Annual Report (10-k)

Date : 03/08/2019 @ 6:30PM
Source : Edgar (US Regulatory)
Stock : General Cannabis Corp. (QX) (CANN)
Quote : 0.735  -0.01505 (-2.01%) @ 9:29PM

Annual Report (10-k)


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


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


For the fiscal year ended December 31, 2018


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


For the transition period from ____________ to ____________


Commission file number:   000-54457


GENERAL CANNABIS CORP

(Exact name of registrant as specified in its charter)


COLORADO

 

90-1072649

(State or other jurisdiction of incorporation or organization)

 

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


6565 E. Evans Avenue

Denver, Colorado  80224

(Address of principal executive offices)


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


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


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


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

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

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

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

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

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


Large accelerated filer  o

 

Accelerated filer      þ

Non-accelerated filer    o

 

Smaller reporting company      þ

 

 

Emerging Growth Company      o


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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the registrant s common stock on June 30, 2018, was $122,807,000.

As of February 28, 2019, the Registrant had 36,222,752 issued and outstanding shares of common stock.

Documents incorporated by reference: The information required by Part III (Items 10, 11, 12, 13 and 14) will be incorporated by reference from the Registrant s definitive proxy statement relating to its 2019 annual meeting of stockholders (the 2019 Proxy Statement ). The 2019 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.






TABLE OF CONTENTS


PART I

 

 

 

 

Item 1.

Business

4

Item 1A.

Risk Factors

10

Item 1B.

Unresolved Staff Comments

19

Item 2.

Properties

19

Item 3.

Legal Proceedings

19

Item 4.

Mine Safety Disclosures

19

 

 

 

PART II

 

 

 

 

Item 5.

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

20

Item 6.

Selected Financial Data

21

Item 7.

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

21

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

28

Item 8.

Financial Statements and Supplementary Data

29

Item 9.

Changes In and Disagreements With Accountants On Accounting and Financial Disclosure

52

Item 9A.

Controls and Procedures

52

Item 9B.

Other Information

53

 

 

 

PART III

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

54

Item 11.

Executive Compensation

54

Item 12.

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

54

Item 13.

Certain Relationships and Related Transactions and Director Independence

54

Item 14.

Principal Accounting Fees and Services 

54

 

 

 

PART IV

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

54

 

Signatures

58


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PART I


CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION


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


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


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


·

Competition from other similar companies;  

·

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

·

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

·

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

·

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

·

Our ability to identify and successfully integrate acquisitions, and the ability of acquired businesses to perform as expected;

·

Challenges with new products, services and markets; and  

·

Fluctuations in the credit markets and demand for credit.


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


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


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


3



ITEM 1.   BUSINESS.


History and Corporate Structure


General Cannabis Corp, a Colorado corporation, was incorporated on June 3, 2013.  We operate through our four wholly-owned subsidiaries: (a) 6565 E. Evans Owner LLC, a Colorado limited liability company formed in 2014; (b) General Cannabis Capital Corporation, a Colorado corporation formed in 2015; (c) GC Security LLC (“GCS”), a Colorado limited liability company formed in 2015; and (d) GC Corp., a Colorado corporation, originally formed in 2013 under ACS Corp.  In 2015, the name was changed to GC Corp.


Our Products, Services and Customers


Through our reporting segments (Security, Operations, Consumer Goods, and Investments), we provide products, services and capital to the regulated cannabis industry and non-cannabis customers, which include the following:


Security and Cash Transportation Services (“Security Segment”)


We provide advanced security, including on-site professionals and cash transport, to licensed cannabis cultivators, cannabis processing facilities and retail shops, under the business name Iron Protection Group (“IPG”) in California and Colorado, and security services to non-cannabis customers in Colorado, such as hotels, apartment buildings and retail, under the business name Mile High Protection Services (“MHPS”), which we acquired in August 2017.


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 2018, 60% of NBC’s revenue was with one customer.


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.


Consumer Goods and Marketing Consulting (“Consumer Goods Segment”)


Our apparel business, Chiefton, has two primary revenue streams.  Chiefton Supply strives to create innovative, unique t-shirts, hats, hoodies and accessories. Our apparel is sold through our on-line shop, cannabis retailers, non-cannabis retailers, and specialty t-shirt and gift shops.  Chiefton Design provides design, branding and marketing strategy consulting services to the cannabis industry, which frequently includes sourcing and selling customer-specific apparel and accessories.


Capital Investments and Real Estate (“Investments Segment”)


As a publicly traded company, we have access to capital that may not be available to businesses operating in the cannabis industry.  Accordingly, we may provide debt or equity capital through (a) loans or revolving lines of credit, (b) leasing real estate we own, or (c) investing in businesses using cash or shares of our common stock.


