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TREES Corp (Colorado) - Quarter Report: 2021 March (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

for the quarterly period ended March 31, 2021.

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)

(303) 759-1300

(Registrant’s Telephone Number, Including Area Code)

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

Title of each class

Name of each exchange on which registered

Ticker symbol

N/A

N/A

N/A

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

As of May 11, 2021, there were 62,146,515 issued and outstanding shares of the Company's  common stock.

Table of Contents

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

17

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

22

Item 4.

Controls and Procedures

22

PART II. OTHER INFORMATION

23

Item 1.

Legal Proceedings

23

Item 1A.

Risk Factors

23

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

Item 3.

Defaults Upon Senior Securities

24

Item 4.

Mine Safety Disclosures

24

Item 5.

Other Information

24

Item 6.

Exhibits

25

Signatures

26

2

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2021

(Unaudited)

December 31, 2020

Assets

 

  

 

  

Current assets

 

  

 

  

Cash and cash equivalents

$

840,092

$

750,218

Accounts receivable, net of allowance of $54,000 and $27,000 as of March 31, 2021 and December 31, 2020, respectively

 

299,884

 

327,790

Notes receivable, net of allowance of $41,608 and $125,000 as of March 31, 2021 and December 31, 2020, respectively

260,000

350,000

Inventories, net

419,825

371,799

Prepaid expenses and other current assets

 

376,910

 

744,396

Assets of discontinued operations

 

5,401

 

5,551

Total current assets

 

2,202,112

 

2,549,754

Right-of-use operating lease asset

1,826,523

1,836,455

Property and equipment, net

666,306

455,222

Investment, held for sale

 

 

208,761

Intangible assets, net

912,500

984,375

Goodwill

2,484,200

2,484,200

Total assets

$

8,091,641

$

8,518,767

Liabilities and Stockholders' Equity

 

 

Current liabilities

 

 

  

Accounts payable and accrued expenses

$

733,065

$

1,513,761

Interest payable

 

106,141

 

16,790

Customer deposits

75,906

517,931

Operating lease liability, current

373,581

370,800

Accrued stock payable

 

60,900

 

94,861

Warrant derivative liability

 

236,995

 

561,368

Liabilities of discontinued operations

 

53,128

 

54,641

Total current liabilities

 

1,639,716

 

3,130,152

Operating lease liability, non-current

1,497,316

1,499,280

Long-term notes payable

3,276,285

2,598,965

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

293,750

289,579

Total liabilities

6,707,067

7,517,976

Commitments and contingencies (Note 9)

Stockholders’ equity

 

  

 

  

Preferred stock, no par value; 5,000,000 shares authorized; no shares issued and outstanding as of March 31, 2021 and December 31, 2020

Common stock, $0.001 par value; 200,000,000 and 100,000,000 shares authorized; 62,146,515 shares and 60,813,673 shares issued and outstanding on March 31, 2021 and December 31, 2020, respectively

62,144

60,813

Additional paid-in capital

 

78,632,934

 

75,891,414

Accumulated deficit

 

(77,310,504)

 

(74,951,436)

Total stockholders’ equity

 

1,384,574

 

1,000,791

Total liabilities & stockholders’ equity

$

8,091,641

$

8,518,767

See Notes to condensed consolidated financial statements.

3

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GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three months ended March 31, 

2021

2020

Revenue

Service

$

423,749

$

308,386

Cultivation sales

649,333

Product sales

560,436

1,339,073

Interest

14,472

16,729

Total revenue

1,647,990

1,664,188

Costs and expenses

Cost of sales

1,396,097

1,423,980

Selling, general and administrative

750,577

1,039,934

Stock-based compensation expense

103,932

572,574

Professional fees

262,914

597,036

Depreciation and amortization

121,941

31,913

Total costs and expenses

2,635,461

3,665,437

Operating loss

(987,471)

(2,001,249)

Other expenses (income)

Amortization of debt discount and equity issuance costs

68,330

66,321

Interest expense

103,056

171,048

Loss on extinguishment of debt

1,137,428

Loss (gain) on derivative liability

1,198,744

(1,375,620)

Other expense (income), net

1,467

(139,105)

Total other expenses, net

1,371,597

(139,928)

Net loss from continuing operations before income taxes

(2,359,068)

(1,861,321)

Loss from discontinued operations

(152,858)

Loss from operations before income taxes

(2,359,068)

(2,014,179)

Provision for income taxes

Net loss

$

(2,359,068)

$

(2,014,179)

Per share data - basic and diluted

Net loss from continuing operations per share

$

(0.04)

$

(0.05)

Net loss from discontinued operations per share

$

$

Net loss attributable to common stockholders per share

$

(0.04)

$

(0.05)

Weighted average number of common shares outstanding

61,563,379

39,694,890

See Notes to condensed consolidated financial statements.

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GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Three months ended March 31, 

2021

2020

Cash flows from operating activities

  

 

  

Net loss

$

(2,359,068)

$

(2,014,179)

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

 

  

 

  

Amortization of debt discount and equity issuance costs

 

68,330

 

66,321

Depreciation and amortization

 

121,941

 

34,087

Amortization of loan origination fees

(2,487)

Loss on extinguishment of debt

1,137,428

Non-cash lease expense

103,450

Bad debt expense

(39,463)

51,572

Loss on disposal of property and equipment

2,964

Loss (gain) on warrant derivative liability

 

1,198,744

 

(1,375,620)

Stock-based compensation

 

103,932

 

572,574

Loss on discontinued operations

5,183

Gain on sale of building

(139,105)

Changes in operating assets and liabilities, net of acquisitions

 

 

Accounts receivable

 

157,369

 

204,502

Prepaid expenses and other assets

 

367,486

 

(261,778)

Inventories

 

(48,026)

 

Accounts payable and accrued liabilities

(1,034,883)

238,674

Operating lease liabilities

(92,701)

Net cash used in operating activities:

 

(1,449,925)

 

(1,482,828)

Cash flows from investing activities

 

  

 

  

Purchases of property and equipment

 

(264,114)

 

(3,011)

Proceeds from sale of investment

208,761

Proceeds from sale of building

1,421,134

Net cash (used in) provided by investing activities

 

(55,353)

 

1,418,123

Cash flows from financing activities

 

  

 

Proceeds from sale of common stock and warrants

 

 

90,000

Proceeds from exercise of stock options

135,002

Proceeds from notes payable

1,660,000

1,500,000

Payments on notes payable

(200,000)

(975,000)

Net cash provided by financing activities

 

1,595,002

 

615,000

Net increase in cash and cash equivalents

 

89,724

 

550,295

Cash and cash equivalents, beginning of period

 

755,769

 

224,994

Cash and cash equivalents, end of period

$

845,493

$

775,289

Supplemental schedule of cash flow information

 

  

 

  

Cash paid for interest

$

13,705

$

173,067

Non-cash investing and financing activities

 

  

 

  

Cashless warrant exercises

$

1,557,078

$

Beneficial conversion feature

417,539

233,500

10% Warrants recorded as a debt discount and additional paid-in capital

429,300

Issuance of common stock to a consultant

100,000

15% Warrants recorded as a loss on extinguishment of debt and additional paid-in capital

668,336

Debt converted to equity

250,000

15% Warrants recorded as a debt discount and additional paid-in capital

167,163

Issuance of common stock to an employee

100,000

See Notes to condensed consolidated financial statements.

