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TREES Corp (Colorado) - Annual Report: 2017 (Form 10-K)

10-K



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2017


[  ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from ____________ to ____________


Commission file number:  000-54457


GENERAL CANNABIS CORP

(Exact name of registrant as specified in its charter)


COLORADO

 

90-1072649

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)


6565 E. Evans Avenue

Denver, Colorado  80224

(Address of principal executive offices)


Registrant's telephone number, including area code: (303) 759-1300


Securities registered pursuant to Section 12(b) of the Act:  None.


Securities registered pursuant to Section 12(g) of the Act:  None.


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o   No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o   No þ

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ   No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge,  in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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


Large accelerated filer  o

 

Accelerated filer     o

Non-accelerated filer    o

 

Smaller reporting company     þ

 

 

Emerging Growth Company     o


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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the registrants common stock on June 30, 2017, was $36,176,950.

As of March 5, 2018, the Registrant had 35,433,990 issued and outstanding shares of common stock.

Documents incorporated by reference:  None.






TABLE OF CONTENTS


PART I

 

 

 

 

Item 1.

Business

4

Item 1A.

Risk Factors

10

Item 1B.

Unresolved Staff Comments

17

Item 2.

Properties

17

Item 3.

Legal Proceedings

17

Item 4.

Mine Safety Disclosures

17

 

 

 

PART II

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

18

Item 6.

Selected Financial Data

19

Item 7.

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

19

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

25

Item 8.

Financial Statements and Supplementary Data

26

Item 9.

Changes In and Disagreements With Accountants On Accounting and Financial Disclosure

50

Item 9A.

Controls and Procedures

50

Item 9B.

Other Information

51

 

 

 

PART III

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

52

Item 11.

Executive Compensation

52

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

52

Item 13.

Certain Relationships and Related Transactions and Director Independence

52

Item 14.

Principal Accounting Fees and Services

52

 

 

 

PART IV

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

53

 

Signatures

55


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PART I


CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION


This Annual Report on Form 10-K (this “Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Forward-looking statements discuss matters that are not historical facts.  Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions.  Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees.  Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.


We cannot predict all risks and uncertainties.  Accordingly, such information should not be regarded as representations that the results or conditions described in such statements will occur or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements.  These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management, any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.


Some factors that might cause such differences are described in the section entitled “Risk Factors” in this Report and in other documents that we file from time to time with the Securities and Exchange Commission (“SEC”), which factors include, without limitation, the following:


·

Competition from other similar companies;  

·

Regulatory limitations on the products we can offer and markets we can serve;  

·

Other changes in the regulation of medical and recreational cannabis use;  

·

Changes in underlying consumer behavior, which may affect the business of our customers;  

·

Our ability to access adequate financing on reasonable terms and our ability to raise additional capital in order to fund our operations;  

·

Challenges with new products, services and markets; and  

·

Fluctuations in the credit markets and demand for credit.


These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors.  Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements.  In light of these risks, uncertainties and assumptions, the events described in forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report.  All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.


Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.


The following description of the business of General Cannabis Corp should be read in conjunction with the information included elsewhere in this Report. Unless the context indicates otherwise, references to the words “we,” “us,” “our,” “GCC,” and the “Company” in this Report refer to General Cannabis Corp.


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ITEM 1. BUSINESS.


History


General Cannabis Corp, a Colorado corporation, was incorporated on June 3, 2013.  Our predecessor company, Promap Corporation (“Promap”), a Colorado corporation, was incorporated on November 12, 1987. Promap previously operated an oil and gas mapping business, and most of its sales were to a company controlled by its former chief executive officer. On August 14, 2013, Promap acquired 94% of the issued and outstanding shares of Advanced Cannabis Solutions, Inc. (“ACSI”), a private Colorado corporation, in exchange for 12,400,000 shares of its common stock. Following the acquisition, our core business became the provision of sophisticated services and solutions to the regulated cannabis industry throughout the United States.


On November 9, 2013, Promap acquired the remaining 6% of the share capital of ACSI. On October 1, 2013, Promap changed its name from Promap Corporation to Advanced Cannabis Solutions, Inc. On December 31, 2013, the oil and gas mapping business was sold to our former chief executive officer in consideration of his agreement to assume all liabilities associated with such business. On June 17, 2015, we changed our name from Advanced Cannabis Solutions, Inc. to General Cannabis Corp.

 

On March 26, 2015, we acquired substantially all of the assets of Iron Protection Group, LLC, a Colorado limited liability company, doing business as “Iron Protection Group” or “IPG.”  In May 2015, we relaunched our consulting business under the tradename “Next Big Crop” (“NBC”) by hiring individuals with expertise in the cannabis consulting industry.  On September 25, 2015, we acquired substantially all of the assets of Chiefton Supply Co., a Colorado corporation, doing business as “Chiefton.”  In August 2017, we acquired the operating assets of Mile High Protection Group, LLC, a Colorado limited liability company, which will continue to do business as “Mile High Protection Services”, or Mile High.  Mile High has a diversified client roster, providing security services to hospitality companies, such as hotels, and to licensed cannabis retailers and cultivators in Colorado.


Our stock currently is quoted under the symbol “CANN” (OTCQB).


Corporate Structure


We operate through our five wholly-owned subsidiaries: (a) ACS Colorado Corp., a Colorado corporation incorporated in 2013; (b) Advanced Cannabis Solutions Corporation, a Colorado corporation incorporated in 2013; (c) 6565 E. Evans Owner LLC, a Colorado limited liability company formed in 2014; (d) General Cannabis Capital Corporation, a Colorado corporation incorporated 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., a Colorado corporation, incorporated in 2013.


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 in revenue by the year 2020.  We have been and will continue to be aggressive in executing acquisitions and pursuing other opportunities that we believe will benefit us in the long-term.


Through our reporting segments (Security, Marketing, Operations and Finance), we provide products and services to the regulated cannabis industry, which include the following:


Security and Cash Transportation Services (“Security Segment”)


We provide advanced security, including on-site professionals and cash transport, to licensed cannabis cultivators and retail shops, under the business name IPG, and security services to non-cannabis customers in the hospitality business, such as hotels, under the business name Mile High Protection Services (“MHPS”). The drop in wholesale prices in Colorado has negatively impacted security services in Colorado, as grow facilities and retailers seek cheaper alternatives or curtail services. We acquired Mile High in order to expand our Colorado security business into the non-cannabis space, as we believe that market provides an opportunity for growth. We have opened an IPG office in California, which recently legalized recreational cannabis in addition to previously legal medical marijuana.


In states that have recently legalized cannabis, whether medical, recreational or both, license applications require a security plan and, if approved, implementation of that security plan. Accordingly, we are assessing the opportunity to expand our security consulting business to assist companies with their application process and the subsequent implementation of compliant security services.


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Marketing Consulting and Apparel (“Marketing Segment”)


Chiefton’s apparel business, Chiefton Supply, strives to create innovative, unique t-shirts, hats, hoodies and accessories. Our apparel is sold through our on-line shop, cannabis retailers, and specialty t-shirt and gift shops. We are pursuing relationships with national apparel retailers and distributors, as well as expanding our offerings nationwide within the cannabis industry.


Chiefton Design provides design, branding and marketing strategy consulting services to the cannabis industry. We assist clients in developing a comprehensive marketing strategy, as well as designing and sourcing client-specific apparel and products. We now have the capacity of a full service marketing agency. Chiefton Design also supports our other segments with marketing designs and apparel.

 

Operations Consulting and Products (“Operations Segment”)


Through Next Big Crop (“NBC”), we deliver comprehensive consulting services to the cannabis industry that include obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and construction, and expansion of existing operations. Our business plan for NBC correlates to future growth of the regulated cannabis market in the United States.


NBC oversees our wholesale equipment and supply business, operated under the name “GC Supply,” which provides turnkey sourcing and stocking services to cultivation, retail and infused products manufacturing facilities. Our products include infrastructure, equipment, consumables and compliance packaging.


Finance and Real Estate (“Finance Segment”)


Real Estate Leasing


Until December 29, 2017, we owned 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 a parking lot. The property is zoned for cultivating cannabis and is leased to a medical cannabis grower until December 31, 2022. On December 19, 2017, the Company entered into an agreement to sell this property for $625,000 in cash, which closed on December 29, 2017.


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 building is a 16,056 square foot facility, which we use as our corporate headquarters.


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 office, meeting, lecture, educational and networking space, and individual workstations. We expect to continue the renovation of The Greenhouse in 2018.


We plan to continue to acquire commercial real estate and lease office space to participants in the cannabis industry. These participants may include media, internet, packaging, lighting, cultivation supplies and financial services-related companies. In exchange for certain services that may be provided to these tenants, we expect to receive rental income in the form of cash. In certain cases, we may acquire equity interests or provide debt capital to these businesses.


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 type of financing. We are assessing other finance services including customized finance, capital formation and banking, for participants in the cannabis industry.


Desert Created Company LLC / DB Products Arizona, LLC


In January 2018, we entered into a limited liability company operating agreement with DNFC LLC (“DNFC”), pursuant to the formation of Desert Created Company LLC (“Desert Created Company”).  Each party owns a 50% interest in Desert Created Company, the successor company to DB Arizona.  Desert Created Company is the successor entity to DB Products Arizona, LLC (“DB Arizona”).


5



DB Arizona produced and distributed cannabis-infused elixirs and edible products in Arizona.  We loaned $26,500 and $75,000, respectively, to DB Arizona during the years ended December 31, 2017 and 2016.  In June 2017, we purchased 100% of the ownership interests in GC Finance Arizona LLC (“GC Finance Arizona”) from Infinity Capital for $106,000 in cash.  GC Finance Arizona holds a 50% ownership interest in DB Arizona, an $825,000 loan to DB Arizona, and no liabilities.  We expected future positive cash flows, if any, would first go towards paying the holders of DB Arizona’s notes payable.  Accordingly, we allocated the entire consideration of $106,000 to the note receivable from DB Arizona.  During the quarter ended December 31, 2017, DB Arizona ceased operations and we impaired the full amount of our notes receivable from DB Arizona.


Competitive Strengths


We believe we possess certain competitive strengths and advantages in the industries in which we operate:


Range of Services. We are able to leverage our breadth of services and resources to deliver comprehensive, integrated solutions to companies in the cannabis industry—from operational, compliance and marketing consulting, to products, security and financing services.


Strategic Alliances. We are dedicated to growing through strategic acquisitions, partnerships and agreements that will enable us to enter and expand into new markets. Our strategy is to pursue alliances with potential targets that have the ability to generate positive cash flow, effectively meet customer needs and supply desirable products, services or technologies, among other considerations. We anticipate that strategic alliances will play a significant role as more states pass legislation permitting the cultivation and sale of hemp and cannabis.


Regulatory Compliance. The state laws regulating the cannabis industry are changing at a rapid pace. Currently, there are 29 U.S. states, the District of Columbia and the territories of Guam and Puerto Rico that have adopted legislation to manage the medical cannabis industry. Eight of those states also allow recreational use, and a ninth will allow it as of July 1, 2018. In the state of Colorado, where we draw almost all of our revenue, cannabis is heavily regulated. Ensuring that all aspects of our operations are in compliance with all state and local laws, policies, guidance and regulations to which we are subject and providing an opportunity to our customers and allies to use our services in order to ensure that they, too, are in full compliance are both critical components of our business plan.


Industry Knowledge. We continue to create, share and leverage information and experiences with the purpose of creating awareness and identifying opportunities to increase shareholder value. Our management team has business expertise, extensive knowledge of the cannabis industry and closely monitors changes in legislation. We work with partners who enhance the breadth of our industry knowledge.


Lending Capabilities. In February 2014, the Treasury Department issued guidelines for financial institutions dealing with cannabis-related businesses, (see “Business—Government and Industry Regulation—FinCEN”).  Nevertheless, many banks and traditional financial institutions refuse to provide financial services to cannabis-related businesses. We plan to provide finance and leasing solutions to market participants using the FinCEN guidelines as a primary guide for compliance with federal law.


Market Conditions


Our target markets are those where states have legalized the production and use of cannabis. Historically, the majority of our revenues have come from the state of Colorado. In Colorado, the cannabis market was expanded in January 2014 to permit “recreational use.” Generally, this means adults over the age of twenty-one, including visitors from other states, can purchase cannabis from licensed retailers, subject to certain daily limits. According to published reports, Colorado’s cannabis industry reported estimated wholesale and retail sales during calendar years 2017 and 2016 of $1.5 billion and $1.3 billion, respectively.


In January 2018, Vermont legalized recreational cannabis use, joining Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington, bringing the total number of states with legalized recreational cannabis use to nine, in addition to the District of Columbia.


As of December 31, 2017, 29 states, the District of Columbia and the territories of Guam and Puerto Rico have legalized the use of cannabis for medical use in some form. It may take multiple years for a state to establish regulations and for cannabis businesses to begin generating revenue from operations, so the impact of new states legalizing the medical use of cannabis may begin to be realized in 2018 and 2019.


Continued development of the regulated cannabis industry depends on continued legislative authorization at the state level. Progress, while encouraging, is not assured and any number of factors could slow or halt progress in the cannabis industry.


6



Competition


Overall, we believe we have a competitive advantage by providing a range of goods and services to the cannabis industry. This allows us to provide integrated solutions to our customers, as well as sell additional goods and services to customers of a single segment. There is no aspect of our business, however, that is protected by patents or copyrights. As a result, our competitors could duplicate our business model with little effort.


Security and Cash Transportation Services. IPG faces competition from national security and cash transportation firms, as well as local agencies that provide general or cannabis-specific security services. We endeavor to establish a competitive advantage through our hiring practices, training and supervision to ensure we provide qualified, reliable service. The market for these services, however, is driven primarily by pricing.


Marketing Consulting and Apparel. Our apparel line competes with local and national cannabis-oriented clothing sellers, as well as non-cannabis-related clothing. Our marketing services compete with local and national marketing agencies, which may or may not have a focus in the cannabis industry.


Operations Consulting and Products. There are a limited number of competitors that provide the full range of services that NBC delivers. However, each individual service we provide has competition from experts in individual, specific fields. For example, attorneys may assist with license procurement and compliance. There are numerous firms that specialize in traditional greenhouse and cultivation consulting, as well as companies that provide operations services. As the cannabis industry grows, these competitors may develop further expertise and expand their focus on the cannabis industry.


Finance and Real Estate. In February 2014, the Treasury Department issued guidelines for financial institutions dealing with cannabis-related businesses, (see “—Government and Industry Regulation—FinCEN”). Many banks and traditional financial institutions refuse to provide financial services to cannabis-related business. We plan to provide finance and leasing solutions to market participants using the FinCEN guidelines as a primary guide for compliance with federal law. However, with the growth of the cannabis industry, there has been growth in alternative financing and banking resources. Many of these alternative sources have more capital and resources than we have.


Government and Industry Regulation


Cannabis is currently a Schedule I controlled substance under the CSA and is, therefore, illegal under federal law. Even in those states in which the use of cannabis has been legalized pursuant to state law, its use, possession and/or cultivation remains a violation of federal law. A Schedule I controlled substance is defined as one that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The U.S. Department of Justice (the “DOJ”) describes Schedule I controlled substances as “the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence.” If the federal government decides to enforce the CSA in Colorado with respect to state-regulated cannabis activities in Colorado and other states, persons that are charged with distributing, possessing with intent to distribute or growing cannabis could be subject to fines and/or terms of imprisonment, the maximum being life imprisonment and a $50 million fine.


Notwithstanding the CSA, as of the date of this Report, 29 U.S. states, the District of Columbia and the U.S. territories of Guam and Puerto Rico allow their residents to use medical cannabis. Voters in the states of Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington have approved ballot measures, and the state legislature of Vermont has approved legislation, to legalize cannabis for adult recreational use. Such state and territorial laws are in conflict with the federal CSA, which makes cannabis use and possession illegal at the federal level.


In light of such conflict between federal laws and state laws regarding cannabis, the previous administration under President Obama had effectively stated that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis. For example, the prior DOJ Deputy Attorney General of the Obama administration, James M. Cole, issued a memorandum (the “Cole Memo”) to all United States Attorneys providing updated guidance to federal prosecutors concerning cannabis enforcement under the CSA. In addition, the Financial Crimes Enforcement Network (“FinCEN”) provided guidelines (the “FinCEN Guidelines”) on February 14, 2014, regarding how financial institutions can provide services to cannabis-related businesses consistent with their Bank Secrecy Act (“BSA”) obligations (see “– FinCEN”).


Additional existing and pending legislation provides, or seeks to provide, protection to persons acting in violation of federal law but in compliance with state laws regarding cannabis. The Rohrabacher-Blumenauer Amendment (formerly known as the Rohrbacher-Farr Amendment) to the Commerce, Justice, Science and Related Agencies Appropriations Bill, which funds the DOJ, since 2014 has prohibited the DOJ from using funds to prevent states with laws authorizing the use, distribution, possession or cultivation of medical cannabis from implementing such laws. On August 2016, the Ninth Circuit Court of Appeals ruled in United States v. McIntosh that the Amendment bars the DOJ from spending funds on the prosecution of conduct that is allowed by state medical cannabis laws, provided that such conduct is in strict compliance with applicable state law.  The Rohrabacher-Blumenauer Amendment is currently effective through March 23, 2018, but as an amendment to an appropriations bill, it must be renewed annually.


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These developments previously were met with a certain amount of optimism in the cannabis industry, but (i) neither the CARERS Act nor the Respect State Marijuana Laws Act of 2017 have yet been adopted, (ii) the Rohrabacher-Blumenauer Amendment, being an amendment to an appropriations bill that must be renewed annually, has not currently been renewed beyond March 23, 2018, and (iii) the ruling in United States v. McIntosh is only applicable precedent in the Ninth Circuit, which does not include Colorado, the state where we currently primarily operate.


