TREES Corp (Colorado) - Quarter Report: 2018 September (Form 10-Q)

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2018.

o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________.

Commission file number: 000-54457

GENERAL CANNABIS CORP

(Exact name of registrant as specified in its charter)


Colorado		90-1072649
(State of incorporation)		(IRS Employer Identification No.)

6565 East Evans Avenue
Denver, CO 80224
(Address of principal executive offices) (Zip Code)

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

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

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 þ

Smaller reporting company o

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 Exchange Act). Yes o No þ

As of October 31, 2018 there were 36,123,827 issued and outstanding shares of the Company’s common stock.

GENERAL CANNABIS CORP

FORM 10-Q

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.	Controls and Procedures	25

PART II. OTHER INFORMATION		28

Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	36

	Signatures	37

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED BALANCE SHEETS


		September 30, 2018 (Unaudited)		December 31, 2017
ASSETS
Current Assets
Cash and cash equivalents	$	9,841,647	$	5,036,787
Accounts receivable, net		421,535		446,219
Prepaid expenses and other current assets		300,358		672,636
Inventory		102,343		34,769
Total current assets		10,665,883		6,190,411

Property and equipment, net		1,440,177		1,293,761
Intangible assets, net		61,783		119,754
Total Assets	$	12,167,843	$	7,603,926

LIABILITIES & STOCKHOLDERS’ EQUITY

Current Liabilities
Accounts payable and accrued expenses	$	511,407	$	997,794
Interest payable		152,370		123,446
Customer deposits		112,382		107,370
Accrued stock payable		–		321,860
Notes payable (net of discount)		4,101,021		1,177,333
Infinity Note – related party		–		1,370,126
Total current liabilities		4,877,180		4,097,929

Commitments and Contingencies

Stockholders’ Equity
Preferred stock, no par value; 5,000,000 shares authorized; no shares issued and outstanding at September 30, 2018 and December 31, 2017		–		–
Common Stock, $0.001 par value; 100,000,000 shares authorized; 36,057,827 shares and 27,692,910 shares issued and outstanding on September 30, 2018 and December 31, 2017, respectively		36,058		27,693
Additional paid-in capital		54,418,680		38,292,493
Accumulated deficit		(47,164,075)		(34,814,189)
Total Stockholders’ Equity		7,290,663		3,505,997

Total Liabilities & Stockholders’ Equity	$	12,167,843	$	7,603,926

See Notes to condensed consolidated financial statements.

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


		Three months ended September 30,				Nine months ended September 30,
		2018		2017		2018		2017
				As Adjusted (Note 14)				As Adjusted (Note 14)
REVENUES
Service	$	1,050,752	$	932,140	$	2,994,416	$	2,197,683
Rent and interest		16,858		32,902		16,858		99,251
Product Sales		29,437		14,949		142,796		235,767
Total revenues		1,097,047		979,991		3,154,070		2,532,701

COSTS AND EXPENSES
Cost of service revenues		805,664		752,154		2,393,952		1,757,241
Cost of goods sold		52,601		32,459		146,011		240,577
Selling, general and administrative		1,091,988		657,532		3,198,625		1,976,244
Share-based expense		1,289,408		839,322		4,252,900		2,995,251
Professional fees		275,516		126,303		1,167,978		454,591
Depreciation and amortization		38,732		39,885		109,265		88,788
Total costs and expenses		3,553,909		2,447,655		11,268,731		7,512,692

OPERATING LOSS		(2,456,862)		(1,467,664)		(8,114,661)		(4,979,991)

OTHER EXPENSE
Amortization of debt discount		1,557,760		193,820		3,014,938		750,466
Interest expense, net		119,097		81,563		214,332		240,380
Loss from Desert Created investment		62,164		–		182,136		–
Impairment of Desert Created investment		18,319		–		823,819		–
Total other expense, net		1,757,340		275,383		4,235,225		990,846

NET LOSS	$	(4,214,202)	$	(1,743,047)	$	(12,349,886)	$	(5,970,837)

PER SHARE DATA – Basic and diluted
Net loss per share	$	(0.12)	$	(0.08)	$	(0.35)	$	(0.30)
Weighted average number of common shares outstanding		36,013,107		20,654,502		34,921,388		19,883,329

See Notes to condensed consolidated financial statements.

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


		Nine months ended September 30,
		2018		2017
				As Adjusted (Note 14)
OPERATING ACTIVITIES
Net loss	$	(12,349,886)	$	(5,970,837)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount		3,014,938		750,466
Depreciation and amortization expense		109,265		88,788
Bad debt expense		82,615		78,700
Impairment of Desert Created investment		823,819		–
Loss from Desert Created investment		182,136		–
Equity-based payments		4,252,900		2,995,251
Changes in operating assets and liabilities:
Accounts receivable		(57,931)		(179,892)
Prepaid expenses and other assets		395,323		(109,384)
Inventory		(67,574)		(22,462)
Accounts payable and accrued liabilities		(467,451)		245,357
Net cash used in operating activities:		(4,081,846)		(2,124,013)

INVESTING ACTIVITIES
Purchase of property and equipment		(197,710)		(38,925)
Lending on note receivable		(585,000)		(26,500)
Proceeds on note receivable		600,000		–
Investment in Desert Created		(50,000)		–
Purchase of GC Finance Arizona LLC		–		(106,000)
Net cash used in investing activities		(232,710)		(171,425)

FINANCING ACTIVITIES
Proceeds from exercise of warrants		3,985,197		1,326,374
Proceeds from exercise of stock options		625,595		272,807
Proceeds from the sale of common stock – accrued stock payable		–		175,000
Proceeds from notes payable		7,500,000		–
Payments on notes payable		(1,621,250)		–
Payments on Infinity Note – related party		(1,370,126)		–
Net cash provided by financing activities		9,119,416		1,774,181

NET INCREASE (DECREASE) IN CASH		4,804,860		(521,257)
CASH, BEGINNING OF PERIOD		5,036,787		773,795
CASH, END OF PERIOD	$	9,841,647	$	252,538

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest	$	334,365	$	131,763

NON-CASH TRANSACTIONS

8.5% Note principal used to exercise 8.5% Warrants	$	604,000	$	–
12% Note principal used to exercise 12% Warrants		–		668,750
8.5% Warrants recorded as debt discount and additional paid-in capital		5,366,000		–
Acquisition of MHPS – accrued stock payable		–		155,000
Issuance of common stock for accrued stock payable		321,860		–
Issuance of common stock and warrants for investment in Desert Created		979,000		–
Portion of Dope Media Note related to reimbursed legal fees		15,000		–

See Notes to condensed consolidated financial statements.

GENERAL CANNABIS CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(As Adjusted – Note 14)

(Unaudited)

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. On June 6, 2018 we began trading on the OTCQX® Best Market after upgrading from the OTCQB® Venture Market. 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, cannabis processing facilities and retail shops, under the business name Iron Protection Group (“IPG”) in California and Colorado, and security services to non-cannabis customers in Colorado, such as hotels, apartment buildings and retail, under the business name Mile High Protection Services (“MHPS”). We strategically acquired MHPS in order to expand our Colorado security business into the non-cannabis space, as we believe that market provides an opportunity for growth.

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 security plans.

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, festivals and events, 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. 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.

42.73% and 39.06%, respectively, of NBC’s revenue during the three and nine months ended September 30, 2018, was derived from customers within the same ownership group.

Finance and Real Estate (“Finance Segment”)

Real Estate Leasing

On December 29, 2017, we sold for $625,000 in cash, 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. We previously leased this property to a licensed medical cannabis grower.

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. 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.

