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, 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 Markets OTCQB. Our operations are segregated into the following four segments:
Security and Cash Transportation Services (Security Segment)
Iron Protection Group, or IPG, provides advanced security, including on-site professionals and cash transport, to licensed cannabis cultivators and retail shops. In August 2017, we acquired the operating assets of Mile High Protection Group, LLC, a Colorado limited liability company, which will continue to do business as Mile High Protection Services, or Mile High. Mile High has a diversified client roster, providing security services to hospitality companies, such as hotels, and to licensed cannabis retailers and cultivators in Colorado. We have also opened an IPG office in California.
Marketing Consulting and Apparel (Marketing Segment)
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 as well as the resources to expand our clothing lines. Chiefton Design also supports our other segments with marketing designs and apparel.
Chieftons 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. The apparel sold by Chiefton is purchased and screen printed by third parties, for which there are numerous suppliers.
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 the future growth of the regulated cannabis market in the United States.
NBC oversees our wholesale equipment and supply business, operated under the name GC Supply, which provides turnkey sourcing and stocking services to cultivation, retail and infused products manufacturing facilities. Our products include infrastructure, equipment, consumables, and compliance packaging.
Finance and Real Estate (Finance Segment)
Real Estate Leasing
We own a cultivation property in a suburb of Pueblo, Colorado, consisting of approximately three acres of land, which currently includes a 5,000 square foot steel building and a parking lot. The property is zoned for cultivating cannabis and is leased to a medical cannabis grower until December 31, 2022.
Our real estate leasing business plan includes the potential future acquisition and leasing of cultivation space and related facilities to licensed marijuana growers and dispensary owners for their operations. Management anticipates that these facilities would range in size from 5,000 to 50,000 square feet. These facilities would only be leased to tenants that possess the requisite state licenses to operate cultivation facilities. The leases with the tenants would include certain requirements that permit us to continually evaluate our tenants compliance with applicable laws and regulations.
Shared Office Space, Networking and Event Services
In October 2014, we purchased a former retail bank located at 6565 East Evans Avenue, Denver, Colorado 80224, which has been branded as The Greenhouse. The building is a 16,056 square foot facility, which we use as our corporate headquarters.
6
The Greenhouse has approximately 10,000 square feet of existing office space and 5,000 square feet on its ground floor that is dedicated to a consumer banking design. We continue to assess the opportunity to lease shared workspace for entrepreneurs, professionals and others serving the cannabis industry. Clients would be able to lease office, meeting, lecture, educational and networking space, and individual workstations. We expect to continue the renovation of The Greenhouse in 2017.
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.
DB Products Arizona, LLC
DB Products Arizona, LLC (DB Arizona) produces and distributes cannabis-infused elixirs and edible products in Arizona.
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 expect future positive cash flows, if any, will first go towards paying the holders of DB Arizonas notes payable. Accordingly, we allocated the entire consideration of $106,000 to the note receivable from DB Arizona.
We have determined that DB Arizona is a variable interest entity. The other 50% owner owns the building in which DB Arizona operates, and holds the Arizona cannabis license required for DB Arizona to extract cannabis oil and sell cannabis oil-infused products. Accordingly, the other owner is the primary beneficiary, as they have the power to direct activities that most significantly impact the economic performance of DB Arizona. We will treat our 50% ownership in DB Arizona as an equity investment.
As of September 30, 2017, DB Arizona had total assets of $1,200,000, operating liabilities of $73,639, debt and accrued interest liabilities of $2,463,373, and for the nine months ended September 30, 2017, total revenues of $632,000 and a net loss of $611,000.