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GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ (DEFICIT) EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

Common Stock

Additional

Accumulated

Shares

Amount

Paid-in Capital

Deficit

Total

January 1, 2021

    

60,813,673

    

$

60,813

    

$

75,891,414

    

$

(74,951,436)

    

$

1,000,791

Common stock issued to a consultant

112,359

 

112

 

99,888

 

 

100,000

Common stock issued upon exercise of stock options

 

213,860

 

214

 

134,788

 

 

135,002

Warrants issued with 10% Notes

429,300

429,300

Beneficial conversion feature

417,539

417,539

Cashless exercise of warrants

1,006,623

1,005

1,556,073

1,557,078

Stock options granted to employees and consultants

103,932

103,932

Net loss

 

 

 

 

(2,359,068)

 

(2,359,068)

March 31, 2021

 

62,146,515

$

62,144

$

78,632,934

$

(77,310,504)

$

1,384,574

Common Stock

Additional

Accumulated

Shares

Amount

Paid-in Capital

Deficit

Total

January 1, 2020

39,497,480

    

$

39,498

    

$

61,468,034

    

$

(67,271,744)

    

$

(5,764,212)

Warrants issued with the 15% Notes

 

 

835,499

 

 

835,499

Common stock issued upon exercise of warrants

200,000

200

172,041

172,241

Common stock issued to an employee for services

42,735

43

99,957

100,000

Common stock issued upon conversion of debt

541,666

541

249,459

250,000

Expense in relation to beneficial conversion feature

233,500

233,500

Stock options granted to employees and consultants

492,331

492,331

Net loss

 

 

 

(2,014,179)

 

(2,014,179)

March 31, 2020

40,281,881

$

40,282

$

63,550,821

$

(69,285,923)

$

(5,694,820)

See Notes to condensed consolidated financial statements.

6

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GENERAL CANNABIS CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1.  NATURE OF OPERATIONS, HISTORY AND PRESENTATION

Nature of Operations

General Cannabis Corp, a Colorado Corporation (the “Company,” “we,” “us,” or “our,”) (formerly, Advanced Cannabis Solutions, Inc.), was incorporated on June 3, 2013, and provides services and products to the regulated cannabis industry. We currently trade on the OTCQB® Market under the trading symbol CANN. As of March 31, 2021, our operations are segregated into the following two segments:

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. During the three months ended March 31, 2021 and 2020, 69% and 73% of NBC’s revenue was with three customers, respectively.

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 building materials, equipment, consumables and compliance packaging. There are generally multiple suppliers for the products we sell; however, there are a limited number of manufacturers of certain high-tech cultivation equipment. NBC also provides operational support for our internal cultivation.

Cultivation (“Cultivation Segment”)

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

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

Basis of Presentation

The accompanying condensed consolidated financial statements include all accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States of America ("U.S. GAAP") can be condensed or omitted. The condensed consolidated balance sheet for the year ended December 31, 2020 was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto of the Company for the year ended December 31, 2020 which were included in the annual report on Form 10-K filed by the Company on April 1, 2021.

In the opinion of management, these condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and notes thereto of the Company and include all adjustments, consisting only of normal recurring adjustments, considered necessary for the fair presentation of the Company's financial position and operating results. The results for the three months ended March 31, 2021 are not necessarily indicative of the operating results for the year ending December 31, 2021, or any other interim or future periods. Since the date of the Annual Report, there have been no material changes to the Company’s significant accounting policies.

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Reclassifications

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

Use of Estimates

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

Discontinued Operations

On December 26, 2019, the board of directors and management made the strategic decision to discontinue the operations for both the Security Segment and the Consumer Goods Segment. The assets and liabilities classified as discontinued operations for the Security Segment and Consumer Goods Segment are presented separately in the balance sheet and the operating results. The cash flows related to discontinued operations have not been segregated and are included in the consolidated statements of cash flows. As of March 31, 2021, and December 31, 2020, there are $5,401 and $5,551 of cash and cash equivalents included in asset of discontinued operations on the balance sheet.

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

Going Concern

The Company incurred net losses of $2.4 million and $2.0 million in three months ended March 31, 2021 and 2020, respectively, and had an accumulated deficit of $77.3 million as of March 31, 2021. The Company had cash, cash equivalents, and short-term and long-term investments of $0.8 million and $1.0 million as of March 31, 2021 and December 31, 2020, respectively.

The accompanying consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets, and the satisfaction of liabilities and commitments in the ordinary course of business. The Company has incurred recurring losses and negative cash flows from operations since inception and has primarily funded its operations with proceeds from the issuance of convertible debt. The Company expects its operating losses to continue into the foreseeable future as it continues to execute its acquisition and growth strategy.

The Company believes that its cash, cash equivalents, and short-term investments as of March 31, 2021 will be sufficient to fund its operating expenses and capital expenditure requirements for at least twelve months from the date of filing this Quarterly Report on Form 10-Q due to the receipt of an additional $2.3 million of cash in April 2021 from the issuance of a convertible note offering and the pending acquisition of three dispensaries (See Note 13 for further information). The Company may need additional funding to support its planned investing activities. If the Company is unable to obtain additional funding, it would be forced to delay, reduce or eliminate some or all of its acquisition efforts, which could adversely affect its business prospects.

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Summary of Significant Accounting Policies

See our Annual Report on Form 10-K for the year ended December 31, 2020, for discussion of the Company's significant accounting policies.