Basis of Presentation

The accompanying (a) condensed consolidated balance sheet at December 31, 2017, has been derived from audited financial statements and (b) condensed consolidated unaudited financial statements as of September 30, 2018 and 2017, have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements, and should be read in conjunction with the audited consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on March 12, 2018. It is management’s opinion, however, that all material adjustments (consisting of normal recurring adjustments), have been made which are necessary for a fair financial statement presentation. The condensed consolidated financial statements include all material adjustments (consisting of normal recurring accruals) necessary to make the condensed consolidated financial statements not misleading as required by Regulation S-X, Rule 10-01. Operating results for the three and nine months ended September 30, 2018, are not necessarily indicative of the results of operations expected for the year ending December 31, 2018.

The condensed 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.

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 2017 periods presented. See Note 14.

Going Concern

The condensed consolidated financial statements have been prepared on a going concern basis, which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. Our cash reserves of $9,841,647 are not sufficient to absorb our operating losses and retire our debt of $6,896,000. The warrants associated with this debt, if exercised, would provide sufficient funds to retire the debt; however, there is no guarantee that these warrants will be exercised. Our ability to continue as a going concern is dependent upon our generating profitable operations in the future and / or obtaining the

necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. Management believes that (a) we will be successful obtaining additional capital and (b) actions presently being taken to further implement our business plan and generate additional revenues provide opportunity for the Company to continue as a going concern. While we believe in the viability of our strategy to generate additional revenues and our ability to raise additional funds, there can be no assurances to that effect. Accordingly, there is substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

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 consider the following individuals / companies to be related parties:

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.

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.

Significant Accounting Policy Updates

Revenue Recognition

During the first quarter of 2018, we adopted the following accounting principles related to revenue recognition: (a) FASB ASU 2016-12 “Revenue from Contracts with Customers (Topic 606);” (b) FASB ASU 2016-11 “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815);” and (c) FASB ASU 2016-10 “Revenue from Contracts with Customers (Topic 606).” Due to the nature of our contracts with customers, adopting the new accounting principles did not have a significant impact on our prior period results of operations, cash flows or financial position.

Our service and product revenues arise from contracts with customers. Service revenue includes (a) Security Segment, (b) Operations Segment consulting revenue, and (c) Marketing Segment revenues from design consulting, including customer-branded apparel designed and fulfilled by Chiefton. Product revenue includes (a) Operations Segment product sales and (b) Marketing Segment Chiefton-branded apparel. The majority of our revenue is derived from distinct performance obligations, such as time spent delivering a service or the delivery of a specific product.

We may also enter into contracts with customers that identify a single, or few, distinct performance obligations, but that also have non-distinct, underlying performance obligations. These contracts are typically fulfilled within one to three months. Only an insignificant portion of our revenue would be assessed for allocation between distinct (contractual) performance obligations and non-distinct deliverables between reporting periods and, accordingly, we do not record a contract asset for completed, non-distinct performance obligations prior to invoicing the customer.

We recognize revenue when the following criteria are met:

The parties to the contract have approved the contract and are committed to perform their respective obligations – our customary practice is to obtain written evidence, typically in the form of a contract or purchase order.

Each party’s rights regarding the goods or services have been identified – we have rights to payment 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 payment terms for the goods or services have been identified – prices are typically fixed and no price protections or variables are offered.

The contract has commercial substance – our practice is to only enter into contracts that will positively affect our future cash flows.

Collectability is probable – we typically require a retainer for all or a portion of the goods or services to be delivered, as well as continually monitoring and evaluating customers’ ability to pay. Payment terms are typically zero to fifteen days within delivery of the good or service.

Customer deposits are contract liabilities with customers that represent our obligation to either transfer goods or services in the future, or refund the amount received. Where possible, we obtain retainers to lessen our risk of non-payment by our customers. Customer deposits are recognized as revenue as we perform under the contract.

Equity-method Investments

We use the equity method for investments when we are able to exercise significant influence over, but do not control, the investee, and are not the primary beneficiary of the investee’s activities. We include our portion of an equity-method investee’s net income or loss within other expense on the condensed consolidated statements of operations. In the event that the cost basis in an investment exceeds the fair value of the underlying business, we record an impairment charge to reduce our carrying value to the estimated fair value.

Recently Issued Accounting Standards

FASB ASU 2018-07 “Compensation – Stock Compensation (Topic 718)” - In June 2018, the FASB issued ASU 2018-07. This update is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to non-employees (for example, service providers, external legal counsel, suppliers, etc.). The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This standard will be effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption of the standard is permitted. The standard will be applied in a retrospective approach for each period presented. We do not currently expect this ASU to have a significant impact on our consolidated financial statements and related disclosures.

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.

NOTE 2. EQUITY-METHOD INVESTMENT AND BUSINESS ACQUISITIONS

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”). Each party owns a 50% interest in Desert Created, which took over the assets and operations of DB Products Arizona, LLC (“DB Arizona”). Desert Created produces and distributes cannabis-infused edible products in Arizona. In connection with the formation of Desert Created, 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 (collectively, the “DNFC Sellers”). This pricing was agreed to in November 2017, however, the transaction did not close until January 2018. In the interim, our stock price increased substantially, which was the reason for the initial impairment noted below. In October 2018, we sold our 50% interest to DNFC for cash consideration of $23,045 and, accordingly, impaired the remaining balance.

The 75,000 shares of our common stock were valued at $461,000, based on the closing price per share of our common stock on January 24, 2018, or $7.23 per share, reduced by a discount of 15% due to the restrictions on the DNFC Seller’s ability to immediately sell such shares. The warrants were valued at $518,000, using the Black-Scholes model, assuming a life of 5.0 years, a risk-free interest rate of 1.2% and a volatility of 150%. The fair value of Desert Created was estimated based on the relative fair value of the underlying assets and liabilities, consisting primarily of cash, accounts receivable, equipment and accounts payable.

The purchase price allocation was as follows:


Common Stock	$	461,000
Warrants		518,000
Initial investment in Desert Created	$	979,000

Fair value of Desert Created	$	347,097
Percentage ownership		50%
Fair value of 50% of Desert Created		173,500
Initial investment in Desert Created		979,000
Impairment	$	805,500

The income and losses related to Desert Created are recognized using the equity method of accounting. The value of the investment as of September 30, 2018, consists of the following and is included in prepaid expenses and other current assets on the balance sheet:


Initial investment in Desert Created	$	979,000
Initial impairment		(805,500)
Additional investment		50,000
Net loss		(182,136)
Impairment, September 30, 2018		(18,319)
September 30, 2018	$	23,045

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’s operations were taken over by Desert Created and, as a result, we impaired the full amount of our notes receivable from DB Arizona.

Mile High Protection Services

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 the “Mile High 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 Mile High Seller 224,359 restricted shares of our common stock. The shares vested over a six month period. The Mile High APA contained certain provisions that required Mile High Seller to forfeit a portion of such shares in the event that Mile High Seller did 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, to 104,359 shares of our common stock. Mile High 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 Mile High 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, 2017, are as follows:


		Three months ended September 30, 2017		Nine months ended September 30, 2017
Total revenues	$	1,092,088	$	3,114,042
Net loss		(1,759,438)		(6,055,841)
Net loss per common share:
Basic and diluted	$	(0.09)	$	(0.30)

NOTE 3. ACCOUNTS RECEIVABLE AND CUSTOMER DEPOSITS

Our accounts receivables consisted of the following:


		September 30, 2018		December 31, 2017
Accounts receivable	$	622,535	$	586,219
Less: Allowance for doubtful accounts		(201,000)		(140,000)
Total	$	421,535	$	446,219

We record bad debt expense when we conclude the credit risk of a customer indicates the amount due under the contract is not collectible. We recorded bad debt expense (recovery) of $(28,000) and $2,200, respectively, during the three months ended September 30, 2018 and 2017, and $82,615 and $78,700, respectively, during the nine months ended September 30, 2018 and 2017.