Basis of Presentation
The accompanying (a) condensed consolidated balance sheet at December 31, 2016, has been derived from audited financial statements and (b) condensed consolidated unaudited financial statements as of September 30, 2017 and 2016, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, and should be read in conjunction with the audited consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2016 (the 2016 Annual Report), filed with the Securities and Exchange Commission (the SEC) on March 31, 2017. It is managements opinion, however, that all material adjustments (consisting of normal recurring adjustments), have been made which are necessary for a fair financial statements presentation. The condensed consolidated financial statements include all material adjustments (consisting of normal recurring accruals) necessary to make the condensed consolidated financial statements not misleading as required by Regulation S-X, Rule 10-01. Operating results for the three and nine months ended September 30, 2017, are not necessarily indicative of the results of operations expected for the year ending December 31, 2017.
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.
7
Reclassifications
Certain reclassifications have been made to the prior period segment reporting to conform to the current period presentation related to now including GC Supply in our Operations Segment. The reclassifications had no effect on net loss, total assets, or total stockholders equity (deficit).
Related Parties
Related parties are any entities or individuals that, through employment, ownership or other means, possess the ability to direct or cause the direction of the management and policies of the Company. We disclose related party transactions that are outside of normal compensatory agreements, such as salaries or board of director fees. We had related party transactions with the following individuals / companies:
·
Michael Feinsod
Chairman of our Board of Directors (Board).
·
Infinity Capital West, LLC (Infinity Capital)
An investment management company that was founded and is controlled by Michael Feinsod.
·
GC Finance Arizona
A company owned 100% by Infinity Capital prior to our purchase in June 2017.
·
DB Arizona A company that borrowed $825,000 from GC Finance Arizona, which also holds a 50% ownership interest in DB 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.
Going Concern
The condensed consolidated financial statements have been prepared on a going concern basis, which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. The ability to continue as a going concern is dependent upon our generating profitable operations in the future and / or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. Management believes that actions presently being taken to further implement our business plan and generate additional revenues provide opportunity for the Company to continue as a going concern. While we believe in the viability of our strategy to generate additional revenues and our ability to raise additional funds, there can be no assurances to that effect.
We had an accumulated deficit of $45,001,858 and $49,227,055, respectively, at September 30, 2017 and December 31, 2016, and further losses are anticipated in the development of our business. Accordingly, there is substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Recently Issued Accounting Standards
Financial Accounting Standards Board, or FASB, Accounting Standards Update, or FASB ASU 2017-11 Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Heding (Topic 815)
In July 2017, the FASB issued 2017-11. The guidance eliminates the requirement to consider down round features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entitys own stock. Our 12% Warrants are 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. The ASU is effective for annual periods beginning after December 15, 2018, and for interim periods within those years, with early adoption permitted. Early adoption of this guidance could have a significant impact on our financial statements, as it would effectively eliminate the derivative liability and the gain or loss from changes in the fair value of the derivative. We are currently assessing whether to early adopt this standard.
FASB ASU 2017-09 Scope of Modification Accounting (Topic 718)
In May 2017, the FASB issued 2017-09. The guidance clarifies the accounting for when the terms of a share-based award are modified. The ASU is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those years, with early adoption permitted. This new guidance would only impact our financial statements if, in the future, we modified the terms of any of our share-based awards.
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 units 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 expect this ASU to have a significant impact on our consolidated financial statements and related disclosures.
8
FASB ASU 2017-01 Clarifying the Definition of a Business (Topic 805)
In January 2017, the FASB issued 2017-01. The new guidance that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. The ASU is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those years. Adoption of this ASU is not expected to have a significant impact on our consolidated results of operations, cash flows and financial position.
FASB ASU 2016-15 Statement of Cash Flows (Topic 230)
In August 2016, the FASB issued 2016-15. Stakeholders indicated that there is a diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU will not have a significant impact on our statement of cash flows.
FASB ASU 2016-12 Revenue from Contracts with Customers (Topic 606)
In May 2016, the FASB issued 2016-12. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2016-12 provides clarification on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.
FASB ASU 2016-11 Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815)
In May 2016, the FASB issued 2016-11, which clarifies guidance on assessing whether an entity is a principal or an agent in a revenue transaction. This conclusion impacts whether an entity reports revenue on a gross or net basis. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.