Recently Issued Accounting Standards

FASB ASU 2020-06 – “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”- In June 2020, the Financial Accounting Standards Board (“FASB”) issued guidance which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Accounting Standards Updates (“ASU”) also removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and simplifies the diluted earnings per share calculation in certain areas. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2021, although early adoption is permitted. We are in the process of evaluating the impact of this new guidance on our consolidated financial statements.

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

NOTE 2. BUSINESS ACQUISITION

On May 13, 2020, we received approval of the transaction and transfer of the Dalton Adventures, LLC (“Seller”) license from the Colorado Marijuana Enforcement Division. On May 25, 2020, we finalized the acquisition, pursuant to which we acquired the assets of the Seller that constitute the business of SevenFive Farm, a cultivation facility in Boulder, Colorado, whereby we acquired fixed assets, inventory, a cultivation license and the tradename. The purchase price paid by the Company to the Seller was 8,859,117 shares of common stock. The shares issued have not been registered and are restricted shares under applicable U.S. federal and state securities laws and their resale may be made only pursuant to registration under the Securities Act or an available exemption from registration. The closing price of General Cannabis Corp’s common stock on May 13, 2020, the date of license transfer, was $0.38 per share, as such, fair value of consideration is $3,808,951. The purchase agreement had a provision whereby the Seller may require us to repurchase in cash 25% of the shares issued to the owner of Dalton Adventures, LLC at a repurchase price equal to the same volume weighted average price used to determine the number of shares issued to the owner of Dalton Adventures, LLC at closing. As a result, we recorded a liability using Black-Scholes in the amount of $442,487 and reduced additional paid-in capital. In December 2020, the Seller waived his right to this provision in the purchase agreement and no longer has the possibility of the buyback of the shares. Therefore, no stock put liability is recorded as of December 31, 2020 and the liability was reversed into equity. As March 31, 2021, we have completed the allocation of the purchase price. As of March 31, 2021, the condensed consolidated balance sheet includes an allocation of fixed assets, inventory, intangible assets and goodwill.

The purchase price allocation is as follows:

Inventories

$

185,261

Fixed assets

    

89,490

Customer relationships

 

50,000

Tradename

1,000,000

Goodwill

 

2,484,200

$

3,808,951

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The accompanying condensed consolidated financial statements include the results of SevenFive from the date of acquisition for financial reporting purposes, May 13, 2020. The pro forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2020, are as follows:

Three months ended

March 31, 

2021

2020

Total revenues

$

1,647,990

$

2,312,231

Net loss attributable to common stockholders

$

(2,359,068)

$

(1,814,318)

Net loss per common share:

$

(0.04)

$

(0.04)

Weighted average number of basic and diluted common shares outstanding

61,563,379

48,554,007

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

NOTE 3. CUSTOMER DEPOSITS

Our deferred revenue and customer deposit liability had the following activity:

    

Amount

Balance as of December 31, 2020

$

517,931

Additional deposits received

321,772

Less: Deposits recognized as revenue

(763,797)

Balance as of March 31, 2021

$

75,906

NOTE 4. INVENTORIES, NET

Our inventories consisted of the following:

March 31, 

December 31, 

    

2021

    

2020

Work-in-progress and finished goods

419,825

371,799

Less: Inventory reserves

Total inventories

$

419,825

$

371,799

NOTE 5. LEASES

On May 13, 2020, we entered into a commercial real estate lease with a related party (see Note 11) for 17,000 square feet of greenhouse space in Boulder, CO, with an initial term of five years and, at our option, two additional terms of five years each. Rent is $30,900 per month with 1.5% annual escalations. We also pay our portion of real estate taxes. In December 2020, we amended the lease to include a 3% rent escalation in 2021 and 2022. No other changes to the lease were made. We accounted for the amendment as a lease modification and remeasured the lease with an incremental borrowing rate of 20% which resulted in an increase of $246,250 to the right-of-use operating lease asset and lease liability from the initial lease valued on May 13, 2020 using an incremental borrowing rate of 22.8%. We determined the present value of the future lease payments using a discount rate of 20% over a 15 year term, our incremental borrowing rate based on outstanding debt, resulting in a right-of-use asset and lease liability of $1,877,423 which are being applied ratably over the term of the lease. As of March 31, 2021, the balance of the right-of-use asset and lease liability was $1,826,523 and $1,870,897, respectively. Future remaining minimum lease payments were as follows:

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Year ending December 31, 

    

Amount

2021 (remaining nine months)

$

278,100

2022

 

381,924

2023

 

387,653

2024

 

393,468

2025

 

399,370

Thereafter

 

4,048,779

Total

 

5,889,294

Less: Present value adjustment

 

(4,018,397)

Operating lease liability

$

1,870,897

NOTE 6. ACCRUED STOCK PAYABLE

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

Number of

    

Amount

    

Shares

Balance as of December 31, 2020

$

94,861

359,415

Stock issued

(33,961)

(259,415)

Balance as of March 31, 2021

$

60,900

100,000

In December 2020, several warrant holders exercised their 2020 A warrants through cashless exercises and we issued 282,213 shares of common stock. 259,415 of those shares issued had not been transferred to the warrant holders as of December 31, 2020 and were included in accrued stock. During January 2021 all shares were issued. See Note 7 for further details of the cashless exercises.

NOTE 7.   NOTES PAYABLE

Our notes payable consisted of the following:

    

March 31, 

    

December 31, 

2021

2020

2020 10% Notes

$

4,260,000

$

2,600,000

2019 15% Notes

200,000

Related party note payable

340,000

340,000

Unamortized debt discount

(1,029,965)

(251,456)

3,570,035

2,888,544

Less: Current portion

Long-term portion

$

3,570,035

$

2,888,544

10% Notes

In December 2020, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement’) with certain accredited investors (the “10% Investors”), pursuant to which we issued and sold senior convertible promissory notes (the “10% Notes”) with an aggregate principal amount of $2,940,000 in exchange for payment to us by certain 10% Investors of an aggregate amount of $1,940,000 in cash, as well as cancellation of outstanding indebtedness of the 15% Notes (defined below) in the aggregate amount of $1,000,000. In connection with the issuance of the 10% Notes, the holders of the 10% Notes received warrants (the “10% Warrants”) to purchase shares of our common stock equal to 20% coverage of the aggregate principal amount at $0.56 per share. In the aggregate, this equals 1,050,011 shares of our common stock. The 10% Notes bear interest at an annual rate of 10% and will mature on December 23, 2023. The 10% Investors have the option at any time to convert up to 50% of the outstanding unpaid principal and accrued interest of the 10% Notes into Common Stock at a variable price of 80% of the market price but no less than $0.65 per share and no more than $1.00 per share. The 10% Warrants are exercisable at an exercise price of $0.56 per warrant.