Furthermore, on January 4, 2018, the U.S. Attorney General, Jeff Sessions, issued a memorandum for all U.S. Attorneys (the “Sessions Memo”) stating that the Cole Memo was rescinded effectively immediately. In particular, Mr. Sessions stated that “prosecutors should follow the well-established principles that govern all federal prosecutions,” which require “federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.” The Sessions Memo went on to state that given the DOJ’s well-established general principles, “previous nationwide guidance specific to marijuana is unnecessary and is rescinded, effective immediately.”


In response to the Sessions Memo, U.S. Attorney Bob Troy for the District of Colorado, the state in which our principal business operations are presently located, issued a statement on January 4, 2018, stating that the United States Attorney’s Office in Colorado is already guided by the well-established principles referenced in the Sessions Memo, “focusing in particular on identifying and prosecuting those who create the greatest safety threats to our communities around the state. We will, consistent with the Attorney General’s latest guidance, continue to take this approach in all of our work with our law enforcement partners throughout Colorado.”


It is unclear at this time whether the Sessions Memo indicates that the Trump administration will strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement. However, a significant change in the federal government’s enforcement policy with respect to current federal laws applicable to cannabis could cause significant financial damage to us. We do not currently cultivate, distribute or sell cannabis, but hold a 50% non-operated ownership in an entity that does, we may be irreparably harmed by a change in enforcement policies of the federal government depending on the nature of such change. As of the date of this Report, we have provided products and services to state-approved cannabis cultivators and dispensary facilities. As a result, we could be deemed to be aiding and abetting illegal activities, a violation of federal law.


The Cole Memo


Because of the discrepancy between the laws in some states, which permit the distribution and sale of medical and recreational cannabis, from federal law that prohibits any such activities, DOJ Deputy Attorney General James M. Cole issued the Cole Memo concerning cannabis enforcement under the CSA.


At the time of its issuance, the Cole Memo reiterated Congress’s determination that cannabis is a dangerous drug and that the illegal distribution and sale of cannabis is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels. The Cole Memo noted that the DOJ was committed to enforcement of the CSA consistent with those determinations. It also noted that the DOJ was committed to using its investigative and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way. In furtherance of those objectives, the Cole Memo provided guidance to DOJ attorneys and law enforcement to focus their enforcement resources on persons or organizations whose conduct interferes with any one or more of the following important priorities (the “Enforcement Priorities”) in preventing:


·

the distribution of cannabis to minors;

·

revenue from the sale of cannabis from going to criminal enterprises, gangs, and cartels;

·

the diversion of cannabis from states where it is legal under state law in some form to other states;

·

state-authorized cannabis activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;

·

violence and the use of firearms in the cultivation and distribution of cannabis;

·

drugged driving and the exacerbation of other adverse public health consequences associated with cannabis use;

·

the growing of cannabis on public lands and the attendant public safety and environmental dangers posed by cannabis production on public lands; and

·

cannabis possession or use on federal property.


Although the Sessions Memo has rescinded the Cole Memo and it is unclear at this time what the ultimate impact of that rescission will have on our business, if any, we intend to continue to conduct rigorous due diligence to verify the legality of all activities that we engage in and ensure that our activities do not interfere with any of the Enforcement Priorities set forth in the Cole Memo.


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FinCEN


FinCEN provided guidance regarding how financial institutions can provide services to cannabis-related businesses consistent with their BSA obligations. For purposes of the FinCEN guidelines, a “financial institution” includes any person doing business in one or more of the following capacities:


·

bank (except bank credit card systems);

·

broker or dealer in securities;

·

money services business;

·

telegraph company;

·

card club; and

·

a person subject to supervision by any state or federal bank supervisory authority.


In general, the decision to open, close, or refuse any particular account or relationship should be made by each financial institution based on a number of factors specific to that institution. These factors may include its particular business objectives, an evaluation of the risks associated with offering a particular product or service, and its capacity to manage those risks effectively. Thorough customer due diligence is a critical aspect of making this assessment.


In assessing the risk of providing services to a cannabis-related business, a financial institution should conduct customer due diligence that includes: (i) verifying with the appropriate state authorities whether the business is duly licensed and registered; (ii) reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its cannabis-related business; (iii) requesting from state licensing and enforcement authorities available information about the business and related parties; (iv) developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers); (v) ongoing monitoring of publicly available sources for adverse information about the business and related parties; (vi) ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and (vii) refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk. With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available.


As part of its customer due diligence, a financial institution should consider whether a cannabis-related business implicates one of the Cole Memo Enforcement Priorities or violates state law. This is a particularly important factor for a financial institution to consider when assessing the risk of providing financial services to a cannabis-related business. Considering this factor also enables the financial institution to provide information in BSA reports pertinent to law enforcement’s priorities. A financial institution that decides to provide financial services to a cannabis-related business would be required to file suspicious activity reports. It is unclear at this time what impact the Sessions Memo will have on customer due diligence by a financial institution.


While we believe we do not qualify as a financial institution in the United States, we cannot be certain that we do not fall under the scope of the FinCEN guidelines. We plan to use the FinCEN Guidelines, as may be amended, as a basis for assessing our relationships with potential tenants, clients and customers. As such, as we engage in financing activities, we intend to adhere to the guidance of FinCEN in conducting and monitoring our financial transactions. Because this area of the law is uncertain and is expected to evolve rapidly, we believe that FinCEN’s guidelines will help us best operate in a prudent, reasonable and acceptable manner. There is no assurance, however, that our activities will not violate some aspect of the CSA. If we are found to violate the federal statute or any other in connection with our activities, our company could face serious criminal and civil sanctions.


Moreover, since the use of cannabis is illegal under federal law, we may have difficulty acquiring or maintaining bank accounts and insurance, and our stockholders may find it difficult to deposit their stock with brokerage firms.


Licensing and Local Regulations


Where applicable, we will apply for state licenses or similar approvals that are necessary to conduct our business in compliance with local laws. Our subsidiary, ACS Corp., has been registered with Colorado’s Marijuana Enforcement Division (the “MED”) as an approved vendor since September 8, 2014. GCS, another subsidiary, has been registered as a MED approved vendor since March 11, 2015.


Local laws at the county and municipal level add an additional layer of complexity to legalized cannabis. Despite a state’s adoption of legislation legalizing cannabis, counties and municipalities within the state may have the ability to otherwise restrict cannabis activities, including but not limited to cultivation, retail, distribution, manufacturing or consumption.


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Zoning sets forth the approved use of land in any given city, county or municipality. Zoning is set by local governments or local voter referendum, and may otherwise be restricted by state laws. For example, under certain state laws a seller of liquor may not be allowed to operate within 1,000 feet of a school. There may be similar restrictions imposed on cannabis operators, which will restrict where cannabis operations may be located and the manner and size to which they can grow and operate. Zoning can be subject to change or withdrawal, discretionary approvals may be required for certain uses, and properties can be re-zoned. The zoning of our properties will have a direct impact on our business operations.


Employees


As of December 31, 2017, we had 83 full-time employees.


Corporate Contact Information


Our principal executive offices are located at 6565 E. Evans Avenue, Denver, Colorado 80224; Telephone No.: (303) 759-1300. Our website is http://www.generalcann.com. The content on our website is available for informational purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Form 10-K.


Available Information


We maintain a website at www.generalcann.com and make available, free of charge, on our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K (including any amendments thereto), registration statements and other information filed with, or furnished to, the SEC, as soon as reasonably practicable after such documents are so filed or furnished, as well as our Code of Ethics. Any materials we file with the SEC, including our annual reports, quarterly reports, current reports, proxy statements, information statements and other information, are also available at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m. eastern.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.


ITEM 1A. RISK FACTORS.


Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and all other information contained in this Form 10-K, including our consolidated financial statements and the related notes, before investing in our common stock. The risks and uncertainties described below are not the only ones we face, but include the most significant factors currently known by us that make investing in our common stock speculative or risky. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of the following risks materialize, our business, financial condition and results of operations could be materially harmed. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.


Risks Related to Our Business and Industry


We have a limited operating history in an evolving industry, which makes it difficult to accurately assess our future growth prospects.


Although we believe our management team has extensive knowledge of the cannabis industry and closely monitors changes in legislation, we also operate in an evolving industry that may not develop as expected. Furthermore, our operations continue to evolve under our business plan as we continually assess new strategic opportunities for our business within our industry. Assessing the future prospects of our business is challenging in light of both known and unknown risks and difficulties we may encounter. Growth prospects in our industry can be affected by a wide variety of factors including:


·

Competition from other similar companies;

·

Regulatory limitations on the products we can offer and markets we can serve;

·

Other changes in the regulation of medical and recreational cannabis use;  

·

Changes in underlying consumer behavior, which may affect the business of our customers;

·

Our ability to access adequate financing on reasonable terms and our ability to raise additional capital in order to fund our operations;  

·

Challenges with new products, services and markets; and

·

Fluctuations in the credit markets and demand for credit.


We may not be able to successfully address these factors, which could negatively impact our growth, harm our business and cause our operating results to be worse than expected.


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We have a history of losses and may not achieve profitability in the future.


We generated net losses of $8.2 million and $10.2 million, respectively, in the years ended December 31, 2017 and 2016. As of December 31, 2017, we had an accumulated deficit of $34.8 million. We will need to generate and sustain increased revenues in future periods in order to become profitable, and, even if we do, we may not be able to maintain or increase any such level of profitability.


As we grow, we expect to continue to expend substantial financial and other resources on:


·

personnel, including significant increases to the total compensation we pay our employees as we grow our employee headcount;  

·

expenses relating to increased marketing efforts;  

·

strategic acquisitions of businesses and real estate; and  

·

general administration, including legal, accounting and other compliance expenses related to being a public company.


These expenditures are expected to increase and may adversely affect our ability to achieve and sustain profitability as we grow. Our efforts to grow our business may also be more costly than we expect, and we may not be able to increase our revenues enough to offset our higher operating expenses. We may incur losses in the future for a number of reasons, including the other risks described in this Report, unforeseen expenses, difficulties, complications and delays and other unknown events. If we are unable to achieve and sustain profitability, the market price of our common stock may significantly decrease.


Cannabis remains illegal under federal law, and any change in the enforcement priorities of the federal government could render our current and planned future operations unprofitable or even prohibit such operations.


We operate in the cannabis industry, which is dependent on state laws and regulations pertaining to such industry; however, under federal law, cannabis remains illegal.


The United States federal government regulates drugs through the Controlled Substances Act (the “CSA”), which places controlled substances, including cannabis, on one of five schedules. Cannabis is currently classified as a Schedule I controlled substance, which is viewed as having a high potential for abuse and having no currently accepted medical use in treatment in the United States. No prescriptions may be written for Schedule I substances, and such substances are subject to production quotas imposed by the United States Drug Enforcement Administration (the “DEA”). Because of this, doctors may not prescribe cannabis for medical use under federal law, although they can recommend its use under the First Amendment.


Currently, 29 U.S. states, the District of Columbia and the U.S. territories of Guam and Puerto Rico allow the use of medical cannabis. Voters in the states of Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington have approved ballot measures, and the state legislature of Vermont has approved legislation, to legalize cannabis for adult recreational use. Such state and territorial laws are in conflict with the federal CSA, which makes cannabis use and possession illegal at the federal level. Because cannabis is a Schedule I controlled substance, however, the development of a legal cannabis industry under the laws of these states is in conflict with the CSA, which makes cannabis use and possession illegal on a national level. The United States Supreme Court has confirmed that the federal government has the right to regulate and criminalize cannabis, including for medical purposes, and that federal law criminalizing the use of cannabis preempts state laws that legalize its use.


In light of such conflict between federal laws and state laws regarding cannabis, the previous administration under President Obama had effectively stated that it was not an efficient use of resources to direct law federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis. For example, the prior DOJ Deputy Attorney General of the Obama administration, James M. Cole, issued a memorandum (the “Cole Memo”) to all United States Attorneys providing updated guidance to federal prosecutors concerning cannabis enforcement under the CSA (see “Business—Government and Industry Regulation—The Cole Memo”). In addition, the Financial Crimes Enforcement Network (“FinCEN”) provided guidelines (the “FinCEN Guidelines”) on February 14, 2014, regarding how financial institutions can provide services to cannabis-related businesses consistent with their Bank Secrecy Act (“BSA”) obligations (see “Business—Government and Industry Regulation—FinCEN”).


In 2014, the United States House of Representatives passed an amendment (the “Rohrabacher-Blumenauer Amendment”) to the Commerce, Justice, Science, and Related Agencies Appropriations Bill, which funds the United States Department of Justice (the “DOJ”). The Rohrabacher-Blumenauer Amendment prohibits the DOJ from using funds to prevent states with medical cannabis laws from implementing such laws. In August 2016, a 9th Circuit federal appeals court ruled in United States v. McIntosh that the Rohrabacher-Blumenauer Amendment bars the DOJ from spending funds on the prosecution of conduct that is allowed by state medical cannabis laws, provided that such conduct is in strict compliance with applicable state law. In March 2015, bipartisan legislation titled the Compassionate Access, Research Expansion, and Respect States Act (the “CARERS Act”) was introduced, proposing to allow states to regulate the medical use of cannabis by changing applicable federal law, including by reclassifying cannabis under the Controlled Substances Act to a Schedule II controlled substance and thereby changing the plant from a federally-criminalized substance to one that has recognized medical uses. More recently, the Respect State Marijuana Laws Act of 2017 has


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been introduced in the U.S. House of Representatives, which proposes to exclude persons who produce, possess, distribute, dispense, administer or deliver marijuana in compliance with state laws from the regulatory controls and administrative, civil and criminal penalties of the CSA.


These developments previously were met with a certain amount of optimism in the cannabis industry, but (i) neither the CARERS Act nor the Respect State Marijuana Laws Act of 2017 have yet been adopted, (ii) the Rohrabacher-Blumenauer Amendment, being an amendment to an appropriations bill that must be renewed annually, has not currently been renewed beyond March 23, 2018, and (iii) the ruling in United States v. McIntosh is only applicable precedent in the Ninth Circuit, which does not include Colorado, the state where we currently primarily operate.


Furthermore, on January 4, 2018, the U.S. Attorney General, Jeff Sessions, issued a memorandum for all U.S. Attorneys (the “Sessions Memo”) stating that the Cole Memo was rescinded effectively immediately. In particular, Mr. Sessions stated that “prosecutors should follow the well-established principles that govern all federal prosecutions,” which require “federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.” The Sessions Memo went on to state that given the DOJ’s well-established general principles, “previous nationwide guidance specific to marijuana is unnecessary and is rescinded, effective immediately.


In response to the Sessions Memo, U.S. Attorney Bob Troy for the District of Colorado, the state in which our principal business operations are presently located, issued a statement on January 4, 2018, stating that the United States Attorney’s Office in Colorado is already guided by the well-established principles referenced in the Sessions Memo, “focusing in particular on identifying and prosecuting those who create the greatest safety threats to our communities around the state. We will, consistent with the Attorney General’s latest guidance, continue to take this approach in all of our work with our law enforcement partners throughout Colorado.”


It is unclear at this time whether the Sessions Memo indicates that the Trump administration will strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement. However, a significant change in the federal government’s enforcement policy with respect to current federal laws applicable to cannabis could cause significant financial damage to us. While we do not currently cultivate, distribute or sell cannabis, but hold a 50% non-operated ownership in an entity that does, we may be irreparably harmed by a change in enforcement policies of the federal government depending on the nature of such change. As of the date of this Report, we have provided products and services to state-approved cannabis cultivators and dispensary facilities. As a result, we could be deemed to be aiding and abetting illegal activities, a violation of federal law.


Additionally, as we are always assessing potential strategic acquisitions of new businesses, we may in the future also pursue opportunities that include growing and/or distributing medical or recreational cannabis, should we determine that such activities are in the best interest of the Company and our stockholders. Any such pursuit would involve additional risks with respect to the regulation of cannabis, particularly if the federal government determines to actively enforce all federal laws applicable to cannabis.


Any potential growth in the cannabis industry continues to be subject to new and changing state and local laws and regulations.


Continued development of the cannabis industry is dependent upon continued legislative legalization of cannabis at the state level, and a number of factors could slow or halt progress in this area, even where there is public support for legislative action. Any delay or halt in the passing or implementation of legislation legalizing cannabis use, or its cultivation, sale and distribution, or the re-criminalization or restriction of cannabis at the state level could negatively impact our business. Additionally, changes in applicable state and local laws or regulations, including zoning restrictions, permitting requirements, and fees, could restrict the products and services we offer or impose additional compliance costs on us or our customers and tenants. Violations of applicable laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our operations. We cannot predict the nature of any future laws, regulations, interpretations or applications, and it is possible that regulations may be enacted in the future that will be materially adverse to our business.


The cannabis industry faces significant opposition, and any negative trends will adversely affect our business operations.


We are substantially dependent on the continued market acceptance, and the proliferation of consumers, of medical and recreational cannabis. We believe that with further legalization, cannabis will become more accepted, resulting in growth in consumer demand. However, we cannot predict the future growth rate or future market potential, and any negative outlook on the cannabis industry may adversely affect our business operations.


Large, well-funded business sectors may have strong economic reasons to oppose the development of the cannabis industry. For example, medical cannabis may adversely impact the existing market for the current “cannabis pill” sold by mainstream pharmaceutical companies. Should cannabis displace other drugs or products, the medical cannabis industry could face a material threat from the pharmaceutical industry, which is well-funded and possesses a strong and experienced lobby. Any inroads the pharmaceutical, or any other potentially displaced, industry or sector could make in halting or impeding the cannabis industry could have a detrimental impact on our business.


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We operate in a highly competitive industry.


The markets for ancillary businesses in the medical marijuana and recreational marijuana industries are competitive and evolving. There is no material aspect of our business that is protected by patents, copyrights, trademarks, or trade names, and we face strong competition from larger companies that may offer similar products and services to ours. Many of our current and potential competitors have longer operating histories, significantly greater financial, marketing and other resources and larger client bases than us, and there can be no assurance that we will be able to successfully compete against these or other competitors.


