common stock at an exercise price of $0.67 per share with a five year life, in consideration for extending the expiration date of the DB Option Agreement.


ITEM 3.    DEFAULTS UPON SENIOR SECURITIES


None.


ITEM 4.    MINE SAFETY DISCLOSURES


Not applicable.


ITEM 5.   OTHER INFORMATION


None.


ITEM 6.  EXHIBITS


Exhibits

 

31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

The following financial information from the Quarterly Report on Form 10-Q of General Cannabis Corporation for the quarter ended September 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows, and (iv) Notes to the Condensed Consolidated Financial Statements.


28




SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 

GENERAL CANNABIS CORPORATION

 

 

 

Date: November 7, 2016

By:

/s/Robert Frichtel

 

 

Robert Frichtel, Principal Executive Officer

 

 

 

 

By:

/s/ Shelly Whitson

 

 

Shelly Whitson, Principal Financial and Accounting Officer


29