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The relative fair value of the new funding on the 10% Warrants was recorded as a debt discount and additional paid-in capital of $254,400.  The relative fair value of the cancellation of the outstanding indebtedness was recorded as an extinguishment of debt and additional paid-in capital of $131,000.  For the three months ended March 31, 2021 and 2020, amortization of debt discount expense was $21,393 and $0, respectively, from the 10% Notes issued in December 2020.  We determined there was no beneficial conversion feature on the 10% Notes issued in December 2020. The 10% Notes are treated as conventional debt.

For purposes of determining the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the 10% Warrants as of December 23, 2020, were:

Current stock price

    

$

0.53

Exercise price

$

0.56

Risk-free interest rate

0.38 %

Expected dividend yield

Expected term (in years)

5.0

Expected volatility

115%

On February 8, 2021, we entered into a Securities Purchase Agreement with an accredited a 10% Investor, pursuant to which we issued and sold 10% Notes with an aggregate principal amount of $1,660,000 to such 10 % Investor.  The 10% Notes are part of an over-allotment option exercised by us in connection with the convertible note offering consummated on December 23, 2020, as discussed above. In connection with the issuance of the 10% Notes, the holder received warrants to purchase shares of our common stock equal to 20% coverage of the aggregate principal amount at $0.56 per share. In the aggregate, this equals 592,858 shares of our common stock with a par value $0.001 per share. The 10% Notes bear interest at an annual rate of 10% and will mature on February 8, 2024.  The 10% Investor has the option to convert up to 50% of the outstanding unpaid principal and accrued interest of the 10% Notes into Common Stock at a variable price of 80% of the market price but no less than $0.65 per share and no more than $1.00 per share. The 10% Warrants are exercisable at an exercise price of $0.56 per warrant.

The relative fair value of the new funding on the 10% Warrants was recorded as a debt discount and additional paid-in capital of $429,300. We determined that this 10% Note had a beneficial conversion feature and is calculated at its intrinsic value (that is, the difference between the effective conversion price of $0.66 at the date of the note issuance and the fair value of the common stock into which the debt is convertible at the commitment date, per share being $0.90, multiplied by the number of shares into which the debt is convertible).  The valuation of the beneficial conversion feature recorded cannot be greater than the face value of the note issued.  We recorded $417,539 as additional paid in capital and a debt discount and included in our consolidated statement of operations. For the three months ended March 31, 2021 and 2020, amortization of debt discount expense was $28,531 and $0, respectively, from the 10% Notes issued in February 2021. The 10% Notes are treated as conventional debt.

For purposes of determining the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the 10% Warrants as of February 8, 2021, were:

Current stock price

    

$

1.12

Exercise price

$

0.56

Risk-free interest rate

0.48 %

Expected dividend yield

Expected term (in years)

5.0

Expected volatility

118%

15% Notes

In December 2019, we completed a private placement with certain accredited investors pursuant to an unsecured promissory note (the “15% Notes”) with an aggregate principal amount of $300,000.  In February and March 2020, we completed private placements with certain accredited investors, including some holders of our 2019 12% Notes (as defined below), of 15% Notes with an aggregate principal amount of $2,031,000 in exchange for $525,000 of new

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funding and the cancellation of $1,506,000 aggregate principal amount of the 2019 12% Notes.  The 15% Notes have an annual interest rate of 15% and matured on January 31, 2021. $1.0 million of the 15% Notes were exchanged for the 10% Notes (see above), $2.1 million was paid in full in December 2020 and the remaining $200,000 was paid in full in the three months ended March 31, 2021. The 15% Notes provide that they shall be repaid in full out of the proceeds of any new debt or equity capital raise with net proceeds of more than $5,000,000.  In connection with the issuance of the 15% Notes, each holder of 15% Notes received three warrants (i.e., a 2020 A Warrant, a 2020 B Warrant and a 2020 C Warrant) to acquire shares of common stock at an exercise price equal to $0.45 per share, with the number of shares subject to each warrant equal to one share for each $1.00 of principal amount of 15% Notes issued to the noteholder.  The 2020 A Warrants had an expiration date of December 31, 2020, the 2020 B Warrants have an expiration date of December 31, 2021, and the 2020 C Warrants have an expiration date of December 31, 2022 (collectively, the “15% Warrants”).  By way of example, if an investor was issued a 15% Note with a principal amount of $250,000, such noteholder would receive a 2020 A Warrant to purchase 250,000 shares of common stock, a 2020 B Warrant to purchase 250,000 shares of common stock and a 2020 C Warrant to purchase 250,000 shares of common stock.  Accordingly, as of March 31, 2020, the Company has issued 15% Warrants to purchase a total of 6,993,000 shares of common stock to the holders of 15% Notes. The exercise price of these warrants is subject to adjustment as a result of certain future equity issuances of securities by the Company at a price below the then-effective exercise price of the 15% Warrants. As a result of such subsequent issuances of securities by the Company during the second quarter of 2020, the exercise price of the 15% Warrants had decreased to $0.3983 per share. In December 2020, the warrant holders exercised 1,131,000 of the 2020 A Warrants into 282,813 shares of our common stock through cashless exercise.

We received $300,000 of cash in December 2019 and an additional $525,000 of cash January 2020 through March 2020 for issuing the 15% Notes.  The relative fair value of the new funding on the 15% Warrants was recorded as a debt discount and additional paid-in capital of $333,056.  The relative fair value of the cancellation of the outstanding indebtedness was recorded as an extinguishment of debt and additional paid-in capital of $668,335.  For the three months ended March 31, 2021 and 2020, amortization of debt discount expense was $0 and $69,159, respectively, from the 15% Notes. The 15% 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 15% Warrants as of March 2020, were:

Current stock price

    

$

0.45 - 0.67

Exercise price

$

0.45

Risk-free interest rate

0.68 - 1.62 %

Expected dividend yield

Expected term (in years)