Given the rapid changes affecting the global, national, and regional economies generally and the medical marijuana and recreational marijuana industries, in particular, we may not be able to create and maintain a competitive advantage in the marketplace. Our success will depend on our ability to keep pace with any changes in our markets, particularly, legal and regulatory changes. Our success will also depend on our ability to respond to, among other things, changes in the economy, market conditions, and competitive pressures. Any failure by us to anticipate or respond adequately to such changes could have a material adverse effect on our financial condition and results of operations.


We may be unable to obtain capital to execute our business plan.


Our business plan involves the acquisition of real estate properties to be leased to participants in the cannabis industry, as well as the general expansion of our business within and outside of Colorado. In order to execute on our business plan, we will need additional capital. However, there can be no assurance that we will be able to obtain financing on agreeable terms, if at all, and any future sale of our equity securities will dilute the ownership of our existing stockholders and could be at prices substantially below the price of the shares of common stock sold in the past. If we are unable to obtain the necessary capital, we may need to delay the implementation of or curtail our business plan.


We face risks associated with strategic acquisitions.


As an important part of our business strategy, we strategically acquire businesses and real property, some of which may be material. These acquisitions involve a number of financial, accounting, managerial, operational, legal, compliance and other risks and challenges, including the following, any of which could adversely affect our results of operations:


·

The applicable restrictions on cannabis industry and its participants limit the number of available suitable businesses and real properties that we can acquire;

·

Any acquired business or real property could under-perform relative to our expectations and the price that we paid for it, or not perform in accordance with our anticipated timetable;

·

We may incur or assume significant debt in connection with our acquisitions;

·

Acquisitions could cause our results of operations to differ from our own or the investment community’s expectations in any given period, or over the long term; and

·

Acquisitions could create demands on our management that we may be unable to effectively address, or for which we may incur additional costs.


Additionally, following any business acquisition, we could experience difficulty in integrating personnel, operations, financial and other systems, and in retaining key employees and customers.


We may record goodwill and other intangible assets on our consolidated balance sheet in connection with our acquisitions. If we are not able to realize the value of these assets, we may be required to incur charges relating to the impairment of these assets, which could materially impact our results of operations.


Our future success depends on our ability to grow and expand our customer base and operational territory.


Our success and the planned growth and expansion of our business depend on our products and services achieving greater and broader acceptance, resulting in a larger customer base, and on the expansion of our operations into new markets. However, there can be no assurance that customers will purchase our products and/or services, or that we will be able to continually expand our customer base. Additionally, if we are unable to effectively market or expand our product and/or service offerings, we will be unable to grow and expand our business or implement our business strategy.


Operating in new markets may expose us to new operational, regulatory or legal risks and subject us to increased compliance costs. We may need to modify our existing business model and cost structure to comply with local regulatory or other requirements. Facilities we open in new markets may take longer to reach expected revenue and profit levels on a consistent basis, may have higher construction, occupancy or operating costs, and may present different competitive conditions, consumer preferences and spending patterns than we anticipate.


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Any of the above could materially impair our ability to increase sales and revenue.


Our existing and potential customers, clients and tenants have difficulty accessing the service of banks, which may make it difficult for them to operate.


On February 14, 2014, the U.S. government issued rules allowing banks to legally provide financial services to state-licensed cannabis businesses. A memorandum issued by the Justice Department to federal prosecutors reiterated guidance previously given, this time to the financial industry that banks can do business with legal marijuana businesses and “may not” be prosecuted. FinCEN issued guidelines to banks noting that it is possible to provide financial services to state-licensed cannabis businesses and still be in compliance with federal anti-money laundering laws. The guidance, however, falls short of the explicit legal authorization that banking industry officials had requested the government provide, and, to date, it is not clear if any banks have relied on the guidance to take on legal cannabis companies as clients. The aforementioned policy can be changed, including in connection with a change in presidential administration, and any policy reversal and or retraction could result in legal cannabis businesses losing access to the banking industry.


Because the use, sale and distribution of cannabis remains illegal under federal law, many banks will not accept deposits from or provide other bank services to businesses involved with cannabis. The inability to open bank accounts may make it difficult for our existing and potential customers, clients and tenants to operate and may make it difficult for them to contract with us.


In addition, it is unclear at this time what impact the Sessions Memo will have on banks’ provision of services to state-licensed cannabis businesses, as the Sessions Memo also rescinded the Justice Department’s February 14, 2014 guidance described above regarding the financial services banks may provide to state-licensed cannabis businesses.


Conditions in the economy, the markets we serve and the financial markets generally may adversely affect our business and results of operations.


Our business is sensitive to general economic conditions. Slower economic growth, volatility in the credit markets, high levels of unemployment, and other challenges that affect the economy adversely could affect us and our customers and suppliers. If growth in the economy or in any of the markets we serve slows for a significant period, if there is a significant deterioration in the economy or such markets or if improvements in the economy do not benefit the markets we serve, our business and results of operations could be adversely affected.


We depend on our management, certain key personnel and board of directors, as well as our ability to attract, retain and motivate qualified personnel.


Our future success depends largely upon the experience, skill, and contacts of our officers and directors, and the loss of the services of these officers or directors, particularly our chief executive officer and chairman of our board of directors, may have a material adverse effect upon our business. Additionally, our revenues are largely driven by several employees with particular expertise in cannabis-related security, marketing and operations. If one of these key employees were to leave, it would negatively impact our short and long-term results from operations. Shortages in qualified personnel could also limit our ability to successfully implement our growth plan. As we grow, we will need to attract and retain highly skilled experts in the cannabis industry, as well as managerial, sales and marketing, security and finance personnel. There can be no assurance, however, that we will be able to attract and retain such personnel.


Our reputation and ability to do business may be negatively impacted by the improper conduct by our business partners, employees or agents.


We depend on third party suppliers to produce and timely ship our orders. Products purchased from our suppliers are resold to our customers. These suppliers could fail to produce products to our specifications or quality standards and may not deliver units on a timely basis. Any changes in our suppliers to resolve production issues could disrupt our ability to fulfill orders. Any changes in our suppliers to resolve production issues could also disrupt our business due to delays in finding new suppliers.


Furthermore, we cannot provide assurance that our internal controls and compliance systems will always protect us from acts committed by our employees, agents or business partners in violation of U.S. federal or state laws. Any improper acts or allegations could damage our reputation and subject us to civil or criminal investigations and related shareholder lawsuits, could lead to substantial civil and criminal monetary and non-monetary penalties, and could cause us to incur significant legal and investigatory fees.


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A cybersecurity incident and other technology disruptions could result in a violation of law or negatively impact our reputation and relationships, our business operations and our financial condition.


Information and security risks have generally increased in recent years due to the rise in new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. We use computers in substantially all aspects of our business operations and we also use mobile devices and other online activities to connect with our employees, customers, tenants, suppliers and other parties. Such uses give rise to cybersecurity risks, including the risk of security breaches, espionage, system disruption, theft and inadvertent release of information. Our business involves the storage and transmission of numerous classes of sensitive and/or confidential information and intellectual property, including employees’, customers’, tenants’ and suppliers’ personally identifiable information and financial and strategic information about us.


If we fail to adequately assess and identify cybersecurity risks associated with our business operations, we may become increasingly vulnerable to such risks. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we, our customers and our suppliers may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us, our customers and our suppliers to entirely mitigate this risk. Further, in the future we may be required to expend additional resources to continue to enhance information security measures and/or to investigate and remediate any information security vulnerabilities. We can provide no assurances that the measures we have implemented to prevent security breaches and cyber incidents will be effective in the event of a cyber-attack.


The theft, destruction, loss, misappropriation or release of sensitive and/or confidential information or intellectual property, or interference with our information technology systems or the technology systems of third-parties on which we rely, could result in business disruption, negative publicity, violation of privacy laws, loss of tenants, loss of customers, potential liability and competitive disadvantage, any of which could result in a material adverse effect on financial condition or results of operations.


We may be required to recognize impairment charges that could materially affect our results of operations.


We assess our intangible assets, and our other long-lived assets as and when required by accounting principles generally accepted in the United States (“GAAP”) to determine whether they are impaired. If they are impaired, we would record appropriate impairment charges. It is possible that we may be required to record significant impairment charges in the future and, if we do so, our results of operations could be materially adversely affected.


Changes in accounting standards could affect our reported financial results.


Our management uses significant judgment, estimates and assumptions in applying GAAP. New accounting standards that may be applicable to our financial statements, or changes in the interpretation of existing standards, could have a significant effect on our reported results of operations for the affected periods.


Risks Related to the Securities Markets and Ownership of Our Common Stock


The price of our common stock is volatile, and the value of your investment could decline.


The market price of our common stock has been highly volatile. Between January 1, 2015, and December 31, 2017, the closing price of our stock has ranged from a low of $0.37 per share to a high of $8.37 per share. Accordingly, it is difficult to forecast the future performance of our common stock. The market price of our common stock may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:


·

regulatory developments at the federal, state or local level;

·

announcements of new products, services, relationships with strategic partners, acquisitions or other events by us or our competitors;  

·

changes in general economic conditions;  

·

price and volume fluctuations in the overall stock market from time to time;  

·

significant volatility in the market price and trading volume of similar companies in our industry;  

·

fluctuations in the trading volume of our shares or the size of our public float;  

·

actual or anticipated changes in our operating results or fluctuations in our operating results;  

·

major catastrophic events;  

·

sales of large blocks of our stock; or  

·

departures of key personnel.  


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In addition, if the market for cannabis company stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock might decline in reaction to events that affect other companies in our industry, even if these events do not directly affect us. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price continues to be volatile, we may become the target of securities litigation, which could result in substantial costs and divert our management’s attention and resources from our business. This could have a material adverse effect on our business, operating results and financial condition.


We do not intend to pay dividends for the foreseeable future.


We do not currently anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on our earnings and financial condition, as well as on other business and economic factors affecting our business, as our board of directors may consider relevant. Our current intention in the foreseeable future is to apply net earnings, if any, to increasing our capital base and our development and marketing efforts. There can be no assurance that we will ever have sufficient earnings to declare and pay dividends to the holders of our common stock and, in any event, a decision to declare and pay dividends is at the sole discretion of our board of directors. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases compared to the price at which you purchased our common stock.


Our common stock is subject to SEC rules applicable to penny stocks, which may make it difficult to resell your shares.


Broker-dealers are generally prohibited from effecting transactions in “penny stocks” unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934 (the “Exchange Act”) and the rules promulgated thereunder. These rules apply to the stock of companies whose shares are not traded on a national stock exchange, trade at less than $5.00 per share or who do not meet certain other financial requirements specified by the Securities and Exchange Commission (the “SEC”). Trades in our common stock are subject to these rules, which include Rule 15g-9 under the Exchange Act, which imposes certain requirements on broker/dealers who sell securities subject to the rule to persons other than established customers and accredited investors. For transactions covered by the rule, brokers/dealers must make a special suitability determination for purchasers of the securities and receive the purchaser’s written agreement to the transaction prior to sale.


The penny stock rules also require a broker/dealer, prior to effecting a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. A broker/dealer also must provide the customer with current bid and offer quotations for the relevant penny stock and information on the compensation of the broker/dealer and its salesperson in the transaction. A broker/dealer must also provide monthly account statements showing the market value of each penny stock held in a customer’s account. The bid and offer quotations, and the broker/dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation.


These rules may discourage or restrict the ability of brokers/dealers to sell our shares of common stock and may affect the secondary market for our shares of common stock. These rules could also hamper our ability to raise funds in the primary market for our shares of common stock.


Our stockholders may experience significant dilution.


We have a significant number of warrants and options to purchase our common stock outstanding, the exercise of which would be dilutive to stockholders. In certain instances, the exercise prices are subject to adjustment if we issue or sell shares of our common stock or equity-based instruments at a price per share less than the exercise price then in effect. In such case, both the issuance and the adjustment would be dilutive to stockholders.


We may from time to time finance our future operations or acquisitions through the issuance of equity securities, which securities may also have rights and preferences senior to the rights and preferences of our common stock. We may also grant options to purchase shares of our common stock to our directors, employees and consultants, the exercise of which would also result in dilution to our stockholders.


We may face continuing challenges in complying with the Sarbanes-Oxley Act, and any failure to comply or any adverse result from management’s evaluation of our internal control over financial reporting may have an adverse effect on our stock price.  


As a smaller reporting company as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, we are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Section 404 requires us to include an internal control report with our Annual Report on Form 10-K. The report must include management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year. This report must also include disclosure of any material weaknesses in internal control over financial reporting that we have identified.


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Failure to comply, or any adverse results from such evaluation, could result in a loss of investor confidence in our financial reports and have an adverse effect on the trading price of our equity securities. Management believes that our internal controls and procedures as of December 31, 2017 were not effective to detect the inappropriate application of U.S. GAAP rules. Management realizes there are deficiencies in the design or operation of our internal control that adversely affect our internal controls, and management considers such deficiencies to be material weaknesses. As of the December 31, 2017, management had identified the following material weaknesses:


·

we had not performed a risk assessment and mapped our processes to control objectives;

·

we had not implemented comprehensive entity-level internal controls;

·

we had not implemented adequate system and manual controls; and

·

we did not have sufficient segregation of duties.


Achieving continued compliance with Section 404 may require us to incur significant costs and expend significant time and management resources. We cannot assure you that we will be able to fully comply with Section 404 or that we will be able to conclude that our internal control over financial reporting is effective at fiscal year-end. As a result, investors could lose confidence in our reported financial information, which could have an adverse effect on the trading price of our securities, as well as subject us to civil or criminal investigations and penalties. In addition, our independent registered public accounting firm may not agree with our management’s assessment or conclude that our internal control over financial reporting is operating effectively.


ITEM 1B. UNRESOLVED STAFF COMMENTS.


None.


ITEM 2. PROPERTIES


As of the date of this Report, we owned the following property:


Property Name

 

Location

 

Description

The Greenhouse

 

6565 E. Evans Ave.

Denver, CO 80224

 

A 16,056 square foot building that we currently used as our corporate headquarters. We plan to continue renovations in 2018 to create a multi-tenant office building that will, among other things, provide shared workspace environment purely dedicated to participants serving the cannabis industry to drive revenue in our Finance Segment. This property was collateral for the 12% Notes and Infinity Note, which were paid off in January and February 2018, respectively.


ITEM 3. LEGAL PROCEEDINGS


From time to time, we may be involved in various claims and legal actions in the ordinary course of business. We are not currently involved in any material legal proceedings outside the ordinary course of our business.


ITEM 4. MINE SAFETY DISCLOSURES


Not applicable.


17



PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information


On April 28, 2015, our common stock was uplisted and on May 6, 2015, resumed quotation on the OTC Market’s OTCQB.  Quotation of our stock on the OTC Bulletin Board began on August 15, 2013. Trading was suspended on March 28, 2014, due to a suspension of trading order issued by the SEC. From April 10, 2014 to April 27, 2015, our common stock was traded under the symbol “CANN” on an unsolicited basis in the grey market.


The following table sets forth the high and low sales prices as reported on the OTCQB, when available. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.


Quarter ended

 

High

 

Low

December 31, 2017

$

6.48

$

1.10

September 30, 2017

 

2.12

 

1.30

June 30, 2017

 

2.44

 

1.12

March 31, 2017

 

3.38

 

1.89

December 31, 2016

 

4.86

 

2.03

September 30, 2016

 

2.06

 

0.68

June 30, 2016

 

1.95

 

0.50

March 31, 2016

 

0.82

 

0.33


Holders


As of March 5, 2018, we had approximately 76 holders of record of our common stock.  A substantially greater number of holders of the Company’s common stock are “street name” or beneficial holders, whose shares of record are held by banks, brokers and other financial institutions.  In addition, our Articles of Incorporation authorize the Board to issue up to 5,000,000 shares of preferred stock. The provisions in the Articles of Incorporation relating to the preferred stock allow directors to issue preferred stock with multiple votes per share and dividend rights, which would have priority over any dividends paid with respect to the holders of common stock. The issuance of preferred stock with these rights may make the removal of management difficult even if the removal would be considered beneficial to stockholders, generally, and will have the effect of limiting stockholder participation in certain transactions such as mergers or tender offers if these transactions are not favored by management.


Dividend Policy


Holders of our common stock are entitled to receive dividends as may be declared by the Board. The Board is not restricted from paying any dividends, but is not obligated to declare a dividend. No cash dividends have ever been declared and it is not anticipated that cash dividends will be paid in the near future. We currently intend to retain any future earnings to finance future growth. Any future determination to pay dividends will be at the discretion of the Board and will depend on our financial condition, results of operations, capital requirements and other factors the Board considers relevant.


Securities Authorized for Issuance under Equity Compensation Plans


The following table provides information regarding our equity compensation plans as of December 31, 2017:


Equity Compensation Plan Information


Plan Category

 

Number of securities to be issued upon exercise of outstanding options, warrants and rights

 

Weighted-average exercise price of outstanding options, warrants and rights

 

Number of securities remaining available for future issuance under equity compensation plans

Equity compensation plans approved by security holders

 

8,705,278

 

$ 1.28

 

129,200

Equity compensation plans not approved by security holders

 

1,027,500

 

$ 3.32

 

Total

 

9,732,778

 

$ 1.49

 

129,200


18



On October 29, 2014, the Board authorized the adoption of our 2014 Equity Incentive Plan (the “Incentive Plan”), which is designed to provide an additional incentive to executives, employees, directors and key consultants, aligning the long term interests of participants in the Incentive Plan with ours and our stockholders. The Incentive Plan provides that up to 10 million shares of our common stock may be issued under the plan.  On June 26, 2015, our stockholders ratified the Incentive Plan.  Forfeited or expired issuances are returned to the shares that may be issued under the plan.  As of December 31, 2017, 1,165,522 stock options issued under the Incentive Plan have been exercised.  The equity compensation plans not approved by security holders include 900,000 options to purchase shares of our common stock granted to Mr. Feinsod, our Executive Chairman of our Board of Directors, on December 8, 2017, and 127,500 warrants to purchase shares of our common stock granted to non-employees for services.