Our customer deposit liability had the following activity:


		Amount
December 31, 2017	$	107,370
Additional deposits received		478,274
Less: Deposits recognized as revenue		(473,262)
September 30, 2018	$	112,382

NOTE 4. PREPAIDS AND OTHER CURRENT ASSETS

Our Prepaids and other current assets consisted of the following:


		September 30, 2018		December 31, 2017
Prepaid insurance	$	102,907	$	53,498
Employee receivable – payroll tax withholding for stock option exercise		–		499,587
Investment in Desert Created		23,045		–
Other		174,406		119,551
	$	300,358	$	672,636

NOTE 5. NOTE RECEIVABLE

On June 6, 2018, we loaned $600,000 to Dope Media, Inc. (“Dope Media”) pursuant to the terms of a senior secured note (“Dope Media Note”), bearing interest at 10% per annum and a maturity date of May 31, 2019. The Dope Media Note was paid in full in September 2018. Dope Media’s obligations under the Dope Media Note were secured by all of Dope Media’s assets. In connection with the loan transaction, Dope Media also issued a warrant (“Dope Media Warrant”) to the Company to purchase an aggregate of 1,846,187 shares of Dope Media’s common stock at an exercise price of $0.3278 per share, which represents approximately 5% of fully diluted outstanding common and preferred shares of Dope Media. Subsequent to the repayment of the Dope Media Note, the warrant expired unexercised.

NOTE 6. LONG-LIVED ASSETS

Property and Equipment

Depreciation expense was $19,196 and $15,997, respectively, for the three months ended September 30, 2018 and 2017, and $51,294 and $47,693, respectively, for the nine months ended September 30, 2018 and 2017. We have not recognized any impairment as of September 30, 2018.

Intangible Assets

Intangible assets of $61,783 as of September 30, 2018, consisted of MHPS customer relationships of $100,000, net of accumulated amortization of $60,140 and MHPS tradename of $55,000, net of accumulated amortization of $33,077, both based on an estimated useful life of two years.

Amortization expense was $19,536 and $23,888, respectively, for the three months ended September 30, 2018 and 2017, and $57,971 and $41,095, respectively, for the nine months ended September 30, 2018 and 2017.

NOTE 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Our accounts payable and accrued expenses consisted of the following:


		September 30, 2018		December 31, 2017
Accounts payable	$	213,764	$	192,204
Accrued payroll, taxes and vacation		297,643		243,659
Payroll tax liability for stock option exercises		–		519,278
Property taxes and other		–		42,653
	$	511,407	$	997,794

NOTE 8 ACCRUED STOCK PAYABLE

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


		Amount	Number of Shares
December 31, 2016	$	–	–
Acquisition of MHPS – accrual		155,000	104,359
Warrant exercises – accrual		166,860	154,500
December 31, 2017		321,860	258,859
Acquisition of MHPS – issued		(155,000)	(104,359)
Warrant exercises – issued		(166,860)	(154,500)
September 30, 2018	$	–	–

NOTE 9. DEBT

Infinity Note – Related Party

This note was paid in full in February 2018. 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 September 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. The Infinity Note was collateralized by a security interest in substantially all of our assets. Interest expense for the Infinity Note for the nine months ended September 30, 2018 and 2017, was $9,272 and $51,239, respectively, and $0 was accrued as of September 30, 2018.

Notes Payable


		September 30, 2018		December 31, 2017
8.5% Notes	$	6,896,000	$	–
Unamortized debt discount		(2,794,979)		–
12% Notes		–		1,621,250
Unamortized debt discount		–		(443,917)
		4,101,021		1,177,333
Less: Current portion		(4,101,021)		(1,177,333)
Long-term portion	$	–	$	–

8.5% Notes

In April 2018, we completed a $7,500,000 private placement pursuant to a promissory note (“8.5% Notes”) and warrant purchase agreement (the “8.5% Agreement”) with certain accredited investors, bearing interest at 8.5%, with principal due May 1, 2019, and interest payable quarterly. In the event of default, the interest rate increases to 18%. The 8.5% Notes are collateralized by a security interest in substantially all of our assets. We may prepay the 8.5% Notes at any time, but in any event must pay at least one year of interest.

Subject to the terms and conditions of the 8.5% Agreement, each investor was granted fully-vested warrants equal to their note principal times 80%, or six million warrants, with an exercise price of $2.35 per share and a life of two years (the “8.5% Warrants”). Should we issue any equity-based instruments at a price lower than the exercise price(s) of the 8.5% Warrants, other than under our Incentive Plan (as defined below), the exercise price(s) of the 8.5% Warrants will be adjusted to the lower price. If the shares underlying the 8.5% Warrants were not registered for resale on a registration statement within six months, we would have issued an additional warrant to each purchaser at the same exercise price for one-half of the shares covered by the initial 8.5% Warrants. A registration statement related to the 8.5% Warrants was declared effective on June 5, 2018. We may call the 8.5% Warrants at $0.01 per share if our stock trades above $8.00 per share for 15 consecutive days. The 8.5% Warrants may be exercised at the option of the holder by paying cash or by applying the amount due under the 8.5% Notes as consideration.

We received $7,500,000 of cash for issuing the 8.5% Notes. The relative fair value of the 8.5% Warrants was recorded as a debt discount and additional paid-in capital of $5,366,000. During the nine months ended September 30, 2018, amortization of debt discount expense includes $2,571,021 from the 8.5% Notes. The 8.5% Notes are otherwise treated as conventional debt.

For purposes of determining the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the 8.5% Warrants as of April 2018, were:


Current stock price	$ 4.18
Exercise price	$ 2.35
Risk-free interest rate	2.46 %
Expected dividend yield	–
Expected term (in years)	2.0
Expected volatility	134%
Number of iterations	5

12% Notes

The 12% Notes (as defined below) were paid off in January 2018.

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 would have increased to 18%. The 12% Notes were collateralized by a security interest in substantially all of our assets. We could have prepaid 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 six million warrants, with a life of three years. 4.5 million warrants had an exercise price of $0.35 per share and the other 4.5 million warrants had an exercise price of $0.70 per share. Had we issued 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 would have been adjusted to the lower price. The 12% Warrants could 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 could exercise on a cashless basis. The registration statement related to the 12% Warrants was declared effective on December 23, 2016. If our common stock closed above $5.00 for ten consecutive days, we could call the warrants, giving the warrant holders 30 days to exercise. We called the warrants during the three months ended March 31, 2018, and all holders elected 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 $2,450,000 and interest expense of $5,189,000. The 12% Notes are otherwise treated 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. 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 had an exercise price of $0.50 per share and were exercisable for two years. If our common stock closed above $5.00 for ten consecutive days, we may call the warrants, giving the warrant holders 10 days to exercise. During the quarter ended March 31, 2018, we called the warrants and all were exercised. 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.