Significant Transactions


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


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


In January 2018, we entered into a limited liability company operating agreement with DNFC LLC (“DNFC”), pursuant to the formation of Desert Created Company LLC (“Desert Created”).  Each party owned a 50% interest in Desert Created, which took over the assets and operations of DB Products Arizona, LLC (“DB Arizona”).  Desert Created produces and distributes cannabis-infused edible products in Arizona.  In connection with the formation of Desert Created, we contributed 75,000 shares of our common stock and warrants to purchase 75,000 shares of our common stock, at an exercise price of $2.00 per share, to members of DNFC, for an initial investment of $979,000.  This pricing was agreed to in November 2017, however, the transaction did not close until January 2018.  In the interim, our stock price increased substantially, which resulted in an impairment of $805,500.  In October 2018, we sold our 50% interest to DNFC for cash consideration of $23,045.


During the year ended December 31, 2017, in a private placement we raised $4 million of equity by issuing four million shares of our common stock and four million warrants (“Fall 2017 Warrants”) to purchase shares of our common stock (together “Units”) for $1.00 per Unit.  The Fall 2017 Warrants had an exercise price of $0.50 per share and were exercisable for two years.  If our common stock closed above $5.00 for ten consecutive days, we could call the warrants, giving the warrant holders 10 days to exercise.  During the quarter ended March 31, 2018, we called the warrants, and all were exercised.  In consideration for the sale of the Units, we received $3,750,000 in cash and extinguished $250,000 of 12% Notes.


On December 29, 2017, we sold for $625,000 in cash a cultivation property in a suburb of Pueblo, Colorado, which consisted of approximately three acres of land, a 5,000 square foot steel building and a parking lot.  The sale resulted in a gain of $196,000.  We previously leased this property to a licensed medical cannabis grower.


Competitive Strengths


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


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


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


Regulatory Compliance . The state and local laws regulating the cannabis industry change at a rapid pace.  We have resources committed to ensure our operations are in compliance with all state and local laws, policies, guidance and regulations to which we are subject.  We apply this compliance knowledge to our customers in order to ensure that they, too, are in full compliance.


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


Lending Capabilities . In February 2014, the Treasury Department issued guidelines for financial institutions dealing with cannabis-related businesses, (see “Business—Government and Industry Regulation—FinCEN”).  In January 2018, former U.S. Attorney General Jeff Sessions revoked the Obama-era guidelines that enabled states to self-regulate cannabis-related business.  Nevertheless, many banks and traditional financial institutions have continued to provide financial services to cannabis-related businesses.


5



Market Conditions


Our target markets are the locations in the U.S. and its territories that have legalized cannabis:


Location

Medical

Recreational

Year*

California**

X

X

1996 / 2016

Washington

X

X

1998 / 2012

Alaska

X

X

1998 / 2014

Oregon**

X

X

1998 / 2014

Maine

X

X

1999 / 2016

Hawaii**

X

 

2000

Colorado**

X

X

2000 / 2012

Nevada**

X

X

2000 / 2016

Montana

X

 

2004

Vermont

X

X

2004 / 2018

Rhode Island

X

 

2006

New Mexico

X

 

2007

Michigan

X

X

2008 / 2018

District of Columbia

X

X

2009 / 2014

Arizona**

X

 

2010

New Jersey**

X

 

2010

Delaware

X

 

2011

Connecticut

X

 

2012

Massachusetts

X

X

2012 / 2016

Illinois**

X

 

2013

New Hampshire

X

 

2013

Guam

X

 

2014

Maryland**

X

 

2014

Minnesota

X

 

2014

New York**

X

 

2014

Louisiana

X

 

2015

Puerto Rico

X

 

2015

Arkansas**

X

 

2016

Florida

X

 

2016

North Dakota

X

 

2016

Ohio**

X

 

2016

Pennsylvania**

X

 

2016

West Virginia

X

 

2017

Missouri

X

 

2018

Northern Mariana Islands

X

X

2018

Oklahoma**

X

 

2018

Utah

X

 

2018


*     When two dates are listed the first date refers to medical legalization.

**   Indicates locations in which we provide or have provided services.


We estimate total forecasted cannabis sales in the United States to be as follows (in millions):


2018

$

9,314

2019

 

12,590

2020

 

19,243

2021

 

26,250

2022

 

33,354


6



Our best opportunities are in locations with large populations or legal recreational cannabis use.  Continued development of the regulated cannabis industry depends on additional legalization, which is significantly influenced by state and local legislation.


Competition


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


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


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


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


Capital Investments and Real Estate . Many banks and traditional financial institutions refuse to provide financial services to cannabis-related business. With the growth of the cannabis industry, however, there has been growth in alternative financing and banking resources. Many of these alternative sources have more capital and resources than we have.