Recent Sales of Unregistered Securities


We have described further below sales of equity securities that were not registered under the Securities Act of 1933, as amended, and not otherwise included in a Quarterly Report on Form 10-Q or Current Report on Form 8-k:


On November 13, 2017, we issued 10,000 warrants with an exercise price of $1.40 and a two year life, to an individual for marketing services.  We relied upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933 with respect to the issuance of such warrants.


ITEM 6. SELECTED FINANCIAL DATA


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


ITEM 7. 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 Consolidated Financial Statements and related notes in Item 8 of this Report.


Cautionary Statement Regarding Forward-looking Statements


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


Plan of Operations


We operate in a rapidly evolving and highly regulated industry that, as has been estimated by some, will exceed $30 billion in U.S. sales by the year 2020.  We have been and will continue to be aggressive in executing acquisitions and other opportunities that we believe will benefit us in the long term.  We plan to leverage our breadth of services and resources to deliver a comprehensive, integrated solution to companies in the cannabis industry – from operational and compliance consulting to security and marketing to financing needs.


In February 2018, we hired cannabis industry veteran Joe Hodas as our new chief operating officer.  Mr. Hodas is responsible for driving revenue and efficiency across all existing lines of business.


Security and Cash Transportation Services We intend to continue to expand the workforce of Iron Protection Group and grow our customer base in Colorado and California.  We continue to solidify our infrastructure, fine-tune processes to make the business scalable and exploring opportunities in other states.  Additionally, we are evaluating additional service offerings, such as expanding our security consulting services.


Marketing Consulting and Apparel – In the fourth quarter of 2017, we brought Cheifton Supply and Chiefton Design under one managing director, which is already allowing us to benefit significantly from cross-marketing efforts.  We are expanding our brand offerings nationwide, as well as continuing to serve the Colorado market.  In February 2018, we have an initial apparel sale with a national retailer at select stores, which could potentially lead to sales at more than 220 locations.  We also have launched a line of clothing made from hemp, which has met with significant interest from buyers across the country.  All of these efforts have also gained the attention of companies seeking design consulting, which could allow us further expand our private label apparel sales.


19



Operations Consulting and Products – In addition to NBC providing consulting services surrounding regulatory compliance, cultivation, logistical support, facility design and construction, and operations to a significant client beginning in the third quarter of 2017, another large customer for these services will come online in 2018.  NBC also has developed teams to provide separate services to customers surrounding license applications, regulatory compliance, construction, and dispensary operations.  Previously, these were typically provided as bundled services, whereas in 2018 we expect to expand our client base and increase revenues by offering these as discrete projects.


Finance – Part of our growth strategy is to invest in businesses, acquire real estate, and provide financing to companies in the cannabis industry.  In January 2018, we acquired a 50% non-operating interest in Desert Created Company LLC, which produces and distributes cannabis-infused elixirs and edible products in Arizona.  


Results of Operations


The following tables set forth, for the periods indicated, statements of income data.  The tables and the discussion below should be read in conjunction with the accompanying consolidated financial statements and the notes thereto appearing in Item 8 in this Report, including Note 16, which describes the impact of a change in accounting principle from our early adoption of Accounting Standards Update 2017-11 relating to derivative treatment of our 12% Warrants.


Consolidated Results


 

 

Year ended December 31,

 

 

 

Percent

 

 

2017

 

2016

 

Change

 

Change

Revenues

$

3,522,075

$

2,981,982

$

540,093

 

18%

Costs and expenses

 

(10,569,249)

 

(10,038,790)

 

(530,459)

 

5%

Other expense

 

(1,173,677)

 

(3,109,152)

 

1,935,475

 

(62)%

Net loss

$

(8,220,851)

$

(10,165,960)

$

1,945,109

 

(19)%


Revenues


Revenues increased primarily due to an increase in revenue in our Operations and Marketing Segments, offset by a decrease in revenue for our Security Segment.


Costs and expenses


 

 

Year ended December 31,

 

 

 

Percent

 

 

2017

 

2016

 

Change

 

Change

Cost of service revenues

$

2,405,076

$

1,916,526

$

488,550

 

25%

Cost of goods sold

 

380,632

 

76,978

 

303,654

 

394%

Selling, general and administrative

 

2,842,543

 

2,040,532

 

802,011

 

39%

Share-based compensation

 

3,880,827

 

3,752,312

 

128,515

 

3%

Professional fees

 

712,589

 

513,985

 

198,604

 

39%

Depreciation and amortization

 

125,911

 

394,215

 

(268,304)

 

(68)%

Impairment of assets

 

221,671

 

1,344,242

 

(1,122,571)

 

(84)%

 

$

10,569,249

$

10,038,790

$

530,459

 

5%


Cost of service revenues typically fluctuates with the changes in revenue for our Operations and Security Segments, while these costs are relatively fixed for our Marketing Segment.  Cost of goods sold varies with changes in product sales, including an increase in products sold by our Operations Segment, which have smaller margins than apparel sold by our Marketing Segment.


Selling, general and administrative expense increased in 2017 primarily due to increases for (a) marketing and promotion; (b) premiums for liability, and directors and officers insurance; and (c) additional personnel added to our corporate and segment teams.


Share-based compensation included the following:


 

 

Year ended December 31,

 

 

 

Percent

 

 

2017

 

2016

 

Change

 

Change

Employee awards

$

3,742,294

$

3,347,259

$

395,035

 

12%

Consulting awards

 

34,399

 

157,153

 

(122,754)

 

(78)%

Feinsod Agreement

 

104,134

 

192,800

 

(88,666)

 

(46)%

DB Option Agreement warrants

 

 

55,100

 

(55,100)

 

(100)%

 

$

3,880,827

$

3,752,312

$

128,515

 

3%


20



Employee awards are issued under our 2014 Equity Incentive Plan, which was approved by shareholders on June 26, 2015, and expense varies primarily due to the number of stock options granted and the share price on the date of grant.  Consulting awards are granted to third parties in lieu of cash for services provided.  The Feinsod Agreement expense represents equity-based compensation pursuant to agreements with Michael Feinsod for serving as the Executive Chairman of our Board.  In March 2016, we issued 100,000 warrants of our common stock to extend the option to invest in DB Arizona through an entity owned by Infinity Capital.


Professional fees consist primarily of accounting and legal expenses, and increased in 2017 due to our registration statements and general corporate matters.


Depreciation and amortization expense decreased because the intangibles from the IPG acquisition were fully impaired as of December 31, 2016, and are no longer being amortized.


Impairment expense in 2017 consists of the write off of our notes receivable with DB Arizona and, in 2016, represents the impairment of the goodwill and intangible assets from our acquisition of IPG.


Other Expense


 

 

Year ended December 31,

 

 

 

Percent

 

 

2017

 

2016

 

Change

 

Change

Amortization of debt discount

$

1,056,550

$

651,788

$

404,762

 

62%

Interest expense

 

313,130

 

287,084

 

26,046

 

9%

Loss on extinguishment of debt

 

 

2,170,280

 

(2,170,280)

 

(100)%

Gain on sale of Pueblo property

 

(196,003)

 

 

(196,003)

 

100%

 

$

1,173,677

$

3,109,152

$

(1,935,475)

 

(62)%


Amortization of debt discount is higher in 2017 compared to 2016, because 2017 also includes amounts immediately expensed upon the exercise of 12% Warrants through the reduction of principal for the related 12% Notes.  Interest expense is higher in 2017 compared to 2016 due to carrying more debt in 2017 than in 2016.  Loss on extinguishment of debt includes (a) $1,715,000 of the fair value of the 12% Warrants 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.  In December 2017, we sold our Pueblo property, consisting of land, building and leasehold improvements with a net carrying value of approximately $410,000 for cash consideration of $579,823, net of certain expenses, and recognized a gain on sale.


Security and Cash Transportation Services


 

 

Year ended December 31,

 

 

 

Percent

 

 

2017

 

2016

 

Change

 

Change

Revenues

$

1,884,618

$

2,232,915

$

(348,297)

 

(16)%

Costs and expenses

 

(2,320,042)

 

(2,253,194)

 

(66,848)

 

3%

 

$

(435,424)

$

(20,279)

$

(415,145)

 

2,047%


Revenues decreased in 2017 primarily from the loss of a significant customer due to the drop in wholesale cannabis prices in Colorado, partially offset in the third quarter of 2017 by organic growth and our acquisition of Mile High.  Costs and expenses typically vary with changes in revenue, however, the increase in costs and expenses in 2017 compared to 2016, relates primarily to overtime and training time for guards as our customer base recovered from the decline experienced during the first six months of 2017.  We also incurred additional expenses in 2017 for our expansion into California and overhead from the Mile High acquisition.


Marketing Consulting and Apparel


 

 

Year ended December 31,

 

 

 

Percent

 

 

2017

 

2016

 

Change

 

Change

Revenues

$

239,604

$

188,594

$

51,011

 

27%

Costs and expenses

 

(527,590)

 

(387,330)

 

(140,260)

 

36%

 

$

(287,985)

$

(198,736)

$

(89,249)

 

45%


In 2017, we experienced a drop in apparel sales and an increase in consulting revenue, as we dedicated resources to launching our design agency.   Expenses for the design business during the first six months of 2017 were high, as we tried different approaches to establishing its operations, which negatively impacted costs and expenses.  We believe we now have an efficient model for Chiefton Design, with manageable, moderate recurring expenses.  In the third quarter of 2017, we hired a new managing director to drive Chiefton Supply’s apparel business, which contributed to increased sales in the fourth quarter of 2017.


21



Operations Consulting and Products


 

 

Year ended December 31,

 

 

 

Percent

 

 

2017

 

2016

 

Change

 

Change

Revenues

$

1,265,072

$

432,046

$

833,026

 

193%

Costs and expenses

 

(1,453,436)

 

(555,892)

 

(897,544)

 

161%

 

$

(188,364)

$

(123,846)

$

(64,518)

 

52%


Revenues in 2017 increased primarily due to (a) assisting companies submitting applications to acquire licenses in states that recently legalized cannabis; (b) adding a significant two year contract in July 2017 to manage the cannabis grow facility for a customer; and (c) 2017 product sales of approximately $280,000; offset by (d) the completion in the second quarter of 2017 of two small contracts to manage customer grow facilities.  Costs and expenses increased in 2017 primarily due to hiring new consultants to meet current and expected future demand for services, as well as the cost of the products sold.


Finance and Real Estate


 

 

Year ended December 31,

 

 

 

Percent

 

 

2017

 

2016

 

Change

 

Change

Revenues

$

132,780

$

128,427

$

4,353

 

3%

Costs and expenses

 

(277,114)

 

(32,143)

 

(244,971)

 

762%

Interest expense

 

 

(8,669)

 

8,669

 

(100)%

Gain on sale of Pueblo property

 

196,003

 

 

196,003

 

100%

 

$

51,669

$

87,615

$

(35,946)

 

(41)%


Revenue from leasing our Pueblo facility remained steady between 2017 and 2016.  Revenues in 2017 also include interest income from our notes receivable with DB Arizona.  Costs and expenses in 2017 were higher than in 2016 due to the impairment of the notes receivable with DB Arizona, of $221,671.  In December 2017, we sold our Pueblo property, consisting of land, building and leasehold improvements with a net carrying value of approximately $410,000 for cash consideration of $579,823, net of certain expenses, and recognized a gain on sale.  Interest expense represents the interest for the mortgage on our Pueblo facility, which was paid off in September 2016.  


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 Report. 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 Consolidated Financial Statements.


22




 

 

Year ended December 31,

 

 

2017

 

2016

Net loss

$

(8,220,851)

$

(10,165,960)

Adjustments:

 

 

 

 

Share-based expense

 

3,880,827

 

3,752,312

Depreciation and amortization

 

125,911

 

394,215

Impairment of assets

 

221,671

 

1,344,242

Amortization of debt discount

 

1,056,550

 

651,788

Interest expense

 

313,130

 

287,084

Loss on extinguishment of debt

 

 

2,170,280

Gain on sale of Pueblo property

 

(196,003)

 

Total adjustments

 

5,402,086

 

8,599,921

Adjusted EBITDA

$

(2,818,765)

$

(1,566,039)

 

 

 

 

 

Per share – basic and diluted:

 

 

 

 

Net loss

$

(0.40)

$

(0.66)

Adjusted EBITDA

 

(0.16)

 

(0.11)

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

Net loss

 

20,472,946

 

15,489,144

Adjusted EBITDA

 

17,193,371

 

13,705,787


Liquidity


Sources of liquidity


Our sources of liquidity include cash generated from operations, the cash exercise of common stock options and warrants, debt,  and the issuance of common stock or other equity-based instruments. We anticipate our more significant uses of resources will include funding operations, developing infrastructure, renovating The Greenhouse, as well as potential business and real property acquisitions.


During the year ended December 31, 2017, in a private placement we raised $4 million of equity by issuing four million shares of our common stock and four million warrants (“Fall 2017 Warrants”) to purchase shares of our common stock (together “Units”) for consideration of $1.00 per Unit.  The Fall 2017 Warrants have an exercise price of $0.50 per share and are exercisable for two years.  If our common stock closes above $5.00 for ten consecutive days, we may call the warrants, giving the warrant holders 10 days to exercise.  All four million  Fall 2017 Warrants were outstanding as of December 31, 2017.  In consideration for the sale of the Units, we received $3,750,000 in cash and extinguished $250,000 of 12% Notes.


On September 21, 2016, we entered into a promissory note and warrant purchase agreement, pursuant to which we issued $3,000,000 aggregate principal amount of 12% notes due September 21, 2018 (the “12% Notes”) to such selling stockholders in a private placement. Subject to the terms and conditions of the agreement, each investor was also granted fully-vested warrants to purchase shares of our common stock in an amount equal to their note principal multiplied by three, resulting in the issuance of warrants to purchase 9,000,000 shares of our common stock, with an exercise period of three years. We received $2,450,000 cash for issuing the 12% Notes, and $300,000 of our 10% Notes and $250,000 of the 14% Mortgage Note Payable were converted into 12% Notes.  We used the proceeds from the sale of the 12% Notes to retire all of our other long-term debt, which amounted to $912,189. The remaining proceeds from the 12% Notes (approximately $1,400,000) was made available for general working capital purposes and acquisitions.


We received approximately $3.3 million and $0.6 million, respectively, in cash from the exercise of warrants and stock options during the years ended December 31, 2017 and 2016.  We used a portion of these proceeds to retire all of our debt of approximately $3.0 million.


Sources and uses of cash


We had cash of approximately $5.0 million and $0.8 million, respectively, as of and December 31, 2017 and 2016.  Our cash flows from operating, investing and financing activities were as follows:


 

 

Year ended December 31,

 

 

2017

 

2016

Net cash used in operating activities

$

(3,204,994)

$

(1,854,751)

Net cash provided by (used in) investing activities

 

393,634

 

(116,448)

Net cash provided by financing activities

 

7,074,352

 

2,686,283


23



Net cash used in operating activities increased in 2017 by $1,350,243 compared to 2016, primarily due to a larger operating loss.  We have added personnel to our Security, Operations and Marketing Segments in advance of growth opportunities.  We also continue to add personnel to our corporate infrastructure and have expanded our corporate marketing efforts.  Where possible, we continue to use non-cash equity-based instruments to obtain consulting services and compensate employees.


Net cash provided by investing activities in 2017 related primarily to (a) net cash proceeds from the sale of the Pueblo property of approximately $580,000, (b) cash outflows of $132,500 related to DB Arizona, and (c) approximately $54,000 related to purchasing fixed assets.  Net cash used in investing activities in 2016 related primarily to (a) cash outflows of $75,000 related to DB Arizona and (b) approximately $41,000 for fixed assets.


Net cash provided by financing activities in 2017 included (a) $3,750,000 from our fourth quarter capital raise and (b) approximately $3,300,000 from the exercise of warrants and stock options. Net cash provided by financing activities in 2016 included (a) new debt of $2,500,000, (b) $497,500 borrowed from Infinity Capital, a related party, (c) pay down of debt of $917,307, and (d) cash from the exercise of common stock options and warrants of $606,090.


Capital Resources


We have no material commitments for capital expenditures as of December 31, 2017.  Part of our growth strategy, however, is to acquire businesses and real estate.  We also plan to continue the renovation of The Greenhouse in 2018.  We would fund such activity through cash on hand, the issuance of debt, common stock, warrants for our common stock or a combination thereof.


Off-balance Sheet Arrangements


We currently have no off-balance sheet arrangements.


Critical Accounting Policies


The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses.  Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods.  In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates.  Actual results may differ from these estimates.


We define critical accounting policies as those that are reflective of significant judgments and uncertainties and which may potentially result in materially different results under different assumptions and conditions.  In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates.  These estimates are subject to an inherent degree of uncertainty.


Purchase Accounting for Acquisitions


Acquisition of a business requires companies to record assets acquired and liabilities assumed at their respective fair market values at the date of acquisition.  Any amount of the purchase price paid that is in excess of the estimated fair value of the net assets acquired is recorded as goodwill.  We determine fair value using widely accepted valuation techniques, primarily discounted cash flows and market multiple analyses.  These types of analyses require us to make assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, discount rates and cash flow.  If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future.


Impairment of Long-lived Assets


We periodically evaluate whether the carrying value of long-lived assets has been impaired when circumstances indicate the carrying value of those assets may not be recoverable.  The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.  If the carrying value is not recoverable, the impairment loss is measured as the excess of the asset’s carrying value over its fair value.