Share-based compensation

Share-based expense consisted of the following:


		Three months ended September 30,				Nine months ended September 30,
		2018		2017		2018		2017
Employee Awards	$	931,706	$	839,322	$	2,341,933	$	2,969,811
Consulting Awards		–		–		163,965		25,440
Feinsod Agreement		357,702		–		1,747,002		–
	$	1,289,408	$	839,322	$	4,252,900	$	2,995,251

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 for the issuance of 10 million shares of our common stock and, in April 2018, stockholders approved an increase of 5 million shares of common stock that may be granted (the “Incentive Plan”). The Incentive Plan provides for the issuance of up to 15 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. A Registration Statement on Form S-8 for the initial 10 million shares automatically became effective in May 2016, and a Registration Statement on Form S-8 for the additional 5 million shares and 900,000 shares under the Feinsod Agreement automatically became effective in June 2018 (collectively, the “Registration Statements”). The Registration Statements relate to 15,000,000 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. As of September 30, 2018, there were 13,200,206 shares available to issue under the Incentive Plan.

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


	Three months ended
	September 30, 2018	June 30, 2018	March 31, 2018
Exercise price	$2.19 – 4.02	$3.71	$2.21 – 7.17
Stock price on date of grant	$2.19 – 4.02	$3.71	$2.21 – 7.17
Volatility	42 - 133%	133%	140%
Risk-free interest rate	2.69 – 2.89%	2.59%	2.17 – 2.26%
Expected life (years)	3.0	3.0	2.5
Dividend yield	–	–	–

The following summarizes Employee Awards activity:


	Number of Shares		Weighted-average Exercise Price per Share	Weighted-average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at December 31, 2017	8,705,278	$	1.28
Granted	1,397,050		3.46
Exercised	(634,272)		0.99
Forfeited	(585,060)		3.28
Outstanding at September 30, 2018	8,882,996		1.51	6.4	$	20,908,000

Exercisable at September 30, 2018	7,319,446	$	1.06	7.0	$	20,298,000

Based on our estimated forfeiture rates, we expect 1,554,857 Employee Awards will vest. As of September 30, 2018, there was approximately $2,759,160 of total unrecognized compensation expense related to unvested Employee Awards, which is expected to be recognized over a weighted-average period of ten months.

Consulting Services

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


	Number of Shares		Weighted-average Exercise Price per Share	Weighted-average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at December 31, 2017	127,500	$	2.40
Exercised	(75,000)		1.31
Granted	35,000		3.08
Expired	(30,000)		1.92
Outstanding and exercisable at September 30, 2018	57,500		2.27	1.4	$	89,425

The following summarizes the Black-Scholes assumptions used for Consulting Awards granted:


	Three months ended
	September 30, 2018	June 30, 2018	March 31, 2018
Exercise price	–	$3.08	–
Stock price on date of grant	–	$3.08	–
Volatility	–	134%	–
Risk-free interest rate	–	2.3%	–
Expected life (years)	–	2.0	–
Dividend yield	–	–	–

We granted 25,000 shares of common stock with a fair value of $92,500 to a non-employee for consulting services, which were issued in July 2018.

Feinsod Agreement

On December 8, 2017, we entered into an agreement (the “Feinsod 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; however, the underlying shares were included in the Registration Statement on Form S-8 that automatically became effective in June 2018. During the quarter ended March 31, 2018, the $3.50 and $5.00 Market-based Options vested and, accordingly, the expense associated with those options was recognized immediately.

Warrants with Debt

The following summarizes warrants issued with debt:


	Number of Shares		Weighted-average Exercise Price per Share	Weighted-average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at December 31, 2017	3,351,700	$	0.65
Granted	6,000,000		2.35
Exercised	(3,296,786)		0.76
Outstanding and exercisable at September 30, 2018	6,054,914	$	2.28	1.6	$	9,453,597

NOTE 12. SUBSEQUENT EVENTS

In October 2018, we sold our 50% interest in Desert Created to DNFC for cash consideration of $23,045.

Subsequent to September 30, 2018, and up to the date of this filing, 20,000 shares of our common stock were issued upon the exercise of 8.5% Warrants for consideration of a $47,000 reduction in principal of the 8.5% Notes, 2,000 shares of our common stock were issued upon the exercise of stock options for consideration of $2,680 in cash, and the issuance of 44,000 shares of our common stock for services.

On November 7, 2018, we invested $250,000 in Flowhub Holdings, LLC (“Flowhub”) through a simple agreement for future equity (the “Flowhub SAFE”). The Flowhub SAFE provides us with the right to either (a) future equity in Flowhub when it completes an equity financing, or (b) future equity in Flowhub or cash proceeds if there is a liquidity event. If there is an equity financing, Flowhub would issue to us (a) a number of standard preferred units equal to our investment divided by the price per share of the standard preferred units if the pre-money valuation is less than or equal to the valuation cap ($35 million); or (b) a number of safe preferred units equal to the purchase amount divided by the safe price, if the pre-money valuation is greater than the valuation cap. If there is a liquidity event we will receive either (a) a cash payment equal to the purchase amount or (b) automatically receive a number of common units equal to the purchase amount divided by the liquidity price.

NOTE 13. SEGMENT INFORMATION

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

Three months ended September 30


2018		Security		Marketing		Operations		Finance		Total
Service	$	689,930	$	22,150	$	338,672	$	–	$	1,050,752
Rent and interest		–		–		–		16,858		16,858
Product		–		22,904		6,533		–		29,437
Total revenues		689,930		45,054		345,205		16,858		1,097,047
Costs and expenses		(724,558)		(190,636)		(358,556)		–		(1,273,750)
Investment in Desert Created		–		–		–		(80,483)		(80,483)
	$	(34,628)	$	(145,582)	$	(13,351)	$	(63,625)		(257,186)
Corporate										(3,957,016)
								Net loss	$	(4,214,202)


2017		Security		Marketing		Operations		Finance		Total
Service	$	533,065	$	44,862	$	354,213	$	–	$	932,140
Rent and interest		–		–		–		32,902		32,902
Product		–		4,532		10,417		–		14,949
Total revenues		533,065		49,394		364,630		32,902		979,991
Costs and expenses		(647,915)		(100,464)		(402,856)		(9,339)		(1,160,574)
	$	(114,850)	$	(51,070)	$	(38,226)	$	23,563		(180,583)
Corporate										(1,562,464)
								Net loss	$	(1,743,047)

Nine months ended September 30


2018		Security		Marketing		Operations		Finance		Total
Service	$	1,856,188	$	120,238	$	1,017,990	$	–	$	2,994,416
Rent and interest		–		–		–		16,858		16,858
Product		–		107,280		35,516		–		142,796
Total revenues		1,856,188		227,518		1,053,506		16,858		3,154,070
Costs and expenses		(2,228,504)		(572,189)		(1,238,299)		–		(4,038,992)
Investment in Desert Created		–		–		–		(1,005,955)		(1,005,955)
	$	(372,316)	$	(344,671)	$	(184,793)	$	(989,097)		(1,890,877)
Corporate										(10,459,009)
								Net loss	$	(12,349,886)


2017		Security		Marketing		Operations		Finance		Total
Service	$	1,322,509	$	121,250	$	753,924	$	–	$	2,197,683
Rent and interest		–		–		–		99,251		99,251
Product		–		41,966		193,801		–		235,767
Total revenue		1,322,509		163,216		947,725		99,251		2,532,701
Costs and expenses		(1,615,694)		(381,439)		(1,018,655)		(37,113)		(3,052,901)
	$	(293,185)	$	(218,223)	$	(70,930)	$	62,138		(520,200)
Corporate										(5,450,637)
								Net loss	$	(5,970,837)


Total assets		September 30, 2018		December 31, 2017
Security	$	661,740	$	488,299
Marketing		115,412		57,833
Operations		164,484		231,670
Finance		–		–
Corporate		11,226,207		6,826,124
	$	12,167,843	$	7,603,926

NOTE 14. 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 consolidated statement of operations are as follows:

Three months ended September 30, 2017


		Previously Reported		Currently Reported		Effect of Change
Amortization of debt discount	$	284,900	$	193,820	$	(91,080)
Gain on derivative warrant liability		(2,421,000)		–		2,421,000
Total other (income) expense, net		(2,054,537)		275,383		2,329,920
Net income (loss)		586,873		(1,743,047)		(2,329,920)
Net income (loss) per share	$	0.03	$	(0.08)	$	(0.11)

Nine months ended September 30, 2017


		Previously Reported		Currently Reported		Effect of Change
Amortization of debt discount	$	1,134,432	$	750,466	$	(383,966)
Gain on derivative warrant liability		(10,580,000)		–		10,580,000
Total other (income) expense, net		(9,205,188)		990,846		10,196,034
Net income (loss)		4,225,197		(5,970,837)		(10,196,034)
Net income (loss) per share	$	0.21	$	(0.30)	$	(0.50)

The changes to our consolidated statement of cash flows for the nine months ended September 30, 2017, are as follows:


		Previously Reported		Currently Reported		Effect of Change
Net income (loss)	$	4,225,197	$	(5,970,837)	$	(10,196,034)
Amortization of debt discount		1,134,432		750,466		(383,966)
Gain on derivative warrant liability		(10,580,000)		–		10,580,000
Net cash used in operating activities		(2,124,013)		(2,124,013)		–

Non-Cash Transactions
Portion of Warrant derivative liability recorded as additional paid-in capital upon exercise of warrants		7,301,000		–		(7,301,000)

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

This Management’s Discussion and Analysis (“MD&A”) is intended to provide an understanding of our financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. This discussion should be read in conjunction with the Condensed Consolidated Unaudited Financial Statements contained in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and related notes and MD&A of Financial Condition and Results of Operations appearing in our Annual Report on Form 10-K as of and for the years ended December 31, 2017 and 2016. The results of operations for an interim period may not give a true indication of results for future interim periods or for the year.

Cautionary Statement Regarding Forward Looking Statements

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

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

Our Products, Services and Customers

We operate in a rapidly evolving and highly regulated industry that, as has been estimated by some, will exceed $30 billion 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”)

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”)

Finance and Real Estate (“Finance Segment”)

Real Estate Leasing

On December 29, 2017, we sold for $625,000 in cash 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. We previously leased this property to a licensed medical cannabis grower.

Shared Office Space, Networking and Event Services

Industry Finance

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”). Each party owns a 50% interest in Desert Created, which took over the assets and operations of DB Products Arizona, LLC (“DB Arizona”). Desert Created produces and distributes cannabis-infused edible products in Arizona. In connection with the formation of Desert Created, 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 pricing was agreed to in November 2017, however, the transaction did not close until January 2018. In the interim, our stock price increased substantially. Our initial investment in Desert Created was $979,000. In October 2018, we sold our 50% interest to DNFC for cash consideration of $23,045.

Results of Operations

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

Consolidated Results


		Three months ended September 30,					Percent
		2018		2017		Change	Change
Revenues	$	1,097,047	$	979,991	$	117,056	12%
Costs and expenses		(3,553,909)		(2,447,655)		(1,106,254)	45%
Other expense		(1,757,340)		(275,383)		(1,481,957)	538%
Net loss	$	(4,214,202)	$	(1,743,047)	$	(2,471,155)	142%


		Nine months ended September 30,					Percent
		2018		2017		Change	Change
Revenues	$	3,154,070	$	2,532,701	$	621,369	25%
Costs and expenses		(11,268,731)		(7,512,692)		(3,756,039)	50%
Other income (expense)		(4,235,225)		(990,846)		(3,244,379)	327%
Net loss	$	(12,349,886)	$	(5,970,837)	$	(6,379,049)	107%

Revenues

Revenues for the quarter ended September 30, 2018 compared to 2017, increased for our Security and Operations Segments, offset by a decrease in revenue for our Marketing and Finance Segments. Revenue for the nine months ended September 30, 2018 compared to 2017, increased for our Security, Operations and Marketing Segments, offset by a decrease in revenues in our Finance Segment. See Segment discussions below for further details.

Costs and expenses


		Three months ended September 30,					Percent
		2018		2017		Change	Change
Cost of service revenues	$	805,664	$	752,154	$	53,510	7%
Cost of goods sold		52,601		32,459		20,142	62%
Selling, general and administrative		1,091,988		657,532		434,456	66%
Share-based expense		1,289,408		839,322		450,086	54%
Professional fees		275,516		126,303		149,213	118%
Depreciation and amortization		38,732		39,885		(1,153)	(3)%
	$	3,553,909	$	2,447,655	$	1,106,254	45%


		Nine months ended September 30,					Percent
		2018		2017		Change	Change
Cost of service revenues	$	2,393,952	$	1,757,241	$	636,711	36%
Cost of goods sold		146,011		240,577		(94,566)	(39)%
Selling, general and administrative		3,198,625		1,976,244		1,222,381	62%
Share-based expense		4,252,900		2,995,251		1,257,649	42%
Professional fees		1,167,978		454,591		713,387	157%
Depreciation and amortization		109,265		88,788		20,477	23%
	$	11,268,731	$	7,512,692	$	3,756,039	50%

The cost of service revenues increase corresponds to the overall increase in revenue and an increase in personnel that were not fully utilized. Cost of goods sold varies with changes in product sales, product mix, and inventory adjustments. Product sales within our Operations Segment, which have a narrow margin, were lower in 2018 compared to 2017, thus cost of goods sold relative to sales was down. During the three months ended September 30, 2018, however, we wrote off unsold Marketing Segment inventory related to specific festivals and events. See Segment discussions below for further details.

Selling, general and administrative expense increased in 2018 primarily due to increases for (a) additional personnel added to our corporate and segment teams, (b) premiums for liability, and directors and officers insurance; and (c) marketing and promotion.

Share-based expense included the following:


		Three months ended September 30,				Nine months ended September 30,
		2018		2017		2018		2017
Employee Awards	$	931,706	$	839,322	$	2,341,933	$	2,969,811
Consulting Awards		–		–		163,965		25,440
Feinsod Agreement		357,702		–		1,747,002		–
	$	1,289,408	$	839,322	$	4,252,900	$	2,995,251

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.

Professional fees consist primarily of accounting and legal expenses, and increased in 2018 due to filing of registration statements, an increase in corporate work and a change to a larger law firm as outside counsel. The increase was also due to Sarbanes-Oxley (“SOX”) implementation that started in the first quarter and our Enterprise Resource Planning (“ERP”) system implementation that began in the second quarter.

Depreciation and amortization decreased for the three months ended September 30, 2018 compared to 2017 due to the amortization of the Chiefton intangible being fully amortized as of August 2017. Depreciation and amortization expense increased for the nine months ended September 30, 2018 compared to 2017 due to the amortization of MHPS intangibles and depreciation expense for several building improvements completed in the first quarter of 2018.