0.83 - 3.06

Expected volatility

112 - 119 %

NOTE 8. WARRANT DERIVATIVE LIABILITY

On May 31, 2019 we received gross proceeds of $3 million by issuing three million shares of our common stock and three million warrants (“2019 Warrants”) to purchase shares of our common stock (“2019 Units”) in a registered direct offering for $1.00 per 2019 Unit (collectively defined as the “2019 Capital Raise”). The 2019 Warrants, issued with the 2019 Capital Raise, are accounted for as a derivative liability. The 2019 Warrant agreements contain a cash settlement provision whereby the holders could settle the warrants for cash based on the Black-Scholes value, upon certain fundamental transactions, as defined in the 2019 Warrant agreement, that are considered outside of the control of management, such as a change of control. The original exercise price of the 2019 Warrants was $1.30 per share. The 2019 Warrants contain certain anti-dilution adjustment provisions with respect to subsequent issuances of securities by the Company at a price below the exercise price of such warrants. As a result of such subsequent issuances of securities by the Company during the fourth quarter 2019, the exercise price of the 2019 Warrants decreased to $0.45 per share and the number of shares subject to the 2019 Warrants increased to 8,666,666 shares of common stock as of December 31, 2019. In May 2020, we issued securities at a price lower than the $0.45 per share above. As a result, the exercise price of the 2019 Warrants decreased to $0.40 per share and the number of shares subject to the 2019 Warrants increased to 9,591,614 shares of common stock.

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During the three months ended March 31, 2021 the warrant holders exercised 1,323,000 warrants into 747,208 shares of our common stock through cashless exercise. We booked an adjustment to the derivative liability of $1,523,117 as a result. During the three months ended March 31, 2021 and 2020, we recognized a $1,198,744 loss on the fair value of derivative liability and $1,375,620 gain on the fair value of derivative liability, respectively, in the condensed consolidated statements of operations. As of March 31, 2021, there were 322,807 of the 2019 Warrants outstanding.

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

    

May 31,

    

December 31,

March 31,

 

    

2019

    

2020

2021

 

Number of shares underlying the warrants

 

3,000,000

 

1,645,807

322,807

Fair market value of stock

$

0.95

$

0.48

$

0.92

Exercise price

$

1.30

$

0.40

$

0.40

Volatility

 

133

%  

108

%  

110

%

Risk-free interest rate

 

1.93

%  

0.36

%  

0.92

%

Warrant life (years)

 

5.00

3.41

 

3.16

The following table sets forth a summary of the changes in the fair value of the warrant derivative liability, our Level 3 financial liabilities that are measured at fair value on a recurring basis:

Three months ended March 31, 

    

2021

    

2020

Beginning balance

$

561,368

$

4,620,593

Warrant exercise

(1,539,981)

(82,241)

Change in fair value of warrants derivative liability

1,198,744

(1,375,619)

Ending balance

$

220,131

$

3,162,733

NOTE 9.  COMMITMENTS AND CONTINGENCIES

In June 2020, Michael Feinsod resigned as our Executive Chairman, claiming that his resignation was for "Good Reason" under the terms of his employment agreement. If it is ultimately determined that his resignation was, in fact, for "Good Reason", rather than a voluntary act absent "Good Reason", it could enable certain potential claims for benefits under his employment agreement, including potential claims for severance, for the vesting of his unvested options and/or for the extension of the term within which he can exercise his options in the future. Having reviewed the matter, however, we do not believe that Mr. Feinsod's resignation was for "Good Reason". Accordingly, we believe that Mr. Feinsod's resignation was voluntary, and that any such potential claims, if asserted, would be without foundation. Although the outcome of legal proceedings is subject to uncertainty, the Company will vigorously defend any future claims made by Mr. Feinsod alleging a "Good Reason" resignation.

From time to time, the Company is a party to various litigation matters incidental to the conduct of its business. The Company is not presently a party to any legal proceedings that would have a material adverse effect on its business, operating results, financial condition or cash flows.

NOTE 10.  STOCKHOLDERS’ EQUITY

2020 Capital Raise

On May 29, 2020, we entered into a subscription agreement, as amended with Hershey Strategic Capital, LP and Shore Ventures III, LP with respect to the sale of shares of common stock and warrants to purchase common stock (collectively, the “securities”). The sales of the securities to the Hershey Investor consists of a minimum of $2,185,000 of securities and a maximum of $3,000,000 of securities, as described further below. The purchase price of the securities at each closing is as follows: (i) the purchase price of each share of common stock is $0.3983 per share, and (ii) for each one dollar invested by the Hershey Investor, the Hershey Investor receives a warrant to purchase a number of shares of common stock equal to 75% of the number of shares of common stock purchased by the Hershey Investor at an exercise price per share equal to $0.5565. The warrants have a term of five years. During the year ended

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December 31, 2020, we sold $3,000,000 of securities to the Hershey Investor, representing 7,532,010 shares of common stock and warrants to purchase 5,649,007 shares of common stock at an exercise price of $0.5565 per share. The warrants were recorded as equity and equity issuance costs in the amount of $2,173,074. Notwithstanding the foregoing, none of the Hershey warrants are exercisable if after giving effect to such exercise the Hershey Investor (together with affiliates) would own in excess of 9.99% (“Beneficial Ownership Limitation”) of the shares of issued and outstanding Common Stock of the Company. The Beneficial Ownership Limitation may be increased by the Hershey Investor upon not less than 61 days’ prior notice.

The Hershey Subscription Agreement also provides the Hershey Investor with certain participation rights in future financings of the Company until the one-year anniversary of the second closing. The Hershey Subscription Agreement further provides that the Company shall, during a negotiation period ending October 4, 2020, endeavor to cause the existing holders of the promissory notes of the Company having an outstanding balance in the amount of approximately $2,331,000 as of June 1, 2020 that are due on or about January 31, 2021, to extend the maturity date of such notes to a date that is not earlier than January 31, 2022. As of October 4, 2020, $600,000 of the $2,331,000 outstanding notes had extended the maturity date. If, at the end of the negotiation period per the contract, all of the existing notes have not been amended to extend the maturity dates thereof, then the Company shall issue to the Hershey Investor additional warrants to purchase shares of common stock. Any such additional warrants will be for a number of shares of common stock based on the dollar amount of the outstanding balance of the existing notes that were not extended, with each one dollar of existing notes that were not extended representing one share subject to such additional warrant. The exercise price of any such additional warrants will be equal to 100% of the 30-day volume weighted average price of the Company’s common stock on the last day of the negotiation period, provided that such exercise price shall not be lower than $0.45 per share nor higher than $0.56 per share. The Hershey Investor extended the negotiation period to December 11, 2020. As of December 11, 2020, no existing holders had extended their promissory notes, therefore, we issued the Hershey Investor additional warrants in accordance with the agreement. On December 14, 2020 we issued an additional 1,631,000 warrants to purchase common stock at an exercise price of $0.4917 to the Hershey Investor. These warrants expire on December 11, 2025. The warrants were recorded as a deemed dividend in the amount of $732,494.