FASB ASU 2016-10 Revenue from Contracts with Customers (Topic 606)
In April 2016, the FASB issued ASU 2016-10, to clarify identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.
FASB ASU 2016-09 Compensation Stock Compensation (Topic 718)
In March 2016, the FASB issued ASU 2016-09, which includes multiple provisions intended to simplify various aspects of accounting for share-based payments. The new guidance will require entities to recognize all income tax effects of awards in the income statement when the awards vest or are settled. It also will allow entities to make a policy election to account for forfeitures as they occur. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Adopting this ASU did not have a significant impact on our consolidated financial statements and related disclosures.
FASB ASU 2016-02 Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02, which will require lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. This ASU is effective for fiscal years beginning after December 18, 2018, including interim periods within those fiscal years. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.
FASB ASU 2015-17Income Taxes (Topic 740)
In November 2015, the FASB issued ASU 2015-17, which simplifies the presentation of deferred tax assets and liabilities on the balance sheet. Previous GAAP required an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts on the balance sheet. The amendment requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.
FASB ASU 2015-16 Business Combinations (Topic 805), or ASU 2015-16
- In September 2015, the FASB issued ASU 2015-16, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This ASU is effective for interim and annual reporting period beginning after December 15, 2016, including interim periods within those fiscal years, with the option to early adopt for financial statements that have not been issued. We will apply this guidance to any business combinations that may occur.
9
FASB ASU 2015-11 Inventory (Topic 330): Simplifying the Measurement of Inventory, or ASU 2015-11
- In July 2015, the FASB issued ASU 2015-11, which requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments apply to inventory that is measured using first-in, first-out (FIFO) or average cost. This ASU is effective for interim and annual reporting periods beginning after December 15, 2016, with the option to early adopt as of the beginning of an annual or interim period. Adopting this ASU did not have a significant impact on our financial position, results of operations and cash flows.
NOTE 2. BUSINESS ACQUISITION
On August 18, 2017, we entered into an Asset Purchase Agreement (the Mile High APA) with Mile High Protection Services LLC, a Colorado limited liability company, and its sole member (together Seller) whereby we acquired the tradename, workforce, customer contracts, and other intangible assets of the business. Pursuant to the Mile High APA, we agreed to deliver to Seller 224,359 restricted shares of our common stock. The shares vest over a six month period. The Mile High APA contains certain provisions that require Seller to forfeit a portion of such shares in the event that Seller does not meet the obligations under the Mile High APA. In accordance with the terms of the Mile High APA, the number of shares to be delivered was reduced by 120,000, thus 104,359 shares of our common stock are due upon vesting. Seller also agreed to a three year non-compete agreement.
The 104,359 shares of restricted common stock were valued based on the closing price per share of our common stock on August 18, 2017, or $1.75 per share, reduced by a discount of 15% due to the vesting period and the restrictions on the Sellers ability to immediately sell such shares. The $155,000 value of stock consideration was recorded as accrued stock payable on the September 30, 2017, condensed consolidated balance sheet, which will be reduced when the vesting requirements for the shares are met and we issue the common stock. We have not completed the allocation of the purchase price. In the September 30, 2017, condensed consolidated balance sheet we have preliminarily recorded an intangible asset for Mile High of $155,000. Management anticipates completing the purchase price allocation as soon as possible, but no later than one year from the acquisition date.
NOTE 3.
NOTES RECEIVABLE DB ARIZONA
Our notes receivable DB Arizona include accrued interest of $14,171 and $2,202, respectively, as of September 30, 2017 and December 31, 2016. The loans bear interest at 14%, with principal and interest due on May 30, 2017. The face value of the notes includes $101,500 that we loaned directly to DB Arizona and $825,000 that we acquired when we purchased GC Finance Arizona in June 2017 for $106,000. At the time of the purchase, we estimated the fair value of the $825,000 note, which is subordinate to the $101,500 note, to be $106,000.