Other Expense


		Three months ended September 30,				Nine months ended September 30,
		2018		2017		2018		2017
Amortization of debt discount	$	1,557,760	$	193,820	$	3,014,938	$	750,466
Interest expense		119,097		81,563		214,332		240,380
Loss from Desert Created investment		62,164		–		182,136		–
Impairment of Desert Created investment		18,319		–		823,819		–
	$	1,757,340	$	275,383	$	4,235,225	$	990,846

Amortization of debt discount was higher in 2018 compared to 2017, because outstanding debt as of December 31, 2017, was paid off and the remaining debt discount was expensed, coupled with the amortization of the debt discount for our 8.5% Notes issued in April 2018. Interest expense varied in 2018 due to the payoff of the 12% Notes in January 2018, the payoff of the Infinity Note in February 2018, and the issuance of the 8.5% Notes in April 2018. The loss on investment in Desert Created is our 50% share of the net loss of Desert Created during the quarters ended March 31, 2018, June 30, 2018 and September 30, 2018. The impairment of Desert Created occurred primarily because the agreement was priced in November 2017, however, the transaction did not close until January 2018. In the interim, our stock price increased substantially, thus the consideration we paid, in equity instruments, was higher than the fair value of the investment received. In October 2018, we sold our 50% interest to DNFC for cash consideration of $23,045 and, accordingly, impaired the remaining balance.

Security and Cash Transportation Services


		Three months ended September 30,					Percent
		2018		2017		Change	Change
Revenues	$	689,930	$	533,065	$	156,865	29%
Costs and expenses		(724,558)		(647,915)		(76,643)	12%
	$	(34,628)	$	(114,850)	$	80,222	(70)%


		Nine months ended September 30,					Percent
		2018		2017		Change	Change
Revenues	$	1,856,188	$	1,322,509	$	533,679	40%
Costs and expenses		(2,228,504)		(1,615,694)		(612,810)	38%
	$	(372,316)	$	(293,185)	$	(79,131)	27%

Revenues increased in 2018 primarily from (a) signing customers at a higher revenue rate per hour; (b) a general increase in guard rates in the third quarter of 2018 and the fourth quarter of 2017; (c) beginning services to California clients in April 2018; and (d) the acquisition of MHPS in August 2017. Costs and expenses typically vary with changes in revenue, however, the increase in 2018 compared to 2017 was due to higher salaries, bad debt expense, liability insurance prices, and our expansion into California. In addition to the above there was an increase in legal fees due to litigation, which was resolved in our favor in March 2018.

Marketing Consulting and Apparel


		Three months ended September 30,					Percent
		2018		2017		Change	Change
Revenues	$	45,054	$	49,394	$	(4,340)	(9)%
Costs and expenses		(190,636)		(100,464)		(90,172)	90%
	$	(145,582)	$	(51,070)	$	(94,512)	185%


		Nine months ended September 30,					Percent
		2018		2017		Change	Change
Revenues	$	227,518	$	163,216	$	64,302	39%
Costs and expenses		(572,189)		(381,439)		(190,750)	50%
	$	(344,671)	$	(218,223)	$	(126,448)	58%

The decrease in revenues for the three months ended September 30, 2018 compared to 2017 is due to apparel sales at festivals not meeting expectations and fewer design projects. The increase in revenues for the nine months ended September 30, 2018 compared to 2017 was primarily attributable to 2018 first and second quarter sales to a national retailer and apparel sales at festivals and other events; whereas 2017 revenues were supported by higher design projects. Costs and expenses vary with changes in product sales, product mix, and inventory adjustments. Revenue derived from services has a higher margin then revenues derived from product sales. In 2018, a large percentage of revenues came from product sales, increasing the costs related to these sales. Additionally, during the third quarter of 2018 we wrote off unsold inventory related to specific festivals and events.

Operations Consulting and Products


		Three months ended September 30,					Percent
		2018		2017		Change	Change
Revenues	$	345,205	$	364,630	$	(19,425)	(5)%
Costs and expenses		(358,556)		(402,856)		44,300	(11)%
	$	(13,351)	$	(38,226)	$	24,875	(65)%


		Nine months ended September 30,					Percent
		2018		2017		Change	Change
Revenues	$	1,053,506	$	947,725	$	105,781	11%
Costs and expenses		(1,238,299)		(1,018,655)		(219,644)	22%
	$	(184,793)	$	(70,930)	$	(113,863)	161%

Increased revenues in 2018 primarily related to (a) a contract to manage a large grow facility that began in August 2017, compared to two smaller management contracts that expired in July 2017; (b) revenue from license application consulting; offset by (c) lower product sales. Costs and expenses increased in 2018 primarily due to hiring new consultants to meet current and future demand for services, offset by lower cost of goods sold.

Finance and Real Estate


		Three months ended September 30,					Percent
		2018		2017		Change	Change
Revenues	$	16,858	$	32,902	$	(16,044)	(49)%
Costs and expenses		–		(9,339)		9,339	(100)%
Investment in Desert Created		(80,483)		–		(80,483)	100%
	$	(63,625)	$	23,563	$	(87,188)	(370)%


		Nine months ended September 30,					Percent
		2018		2017		Change	Change
Revenues	$	16,858	$	99,251	$	(82,393)	(83)%
Costs and expenses		–		(37,113)		37,113	(100)%
Investment in Desert Created		(1,005,955)		–		(1,005,955)	100%
	$	(989,097)	$	62,138	$	(1,051,235)	(1,692)%

The decrease in revenues was due to the Pueblo rental property being sold in December 2017, which was offset by interest income received for the Dope Media Note that was collected in the third quarter 2018. The investment in Desert Created includes an $823,819 impairment charge and our share of their net loss.

Liquidity and Capital Resources

We had cash of $9,841,647 and $5,036,787, respectively, as of September 30, 2018 and December 31, 2017. Our cash flows from operating, investing and financing activities were as follows:


		Nine months ended September 30,
		2018		2017
Net cash used in operating activities	$	(4,081,846)	$	(2,124,013)
Net cash used in investing activities		(232,710)		(171,425)
Net cash provided by financing activities	$	9,119,416	$	1,774,181

Net cash used in operating activities increased in 2018 by $1,957,833 compared to 2017, primarily due to a larger operating loss. We have added personnel to our Operations Segment and Marketing Segment in advance of growth opportunities, along with our Security Segment’s expansion into California. We also continued to add personnel to our corporate infrastructure and 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 used in investing activities relates primarily to purchasing fixed assets, including building improvements in 2018. In the second quarter of 2017, we purchased GC Finance Arizona LLC for $106,000.

Net cash provided by financing activities in 2018 related to (a) exercise of warrants and options – $4,610,792; (b) issuing our 8.5% Notes – $7,500,000; and (c) paying off our 12% Notes and the Infinity Note– $2,991,376. Net cash provided in 2017 related primarily to the exercise of warrants and options.

Non-GAAP Financial Measures

Adjusted EBITDA per share is a non-GAAP financial measure. We define Adjusted EBITDA per share as (a) net income (loss) calculated in accordance with GAAP, adjusted for the impact of share-based expense, depreciation and amortization, impairment of investments, amortization of debt discounts, and certain other non-cash items; divided by (b) the weighted average shares outstanding, adjusted for the shares related to the calculation of Adjusted EBITDA. Below we have provided a reconciliation of Adjusted EBITDA per share to the most directly comparable GAAP measure.

We believe that the disclosure of Adjusted EBITDA per share provides investors with a better comparison of our period-to-period operating results. We exclude the effects of certain items when we evaluate key measures of our performance internally and in assessing the impact of known trends and uncertainties on our business. We also believe that excluding the effects of these items provides a more comparable view of the underlying dynamics of our operations. We believe such information provides additional meaningful methods of evaluating certain aspects of our operating performance from period to period on a basis that may not be otherwise apparent on a GAAP basis. This supplemental financial information should be considered in addition to, not in lieu of, our condensed consolidated financial statements.

The following table reconciles Adjusted EBITDA to the most directly comparable GAAP measure.