Stock-based compensation

We use the fair value method to account for stock-based compensation. We recorded $103,932 and $572,574 in compensation expense for the three months ended March 31, 2021 and 2020, respectively. This includes expense related to options issued in prior years for which the requisite service period for those options includes the current period as well as options issued in the current period. The fair value of these instruments was calculated using the Black-Scholes option pricing method.

During the quarter ended March 31, 2021 we granted options to purchase 895,500 common shares to employees and directors. The options expire five years from the date of grant and vest over a period of one year. Fair value of the awards at the date of grants totaled $561,237.

The following summarizes Employee Awards activity:

Weighted-  

Weighted- 

Average

Average

Remaining

Number of

Exercise Price

Contractual 

Aggregate 

    

 Shares

    

per Share

    

Term (in years)

    

Intrinsic Value

Outstanding as of December 31, 2020

7,266,420

$

1.03

5.5

$

167,000

Granted

895,500

0.94

  

  

Exercised

 

(213,860)

 

0.63

 

  

 

  

Forfeited or expired

 

(31,000)

 

3.95

 

  

 

  

Outstanding as of March 31, 2021

 

7,917,060

 

$

1.02

 

5.3

$

1,614,000

Exercisable as of March 31, 2021

 

5,340,940

$

1.20

 

5.6

$

868,000

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As of March 31, 2021, there was approximately $803,599 of total unrecognized compensation expense related to unvested employee awards, which is expected to be recognized over a weighted-average period of thirteen months.

NOTE 11. RELATED PARTY TRANSACTIONS

On June 3, 2020, the Company entered into a consulting agreement with Adam Hershey, Interim Chief Executive Officer, board member and investor, pursuant to which he would act as a strategic consultant for the Company, including providing assistance with the sourcing and evaluation of merger and acquisition deals, strategic capital and strategic partnerships or joint ventures. Mr. Hershey is paid an initial monthly rate of $8,333 for the services, subject to certain adjustments. We paid $24,999 and nil for the three months ended March 31, 2021 and 2020, respectively.

We currently have a lease agreement with Dalton Adventures, LLC in which we rent 17,000 square feet of greenhouse space in Boulder, Colorado for $34,636 a month, of which $30,900 is base rent and $3,736 is property taxes. The owner of Dalton Adventures, LLC is a principal shareholder and board member of the Company. We incurred approximately $115,000 and nil for the three months ended March 31, 2021 and 2020, respectively.

On December 23, 2020, all five board members of the Company purchased senior convertible promissory notes from the Company for an aggregate amount of $340,000. These notes are included in the 10% Notes discussed in Note 7. Accrued interest earned and owed to the board members was $9,500 as of March 31, 2021.

NOTE 12.  SEGMENT INFORMATION

Our operations are organized into two segments: Operations Consulting and Products and Cultivation. All revenue originates, and all assets are located in the United States. Segment information is presented in accordance with ASC 280, "Segments Reporting." This standard is based on a management approach that requires segmentation based upon the Company’s internal organization and disclosure of revenue and certain expenses based upon internal accounting methods. The Company’s financial reporting systems present various data for management to run the business, including internal profit and loss statements prepared on a basis not consistent with GAAP. The following information is presented net of discontinued operations.

Three months ended March 31

2021

    

Operations

    

Cultivation

    

Eliminations

Total

Revenues

$

1,296,229

$

649,333

$

(312,044)

$

1,633,518

Costs and expenses

(1,266,727)

(797,708)

279,866

(1,784,569)

Segment operating income (loss)

$

29,502

$

(148,375)

$

(32,178)

(151,051)

Corporate expenses

(2,208,017)

Net loss from continuing operations

 

$

(2,359,068)

2020

    

Operations

    

Cultivation

    

Total

Revenues

$

1,647,459

$

$

1,647,459

Costs and expenses

(1,616,487)

(1,616,487)

Segment operating income

$

30,972

$

30,972

Corporate expenses

 

  

 

  

(1,892,293)

Net loss from continuing operations

 

$

(1,861,321)

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March 31, 

December 31,

Total assets

    

2021

    

2020

Operations

$

462,526

$

750,156

Cultivation

6,452,010

6,208,223

Corporate

 

1,209,283

 

1,567,021

Total assets - segments

8,123,819

8,525,400

Intercompany eliminations

(32,178)

(12,183)

Total assets - consolidated

$

8,091,641

$

8,513,217

NOTE 13.  SUBSEQUENT EVENTS

On April 20, 2021, the Company completed an offering with accredited investors and issued and sold convertible notes with an aggregate principal amount of $2.3 million.  The notes are part of an over-allotment approved by the existing noteholders in connection with the original convertible note offering (and previous over-allotment) of $4.6 million consummated on December 23, 2020 and February 8, 2021.

On April 18, 2021, the Company, entered into an Agreement and Plan of Reorganization and Liquidation among the Company, Trees Acquisition Corp., a newly-formed indirect wholly-owned subsidiary of the Company (“Trees Acquisition”), and TDM, LLC and Station 2, LLC (“Colorado Sellers”), as well as a separate Agreement and Plan of Reorganization and Liquidation among the Company, Trees Acquisition, and Trees Waterfront, LLC, Trees MLK Inc. and Trees Portland, LLC (“Oregon Sellers” and collectively with the Colorado Sellers, the “Sellers”) (collectively, the “Plans”). The transaction will provide the Company with a foundational retail platform from which to expand growth. Pursuant to the Plans, the Company has agreed to purchase substantially all of the assets of each of the Colorado Sellers and Oregon Sellers (“Assets”). The Assets to be transferred to the Company by each of the Colorado Sellers and Oregon Sellers principally consist of the cannabis business licenses, inventory and intellectual property related to the Sellers’ cannabis dispensaries located in Englewood and Denver, Colorado and Portland, Oregon together with substantially all related assets. The Company is not assuming any liabilities of any of the Sellers. The Plan provides that the transaction qualifies as a tax-free reorganization pursuant to Section 368 of the Internal Revenue Code. The purchase price for the transaction consists of a cash payment of $2 million at closing and an additional $3 million in cash payable in equal monthly amounts of $125,000 for a period of 24 months from the closing. In addition, at the closing, the Company will issue to the Sellers 38,745,193 shares of the Company’s common stock. Closing of the transaction is subject to standard closing conditions, including regulatory approval of the transfer of the cannabis licenses by the applicable Colorado and Oregon cannabis regulatory authorities.