Government and Industry Regulation


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


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


Congress previously enacted an omnibus spending bill that included a provision (the “Rohrabacher-Blumenauer Amendment”) prohibiting the DOJ from using funds to prevent states with medical cannabis laws from implementing such laws. This provision, however, has only been extended to February 15, 2019, and must be renewed annually by Congress.  In August 2016, a Ninth Circuit federal appeals court ruled in United States v. McIntosh that the Rohrabacher-Blumenauer Amendment bars the DOJ from spending funds on the prosecution of conduct that is allowed by state medical cannabis laws, provided that such conduct is in strict compliance with applicable state law. In March 2015, bipartisan legislation titled the Compassionate Access, Research Expansion, and Respect States Act (the “CARERS Act”) was introduced, proposing to allow states to regulate the medical use of cannabis by changing applicable federal law, including by reclassifying cannabis


7



under the Controlled Substances Act to a Schedule II controlled substance and thereby changing the plant from a federally-criminalized substance to one that has recognized medical uses. More recently, the Respect State Marijuana Laws Act of 2017 has been introduced in the U.S. House of Representatives, which proposes to exclude persons who produce, possess, distribute, dispense, administer or deliver marijuana in compliance with state laws from the regulatory controls and administrative, civil and criminal penalties of the CSA.


These developments previously were met with a certain amount of optimism in the cannabis industry, but (i) neither the CARERS Act nor the Respect State Marijuana Laws Act of 2017 have yet been adopted, (ii) the Rohrabacher-Blumenauer Amendment, being an amendment to an appropriations bill that must be renewed annually, has not currently been renewed beyond February 15, 2019, and (iii) the ruling in United States v. McIntosh is only applicable precedent in the Ninth Circuit, which does not include Colorado, the state where we currently primarily operate.


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


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


It is unclear at this time whether the Sessions Memo indicates that the Trump administration will strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement. However, a significant change in the federal government’s enforcement policy with respect to current federal laws applicable to cannabis could cause significant financial damage to us. We do not currently cultivate, distribute or sell cannabis. We may be irreparably harmed by a change in enforcement policies of the federal government depending on the nature of such change. As of the date of this Report, we have provided products and services to state-approved cannabis cultivators and dispensary facilities. Accordingly, we could be subject to criminal prosecution, which could lead to imprisonment and/or the imposition of penalties, fines, or forfeiture .


The Cole Memo


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


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


·

the distribution of cannabis to minors;

·

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

·

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

·

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

·

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

·

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


8




·

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

·

cannabis possession or use on federal property.


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


FinCEN


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


·

bank (except bank credit card systems);

·

broker or dealer in securities;

·

money services business;

·

telegraph company;

·

card club; and

·

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


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


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


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


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


9



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


Licensing and Local Regulations


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


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


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


Employees


As of December 31, 2018, we had 82 full-time employees.


Corporate Contact Information


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


Available Information


We maintain a website at www.generalcann.com and make available, free of charge, on our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K (including any amendments thereto), registration statements and other information filed with, or furnished to, the SEC, as soon as reasonably practicable after such documents are so filed or furnished, as well as our Code of Ethics. Any materials we file with the SEC, including our annual reports, quarterly reports, current reports, proxy statements, information statements and other information, are also available at the SEC’s Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov .


ITEM 1A.   RISK FACTORS.


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


Risks Related to Our Business and Industry


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


Although we believe our management team has extensive knowledge of the cannabis industry and closely monitors changes in legislation, we also operate in an evolving industry that may not develop as expected. Furthermore, our operations


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continue to evolve under our business plan as we continually assess new strategic opportunities for our business within our industry. Assessing the future prospects of our business is challenging in light of both known and unknown risks and difficulties we may encounter. Growth prospects in our industry can be affected by a wide variety of factors including:


·

Competition from other similar companies;

·

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

·

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

·

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

·

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

·

Challenges with new products, services and markets; and

·

Fluctuations in the credit markets and demand for credit.


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


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


We generated net losses of  approximately $17 million and $8.2 million, respectively, in the years ended December 31, 2018 and 2017. As of December 31, 2018, we had an accumulated deficit of approximately $52 million. We will need to generate and sustain increased revenues in future periods in order to become profitable, and, even if we do, we may not be able to maintain or increase any such level of profitability.


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


·

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

·

expenses relating to increased marketing efforts;

·

strategic acquisitions of businesses and real estate; and

·

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


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


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


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


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


Currently, numerous U.S. states, the District of Columbia and U.S. territories have legalized cannabis for medical and / or recreational adult use.  Such state and territorial laws are in conflict with the federal CSA, which makes cannabis use and possession illegal at the federal level. Because cannabis is a Schedule I controlled substance, however, the development of a legal cannabis industry under the laws of these states is in conflict with the CSA, which makes cannabis use and possession illegal on a national level. The United States Supreme Court has confirmed that the federal government has the right to


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regulate and criminalize cannabis, including for medical purposes, and that federal law criminalizing the use of cannabis preempts state laws that legalize its use.  We would likely be unable to execute our business plan if the federal government were to strictly enforce federal law regarding cannabis.