Our impairment analyses require management to apply judgment in estimating future cash flows as well as asset fair values, including forecasting useful lives of the assets, assessing the probability of different outcomes, and selecting the discount rate that reflects the risk inherent in future cash flows. If the carrying value is not recoverable, we assess the fair value of long-lived assets using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third party comparable sales and discounted cash flow models.  If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future.


24



Contingent Liabilities


We accrue a loss for contingencies if it is probable that an asset has been impaired or a liability has been incurred, and when the amount of loss can be reasonably estimable. When no accrual is made because one or both of these conditions does not exist, we disclose the contingency if there is at least a reasonable possibility that a loss may be incurred. We estimate contingent liabilities based on the best information we have available at the time. If we have a range of possible outcomes, we accrue the low end of the range.


Debt with Equity-linked Features


We issue debt that may have separate warrants, conversion features, or no equity-linked attributes.


When we issue debt with warrants, we determine the value of the warrants using the Black-Scholes Option Pricing Model (“Black-Scholes”) or the Binomial Model, using the stock price on the date of issuance, the risk-free interest rate associated with the life of the debt, and the estimated volatility of our stock.  


When we issue debt with a conversion feature, we must first assess whether the conversion feature meets the requirements to be treated as a derivative.  If the conversion feature within convertible debt meets the requirements to be treated as a derivative, we estimate the fair value of the convertible debt derivative using Black-Scholes upon the date of issuance, using the stock price on the date of issuance, the risk free interest rate associated with the life of the debt, and the estimated volatility of our stock.  If the conversion feature is not treated as a derivative, we assess whether it is a beneficial conversion feature (“BCF”).  A BCF exists if the conversion price of the convertible debt instrument is less than the stock price on the commitment date.  This typically occurs when the conversion price is less than the fair value of the stock on the date the instrument was issued.  The value of a BCF is equal to the intrinsic value of the feature, the difference between the conversion price and the common stock into which it is convertible.


Equity-based Payments


We estimate the fair value of equity-based instruments issued to employees or to third parties for services or goods using Black-Scholes or the Binomial Model, which requires us to estimate the volatility of our stock and forfeiture rate.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS


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


25



ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Index to Consolidated Financial Statements


 

Page

Report of Independent Registered Public Accounting Firm

27

 

 

Consolidated Balance Sheets

28

 

 

Consolidated Statements of Operations

29

 

 

Consolidated Statements of Cash Flows

30

 

 

Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

31

 

 

Notes to Consolidated Financial Statements

32


26




Report of Independent Registered Public Accounting Firm



Board of Directors and Stockholders

General Cannabis Corp


Opinion on the Financial Statements


We have audited the accompanying consolidated balance sheets of General Cannabis, Corp. (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows, for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 and 2016, and the results of its consolidated operations and its consolidated cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.


Change in Accounting Principle


As discussed in Note 16 to the consolidated financial statements, the Company early adopted Accounting Standards Update 2017-11 – Distinguishing Liabilities from Equity (Topic 480) (“ASU 2017-11”), which changed the classification of certain warrants issued by the Company from derivative liabilities to equity during the year ended December 31, 2017. An adjustment was also made to the 2016 presentation of the consolidated financial statements as a result of the Company applying the retrospective option allowed by ASU 2017-11 and its resulting effects on warrants issued during the year ended December, 31, 2016.


Basis for Opinion


These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no opinion.


Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.



/s/ HALL & COMPANY

Irvine, California

March 12, 2018

Serving as the Company’s auditor since 2014



27



GENERAL CANNABIS CORP

CONSOLIDATED BALANCE SHEETS


 

 

December 31,

 

 

2017

 

2016

 

 

 

 

As Adjusted

(Note 16)

ASSETS

 

 

 

 

Current Assets

 

 

 

 

Cash and cash equivalents

$

5,036,787

$

773,795

Accounts receivable, net

 

446,219

 

182,214

Notes receivable – DB Arizona

 

 

77,202

Prepaid expenses and other current assets

 

672,636

 

76,493

Inventory

 

34,769

 

7,981

Total current assets

 

6,190,411

 

1,117,685

 

 

 

 

 

Property and equipment, net

 

1,293,761

 

1,714,803

Intangible assets, net

 

119,754

 

25,383

Total Assets

$

7,603,926

$

2,857,871

 

 

 

 

 

LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

Accounts payable and accrued expenses

$

997,794

$

363,618

Interest payable

 

123,446

 

9,806

Customer deposits and deferred rental revenue

 

107,370

 

46,155

Accrued stock payable

 

321,860

 

Notes payable (net of discount)

 

1,177,333

 

Infinity Note – related party

 

1,370,126

 

Total current liabilities

 

4,097,929

 

419,579

 

 

 

 

 

Notes payable (net of discount)

 

 

1,249,533

Infinity Note – related party

 

 

1,370,126

Tenant deposits

 

 

8,854

Total Liabilities

 

4,097,929

 

3,048,092

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

Stockholders’ Equity (Deficit)

 

 

 

 

Preferred stock, no par value; 5,000,000 share authorized; no shares issued and outstanding at December 31, 2017 and 2016

 

 

Common Stock, $0.001 par value; 100,000,000 shares authorized; 27,692,910 shares and 17,193,371 shares issued and outstanding on December 31, 2017 and 2016, respectively

 

27,693

 

17,193

Additional paid-in capital

 

38,292,493

 

26,385,924

Accumulated deficit

 

(34,814,189)

 

(26,593,338)

Total Stockholders’ Equity (Deficit)

 

3,505,997

 

(190,221)

 

 

 

 

 

Total Liabilities & Stockholders’ Equity (Deficit)

$

7,603,926

$

2,857,871


See Notes to consolidated financial statements.


28



GENERAL CANNABIS CORP

CONSOLIDATED STATEMENTS OF OPERATIONS


 

 

Year ended December 31,

 

 

2017

 

2016

 

 

 

 

As Adjusted

(Note 16)

REVENUES

 

 

 

 

Service

$

2,826,595

$

2,735,859

Tenant

 

132,780

 

128,427

Product sales

 

562,700

 

117,696

Total revenues

 

3,522,075

 

2,981,982

 

 

 

 

 

COSTS AND EXPENSES

 

 

 

 

Cost of service revenues

 

2,405,076

 

1,916,526

Cost of goods sold

 

380,632

 

76,978

Selling, general and administrative

 

2,842,543

 

2,040,532

Share-based expense

 

3,880,827

 

3,752,312

Professional fees

 

712,589

 

513,985

Depreciation and amortization

 

125,911

 

394,215

Impairment of Notes receivable – DB Arizona

 

221,671

 

Impairment of intangible assets and goodwill

 

 

1,344,242

Total costs and expenses

 

10,569,249

 

10,038,790

 

 

 

 

 

OPERATING LOSS

 

(7,047,174)

 

(7,056,808)

 

 

 

 

 

OTHER (INCOME) EXPENSE

 

 

 

 

Amortization of debt discount

 

1,056,550

 

651,788

Interest expense

 

313,130

 

287,084

Loss on extinguishment of debt

 

 

2,170,280

Gain on sale of Pueblo property

 

(196,003)

 

Total other (income) expense, net

 

1,173,677

 

3,109,152

 

 

 

 

 

NET LOSS

$

(8,220,851)

$

(10,165,960)

 

 

 

 

 

PER SHARE DATA – Basic and diluted

 

 

 

 

Net loss per share

$

(0.40)

$

(0.66)

Weighted average number of common shares outstanding

 

20,472,946

 

15,489,144


See Notes to consolidated financial statements.


29



GENERAL CANNABIS CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS


 

 

Year ended December 31,

 

 

2017

 

2016

 

 

 

 

As Adjusted

(Note 16)

CASH FLOWS USED IN OPERATING ACTIVITIES

 

 

 

 

Net loss

$

(8,220,851)

$

(10,165,960)

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

 

 

 

 

Amortization of debt discount

 

1,056,550

 

651,788

Loss on extinguishment of debt

 

 

2,170,280

Depreciation and amortization expense

 

125,911

 

394,215

Impairment of Notes receivable – DB Arizona

 

221,671

 

Impairment of intangible assets and goodwill

 

 

1,344,242

Share-based payments

 

3,880,827

 

3,752,312

Gain on sale of Pueblo property

 

(196,003)

 

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

 

 

 

 

Accounts receivable

 

(275,974)

 

(57,661)

Prepaid expenses and other assets

 

(96,556)

 

(31,961)

Inventory

 

(26,788)

 

7,537

Accounts payable and accrued liabilities

 

326,219

 

80,457

Net cash used in operating activities:

 

(3,204,994)

 

(1,854,751)

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

 

 

 

Purchase of property and equipment

 

(53,689)

 

(41,448)

Net cash proceeds from sale of Pueblo property

 

579,823

 

Lending on Notes receivable – DB Arizona

 

(26,500)

 

(75,000)

Purchase of GC Finance Arizona LLC membership interest

 

(106,000)

 

Net cash provided by (used in) investing activities

 

393,634

 

(116,448)

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

 

 

 

Proceeds from sale of common stock and common stock warrants

 

3,750,000

 

Proceeds from exercise of warrants and options for shares of common stock

 

3,324,352

 

606,090

Borrowings under notes payable

 

 

2,500,000

Increase in Infinity Note -- related party

 

 

497,500

Payments on notes payable

 

 

(917,307)

Net cash provided by financing activities

 

7,074,352

 

2,686,283

 

 

 

 

 

NET INCREASE IN CASH

 

4,262,992

 

715,084

CASH, BEGINNING OF PERIOD

 

773,795

 

58,711

CASH, END OF PERIOD

$

5,036,787

$

773,795

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION

 

 

 

 

Cash paid for interest

$

195,760

$

169,206

 

 

 

 

 

NON-CASH TRANSACTIONS

 

 

 

 

12% Note principal used to exercise 12% Warrants

$

878,750

$

250,000

12% Note principal used to participate in Fall 2017 Capital Raise

 

250,000

 

Acquisition of MHPS – accrued stock payable

 

155,000

 

Taxes for stock options included in other assets and accrued expenses

 

499,587

 

Warrants issued in connection with debt recorded as debt discount

 

 

1,886,100

Issuance of common stock for accrued stock payable

 

 

1,732,775

10% Notes and 14% Greenhouse Mortgage converted to 12% Notes

 

 

550,000

Accrued interest included in modification of Infinity Note – related party

 

 

72,626


See Notes to consolidated financial statements.


30



GENERAL CANNABIS CORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(As Adjusted – Note 16)


 

 

Common Stock

 

Additional

 

Accumulated

 

 

 

 

Shares

 

Amount

 

Paid-in Capital

 

Deficit

 

Total

December 31, 2015

 

14,980,014

$

14,979

$

16,204,216

$

(16,427,378)

$

(208,183)

Issuance of common stock under Feinsod Agreement

 

150,000

 

150

 

662,850

 

 

663,000

Warrants issued for DB Option

 

 

 

55,100

 

 

55,100

Common stock issued for IPG acquisition

 

400,000

 

400

 

842,800

 

 

843,200

Common stock issued for Chiefton acquisition

 

80,000

 

80

 

69,320

 

 

69,400

Warrants issued and modified for 10% Notes

 

 

 

442,000

 

 

442,000

Warrants issued with 8% Notes

 

 

 

31,100

 

 

31,100

Warrants issued with 12% Notes

 

 

 

3,570,000

 

 

3,570,000

Common stock issued upon exercise of warrants for debt

 

1,330,357

 

1,331

 

701,419

 

 

702,750

Warrants issued for services

 

 

 

150,165

 

 

150,165

Common stock issued for services

 

50,000

 

50

 

24,950

 

 

25,000

Stock options granted to employees

 

 

 

3,346,692

 

 

3,346,692

Common stock issued to employees

 

50,000

 

50

 

132,125

 

 

132,175

Common stock issued upon exercise of stock options

 

153,000

 

153

 

153,187

 

 

153,340

Net loss

 

 

 

 

(10,165,960)

 

(10,165,960)

December 31, 2016

 

17,193,371

 

17,193

 

26,385,924

 

(26,593,338)

 

(190,221)

Common stock and warrants issued with Fall 2017 capital raise

 

4,000,000

 

4,000

 

3,996,000

 

 

4,000,000

Common stock issued upon exercise of   warrants for debt

 

5,479,017

 

5,478

 

3,247,272

 

 

3,252,750

Warrants issued for services

 

 

 

8,959

 

 

8,959

Common stock issued for services

 

8,000

 

8

 

25,432

 

 

25,440

Stock options granted to employees

 

 

 

3,742,294

 

 

3,742,294

Stock options under Feinsod Agreement

 

 

 

104,134

 

 

104,134

Common stock issued upon exercise of stock options

 

1,012,522

 

1,014

 

782,478

 

 

783,492

Net loss

 

 

 

 

(8,220,851)

 

(8,220,851)

December 31, 2017

 

27,692,910

$

27,693

$

38,292,493

$

(34,814,189)

$

3,505,997


See Notes to consolidated financial statements.


31



GENERAL CANNABIS CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(As Adjusted -- Note 16)


NOTE 1.   NATURE OF OPERATIONS, HISTORY AND PRESENTATION


Nature of Operations


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


Security and Cash Transportation Services (“Security Segment”)


We provide advanced security, including on-site professionals and cash transport, to licensed cannabis cultivators and retail shops, under the business name IPG, and security services to non-cannabis customers in the hospitality business, such as hotels, under the business name Mile High Protection Services (“MHPS”). The drop in wholesale prices in Colorado has negatively impacted security services in Colorado, as grow facilities and retailers seek cheaper alternatives or curtail services. We acquired Mile High in order to expand our Colorado security business into the non-cannabis space, as we believe that market provides an opportunity for growth. We have opened an IPG office in California, which recently legalized recreational cannabis in addition to previously legal medical marijuana.


In states that have recently legalized cannabis, whether medical, recreational or both, license applications require a security plan and, if approved, implementation of that security plan. Accordingly, we are assessing the opportunity to expand our security consulting business to assist companies with their application process and the subsequent implementation of compliant security services.


Marketing Consulting and Apparel (“Marketing Segment”)


Chiefton’s apparel business, Chiefton Supply, strives to create innovative, unique t-shirts, hats, hoodies and accessories. Our apparel is sold through our on-line shop, cannabis retailers, and specialty t-shirt and gift shops. We are pursuing relationships with national apparel retailers and distributors, as well as expanding our offerings nationwide within the cannabis industry.


Chiefton Design provides design, branding and marketing strategy consulting services to the cannabis industry. We assist clients in developing a comprehensive marketing strategy, as well as designing and sourcing client-specific apparel and products. We now have the capacity of a full service marketing agency. Chiefton Design also supports our other segments with marketing designs and apparel.


Operations Consulting and Products (“Operations Segment”)


Through Next Big Crop (“NBC”), we deliver comprehensive consulting services to the cannabis industry that include obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and construction, and expansion of existing operations. Our business plan for NBC correlates to future growth of the regulated cannabis market in the United States.

NBC oversees our wholesale equipment and supply business, operated under the name “GC Supply,” which provides turnkey sourcing and stocking services to cultivation, retail and infused products manufacturing facilities. Our products include infrastructure, equipment, consumables and compliance packaging.


Finance and Real Estate (“Finance Segment”)


Real Estate Leasing


Until December 29, 2017, we owned 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 a parking lot. The property is zoned for cultivating cannabis and is leased to a medical cannabis grower until December 31, 2022. On December 19, 2017, the Company entered into an agreement to sell this property for $625,000 in cash, which closed on December 29, 2017.


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.


32



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 building is a 16,056 square foot facility, which we use as our corporate headquarters.


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 office, meeting, lecture, educational and networking space, and individual workstations. We expect to continue the renovation of The Greenhouse in 2018.


We plan to continue to acquire commercial real estate and lease office space to participants in the cannabis industry. These participants may include media, internet, packaging, lighting, cultivation supplies and financial services-related companies. In exchange for certain services that may be provided to these tenants, we expect to receive rental income in the form of cash. In certain cases, we may acquire equity interests or provide debt capital to these businesses.


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 type of financing. We are assessing other finance services including customized finance, capital formation and banking, for participants in the cannabis industry.


Desert Created Company LLC / DB Products Arizona, LLC


In January 2018, we entered into a limited liability company operating agreement with DNFC LLC (“DNFC”), pursuant to the formation of Desert Created Company LLC (“Desert Created Company”). Each party owns a 50% interest in Desert Created Company, the successor company to DB Arizona. Desert Created Company is the successor entity to DB Products Arizona, LLC (“DB Arizona”).


DB Arizona produced and distributed cannabis-infused elixirs and edible products in Arizona.  We loaned $26,500 and $75,000, respectively, to DB Arizona during the years ended December 31, 2017 and 2016.  In June 2017, we purchased 100% of the ownership interests in GC Finance Arizona LLC (“GC Finance Arizona”) from Infinity Capital for $106,000 in cash.  GC Finance Arizona holds a 50% ownership interest in DB Arizona, an $825,000 loan to DB Arizona, and no liabilities.  We expected future positive cash flows, if any, would first go towards paying the holders of DB Arizona’s notes payable.  Accordingly, we allocated the entire consideration of $106,000 to the note receivable from DB Arizona.  During the quarter ended December 31, 2017, DB Arizona ceased operations and we impaired the full amount of our notes receivable from DB Arizona.


Basis of Presentation


The accompanying consolidated financial statements include the results of GCC and its six 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; (e) GC Security LLC (“GCS”), a Colorado limited liability company formed in 2015; and (f) GC Finance Arizona LLC (“GC Finance Arizona”), an Arizona limited liability company .  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.


The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Furthermore, when testing assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment charges may result.


Certain reclassifications have been made to the prior period segment reporting to conform to the current period presentation related to now including GC Supply in our Operations Segment. The reclassifications had no effect on net loss, total assets, or total stockholders’ equity (deficit).