On May 6, 2021, Steven Gutterman resigned as the Company’s Chief Executive Officer. Mr. Gutterman also resigned from the Company’s Board of Directors on the same date. Mr. Gutterman has indicated that he has no disagreement with the Company regarding any matter relating to the Company’s operations, policies or practices.

Effective May 7, 2021, Adam Hershey was appointed the Company’s Interim Chief Executive Officer. Mr. Hershey, a current Board member, will continue to serve on the Board. Mr. Hershey’s compensation pursuant to his Consulting Agreement dated June 3, 2020 remains unchanged. Mr. Hershey will not receive any additional compensation in connection with his new role as Interim Chief Executive Officer.

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 appearing in our Annual Report on Form 10-K as of and for the year ended December 31, 2020, as amended. The results of operations for an interim period may not give a true indication of results for future interim periods or for the year.

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Cautionary Statement Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q, including the financial statements and related notes, contains 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,” or “our,” and the “Company,” they refer to General Cannabis Corp (formerly, “Advanced Cannabis Solutions, Inc.”).

Our Products, Services and Customers

Through our two reporting segments Operations Consulting and Products, and Cultivation, we provide products and services to the regulated cannabis industry and non-cannabis customers, which include the following:

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. During the three months ended March 31, 2021 and 2020, 69% and 73% of NBC’s revenue was with three customers, respectively.

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 building materials, equipment, consumables and compliance packaging. There are generally multiple suppliers for the products we sell; however, there are a limited number of manufacturers of certain high-tech cultivation equipment.

Cultivation (“Cultivation Segment”)

Through our acquisition of SevenFive Farm (“SevenFive”), we operate a 17,000 square foot licensed light deprivation greenhouse cultivation facility. We believe our production capability is sufficient to meet the diverse needs of our recreational consumers in Colorado, from cost-effective, high-yield inputs to sophisticated and dried cannabis flower.

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

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Results of Operations

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

Three months ended March 31, 

Percent

 

2021

2020

Change

Change

 

Revenues

    

$

1,647,990

    

$

1,664,188

    

$

(16,198)

    

(1)

%

Costs and expenses

 

(2,635,461)

 

(3,665,437)

 

1,029,976

(28)

%

Other expense (income)

 

(1,371,597)

 

139,928

 

(1,511,525)

(1,080)

%

Net loss from continuing operations

 

(2,359,068)

 

(1,861,321)

 

(497,747)

27

%

Loss from discontinued operations

 

 

(152,858)

 

152,858

(100)

%

Net loss

$

(2,359,068)

$

(2,014,179)

$

(344,889)

17

%

Revenues

Revenue decreased for our Operations Consulting Segment. The addition of our Cultivation Segment contributed to an increase in sales. See Segment discussions below for further details.

Costs and expenses

Three months ended March 31, 

Percent

 

    

2021

    

2020

    

Change

    

Change

 

Cost of revenues

$

1,396,097

$

1,423,980

$

(27,883)

(2)

%

Selling, general and administrative

 

750,577

 

1,039,934

 

(289,357)

 

(28)

%

Stock-based compensation

 

103,932

 

572,574

 

(468,642)

 

(82)

%

Professional fees

 

262,914

 

597,036

 

(334,122)

 

(56)

%

Depreciation and amortization

 

121,941

 

31,913

 

90,028

 

282

%

$

2,635,461

$

3,665,437

$

(1,029,976)

 

(28)

%

Cost of sales fluctuates with the changes in revenue and product sales in our Operations Consulting Segment. Product sales has a smaller margin than our service revenues. Cost of sales also includes costs associated with cultivation sales, which fluctuates with the changes in cultivation revenues. See Segment discussions below for further details.

Selling, general and administrative expense decreased for the three months ended March 31, 2021 as compared to March 31, 2020 due to a reduction in employees throughout 2020, a reduction in legal fees in the first quarter of 2021 and a concerted effort by management to reduce expenses.

Stock-based compensation expense included the following:

Three months ended March 31, 

Percent

 

2021

2020

Change

Change

 

Employee awards

    

$

103,932

    

$

501,559

    

$

(397,627)

    

(79)

%

Consulting awards

 

 

71,015

 

(71,015)

 

(100)

%

$

103,932

$

572,574

$

(468,642)

 

(82)

%

Employee awards are issued under our 2020 Omnibus Incentive Plan, which was approved by shareholders on November 23, 2020 and 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. The decrease in expense for the three months ended March 31, 2021 as compared to March 31, 2020 is due to the reduction in workforce and the decrease in the amount of options we issue on a quarterly basis. We decreased our employee count by over 50% resulting in a sharp decrease in employee award expense.

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Professional fees consist primarily of accounting and legal expenses and decreased for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 due to the hiring of internal counsel and switching outside counsel during the third quarter of 2020 to be more cost effective.

Other Expense

Three months ended March 31, 

Percent

 

2021

2020

Change

Change

 

Amortization of debt discount

    

$

68,330

    

$

66,321

    

$

2,009

    

3

%

Interest expense

 

103,056

 

171,048

 

(67,992)

 

(40)

%

Loss on extinguishment of debt

 

 

1,137,428

 

(1,137,428)

 

(100)

%

Loss (gain) on derivative liability

 

1,198,744

 

(1,375,620)

 

2,574,364

 

(187)

%

Other expense (income), net

 

1,467

 

(139,105)

 

140,572

 

(100)

%

$

1,371,597

$

(139,928)

$

1,511,525

 

(1,080)

%

Amortization of debt discount stayed consistent in 2021 compared to 2020. Interest expense decreased in 2021 due to the new debt entered in the fourth quarter of 2020 and the payoff of the old debt. The new debt has an interest rate of 10% compared to the prior notes in which the interest rate was 15%. The gain on warrant derivative liability reflects the change in the fair value of the 2019 Warrants. The loss on extinguishment of debt is due to the conversion and extension of the SBI debt, and the exchange of the 12% Notes into the 15% Notes that occurred during the first quarter of 2020.  The other expense (income) in 2020 relates to the gain on the sale of the building we recognized as a result of the sale of our corporate office building in March 2020.