DB Arizona is financed with significant debt and has yet to generate positive cash flows from operations. We have classified the notes as long-term, because DB Arizona does not currently have sufficient resources to satisfy their obligation to us and the notes are in default. These conditions do not meet the level of probable loss required to reduce the carrying value. In the future, however, they may be unable to generate sufficient cash flows from operations or to restructure their capital. Accordingly, there is a reasonable possibility that we may be unable to recover all or a portion of our notes receivable from DB Arizona.
NOTE 4. LONG-LIVED ASSETS
Property and Equipment
Depreciation expense was $15,997 and $11,944, respectively, for the three months ended September 30, 2017 and 2016, and $47,693 and $36,070, respectively, for the nine months ended September 30, 2017 and 2016. We have not recognized any impairment as of September 30, 2017.
Intangible Assets
Intangible assets of $139,288 as of September 30, 2017, consisted of the preliminary purchase price allocation for Mile High of $155,000, net of accumulated amortization of $15,712, based on a preliminary estimated useful life of two years. The intangible asset for Chiefton brand and graphic designs, with a gross value of $69,400, was fully amortized as of September 30, 2017.
Amortization expense was $23,888 and $86,044, respectively, for the three months ended September 30, 2017 and 2016, and $41,095 and $256,259, respectively, for the nine months ended September 30, 2017 and 2016.
10
NOTE 5. DEBT
Infinity Note Related Party
In February 2015, we issued a senior secured note to Infinity Capital, as amended in April 2015, bearing interest at 5% payable monthly in arrears commencing June 30, 2015, until the maturity date of August 31, 2015 (the Infinity Note). On December 31, 2016, the Infinity Note was amended to aggregate principal and interest, and extend the due date of principal and interest to September 21, 2018. No additional advances may be made after December 31, 2016. The Infinity Note is collateralized by a security interest in substantially all of our assets. Interest expense for the Infinity Note for the nine months ended September 30, 2017 and 2016, was $51,239 and $26,540, respectively, and $51,239 was accrued as of September 30, 2017. The Infinity Note is subordinate to the 12% Notes.
Notes Payable
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
12% Notes
|
$
|
2,081,250
|
$
|
2,750,000
|
Unamortized debt discount
|
|
(800,318)
|
|
(1,934,750)
|
Long-term portion
|
$
|
1,280,932
|
$
|
815,250
|
12% Notes
In September 2016, we completed a $3,000,000 private placement pursuant to a promissory note and warrant purchase agreement (the 12% Agreement) with certain accredited investors, bearing interest at 12%, with principal due September 21, 2018, and interest payable quarterly (each such note, a 12% Note, and collectively, the 12% Notes). In the event of default, the interest rate increases to 18%. The 12% Notes are collateralized by a security interest in substantially all of our assets. We may prepay the 12% Notes at any time, but in any event must pay at least one year of interest.
Subject to the terms and conditions of the 12% Agreement, each investor was granted fully-vested warrants equal to their note principal times three (the 12% Warrants), or nine million warrants, with a life of three years. 4.5 million warrants have an exercise price of $0.35 per share and the other 4.5 million warrants have an exercise price of $0.70 per share. Should we issue any equity-based instruments at a price lower than the exercise price(s) of the 12% Warrants, other than under our Incentive Plan, the exercise price(s) of the 12% Warrants will be adjusted to the lower price. The 12% Warrants may be exercised at the option of the holder (a) by paying cash, (b) by applying the amount due under the 12% Notes as consideration, or (c) if there is no effective registration statement for the 12% Warrants within six months of being granted, the holder may exercise on a cashless basis. The registration statement related to the 12% Warrants was declared effective on December 23, 2016. If our common stock closes above $5.00 for ten consecutive days, we may call the warrants, giving the warrant holders 30 days to exercise. Since the 12% Warrants include a clause requiring repricing, the warrants are considered to be a derivative that is recorded as a liability at fair value.