During the year ended December 31, 2017, we adopted Financial Accounting Standards Board, or FASB, Accounting Standards Update, or FASB ASU 2017-11, which impacts accounting for financial instruments with down round features.  This change in accounting principle was applied retrospectively and, accordingly, impacted all periods presented.  See Note 16.


33



 

Significant Accounting Policies


Cash and Cash Equivalents


Cash and cash equivalents include cash on hand, deposits with banks, and investments that are highly liquid and have maturities of three months or less at the date of purchase.  We maintain our cash balances in financial institutions that, from time to time, may exceed amounts insured by the Federal Deposit Insurance Corporation ($250,000 as of December 31, 2017).


Inventory


Our inventory consists of finished goods, including apparel and supplies for the cannabis market.  Inventory is stated at the lower of cost or market, using the first-in, first-out method (“FIFO”) to determine cost. We monitor inventory cost compared to selling price in order to determine if a lower of cost or market reserve is necessary.


Property and Equipment


Property and equipment are recorded at historical cost.  The cost of maintenance and repairs, which are not significant improvements, are expensed when incurred.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets:  thirty years for buildings, the lesser of five years or the life of the lease for leasehold improvements, and three to five years for furniture, fixtures and equipment.  Land is not depreciated.  


Business Combinations


Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition.  The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions provided by management, including expected future cash flows. We allocate any excess purchase price over the fair value of the net assets and liabilities acquired to goodwill.  Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.


Intangible Assets and Goodwill


Goodwill is the cost of an acquisition less the fair value of the net assets of the acquired business.


Intangible assets consist primarily of customer relationships and marketing-related intangibles. Our intangible assets are being amortized on a straight-line basis over a period of two years.


Impairment of Long-lived Assets and Goodwill


We periodically evaluate whether the carrying value of property, equipment and intangible assets has been impaired when circumstances indicate the carrying value of those assets may not be recoverable.  The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.  If the carrying value is not recoverable, the impairment loss is measured as the excess of the asset’s carrying value over its fair value.


We evaluate goodwill for impairment annually in the fourth quarter, and whenever events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying amount.  The goodwill impairment test consists of a two-step process, if necessary. The first step is to compare the fair value of a reporting unit to its carrying value, including goodwill. We typically use discounted cash flow models to determine the fair value of a reporting unit. The assumptions used in these models are consistent with those we believe hypothetical marketplace participants would use. If the fair value of the reporting unit is less than its carrying value, the second step of the impairment test must be performed in order to determine the amount of impairment loss, if any. The second step compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill.


34



Our impairment analyses require management to apply judgment in estimating future cash flows as well as asset fair values, including forecasting useful lives of the assets, assessing the probability of different outcomes, and selecting the discount rate that reflects the risk inherent in future cash flows. If the carrying value is not recoverable, we assess the fair value of long-lived assets using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third party comparable sales and discounted cash flow models.  If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future.


Debt


We issue debt that may have separate warrants, conversion features, or no equity-linked attributes.


Debt with warrants – When we issue debt with warrants, we treat the warrants as a debt discount, record as a contra-liability against the debt, and amortize the balance over the life of the underlying debt as amortization of debt discount expense in the consolidated statements of operations.  When the warrants do not have certain terms, the offset to the contra-liability is recorded as additional paid in capital in our consolidated balance sheets.  If we issue debt with warrants that have certain terms, the warrants may be 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 or gain.  If the debt is retired early, the associated debt discount is then recognized immediately as amortization of debt discount expense in the consolidated statement of operations.  The debt is treated as conventional debt.


We determine the value of the non-complex warrants using the Black-Scholes Option Pricing Model (“Black-Scholes”) using the stock price on the date of issuance, the risk free interest rate associated with the life of the debt, and the volatility of our stock.  For warrants with complex terms, we use the binomial lattice model to estimate their fair value.


Convertible debtderivative treatment – When we issue debt with a conversion feature, we must first assess whether the conversion feature meets the requirements to be treated as a derivative, as follows:  a) one or more underlyings, typically the price of our common stock; b) one or more notional amounts or payment provisions or both, generally the number of shares upon conversion; c) no initial net investment, which typically excludes the amount borrowed; and d) net settlement provisions, which in the case of convertible debt generally means the stock received upon conversion can be readily sold for cash. An embedded equity-linked component that meets the definition of a derivative does not have to be separated from the host instrument if the component qualifies for the scope exception for certain contracts involving an issuer’s own equity.  The scope exception applies if the contract is both a) indexed to its own stock; and b) classified in stockholders’ equity in its statement of financial position.


If the conversion feature within convertible debt meets the requirements to be treated as a derivative, we estimate the fair value of the convertible debt derivative using Black-Scholes upon the date of issuance.  If the fair value of the convertible debt derivative is higher than the face value of the convertible debt, the excess is immediately recognized as interest expense.  Otherwise, the fair value of the convertible debt derivative is recorded as a liability with an offsetting amount recorded as a debt discount, which offsets the carrying amount of the debt.  The convertible debt derivative is revalued at the end of each reporting period and any change in fair value is recorded as a gain or loss in the consolidated statement of operations.  The debt discount is amortized over the life of the debt.


Convertible debt – beneficial conversion feature – If the conversion feature is not treated as a derivative, we assess whether it is a beneficial conversion feature (“BCF’).  A BCF exists if the conversion price of the convertible debt instrument is less than the stock price on the commitment date.  This typically occurs when the conversion price is less than the fair value of the stock on the date the instrument was issued.  The value of a BCF is equal to the intrinsic value of the feature, the difference between the conversion price and the common stock into which it is convertible, and is recorded as additional paid in capital and as a debt discount in the consolidated balance sheet.  We amortize the balance over the life of the underlying debt as amortization of debt discount expense in the consolidated statement of operations.  If the debt is retired early, the associated debt discount is then recognized immediately as amortization of debt discount expense in the consolidated statement of operations.


If the conversion feature does not qualify for either derivative treatment or as a BCF, the convertible debt is treated as traditional debt.


Modification of debt instruments – Modifications or exchanges of debt that are not considered to be 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.  If the original and new debt instruments are not substantially different, the new effective interest rate is applied to the modified agreement based on the original terms and the increase, if any, in fair value under the modified agreement.


35



Fair Value Measurements


Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:


Level 1 – Quoted prices in active markets for identical assets or liabilities.


Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.


Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities.


Our financial instruments include cash, accounts receivable, notes receivable, accounts payables and tenant deposits. The carrying values of these financial instruments approximate their fair value due to their short maturities.  The carrying amount of our debt approximates fair value because the interest rates on these instruments approximate the interest rate on debt with similar terms available to us.


Revenue Recognition


We recognize revenue when the four revenue recognition criteria are met, as follows:


Persuasive evidence of an arrangement exists – our customary practice is to obtain written evidence, typically in the form of a contract or purchase order;


Delivery – when services are completed in accordance with the underlying contract, or for the sale of goods when custody is transferred to our customers either upon shipment to or receipt at our customers’ locations, with no right of return or further obligations;


The price is fixed or determinable – prices are typically fixed and no price protections or variables are offered; and


Collectability is reasonably assured – we typically work with businesses with which we have a long standing relationship, as well as continually monitoring and evaluating customers’ ability to pay.


Refunds and returns, which are minimal, are recorded as a reduction of revenue.  


Share-based Payments


NonemployeesWe may enter into agreements with nonemployees to make share-based payments in return for services. These payments may be made in the form of common stock or common stock warrants. We recognize expense for fully-vested warrants at the time they are granted. For awards with service or performance conditions, we generally recognize expense over the service period or when the performance condition is met; however, there may be circumstances in which we determine that the performance condition is probable before the actual performance condition is achieved. In such circumstances, the amount recognized as expense is the pro rata amount, depending on the estimated progress towards completion of the performance condition. Nonemployee share-based payments are measured at fair value, based on either the fair value of the equity instrument issued or on the fair value of the services received. Typically, it is not practical to value the services received, so we determine the fair value of common stock grants based on the price of the common stock on the measurement date (which is the earlier of the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, if there are sufficient disincentives to ensure performance, or the date at which the counterparty’s performance is complete), and the fair value of common stock warrants using Black-Scholes. We use historical data to estimate the expected price volatility, the expected stock option life and expected forfeiture rate. The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of grant for the estimated life of the stock option. For awards that are recognized when a performance condition is probable, the fair value is estimated at each reporting date. The cost ultimately recognized is the fair value of the equity award on the date the performance condition is achieved. Accordingly, the expense recognized may change between interim reporting dates and the date the performance condition is achieved.


Awards of common stock with a service or performance condition, where the ultimate number of shares to be issued is uncertain, are classified as liabilities.  All other nonemployee awards are classified as equity.


36



Employees – We issue options to purchase our common stock to our employees, which are measured at fair value using Black-Scholes. We use historical data to estimate the expected price volatility, the expected stock option life and expected forfeiture rate. The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of grant for the estimated life of the stock option.  We recognize expense on a straight-line basis over the service period, net of an estimated forfeiture rate, resulting in a compensation cost for only those shares expected to vest.  Awards to employees are classified as equity.


Market price-based awards – We may issue share-based payments that vest when certain market conditions are met, such as our common stock trading above a certain value for a specific number of days.  We recognize expense for market price-based options at the estimated fair value of the options using the binomial lattice model over the estimated life of the options used in the model, or immediately upon the market conditions being met.  We use historical data to estimate the expected price volatility, the expected stock option life and expected forfeiture rate.  The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of grant for the estimated life of the stock option.


Shipping and Handling


Payments by customers to us for shipping and handling costs are included in revenue on the consolidated statements of operations, while our expense is included in cost of goods sold. Shipping and handling for inventory is included as a component of inventory on the consolidated balance sheets, and in cost of goods sold in the consolidated statements of operations when the product is sold.


Income Taxes


We recognize deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the income tax and financial reporting carrying amount of our assets and liabilities. We monitor our deferred tax assets and evaluate the need for a valuation allowance based on the estimate of the amount of such deferred tax assets that we believe do not meet the more-likely-than-not recognition criteria. We also evaluate whether we have any uncertain tax positions and would record a reserve if we believe it is more-likely-than-not our position would not prevail with the applicable tax authorities. Our assessment of tax positions as of December 31, 2017 and 2016, determined that there were no material uncertain tax positions.


Reportable Segments


Our reporting segments consist of:  a) Security and Cash Transportation Services; b) Marketing Consulting and Apparel; c) Operations Consulting and Products; and d) Finance and Real Estate.  Our Chief Executive Officer has been identified as the chief decision maker.  Our operations are conducted primarily within the United States of America.


Related Parties


Related parties are any entities or individuals that, through employment, ownership or other means, possess the ability to direct or cause the direction of the management and policies of the Company.  We disclose related party transactions that are outside of normal compensatory agreements, such as salaries or board of director fees.  We had related party transactions with the following individuals / companies:


·

Michael Feinsod – Chairman of our Board of Directors (“Board”).

·

Infinity Capital West, LLC (“Infinity Capital”) – An investment management company that was founded and is controlled by Michael Feinsod.

·

GC Finance Arizona – A company that holds a 50% ownership in DB Arizona, and was owned 100% by Infinity Capital prior to our purchase in June 2017.

·

DB Arizona– A company that borrowed $825,000 from GC Finance Arizona.  Prior to our purchase in June 2017, we did not possess the ability to influence DB Arizona and DB Arizona did not have the ability to influence us.  We include DB Arizona as a related party due to our relationship with Michael Feinsod and Infinity Capital, and their relationship with DB Arizona.


Recently Issued Accounting Standards


FASB ASU 2017-11 “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815)” – In July 2017, the FASB issued 2017-11.  The guidance eliminates the requirement to consider “down round” features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock.  Our 12% Warrants were treated as derivative instruments, because they include a “down round” feature, whereby if we issue equity-based instruments at a price below the exercise price of the 12% Warrants, the exercise price of the 12% Warrants would be adjusted.  We have early adopted this standard.  See Note 16.


FASB ASU 2017-09 “Scope of Modification Accounting (Topic 718)” – In May 2017, the FASB issued 2017-09.  The guidance clarifies the accounting for when the terms of a share-based award are modified.  The ASU is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those years, with early adoption permitted.  This new guidance would only impact our consolidated financial statements if, in the future, we modified the terms of any of our share-based awards.


37



FASB ASU 2017-04 “Simplifying the Test for Goodwill Impairment (Topic 350)” – In January 2017, the FASB issued 2017-04.  The guidance removes “Step Two” of the goodwill impairment test, which required a hypothetical purchase price allocation.  A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.  The ASU is effective for annual reporting periods beginning after December 15, 2019, and for interim periods within those years, with early adoption permitted.  We do not currently expect this ASU to have a significant impact on our consolidated financial statements and related disclosures.


FASB ASU 2017-01 “Clarifying the Definition of a Business (Topic 805)” – In January 2017, the FASB issued 2017-1.  The new guidance that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business.  The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business.  The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606.  The ASU is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those years.  Adoption of this ASU is not currently expected to have a significant impact on our consolidated results of operations, cash flows and financial position.


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 2016-02 “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. As of January 1, 2018, we do not have any material leases, so adoption of this ASU will not have a significant impact on our consolidated results of operations, cash flows and financial position.


FASB ASU 2015-17”Income Taxes (Topic 740)” – In November 2015, the FASB issued ASU 2015-17, which simplifies the presentation of deferred tax assets and liabilities on the balance sheet.  Previous GAAP required an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts on the balance sheet.  The amendment requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet.  This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.  Adoption of this ASU is not currently expected to have a significant impact on our consolidated results of operations, cash flows and financial position.


The following recently issued accounting standards all impact revenue recognition for annual reporting periods beginning after December 15, 2017:


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.


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.


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.


We have reviewed our contracts with customers, identified the rights of the parties, evaluated the payment terms, assessed the commercial substance of the contracts, and estimated the probability of collectability. We have also considered the goods and services we deliver compared to the contractual performance obligations. Our agreements predominantly have a fixed price for the goods or services to be delivered, we do not provide financing, and settle in cash. Each separate performance obligation within our contracts with customers is priced individually, and we recognize revenue as each good or service is delivered, that is, when the performance obligation is satisfied. Based on this assessment, adoption of these ASUs will not have a significant impact on our consolidated results of operations, cash flows or financial position.


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NOTE 2.   BUSINESS ACQUISITION


On August 18, 2017, we entered into an Asset Purchase Agreement (the “Mile High APA”) with Mile High Protection Services LLC, a Colorado limited liability company, and its sole member (together “Seller”) whereby we acquired the tradename, workforce, customer contracts, and other intangible assets of the business.  Pursuant to the Mile High APA, we agreed to deliver to Seller 224,359 restricted shares of our common stock.  The shares vest over a six month period.  The Mile High APA contains certain provisions that require Seller to forfeit a portion of such shares in the event that Seller does not meet the obligations under the Mile High APA.  In accordance with the terms of the Mile High APA, the number of shares to be delivered was reduced by 120,000, thus 104,359 shares of our common stock are due upon vesting.  Seller also agreed to a three year non-compete agreement.


The 104,359 shares of restricted common stock were valued based on the closing price per share of our common stock on August 18, 2017, or $1.75 per share, reduced by a discount of 15% due to the vesting period and the restrictions on the Seller’s ability to immediately sell such shares.  The $155,000 value of stock consideration was recorded as accrued stock payable on the December 31, 2017, consolidated balance sheet, which was reduced when the vesting requirements for the shares was met and we issued the common stock in February 2018.


The purchase price allocation was as follows:


Intangible assets:

 

 

Customer relationships

$

100,000

Tradename

 

55,000

 

$

155,000


We finalized the purchase price allocation in the quarter ended December 31, 2017.


The accompanying consolidated financial statements include the results of MHPS from the date of acquisition, August 18, 2017.  The pro forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2016, are as follows:


 

 

Year ended December 31,

 

 

2017

 

2016

 

 

(Unaudited)

Total revenues

$

4,103,416

$

3,802,492

Net loss

 

(8,135,847)

 

(10,118,044)

Net loss per common share:

 

 

 

 

   Basic and diluted

$

(0.40)

$

(0.65)


NOTE 3.  RECEIVABLES


Our accounts receivables consisted of the following:


 

 

December 31,

 

 

2017

 

2016

Accounts receivable

$

586,219

$

225,314

Less:  Allowance for doubtful accounts

 

(140,000)

 

(43,100)

   Total

$

446,219

$

182,214


Our Notes receivable – DB Arizona consisted of loans of $26,500 and $75,000, respectively, and interest of $11,969 and $2,202, respectively, during the years ended December 31, 2017 and 2016, along with consideration of $106,000 paid for the acquisition of GC Finance Arizona in June 2017.  GC Finance Arizona held a 50% ownership interest in DB Arizona, an $825,000 loan to DB Arizona, and no liabilities. At the time of purchase of GC Finance Arizona, we estimated the fair value of the $825,000, which was subordinate to the $101,500 notes, to be $106,000. The loans bear interest at 14%, with principal and interest due on May 30, 2017.  During the year ended December 31, 2017, we determined that it was not probable that we would recover the amounts due under the notes receivable and, accordingly, recorded an impairment charge of $221,671 in our consolidated statement of operations for the year ended December 31, 2017.


39




NOTE 4.  PREPAIDS AND OTHER CURRENT ASSETS


Our Prepaids and other current assets consist of the following:


 

 

December 31,

 

 

2017

 

2016

Prepaid insurance

$

53,498

$

42,119

Employee receivable – payroll tax withholding for stock option exercise

 

499,587

 

Other

 

119,551

 

34,374

 

$

672,636

$

76,493


NOTE 5.   PROPERTY AND EQUIPMENT


Property and equipment consisted of the following:


 

 

December 31,

 

 

2017

 

2016

Land

$

800,000

$

812,340

Buildings

 

423,104

 

871,767

Leasehold improvements

 

 

41,534

Furniture, fixtures and equipment

 

161,430

 

107,741

 

 

1,384,534

 

1,833,382

Less:  Accumulated depreciation

 

(90,773)

 

(118,579)

 

$

1,293,761

$

1,714,803


Depreciation expense was $65,282 and $51,913, respectively, for the years ended December 31, 2017 and 2016.