Operations Consulting and Products

Three months ended March 31, 

Percent

 

2021

2020

Change

Change

 

Revenues

    

$

1,296,229

    

$

1,647,459

    

$

(351,230)

    

(21)

%

Costs and expenses

 

(1,266,727)

 

(1,616,487)

 

349,760

 

(22)

%

Segment operating income

$

29,502

$

30,972

$

(1,470)

 

(5)

%

The decrease in NBC revenues for the three months ended March 31, 2021 as compared to March 31, 2020 is due to a decrease in both service and product revenues. Ongoing management revenue remained consistent with prior year. The decrease in expenses is in direct relation to the decrease in revenues. The segment operating income remained consistent with prior year due to the decrease in product sales which has a lower margin.

Cultivation

Three months ended March 31, 

Percent

 

    

2020

    

2019

    

Change

    

Change

 

Revenues

$

649,333

$

$

649,333

 

100

%

Costs and expenses

 

(797,708)

 

 

(797,708)

 

100

%

$

(148,375)

$

$

(148,375)

 

100

%

This is a new segment as of the second quarter of 2020; therefore, all amounts are an increase from the prior quarter.

Liquidity

Sources of liquidity

Our sources of liquidity include cash generated from operations, the cash exercise of common stock options and warrants, debt, and the issuance of common stock or other equity-based instruments. We anticipate our significant uses of resources will include funding operations and developing infrastructure.

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In  April 2021, we received $2,300,000 in cash in a private placement with certain accredited investors pursuant to the 10% Notes to be used for the acquisition of dispensaries (See Note 13 of the accompanying condensed consolidated financial statements).

In  February 2021, we received $1,660,000 in cash in a private placement with certain accredited investors pursuant to the 10% Notes.

Sources and uses of cash

We had cash of $840,092 and $750,218 as of March 31, 2021 and December 31, 2020, respectively. Our cash flows from operating, investing and financing activities were as follows:

Three months ended March 31, 

2021

2020

Net cash used in operating activities

    

$

(1,449,925)

    

$

(1,482,828)

Net cash (used in) provided by investing activities

 

(55,353)

 

1,418,123

Net cash provided by financing activities

 

1,595,002

 

615,000

Net cash used in operating activities decreased slightly in 2021 due to the acquisition of SevenFive Farm which provides positive operating cash flows.

Net cash (used in) provided by investing activities for the three months ended March 31, 2021 decreased from March 31, 2020 due to the sale of the building in the first quarter of 2020. Net cash used in investing activities for the three months ended March 31, 2021 consisted of purchase of property and equipment for SevenFive Farms, offset by the sale of our investment during the first quarter.

Net cash used in financing activities for the three months ended March 31, 2021 related to the payment on notes payable of $200,000, proceeds from notes payable of $1,660,000, and proceeds from the exercise of stock options of $135,002.

Capital Resources

We had no material commitments for capital expenditures as of March 31, 2021. Part of our growth strategy, however, is to acquire operating businesses. We expect to fund such activity through cash on hand, the issuance of debt, common stock, warrants for our common stock or a combination thereof.

Non-GAAP Financial Measures

Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss) attributable to common stockholders calculated in accordance with GAAP, adjusted for the impact of stock-based compensation expense, acquisition related expenses, non-recurring professional fees in relation to litigation and other non-recurring expenses, depreciation and amortization, amortization of debt discounts and equity issuance costs, loss on extinguishment of debt, interest expense, income taxes and certain other non-cash items. Below we have provided a reconciliation of Adjusted EBITDA per share to the most directly comparable GAAP measure, which is net income (loss) per share.

We believe that the disclosure of Adjusted EBITDA provides investors with a better comparison of our period-to-period operating results. We exclude the effects of certain items when we evaluate key measures of our performance internally and in assessing the impact of known trends and uncertainties on our business. We also believe that excluding the effects of these items provides a more comparable view of the underlying dynamics of our operations. We believe such information provides additional meaningful methods of evaluating certain aspects of our operating performance from 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.

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The following table reconciles Adjusted EBITDA to the most directly comparable GAAP measure, which is net loss.

Three months ended March 31, 

2021

2020

Net loss attributable to common stockholders

    

$

(2,359,068)

    

$

(2,014,179)

Adjustment for loss from discontinued operations

 

 

152,858

Loss from continuing operations attributable to common stockholders

 

(2,359,068)

 

(1,861,321)

Adjustments:

 

  

 

  

Stock-based compensation

 

103,932

 

572,574

Depreciation and amortization

121,941

31,913

Amortization of debt discount and equity issuance costs

 

68,330

 

66,321

Loss on extinguishment of debt

 

 

1,137,428

Interest expense

 

103,056

 

171,048

Gain on sale of building

(139,105)

Loss (gain) on derivative liability

 

1,198,744

 

(1,375,620)

Acquisition related expenses

141,580

308,196

Total adjustments

 

1,737,583

 

772,755

Adjusted EBITDA

$

(621,485)

$

(1,088,566)

Off-balance Sheet Arrangements

We currently have no off-balance sheet arrangements.

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, 2020, and Note 1 to the Condensed Consolidated Financial Statements in this Form 10-Q.

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 and Accounting 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 and Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2021, the end of the period covered by this report. Based on that

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evaluation, our Principal Executive Officer and Principal Financial and Accounting Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2021.

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.

Assessment of Internal Control over Financial Reporting

Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2021. 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 its internal control over financial reporting was effective as of March 31, 2021, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.

Changes in Internal Control over Financial Reporting

None.

PART II. OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

As of the date of this report, there have been no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, as amended.

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

On February 8, 2021 we issued warrants to purchase 592,858 shares of our common stock, together with our 10% notes, to an accredited investor. The warrants have an exercise price of $0.56 per share and a life of 5 years.

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ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.   MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.   OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Exhibits

 

 

 

10.1

Agreement and Plan of Reorganization and Liquidation dated April 18, 2021 (Colorado) (incorporated by reference to Exhibit 10.1 of our Form 8-K filed on April 21, 2021)

10.2

Agreement and Plan of Reorganization and Liquidation dated April 18, 2021 (Oregon) (incorporated by reference to Exhibit 10.2 of our Form 8-K filed on April 21, 2021)

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.INS

Inline XBRL Instance Document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

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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: May 17, 2021

/s/ Adam Hershey

 

Adam Hershey, Interim Chief Executive Officer

 

Principal Executive Officer

 

 

/s/ Diane Jones

 

Diane Jones, Chief Financial Officer

 

Principal Financial and Accounting Officer

26