		Three months ended September 30,				Nine months ended September 30,
		2018		2017		2018		2017
Net loss	$	(4,214,202)	$	(1,743,047)	$	(12,349,886)	$	(5,970,837)
Adjustments:
Share-based expense		1,289,408		839,322		4,252,900		2,995,251
Depreciation and amortization		38,732		39,885		109,265		88,788
Impairment of investment		18,319		–		823,819		–
Amortization of debt discount		1,557,760		193,820		3,014,938		750,466
Interest expense		119,097		81,563		214,332		240,380
Loss on investment in Desert Created		62,164		–		182,136		–
Total adjustments		3,085,480		1,154,590		8,597,390		4,074,885
Adjusted EBITDA	$	(1,128,722)	$	(588,457)	$	(3,752,496)	$	(1,895,952)

Per share:
Net loss – Basic and Diluted	$	(0.12)	$	(0.08)	$	(0.35)	$	(0.30)
Adjusted EBITDA – Basic and Diluted		(0.03)		(0.03)		(0.11)		(0.11)

Weighted-average shares outstanding:
Net loss – Basic and Diluted		36,013,107		20,654,502		34,921,388		19,883,329
Adjusted EBITDA – Basic and Diluted		35,316,192		17,128,778		34,292,475		17,175,653

Critical Accounting Policies

Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates used to prepare the condensed financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended December 31, 2017, and Note 1 to the condensed consolidated financial statements in this Form 10-Q.

Off-Balance Sheet Arrangements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal 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 Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2018, the end of the period covered by this report. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses discussed below.

Internal Control over Financial Reporting

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

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

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, 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 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 implemented comprehensive entity-level internal controls;

We have not implemented adequate system controls;

We have implemented, but not tested the efficacy, of manual controls; and

We do not have sufficient segregation of duties.

Assessment of Internal Control over Financial Reporting

Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013). Based on management’s assessment, management concluded that the above material weaknesses have not been remediated and, accordingly, our internal control over financial reporting was not effective as of September 30, 2018.

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 have engaged with a consulting firm to assist us with complying with COSO, with the goal of eliminating our material weaknesses by the end of 2018.

We have performed a risk assessment and mapped our processes to control objectives.

We have preliminarily documented our controls and procedures in accordance with COSO, identified gaps, and are currently identifying and implementing additional controls.

We have evaluated our entity-level controls, identified gaps, and are updating our processes and documentation.

We have implemented controls and procedures to identify, evaluate and record significant transactions, along with the necessary documentation.

We have begun implementing new ERP software, will evaluate efficient changes to system and manual controls, and implement a comprehensive, integrated system of internal controls.

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

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

Changes in Internal Control over Financial Reporting

We made the following changes to our internal control over financial reporting during the nine months ended September 30, 2018:

Implemented comprehensive manual controls over the review and approval of significant transactions, including revenues and expenses. We have not, however, concluded on the efficacy of these controls.

Implemented a checklist to identify all significant transactions during the reporting period, to document our conclusions, and evidence managements’ agreement.

Hired a certified public accountant as our accounting manager.

Implemented an expanded review of our SEC filings and the related supporting schedules.

Added an additional level of review and segregation of duties for account reconciliations and journal entries.

PART II. OTHER INFORMATION

ITEM 1. 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 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-Q, 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.

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 September 30, 2018, we had an accumulated deficit of $47 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 therefore, strict enforcement of the federal laws regarding cannabis 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, 30 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. We would likely be unable to execute our business plan if the federal government were to strictly enforce federal law regarding cannabis.

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 our December 31, 2017, Annual Report on Form 10-K). In addition, the Financial Crimes Enforcement Network (“FinCEN”) provided guidelines on February 14, 2014, regarding how financial institutions can provide services to cannabis-related businesses consistent with their Bank Secrecy Act obligations (see “Business—Government and Industry Regulation—FinCEN” in our December 31, 2017, Annual Report on Form 10-K).

Congress previously enacted an omnibus spending bill that included a provision (the “Rohrabacher-Blumenauer Amendment”) prohibiting the DOJ from using funds to prevent states with medical cannabis laws from implementing such laws. This provision, however, expired on September 30, 2018, and must be renewed by Congress. In August 2016, a Ninth Circuit federal appeals court ruled in United States v. McIntosh that the Rohrabacher-Blumenauer Amendment bars the DOJ from spending funds on the prosecution of conduct that is allowed by state medical cannabis laws, provided that such conduct is in strict compliance with applicable state law. In March 2015, bipartisan legislation titled the Compassionate Access, Research Expansion, and Respect States Act (the “CARERS Act”) was introduced, proposing to allow states to regulate the medical use of cannabis by changing applicable federal law, including by reclassifying cannabis under the Controlled Substances Act to a Schedule II controlled substance and thereby changing the plant from a federally-criminalized substance to one that has recognized medical uses. More recently, the Respect State Marijuana Laws Act of 2017 has been introduced in the U.S. House of Representatives, which proposes to exclude persons who produce, possess, distribute, dispense, administer or deliver marijuana in compliance with state laws from the regulatory controls and administrative, civil and criminal penalties of the CSA.

These developments previously were met with a certain amount of optimism in the cannabis industry, but (i) neither the CARERS Act nor the Respect State Marijuana Laws Act of 2017 have yet been adopted, (ii) the Rohrabacher-Blumenauer Amendment, being an amendment to an appropriations bill that must be renewed annually, has not currently been renewed beyond September 30, 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 strictly 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 may be irreparably harmed by a change in enforcement policies of the federal government depending on the nature of such change. As of the date of this Report, we have provided products and services to state-approved cannabis cultivators and dispensary facilities. As a result, strict enforcement of federal prohibitions regarding cannabis could subject the Company to criminal prosecution.

Additionally, financial transactions involving proceeds generated by cannabis-related conduct can form the basis for prosecution under the federal money laundering statutes, unlicensed money transmitter statutes and the Bank Secrecy Act. Prior to the DOJ's rescission of the “Cole Memo”, supplemental guidance from the DOJ issued under the Obama administration directed federal prosecutors to consider the federal enforcement priorities enumerated in the “Cole Memo” when determining whether to charge institutions or individuals with any of the financial crimes described above based upon cannabis-related activity. It is unclear what impact the recent rescission of the “Cole Memo” will have, but federal prosecutors may increase enforcement activities against institutions or individuals that are conducting financial transactions related to cannabis activities.

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

Federal prosecutors have significant discretion and no assurance can be given that the federal prosecutor in each judicial district where we operate our business will not choose to strictly enforce the federal laws governing cannabis production or distribution. Any change in the federal government's enforcement posture with respect to state-licensed cultivation of medical-use cannabis, including the enforcement postures of individual federal prosecutors in judicial districts where we purchase properties, would result in our inability to execute our business plan, and we would likely suffer significant losses, which would adversely affect the trading price of our securities. Furthermore, following any such change in the federal government's enforcement position, we could be subject to criminal prosecution, which could lead to imprisonment and/or the imposition of penalties, fines, or forfeiture.

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.

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 ability to grow our business depends on state laws pertaining to the cannabis industry.

Continued development of the cannabis industry depends upon continued legislative authorization of cannabis at the state level. The status quo of, or progress in, the cannabis industry is not assured and any number of factors could slow or halt further progress in this area. While there may be ample public support for legislative action permitting the manufacture and use of cannabis, numerous factors impact the legislative process. For example, many states that voted to legalize medical and/or adult-use cannabis have seen significant delays in the drafting and implementation of industry regulations and issuance of licenses. In addition, burdensome regulation at the state level could slow or stop further development of the medical-use cannabis industry, such as limiting the medical conditions for which medical cannabis can be recommended by physicians for treatment, restricting the form in which medical cannabis can be consumed, imposing significant registration requirements on physicians and patients or imposing significant taxes on the growth, processing and/or retail sales of cannabis, which could have the impact of dampening growth of the cannabis industry and making it difficult for cannabis businesses, including our tenants, to operate profitably in those states. Any one of these factors could slow or halt additional legislative authorization of cannabis, which could harm our results of operations, business and prospects.