In December 2017, we sold our Pueblo property, consisting of land, building and leasehold improvements with a net carrying value of approximately $410,000 for cash consideration of $579,823, net of certain expenses, and recognized a gain on sale of approximately $196,000.


NOTE 6.   INTANGIBLE ASSETS AND GOODWILL


Intangible Assets


Intangible assets consisted of the following:


December 31, 2017

 

Gross

 

Accumulated Amortization

 

Net

 

Estimated Life

(in years)

MHPS Customer relationships

$

100,000

$

22,739

$

77,261

 

2

MHPS Tradename

 

55,000

 

12,507

 

42,493

 

2

Chiefton brand and graphic designs

 

69,400

 

69,400

 

 

2

   Intangible assets, net

$

224,400

$

104,646

$

119,754

 

 


December 31, 2016

 

Gross

 

Accumulated Amortization

 

Net

 

Estimated Life

(in years)

Chiefton brand and graphic designs

$

69,400

$

44,017

$

25,383

 

2


Amortization expense was $60,629 and $342,302 for the years ended December 31, 2017 and 2016.  Future amortization expense is $77,500 and $42,254, respectively, during the years ending December 31, 2018 and 2019.


Impairment of Intangible Assets and Goodwill


During the year ended December 31, 2016, we recorded an impairment charge for goodwill and the remaining unamortized value of the IPG intangible assets.  Colorado placed a limit on the number of licenses they would issue for cannabis cultivation facilities, which resulted in the aggregation of licenses by just a few companies.  Colorado did not, however, limit the level of production for these facilities.  As a result, since IPG was acquired, and the related intangible assets and goodwill were valued, there has been significant growth in the supply of cannabis in the Colorado market, which has led to significantly lower wholesale prices for cannabis towards the end of 2016 compared to earlier in the year and in 2015.  As a result of lower prices and aggregation of operations, cultivation companies are not using outside security services to the extent originally projected.  Due to these changes to the Colorado market, as of December 31, 2016, expected future cash flows for IPG’s operations in Colorado are estimated to remain at or near break even.  Accordingly, we have recorded an impairment charge of $1,344,242.


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NOTE 7.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES


Our accounts payable and accrued expenses consist of the following:


 

 

December 31,

 

 

2017

 

2016

Accounts payable

$

192,204

$

191,298

Accrued payroll, taxes and vacation

 

243,659

 

127,178

Payroll tax liability for stock option exercises

 

519,278

 

Property taxes and other

 

42,653

 

45,142

 

$

997,794

$

363,618


NOTE 8.  ACCRUED STOCK PAYABLE


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


 

 

Amount

 

Number of Shares

December 31, 2015

$

1,532,420

 

730,000

Feinsod Agreement – accrual

 

192,800

 

Feinsod Agreement – issued

 

(663,000)

 

(150,000)

Consulting services – accrual

 

6,988

 

Consulting services – issued

 

(25,000)

 

(50,000)

Employment agreements – accrual

 

567

 

Employment agreements – issued

 

(132,175)

 

(50,000)

IPG acquisition – issued

 

(843,200)

 

(400,000)

Chiefton acquisition – issued

 

(69,400)

 

(80,000)

December 31, 2016

 

 

Acquisition of MHPS

 

155,000

 

104,359

Warrant exercises

 

166,860

 

154,500

December 31, 2017

$

321,860

 

258,859


Acquisition of MHPS


The MHPS shares are issuable on February 27, 2018, if the terms of the Mile High APA are met.


Warrant Exercises


We received cash for the exercise of warrants in 2017 and the shares of common stock were issued in January 2018.


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 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.  Mr. Feinsod must remain a member of the Board in order for the common stock to be issued.  In addition, the Feinsod Agreement required 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 would 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 were 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 recognized expense for the unissued shares ratably over the vesting period.


41



Employment Agreements


On May 13, 2015, we hired two individuals and granted them a total of 100,000 shares of our common stock with a vesting date of January 1, 2016. We valued the 100,000 shares on the date of grant, based on a closing price per share of our common stock of $3.11 on May 13, 2015, and then reduced by 15% due to restriction on the ability to trade our common stock, resulting in a fair value of $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 was 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 9.    DEBT


Infinity Note – Related Party


In February 2015, we issued a senior secured note to Infinity Capital, as amended in April 2015, bearing interest at 5% payable monthly in arrears commencing June 30, 2015, until the maturity date of August 31, 2015 (the “Infinity Note”).   On December 31, 2016, the Infinity Note was amended to aggregate principal and interest, and extend the due date of principal and interest to September 21, 2018.  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 through September 1, 2016.  No additional advances may be made after December 31, 2016.  The Infinity Note is collateralized by a security interest in substantially all of our assets.  Interest expense for the Infinity Note for the years ended December 31, 2017 and 2016, was approximately $68,500 and $61,000, respectively.  The Infinity Note is subordinate to the 12% Notes.


Notes Payable


 

 

December 31,

 

 

2017

 

2016

12% Notes

$

1,621,250

$

2,750,000

Unamortized debt discount

 

(443,917)

 

(1,500,467)

 

 

1,177,333

 

1,249,533

Less: Current portion

 

(1,177,333)

 

Long-term portion

$

$

1,249,533


12% 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 principal due September 21, 2018, and interest payable quarterly (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 participants in the Fall 2017 Capital Raise (Note 12) waived this provision for that offering.  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.  The registration statement related to the 12% Warrants was declared effective on December 23, 2016.  If our common stock closes above $5.00 for ten consecutive days, we may call the warrants, giving the warrant holders 30 days to exercise.


We received $2,450,000 of cash for issuing the 12% Notes.  $300,000 of 10% Notes and $250,000 of the 14% Greenhouse Mortgage 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 during the year ended December 31, 2016.  The loss on extinguishment represents the fair value of the 12% Warrants issued to the previous 10% Note holders and the 14% Greenhouse Mortgage lender.  The initial fair value of the 12% Warrants not associated with the conversions was recorded as a debt discount of $1,855,000.  The 12% Notes are otherwise treated as conventional debt.


42



For purposes of determining the loss on extinguishment and the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the warrant as of September 21, 2016, were:


Current stock price

$

1.20

Risk-free interest rate

 

0.92 %

Expected dividend yield

 

Expected term (in years)

 

3.0

Expected volatility

 

146%

Number of iterations

 

5


The fair value of the 12% Warrants, recorded as additional paid in capital, was allocated as follows:


Extinguishment of debt

$

1,715,000

Debt discount

 

1,855,000

 

$

3,570,000


The Infinity Note and the 12% Notes, totaling $2,991,376, are due and payable on September 21, 2018.  We paid off the 12% Notes in January 2018 and paid off the Infinity Note in February 2018.


8% 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 was treated as conventional debt and the fair value of the warrants is included in additional paid-in capital.  Since the 8% Notes were payable on demand, the $31,100 relative fair value of the warrants was expensed immediately, included in amortization of debt discount on the consolidated statements of operations for the year ended December 31, 2016.  One of the 8% Notes, of $25,000, was with one of our board members.  Both 8% Notes were paid off with proceeds from the 12% Notes in September 2016.


10% 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 was 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 was treated as conventional debt.  The 10% Notes were 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.  During the years ended December 31, 2016, approximately $22,500 of interest expense under the 10% Notes related 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 year ended December 31, 2016.  Absent the warrants, the fair value of the new debt remained the same as the fair value of the original debt.  In December 2016, the expiration date of the remaining original warrants was extended from December 23, 2016 to December 31, 2017, resulting in expense of $84,000, included in loss on extinguishment of debt during the year ended December 31, 2016.


14% Greenhouse Mortgage


In September 2016, we extinguished the 14% 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 consolidated statements of operations during the year ended December 31, 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 “14% Greenhouse Mortgage”).  The debt was treated as conventional debt.


43



In addition, we granted warrants to Evans Street Lendco LLC (“Evans Lendco”), the note holder of the 14% Greenhouse Mortgage, which were set to 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 was 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, at which time the remaining debt discount was fully expensed.


8.5% Pueblo Mortgage


In September 2016, we extinguished the 8.5% 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 “8.5% Pueblo Mortgage”). This note was convertible at any time at $5.00 per share.


Derivative treatment was not required, as the conversion feature meets 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 Pueblo Mortgage as conventional debt.


NOTE 10.   COMMITMENTS AND CONTINGENCIES


Legal


To the best of our knowledge and belief, no material legal proceedings of merit are currently pending or threatened.


NOTE 11.   DEFERRED TAXES


The components of net deferred tax assets are as follows:


 

 

December 31,

 

 

2017

 

2016

Net operating loss carryforwards

$

3,446,733

$

2,761,830

Equity-based instruments

 

3,648,787

 

5,043,533

Long-lived assets and other

 

427,779

 

504,721

Deferred tax asset valuation allowance

 

(7,523,299)

 

(8,310,084)

 

$

$


A reconciliation of our income tax provision and the amounts computed by applying statutory rates to income before income taxes is as follows:


 

 

Year ended December 31,

 

 

2017

 

2016

Income tax benefit at statutory rate

$

(2,795,089)

$

(3,456,426)

State income tax benefit, net of Federal benefit

 

(251,213)

 

(470,684)

Equity-based instruments

 

(315,589)

 

Amortization of debt discount

 

391,513

 

251,786

Loss on extinguishment of debt

 

 

838,379

Tax Cuts and Jobs Act rate change

 

991,223

 

Other

 

(242,781)

 

2,377

Valuation allowance

 

2,218,936

 

2,834,568

 

$

$


NOTE 12.   STOCKHOLDERS’ EQUITY


Fall 2017 Capital Raise


During the year ended December 31, 2017, in a private placement we raised $4 million of equity by issuing four million shares of our common stock and four million warrants (“Fall 2017 Warrants”) to purchase shares of our common stock (together “Units”) for $1.00 per Unit.  The Fall 2017 Warrants have an exercise price of $0.50 per share and are exercisable for two years.  If our common stock closes above $5.00 for ten consecutive days, we may call the warrants, giving the warrant holders 10 days to exercise. All four million Fall 2017 Warrants were outstanding as of December 31, 2017.  In consideration for the sale of the Units, we received $3,750,000 in cash and extinguished $250,000 of 12% Notes.


44



Share-based compensation


Share-based compensation expense consisted of the following:


 

 

Year ended December 31,

 

 

2017

 

2016

Employee Awards

$

3,742,294

$

3,347,259

Consulting Awards

 

34,399

 

157,153

Feinsod Agreement

 

104,134

 

192,800

DB Option Agreement

 

 

55,100

 

$

3,880,827

$

3,752,312


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. As of December 31, 2017, there were 8,834,478 shares available to issue under the Incentive Plan. 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:


 

 

Year ended December 31,

 

 

2017

 

2016

Exercise price

 

$1.34 – 4.23

 

$0.61 – 3.20

Stock price on date of grant

 

$1.34 – 4.23

 

$0.63 – 3.20

Volatility

 

140 – 153%

 

146 – 153%

Risk-free interest rate

 

1.4 – 2.3%

 

0.7 – 1.9%

Expected life (years)

 

3.0 – 5.0

 

3.0 – 5.0

Dividend yield

 

 


We use an estimated forfeiture rate of 78% and 67%, respectively, for our hourly employees, who were granted 47,600 and 80,500 options, respectively, during the years ended December 31, 2017 and 2016.  We assume options granted to salaried employees will all vest.


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

 

6,826,000

 

0.87

 

 

 

 

Exercised

 

(153,000)

 

1.00

 

 

 

 

Forfeited or expired

 

(363,600)

 

0.97

 

 

 

 

Outstanding at December 31, 2016

 

8,818,400

 

1.04

 

 

 

 

Granted

 

1,496,100

 

2.29

 

 

 

 

Exercised

 

(1,012,522)

 

0.78

 

 

 

 

Forfeited or expired

 

(596,700)

 

1.19

 

 

 

 

Outstanding at December 31, 2017

 

8,705,278

 

1.28

 

2.1

$

45,290,000

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2017

 

7,385,378

$

1.08

 

1.7

$

39,858,000


Based on our estimated forfeiture rates, we expect 1,305,995 Employee Awards will vest.  As of December 31, 2017, there was approximately $1,712,998 of total unrecognized compensation expense related to unvested Employee Awards, which is expected to be recognized over a weighted-average period of 7 months.


45



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.  Service Awards are revalued at each reporting date until fully vested, which may generate an expense or benefit.


The fair value of each warrant grant is estimated using Black-Scholes.  We use historical data to estimate the expected price volatility.  The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of valuation for the estimated life of the option.  The following summarizes the Black-Scholes assumptions used for Consulting Awards granted:


 

 

Year ended December 31,

 

 

2017

 

2016

Exercise price

$

1.40

$

0.60 – 1.20

Stock price, date of valuation

$

1.40

$

1.91 – 2.33

Volatility

 

128%

 

146 – 163%

Risk-free interest rate

 

1.7%

 

0.8 – 1.3%

Expected life (years)

 

2.0

 

2.0 – 4.8

Dividend yield

 

 


The following summarizes Consulting 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

 

225,500

$

3.62

 

 

 

 

Granted

 

55,000

 

1.01

 

 

 

 

Forfeited or expired

 

(150,000)

 

4.40

 

 

 

 

Outstanding at December 31, 2016

 

157,500

 

1.96

 

 

 

 

Granted

 

10,000

 

1.40

 

 

 

 

Forfeited or expired

 

(40,000)

 

3.62

 

 

 

 

Outstanding and exercisable at
December 31, 2017

 

127,500

 

2.40

 

1.7

$

647,550


Feinsod Employment Agreement


On December 8, 2017, we entered into an employment agreement with Michael Feinsod for his continued service as our Executive Chairman of our Board of Directors.  Pursuant to the agreement, Mr. Feinsod received (a) 600,000 stock options that vest on the anniversary date of the agreement for the next three years, or 200,000 per year (“Time-based Options”); and (b) three tranches of 100,000 stock options that vest when our stock price has an average trading price for 20 days of $3.50, $5.00 and $6.50 (“Market-based Options”).  The options have an exercise price of $3.45 per share and a ten year life.  These options were not issued under the Incentive Plan and, accordingly, the underlying shares are not registered.  As of December 31, 2017, none of the options had vested.


The Time-based Options were valued using the Black-Scholes model and the Market-based Options were valued using the binomial lattice model, with the following assumptions:



 

 

Time-based

Options

 

Market-based

Options

Exercise price

$

3.45

$

3.45

Stock price, date of valuation

$

3.45

 

Trigger Price

Volatility

 

140%

 

144%

Risk-free interest rate

 

2.4%

 

1.9%

Expected life (years)

 

10.0

 

3.0

Dividend yield

 

 


46



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 share-based compensation expense.  All 100,000 warrants were still outstanding as of December 31, 2017.  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

 


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”). All of these warrants were still outstanding as of December 31, 2017.


Warrants with Debt


The fair value of each warrant grant is estimated using Black-Scholes, except for the 12% Warrants (see Note 16).  We use historical data to estimate the expected price volatility.  The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of grant for the estimated life of the warrant.  The following summarizes the Black-Scholes assumptions used for warrants granted for debt during the year ended December 31, 2016:


Volatility

 

148 – 158%

Risk-free interest rate

 

0.8 – 1.2%

Expected life (years)

 

1.1 – 5.0

Dividend yield

 


The following summarizes warrants issued with debt 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

 

597,200

$

1.41

 

 

 

 

Granted

 

9,759,000

 

0.58

 

 

 

 

Cancelled

 

(1,330,357)

 

0.53

 

 

 

 

Outstanding at December 31, 2016

 

9,025,843

 

0.63

 

 

 

 

Exercised

 

(5,633,517)

 

0.61

 

 

 

 

Expired

 

(40,626)

 

1.16

 

 

 

 

Outstanding and exercisable at
December 31, 2017

 

3,351,700

 

0.65

 

2.0

$

19,541,136


NOTE 13.   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.


47



The following summarizes equity instruments that may, in the future, have a dilutive effect on earnings per share:


 

 

December 31,

 

 

2017

 

2016

Stock options

 

9,605,278

 

8,818,400

Warrants

 

8,119,200

 

9,783,343

Accrued stock payable

 

258,859

 

 

 

17,983,337

 

18,601,743


NOTE 14.   SUBSEQUENT EVENTS


Subsequent to December 31, 2017, and up to the date of this filing, 6,900,000 and 507,221 shares, respectively, of our common stock were issued upon the exercise of warrants and stock options for consideration of $3,725,860 and $443,322, respectively, in cash.  In January 2018, we exercised our option to call the 12% Warrants and Fall 2017 Warrants. All holders exercised their warrants, thus we will not be required to buy them back.


In January 2018, we paid off the outstanding balance of the 12% Notes of $1,621,250.  In February 2018, we paid off the outstanding balance of the Infinity Note of $1,370,126.


In January 2018, we entered into a limited liability company operating agreement with DNFC LLC (“DNFC”), pursuant to the formation of Desert Created Company LLC (“Desert Created Company”).  Each party owns a 50% interest in Desert Created Company, the successor company to DB Arizona.  In connection with the formation of Desert Created Company, we contributed 75,000 shares of our common stock and warrants to purchase 75,000 shares of our common stock, at an exercise price of $2.00 per share, to members of DNFC.  This agreement was initially discussed and priced in November 2017, however, the transaction did not close until January 2018.  In the interim, our stock price increased substantially.  We anticipate recording a loss during the quarter ending March 31, 2018, due to the change in stock price between initial discussions and closing, as it relates to the value of our 50% interest in Desert Created Company.


In January 2018, we issued 154,500 shares of our common stock related to warrants exercised in late December 2017.