We received $2,450,000 of cash for issuing the 12% Notes. $300,000 of 10% Notes and $250,000 of the 14% 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.
The Infinity Note and the 12% Notes, totaling $3,451,376, are due and payable on September 21, 2018.
NOTE 6. ACCRUED STOCK PAYABLE
The following tables summarize the changes in accrued common stock payable during the nine months ended September 30, 2017:
|
|
|
|
|
|
|
Amount
|
|
Number of Shares
|
December 31, 2016
|
$
|
|
$
|
|
Acquisition of Mile High
|
|
155,000
|
|
104,359
|
Sale of common stock and warrants
|
|
175,000
|
|
175,000
|
September 30, 2017
|
$
|
330,000
|
$
|
279,359
|
The Mile High shares are issuable on February 27, 2018, if the terms of the Mile High APA are met.
11
The 175,000 shares were issued in October 2017. See Note 11 Subsequent Events.
NOTE 7. DERIVATIVE WARRANT LIABILITY
On September 21, 2016, in connection with the 12% Notes, we issued the 12% Warrants, which are treated as a derivative liability and adjusted to fair value at the end of each period. The underlying assumptions used in the binomial model to determine the fair value of the derivative warrant liability were:
|
|
|
|
|
Three months ended
|
|
September 30, 2017
|
June 30,
2017
|
March 31,
2017
|
Stock price on valuation date
|
$1.43
|
$1.37 2.20
|
$2.21 3.25
|
Risk-free interest rate
|
1.5%
|
1.3 1.4%
|
1.3 1.5%
|
Expected dividend yield
|
|
|
|
Expected term (in years)
|
2.0
|
2.2 2.5
|
2.5 2.7
|
Expected volatility
|
128%
|
131 134%
|
146 153%
|
Number of iterations
|
5
|
5
|
5
|
Changes in the derivative warrant liability were as follows:
|
|
|
December 31, 2016
|
$
|
23,120,000
|
Decrease in fair value
|
|
(10,580,000)
|
Reclassification to additional paid-in capital upon exercise of warrants
|
|
(7,301,000)
|
September 30, 2017
|
$
|
5,239,000
|
NOTE 8. COMMITMENTS AND CONTINGENCIES
Legal
To the best of our knowledge and belief, no material legal proceedings of merit are currently pending or threatened.
NOTE 9. STOCKHOLDERS EQUITY
Share-based expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Employee Awards
|
$
|
839,322
|
$
|
740,844
|
$
|
2,969,811
|
$
|
1,574,906
|
Consulting Awards
|
|
|
|
103,869
|
|
25,440
|
|
151,385
|
Feinsod Agreement
|
|
|
|
27,504
|
|
|
|
192,800
|
DB Option Agreement
|
|
|
|
|
|
|
|
55,100
|
|
$
|
839,322
|
$
|
872,217
|
$
|
2,995,251
|
$
|
1,974,191
|
Employee Stock Options
On October 29, 2014, the Board authorized the adoption of, and on June 26, 2015, our stockholders ratified, our 2014 Equity Incentive Plan (the Incentive Plan). The Incentive Plan provides for the issuance of up to 10 million shares of our common stock, and is designed to provide an additional incentive to executives, employees, directors and key consultants, aligning our long term interests with participants. In April 2016, we filed a Registration Statement on Form S-8 (the Registration Statement), which automatically became effective in May 2016. The Registration Statement relates to 10,000,000 shares of our common stock, which are issuable pursuant to, or upon exercise of, options that have been granted or may be granted under our Incentive Plan.