Applicable state laws may prevent us from maximizing our potential income.

Depending on the laws of each particular state, we may not be able to fully realize our potential to generate profit. For example, some states have residency requirements for those directly involved in the cannabis industry, which may impede our ability to contract with cannabis businesses in those states. Furthermore, cities and counties are being given broad discretion to ban certain cannabis activities. Even if these activities are legal under state law, specific cities and counties may ban them.

Assets used in conjunction with cannabis businesses may be forfeited to the federal government.

Any assets used in conjunction with the violation of federal law are potentially subject to federal forfeiture, even in states where cannabis is legal. In July 2017, the U.S. Department of Justice issued a new policy directive regarding asset forfeiture, referred to as the "equitable sharing program." Under this new policy directive, federal authorities may adopt state and local forfeiture cases and prosecute them at the federal level, allowing for state and local agencies to keep up to 80% of any forfeiture revenue. This policy directive represents a reversal of the U.S. Department of Justice's policy under the Obama administration, and allows for forfeitures to proceed that are not in accord with the limitations imposed by state-specific forfeiture laws. This new policy directive may lead to increased use of asset forfeitures by local, state and federal enforcement agencies. If the federal government decides to initiate forfeiture proceedings against cannabis businesses, our investment in those businesses may be lost.

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

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

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

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

Financial transactions involving proceeds generated by cannabis-related conduct can form the basis for prosecution under the federal money laundering statutes, unlicensed money transmitter statute and the Bank Secrecy Act. Previous guidance issued by the FinCen, a division of the U.S. Department of the Treasury, clarifies how financial institutions can provide services to cannabis-related businesses consistent with their obligations under the Bank Secrecy Act. Prior to the DOJ’s announcement in January 2018 of the rescission of the “Cole Memo” and related memoranda, supplemental guidance from the DOJ directed federal prosecutors to consider the federal enforcement priorities enumerated in the “Cole Memo” when determining whether to charge institutions or individuals with any of the financial crimes described above based upon cannabis-related activity. It is unclear what impact the recent rescission of the “Cole Memo” will have, but federal prosecutors may increase enforcement activities against institutions or individuals that are conducting financial transactions related to cannabis activities. The increased uncertainty surrounding financial transactions related to cannabis activities may also result in financial institutions discontinuing services to the cannabis industry.

Because the use, sale and distribution of cannabis remains illegal under federal law, many banks will not accept deposits from or provide other bank services to businesses involved with cannabis. Consequently, those businesses involved in the cannabis industry continue to encounter difficulty establishing banking relationships, which may increase over time. Our inability to maintain our current bank accounts would make it difficult for us to operate our business, increase our operating costs, and pose additional operational, logistical and security challenges and could result in our inability to implement our business plan. Furthermore, the inability to open bank accounts may make it difficult for our existing and potential customers, clients and tenants to operate and may make it difficult for them to contract with us.

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

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

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

Our future success depends largely upon the experience, skill, and contacts of our key personnel, officers and directors, and the loss of the services of these key personnel, officers or directors, particularly our chief executive officer and chairman of our board of directors, may have a material adverse effect upon our business. Additionally, our revenues are largely driven by several employees with particular expertise in cannabis-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.

Due to our involvement in the cannabis industry, we may have difficulty obtaining various insurance policies that are desired to operate our business, which may expose us to additional risks and financial liabilities.

Insurance that is otherwise readily available, such as workers’ compensation, general liability, and directors’ and officers’ insurance, is more difficult for us to find and more expensive, because of our involvement in the cannabis industry. There are no guarantees that we will be able to find such insurance in the future, or that the cost will be affordable to us. If we are forced to go without such insurance, it may prevent us from entering into certain business sectors, may inhibit our growth, and may expose us to additional risk and financial liabilities.

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 GAAP to determine whether they are impaired. If they are impaired, we would record appropriate impairment charges. It is possible that we may be required to record significant impairment charges in the future and, if we do so, our results of operations could be materially adversely affected.

Changes in accounting standards could affect our reported financial results.

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

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

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

The market price of our common stock has been, and may in the future be volatile. Between January 1, 2015, and September 30, 2018, the closing price of our stock has ranged from a low of $0.37 per share to a high of $11.19 per share. Accordingly, it is difficult to forecast the future performance of our common stock. The market price of our common stock may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:

regulatory developments at the federal, state or local level;

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

changes in general economic conditions;

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

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

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

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

major catastrophic events;

sales of large blocks of our stock; or

changes in senior management or key personnel.

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

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

We do not currently anticipate paying dividends in the foreseeable future. The payment of dividends on our common stock will depend on our earnings and financial condition, as well as on other business and economic factors affecting our business, as our board of directors may consider relevant. Our current intention in the foreseeable future is to apply net earnings, if any, to increasing our capital base and our development and marketing efforts. There can be no assurance that we will ever have sufficient earnings to declare and pay dividends to the holders of our common stock and, in any event, a decision to declare and pay dividends is at the sole discretion of our board of directors. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases compared to the price at which you purchased our common stock, which may never occur.

Were our common stock to be considered penny stock, and therefore become subject to the penny stock rules, U.S. broker-dealers may be discouraged from effecting transactions in shares of our common stock.

Broker-dealers are generally prohibited from effecting transactions in “penny stocks” unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934 (the “Exchange Act”) and the rules promulgated thereunder. These rules apply to the stock of companies whose shares are not traded on a national stock exchange, trade at less than $5.00 per share or who do not meet certain other financial requirements specified by the Securities and Exchange Commission (the “SEC”). Trades in our common

stock are subject to these rules, which include Rule 15g-9 under the Exchange Act, which imposes certain requirements on broker/dealers who sell securities subject to the rule to persons other than established customers and accredited investors. For transactions covered by the rule, brokers/dealers must make a special written determination that the penny stock is a suitable investment for purchasers of the securities and receive the purchaser’s written agreement to the transaction prior to sale.

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

Our securities have in the past constituted “penny stock” within the meaning of the rules. Were our common stock to again be considered penny stock, and therefore become subject to the penny stock rules, the additional sales practice and disclosure requirements imposed upon U.S. broker-dealers may discourage such broker-dealers from effecting transactions in shares of our common stock, which could severely limit the market liquidity of such shares and impede their sale in the secondary market.

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.

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. As of September 30, 2018, management concluded that our disclosure controls and procedures, and our internal control over financial reporting were not effective. 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 September 30, 2018, management had identified the following material weaknesses:

we have not implemented comprehensive entity-level controls;

we have not implemented adequate system controls;

we have implemented, but not tested the efficacy, of manual controls; and

we do 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


Exhibits
10.1 †*	Separation Letter and Release, between the Company and Shelly Whitson
10.2 †*	Amended and Restated 2014 Equity Incentive Plan
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following financial information from the Quarterly Report on Form 10-Q of General Cannabis Corp for the quarter ended September 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows, and (iv) Notes to the Condensed Consolidated Financial Statements.

(*) Filed herewith.

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

SIGNATURES

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


	GENERAL CANNABIS CORP

Date: November 8, 2018		/s/ Robert Frichtel
		Robert Frichtel, Chief Executive Officer Principal Executive Officer

		/s/ Brian Andrews
		Brian Andrews, Chief Financial Officer Principal Financial and Accounting Officer