In February 2018, we issued 104,359 shares of our common stock related to the acquisition of MHPS.


NOTE 15.   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.


Year ended December 31


2017

 

Security

 

Marketing

 

Operations

 

Finance

 

Total

Revenues

$

1,884,618

$

239,605

$

1,265,072

$

132,780

$

3,522,075

Costs and expenses

 

(2,320,042)

 

(527,590)

 

(1,453,436)

 

(277,114)

 

(4,578,182)

Gain on sale

 

 

 

 

196,003

 

196,003

 

$

(435,424)

$

(287,985)

$

(188,364)

$

51,669

 

(860,104)

Corporate expenses

 

 

 

 

 

 

 

 

 

(7,360,747)

 

 

 

 

 

 

 

 

Net loss

$

(8,220,851)


2016

 

Security

 

Marketing

 

Operations

 

Finance

 

Total

Revenues

$

2,232,915

$

188,594

$

432,046

$

128,427

$

2,981,982

Costs and expenses

 

(2,253,194)

 

(387,330)

 

(555,892)

 

(32,143)

 

(3,228,559)

Interest expense

 

 

 

 

(8,669)

 

(8,669)

 

$

(20,279)

$

(198,736)

$

(123,846)

$

87,615

 

(255,246)

Corporate expenses

 

 

 

 

 

 

 

 

 

(9,910,714)

 

 

 

 

 

 

 

 

Net loss

$

(10,165,960)


 

 

December 31,

Total assets

 

2017

 

2016

Security

$

488,299

$

141,140

Marketing

 

57,833

 

50,919

Operations

 

231,670

 

55,750

Finance

 

 

515,205

Corporate

 

6,826,124

 

2,094,857

 

$

7,603,926

$

2,857,871


48


NOTE 16.  CHANGE IN ACCOUNTING PRINCIPLE


During the quarter ended December 31, 2017, we early adopted ASU 2017-11, which eliminates the requirement to consider “down round” features when determining whether certain equity-linked instruments or embedded features are indexed to an entity’s own stock.  Our 12% Warrants were treated as derivative instruments, because they include a “down round” feature, whereby if we issue equity-based instruments at a price below the exercise price of the 12% Warrants, the exercise price of the 12% Warrants would be adjusted.  Upon adoption of the new accounting principle, the 12% Warrants qualify for the exception from derivative treatment.  We have retrospectively adjusted our consolidated financial statements for each prior reporting period to reflect this change in accounting principle.


The changes to our December 31, 2016, consolidated balance sheet are as follows:


 

 

Previously Reported

 

Currently Reported

 

Effect of Change

Warrant derivative liability

$

23,120,000

$

$

(23,120,000)

Total current liabilities

 

23,539,579

 

419,579

 

(23,120,000)

Notes payable (net of discount)

 

815,250

 

1,249,533

 

434,283

Total liabilities

 

25,733,809

 

3,048,092

 

(22,685,717)

Common stock

 

17,129

 

17,193

 

64

Additional paid-in capital

 

26,333,988

 

26,385,924

 

51,936

Accumulated deficit

 

(49,227,055)

 

(26,593,338)

 

22,633,717

Total Stockholders’ Equity (Deficit)

 

(22,875,938)

 

(190,221)

 

22,685,717

Total Liabilities and Stockholders’ Equity (Deficit)

 

2,857,871

 

2,857,871

 


The effect of change for common stock and additional paid-in capital include an unrelated adjustment for number of shares of common stock outstanding from the year ended December 31, 2014.


The changes to our consolidated statement of operations for the year ended December 31, 2016, are as follows:


 

 

Previously Reported

 

Currently Reported

 

Effect of Change

Amortization of debt discount

$

812,505

$

651,788

$

(160,717)

Interest expense

 

5,476,084

 

287,084

 

(5,189,000)

Net loss on derivative liability

 

17,284,000

 

 

(17,284,000)

Total other (income) expense, net

 

25,742,869

 

3,109,152

 

(22,633,717)

Net loss

 

(32,799,677)

 

(10,165,960)

 

22,633,717

Net loss per share

$

(2.13)

$

(0.66)

$

1.47


The changes to our consolidated statement of cash flows for the year ended December 31, 2016, are as follows:


 

 

Previously Reported

 

Currently Reported

 

Effect of Change

Net loss

$

(32,799,677)

$

(10,165,960)

$

22,633,717

Amortization of debt discount

 

812,505

 

651,788

 

(160,717)

Initial fair value of derivative warrant liability included as interest expense

 

5,189,000

 

 

(5,189,000)

Loss on derivative liability, net

 

17,284,000

 

 

(17,284,000)

Net cash used in operating activities

 

(1,854,751)

 

(1,854,751)

 

 

 

 

 

 

 

 

Non-Cash Transactions

 

 

 

 

 

 

Derivative warrant liability recorded as debt discount

$

2,450,000

$

$

(2,450,000)

Warrants issued in connection with debt recorded as debt discount

 

31,100

 

1,886,100

 

1,855,000

Portion of Warrant derivative liability recorded as Additional paid-in capital upon exercise of warrants

 

3,518,000

 

 

(3,518,000)


None of the changes impacted our segments.


49



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


None.


ITEM 9A.   CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures


We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under 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 December 31, 2017, 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 our assets;

·

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.


Our management assessed the effectiveness of internal control over financial reporting as of December 31, 2017.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organization 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 December 31, 2017.


50



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 intend to hire an accounting manager who is a certified public accountant, and assess and remediate any other personnel weaknesses.


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


This Report 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 Securities and Exchange Commission that permits us to provide only management’s report in this Annual Report.

 

Changes in Internal Control over Financial Reporting


We made the following changes to our internal control over financial reporting during the year ended December 31, 2017:


·

Appointed a certified public accountant as our Chief Financial Officer.

·

Hired a certified public accountant as our Corporate Controller.

·

Implemented a formal quarterly review of financial information with our Chief Executive Officer and each managing director that oversees an operating segment.  These individuals provide a certification that the operating results are accurate to the best of their knowledge.

·

Account reconciliations are now prepared for all material accounts and independently reviewed.

·

All manual journal entries are independently reviewed.

·

All expenditures are approved by our Chief Executive Officer.

·

We have segregation of duties between access to our accounting information system and individuals who may sign checks.


ITEM 9B. OTHER INFORMATION


None.


51



PART III


ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE


The information required by this item is set forth under the headings “Board of Directors,” “Corporation Governance and Board Matters,” and “Executive Officers” in our 2018 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2017, in connection with the solicitation of proxies for our 2018 annual meeting of shareholders and is incorporated herein by reference.


ITEM 11. EXECUTIVE COMPENSATION


The information required by this item is set forth under the heading “Executive Officer and Director Compensation” in our 2018 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2017, in connection with the solicitation of proxies for our 2018 annual meeting of shareholders and is incorporated herein by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS


The information required by this item is set forth under the heading “Security Ownership and Certain Beneficial Owners and Management” in our 2018 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2017, in connection with the solicitation of proxies for our 2018 annual meeting of shareholders and is incorporated herein by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE


The information required by this item is set forth under the headings “Certain Relationships and Related Transactions,” Board of Directors” and “Corporate Governance and Board Matters” in our 2018 Proxy Statement, to be filed with the SEC within X days within 120 days after December 31, 2017, in connection with the solicitation of proxies for our 2018 annual meeting of shareholders and is incorporated herein by reference.


ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES


The information required by this item is set forth under the heading “Audit Information” in our 2018 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2017, in connection with the solicitation of proxies for our 2018 annual meeting of shareholders and is incorporated herein by reference.


52



PART IV


ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES


The following Exhibits are filed with this Report:


Exhibit Number

 

Exhibit Name

1

 

Securities Purchase Agreement (Incorporated by reference to Exhibit 1 to our Form 8-K filed on August 3, 2015)

2.1

 

Articles of Merger (Acquisition of shares in Advanced Cannabis Solutions) (Incorporated by reference to Exhibit 2 to our registration statement on Form S-1, File No. 333-163342)

2.2

 

Asset Purchase Agreement dated August 18, 2017, between General Cannabis Corp and Mile High Protection Services LLC (Incorporated by reference to Exhibit 2.1 to our Form 8-K filed on August 24, 2017)

3.1

 

Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to our registration statement on Form S-1, File No. 333-163342)

3.2

 

Articles of Amendment (Incorporated by reference to Exhibit 3.2 to our registration statement on Form S-1, File No. 333-163342)

3.3

 

Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.3 to our registration statement on Form S-1, File No. 333-163342)

3.4

 

Bylaws (Incorporated by reference to Exhibit 3.4 to our registration statement on Form S-1, File No. 333-163342)

3.5

 

Articles of Amendment (name change) (Incorporated by reference to Exhibit 3.5 to our Form 8-K filed on September 30, 2014)

3.6

 

Articles of Amendment (name change) (Incorporated by reference to Exhibit 3.6 to our Form 8-K filed on June 18, 2015)

4.1

 

Senior Secured Note dated February 19, 2015 (Incorporated by reference to Exhibit 4.1 to our Form 8-K filed on February 24, 2015)

4.2

 

Warrant dated March 16, 2015 (Incorporated by reference to Exhibit 4.2 to our Form 8-K filed on March 31, 2015)

4.3

 

Senior Secured Note dated April 30, 2015 (Incorporated by reference to Exhibit 4.3 to our Form 8-K filed on May 1, 2015)

4.4

 

Secured Promissory Note (Incorporated by reference to Exhibit 4.4 to our Form 8-K filed on May 14, 2015)

4.5

 

Warrant to Purchase Common Stock (Incorporated by reference to Exhibit 4.5 to our Form 8-K filed on April 6, 2016)

4.6

 

Amendment to Warrants to Purchase Shares of Common Stock (Incorporated by reference to Exhibit 4.6 to our Form 8-K filed on December 5, 2016)

10.1

 

Share Exchange Agreement (Incorporated by reference to Exhibit 10 to our Form 8-K filed on August 16, 2013.)

10.2

 

Securities Purchase Agreement (Incorporated by reference to Exhibit 10.1 to our Form 8-K/A filed on January 27, 2014)

10.3

 

Warrant (Series C) (Incorporated by reference to Exhibit 10.2 to our Form 8-K/A filed on January 27, 2014)

10.4

 

Registration Rights Agreement (Incorporated by reference to Exhibit 10.3 to our Form 8-K/A filed on January 27, 2014)

10.5

 

Form of Convertible Note (Incorporated by reference to Exhibit 10.4 to our Form 8-K/A filed on January 27, 2014)

10.6

 

Form of Guarantee (Incorporated by reference to Exhibit 10.5 to our Form 8-K/A filed on January 27, 2014)

10.7

 

Form of Security Agreement (Incorporated by reference to Exhibit 10.6 to our Form 8-K/A filed on January 27, 2014)

10.8

 

Amendment No.1 to the Securities Purchase Agreement and Amendment No.1 to the Warrant to Purchase Common Stock by and between the Company and Full Circle Capital Corporation dated September 24, 2014 (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on September 30, 2014)

10.9

 

Agreement Regarding Sale of Oil and Gas Mapping Business (Incorporated by reference to Exhibit 10.8 to our registration statement on Form S-1, File No. 333-193890)

10.10

 

Note and Deed of Trust (Pueblo County, Colorado purchase) (Incorporated by reference to Exhibit 10.9 to our registration statement on Form S-1, File No. 333-193890.)

10.11

 

Form of Convertible Note (Incorporated by reference to Exhibit 10.10 to our registration statement on Form S-1, File No. 333-193890)

10.12

 

Form of Series A Warrant (Incorporated by reference to Exhibit 10.11 to our registration statement on Form S-1, File No. 333-193890)

10.13

 

Form of Series B Warrant (Incorporated by reference to Exhibit 10.12 to our registration statement on Form S-1, File No. 333-193890)

10.14

 

Lease Agreement (Pueblo Property) (Incorporated by reference to Exhibit 10.13 to our registration statement on Form S-1, File No. 333-193890)

10.15

 

Promissory Note (the “Greenhouse”) (Incorporated by reference to Exhibit 10.14 to our registration statement on Form S-1, File No. 333-193890)

10.16

 

Common Stock Warrant dated October 21, 2014 (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on October 27, 2014)

10.17

 

Executive Chairman of the Board and Director Agreement between the Company and Michael Feinsod dated August 4, 2014 (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on August 5, 2014)


53




10.18

 

Independent Contractor Agreement with Brian Kozel dated October 24, 2014 (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on November 24, 2014)

10.19

 

Asset Purchase Agreement by and among the Company, GC Security LLC and Iron Protection Group LLC (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on March 16, 2015)

10.20

 

Amendment No. 2 to Warrant to Purchase Common Stock (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on May 6, 2015.

10.21

 

Form of Security Agreement (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on May 14, 2015)

10.22

 

Form of 10% Warrant (Incorporated by reference to Exhibit 10.2 to our Form 8-K filed on May 14, 2015)

10.23

 

Employee Nonstatutory Stock Option Agreement (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on July 16, 2015)

10.24

 

Warrant to Purchase Common Stock (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on August 3, 2015)

10.25

 

Asset Purchase Agreement (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on October 1, 2015)

10.26

 

Bill of Sale (Incorporated by reference to Exhibit 10.2 to our Form 8-K filed on October 1, 2015)

10.27

 

Assignment and Assumption Agreement (Incorporated by reference to Exhibit 10.3 to our Form 8-K filed on October 1, 2015)

10.28

 

Intellectual Property Assignment Agreement (Incorporated by reference to Exhibit 10.4 to our Form 8-K filed on October 1, 2015)

10.29

 

Option for the Company to Purchase Note and Equity Interest (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on November 9, 2015)

10.30

 

Form of Amendment to Option to Purchase Note and Equity Interest (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on June 8, 2016)

10.31

 

Form of Warrant to Purchase Common Stock (Incorporated by reference to Exhibit 10.2 to our Form 8-K filed on June 8, 2016)

10.32

 

Form of Promissory Note (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on August 26, 2016)

10.33

 

Form of Warrants to Purchase Common Stock (Incorporated by reference to Exhibit 10.2 to our Form 8-K filed on August 26, 2016)

10.34

 

Form of Purchase Agreement (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on September 26, 2016)

10.35

 

Form of Promissory Note (Incorporated by reference to Exhibit 10.2 to our Form 8-K filed on September 26, 2016)

10.36

 

Form of Security Agreement (Incorporated by reference to Exhibit 10.3 to our Form 8-K filed on September 26, 2016)

10.37

 

Form of Series A Warrant (Incorporated by reference to Exhibit 10.4 to our Form 8-K filed on September 26, 2016)

10.38

 

Form of Series B Warrant (Incorporated by reference to Exhibit 10.5 to our Form 8-K filed on September 26, 2016)

10.39

 

Form of Securities Purchase Agreement (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on October 13, 2017)

10.40

 

Form of Warrant (Incorporated by reference to Exhibit 10.2 to our Form 8-K filed on October 13, 2017)

10.41†

 

Employment Agreement, dated as of December 8, 2017, among the Company and Michael Feinsod (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on December 14, 2017)

10.42†

 

Form of Time-Based Options Award (Incorporated by reference to Exhibit 10.2 to our Form 8-K filed on December 14, 2017)

10.41†

 

Form of Performance-Based Options Award (Incorporated by reference to Exhibit 10.3 to our Form 8-K filed on December 14, 2017)

10.42

 

Amendment No. 1 to Securities Purchase Agreement dated as of December 15, 2017, by and among the Company and the investors on the signature pages thereto (Incorporated by reference to Exhibit 10.3 to our Form 8-K filed on December 21, 2017)

10.43

 

Letter agreement dated January 5, 2018, by and between the Company and Infinity Capital (Incorporated by reference to Exhibit 10.3 to our Form 8-K filed on January 8, 2018)

10.44†*

 

Employment Agreement, dated September 15, 2017, between Brian Andrews and the Company

10.45†

 

Employment Agreement, dated February 21, 2018, between Joe Hodas and the Company  (Incorporated by reference to Exhibit 10.3 to our Form 8-K filed on February 23, 2018)

10.46†

 

2014 Equity Incentive Plan (Incorporated by reference to Exhibit 4.1 to our Form S-8 filed on April 25, 2016)

14.1

 

Code of Ethics

21.1*

 

Subsidiaries

31.1*

 

Certification pursuant to Section 302 of the Sarbanes–Oxley Act of 2002 of Principal Executive Officer

31.2*

 

Certification pursuant to Section 302 of the Sarbanes–Oxley Act of 2002 of Principal Financial Officer

32.1*

 

Certification pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 of the Principal Executive and Financial Officers

101

 

XBRL Interactive Data Files


(*)   Filed herewith.

(†)   Denotes management contract or compensatory plan, contract or arrangement


54




SIGNATURES


In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


Signature

 

Title

 

Date

 

 

 

 

 

/s/ Robert L. Frichtel

 

Principal Executive Officer, and a Director

 

March 12, 2018

Robert L. Frichtel

 

 

 

 


In accordance with the Exchange Act, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature

 

Title

 

Date

 

 

 

 

 

/s/ Robert L. Frichtel

 

Principal Executive Officer, and a Director

 

March 12, 2018

Robert L. Frichtel

 

 

 

 

 

 

 

 

 

/s/ Brian Andrews

 

Principal Financial and Accounting Officer

 

March 12, 2018

Brian Andrews

 

 

 

 

 

 

 

 

 

/s/ Michael Feinsod

 

Chairman of the Board of Directors

 

March 12, 2018

Michael Feinsod

 

 

 

 

 

 

 

 

 

/s/ Peter Boockvar

 

Director

 

March 12, 2018

Peter Boockvar

 

 

 

 

 

 

 

 

 

/s/ Mark Green

 

Director

 

March 12, 2018

Mark Green

 

 

 

 

 

 

 

 

 

/s/ Duncan Levin

 

Director

 

March 12, 2018

Duncan Levin

 

 

 

 



55