12
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, 2017
|
June 30,
2017
|
March 31,
2017
|
Exercise price
|
$1.34 2.07
|
$1.92
|
$2.41 3.00
|
Stock price on date of grant
|
$1.34 2.07
|
$1.92
|
$2.41 3.00
|
Volatility
|
140 142%
|
145%
|
148 153%
|
Risk-free interest rate
|
1.4 1.9%
|
1.8%
|
1.7 1.9%
|
Expected life (years)
|
3.0 5.0
|
5.0
|
4.0 5.0
|
Dividend yield
|
|
|
|
The following summarizes Employee Awards activity:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-average Exercise Price per Share
|
|
Weighted-average Remaining Contractual Term
(in years)
|
|
Aggregate Intrinsic Value
|
Outstanding at December 31, 2016
|
|
8,818,400
|
$
|
1.04
|
|
|
|
|
Granted
|
|
1,116,400
|
|
1.78
|
|
|
|
|
Exercised
|
|
(367,240)
|
|
1.09
|
|
|
|
|
Forfeited
|
|
(554,050)
|
|
0.75
|
|
|
|
|
Outstanding at September 30, 2017
|
|
9,013,510
|
|
1.14
|
|
2.2
|
$
|
6,211,944
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2017
|
|
7,984,960
|
$
|
1.00
|
|
1.9
|
$
|
5,726,885
|
Based on our estimated forfeiture rates, we expect 1,007,181 Employee Awards will vest. As of September 30, 2017, there was approximately $1,255,708 of total unrecognized compensation expense related to unvested Employee Awards, which is expected to be recognized over a weighted-average period of eight months.
Warrants for Consulting Services
As needed, we may issue warrants to third parties in exchange for consulting services. Stock-based compensation costs for award grants to third parties for consulting services (Consulting Awards) are recognized on a straight-line basis over the service period for the entire award, with the amount of compensation cost recognized at any date equaling at least the portion of the award that is vested. Consulting Awards are revalued at each reporting date until fully vested, which may generate an expense or benefit.
No Consulting Award warrants were issued during the nine months ended September 30, 2017.
Stock for Consulting Services
During the nine months ended September 30, 2017, we issued 8,000 shares to a third party for marketing services.
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, 2016
|
|
9,025,843
|
$
|
0.63
|
|
|
|
|
Exercised
|
|
(3,377,587)
|
$
|
0.59
|
|
|
|
|
Forfeited
|
|
(28,126)
|
|
1.20
|
|
|
|
|
Outstanding and exercisable at September 30, 2017
|
|
5,620,130
|
$
|
0.69
|
|
2.1
|
$
|
4,573,359
|
13
NOTE 10. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the reporting period. Diluted net loss per share is computed similarly to basic loss per share, except that it includes the potential dilution that could occur if dilutive securities are exercised as of the first day of the reporting period, along with the impact of those dilutive securities on net income (loss).
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income (loss)
|
$
|
586,873
|
$
|
(14,447,094)
|
$
|
4,225,197
|
$
|
(16,971,797)
|
Gain on derivative warrant liability
|
|
(2,421,000)
|
|
|
|
(10,580,000)
|
|
|
|
$
|
(1,834,127)
|
$
|
(14,447,094)
|
$
|
(6,354,803)
|
$
|
(16,971,797)
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares of common stock
|
|
20,654,502
|
|
15,495,421
|
|
19,883,329
|
|
15,270,968
|
Warrants Debt
|
|
4,778,627
|
|
|
|
4,960,848
|
|
|
Stock options
|
|
3,662,422
|
|
|
|
4,667,825
|
|
|
Other warrants
|
|
91,224
|
|
|
|
112,186
|
|
|
Common stock and equivalents
|
|
29,186,775
|
|
15,495,421
|
|
29,624,188
|
|
15,270,968
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.03
|
$
|
(0.93)
|
$
|
0.21
|
$
|
(1.11)
|
Diluted
|
|
(0.06)
|
|
(0.93)
|
|
(0.21)
|
|
(1.11)
|
In 2016, outstanding stock options and common stock warrants are considered anti-dilutive because we were in a net loss position.
NOTE 11. SUBSEQUENT EVENTS
On October 9, 2017, we entered into a securities purchase agreement with several non-affiliated accredited investors in a private placement, pursuant to which for $1.00 we sold one share of our common stock and one warrant to purchase one share of our common stock, at an exercise price of $0.50 per share with a two year life (together, the 2017 Units). We issued 1,000,000 2017 Units. In consideration for issuing the 2017 Units, we received $975,000 in cash and extinguished $25,000 of 12% Notes. We received $175,000 in cash consideration in September 2017, see Note 6 Accrued Stock Payable.
Subsequent to September 30, 2017, and up to the date of this filing, 600,000 shares of our common stock were issued upon the exercise of 12% Warrants for consideration of $210,000 in cash and $210,000 for the extinguishment of 12% Notes.
NOTE 12. SEGMENT INFORMATION
Our operations are organized into four segments: Security and Cash Management 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
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Security
|
|
Marketing
|
|
Operations
|
|
Finance
|
|
Total
|
Revenues
|
$
|
533,065
|
$
|
49,394
|
$
|
364,629
|
$
|
32,903
|
$
|
979,991
|
Costs and expenses
|
|
(647,915)
|
|
(100,464)
|
|
(402,856)
|
|
(9,339)
|
|
(1,160,574)
|
|
$
|
(114,850)
|
$
|
(51,070)
|
$
|
(38,227)
|
$
|
23,564
|
|
(180,583)
|
Corporate
|
|
|
|
|
|
|
|
|
|
767,456
|
|
|
|
|
|
|
|
|
Net income
|
$
|
586,873
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
Security
|
|
Marketing
|
|
Operations
|
|
Finance
|
|
Total
|
Revenues
|
$
|
560,713
|
$
|
106,402
|
$
|
117,700
|
$
|
25,565
|
$
|
810,380
|
Costs and expenses
|
|
(528,916)
|
|
(91,342)
|
|
(235,605)
|
|
(13,352)
|
|
(869,215)
|
Other expense
|
|
|
|
|
|
|
|
(6,414)
|
|
(6,414)
|
|
$
|
31,797
|
$
|
15,060
|
$
|
(117,905)
|
$
|
5,799
|
|
(65,249)
|
Corporate
|
|
|
|
|
|
|
|
|
|
(14,381,845)
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(14,447,094)
|
14
Nine months ended September 30
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Security
|
|
Marketing
|
|
Operations
|
|
Finance
|
|
Total
|
Revenues
|
$
|
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
|
|
|
|
|
|
|
|
|
|
4,745,397
|
|
|
|
|
|
|
|
|
Net income
|
$
|
4,225,197
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
Security
|
|
Marketing
|
|
Operations
|
|
Finance
|
|
Total
|
Revenues
|
$
|
1,599,907
|
$
|
221,563
|
$
|
289,566
|
$
|
93,398
|
$
|
2,204,434
|
Costs and expenses
|
|
(1,604,932)
|
|
(216,443)
|
|
(439,389)
|
|
(36,731)
|
|
(2,297,495)
|
Other expense
|
|
|
|
|
|
|
|
(10,876)
|
|
(10,876)
|
|
$
|
(5,025)
|
$
|
5,120
|
$
|
(149,823)
|
$
|
45,791
|
|
(103,937)
|
Corporate
|
|
|
|
|
|
|
|
|
|
(16,867,860)
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(16,971,797)
|
|
|
|
|
|
Total assets
|
|
September 30,
2017
|
|
December 31,
2016
|
Security
|
$
|
363,757
|
$
|
141,140
|
Marketing
|
|
51,789
|
|
50,919
|
Operations
|
|
92,882
|
|
55,750
|
Finance
|
|
644,384
|
|
515,205
|
Corporate
|
|
1,654,477
|
|
2,094,857
|
|
$
|
2,807,289
|
$
|
2,857,871
|
15