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


Congress previously enacted an omnibus spending bill that included a provision (the “Rohrabacher-Blumenauer Amendment”) prohibiting the DOJ from using funds to prevent states with medical cannabis laws from implementing such laws. This provision, however, has only been extended to February 15, 2019, and must be renewed annually by Congress.  In August 2016, a Ninth Circuit federal appeals court ruled in United States v. McIntosh that the Rohrabacher-Blumenauer Amendment bars the DOJ from spending funds on the prosecution of conduct that is allowed by state medical cannabis laws, provided that such conduct is in strict compliance with applicable state law. In March 2015, bipartisan legislation titled the Compassionate Access, Research Expansion, and Respect States Act (the “CARERS Act”) was introduced, proposing to allow states to regulate the medical use of cannabis by changing applicable federal law, including by reclassifying cannabis under the Controlled Substances Act to a Schedule II controlled substance and thereby changing the plant from a federally-criminalized substance to one that has recognized medical uses. More recently, the Respect State Marijuana Laws Act of 2017 has been introduced in the U.S. House of Representatives, which proposes to exclude persons who produce, possess, distribute, dispense, administer or deliver marijuana in compliance with state laws from the regulatory controls and administrative, civil and criminal penalties of the CSA.


These developments previously were met with a certain amount of optimism in the cannabis industry, but (i) neither the CARERS Act nor the Respect State Marijuana Laws Act of 2017 have yet been adopted, (ii) the Rohrabacher-Blumenauer Amendment, being an amendment to an appropriations bill that must be renewed annually, has not currently been renewed beyond February 15, 2019, and (iii) the ruling in United States v. McIntosh is only applicable precedent in the Ninth Circuit, which does not include Colorado, the state where we currently primarily operate.


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


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


It is unclear at this time whether the Sessions Memo indicates that the Trump administration will strictly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement. However, a significant change in the federal government’s enforcement policy with respect to current federal laws applicable to cannabis could cause significant financial damage to us. We may be irreparably harmed by a change in enforcement policies of the federal government depending on the nature of such change.  As of the date of this Report, we have provided products and services to state-approved cannabis cultivators and dispensary facilities. As a result, strict enforcement of federal prohibitions regarding cannabis could subject the Company to criminal prosecution.


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


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


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


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


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


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


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


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


We operate in a highly competitive industry.


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


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


If we are unable to obtain capital, we may not be able to pay our debt obligations as they become due, and there is substantial doubt about our ability to continue as a going concern.


We do not anticipate generating sufficient cash flows from operations to retire our debt obligations and may not be able to raise sufficient capital from (a) the exercise of warrants and options for our common stock, (b) sale of our common stock, or (c) issuing additional long-term debt. Our failure to obtain additional capital and retire our debt obligations would negatively impact our ability to continue as a going concern.


Our financial statements have been prepared assuming that we will continue as a going concern, which means we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. Our ability to continue as a going concern is dependent upon our becoming profitable 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. However, there can be no assurance that we will be successful in achieving these objectives.


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


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


We face risks associated with strategic acquisitions.


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


·

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

·

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

·

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

·

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

·

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


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


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


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

 

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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


Changes in accounting standards could affect our reported financial results.


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


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


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


The market price of our common stock has been, and may in the future, be volatile. Between January 1, 2015, and December 31, 2018, the closing price of our stock has ranged from a low of $0.37 per share to a high of $10.35 per share. Accordingly, it is difficult to forecast the future performance of our common stock. The market price of our common stock may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:


·

regulatory developments at the federal, state or local level;

·

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

·

changes in general economic conditions;

·

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

·

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

·

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

·

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

·

major catastrophic events;

·

sales of large blocks of our stock; or

·

changes in senior management or key personnel.


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


Trading and listing of securities of cannabis related businesses, including our common stock, may be subject to restrictions.


In the United States, many clearing houses for major broker-dealer firms, including Pershing LLC, the largest clearing, custody and settlement firm in the United States, have refused to handle securities or settle transactions of companies engaged in cannabis related business. This means that certain broker-dealers cannot accept for deposit or settle transactions in the securities of cannabis related businesses.  Further, stock exchanges in the United States, including Nasdaq and the New York Stock Exchange, have historically refused to list certain cannabis related businesses, including cannabis retailers, that


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operate primarily in the United States.  Our existing operations, and any future operations or investments, may become the subject of heightened scrutiny by clearing houses and stock exchanges, in addition to regulators and other authorities in the United States.  Any existing or future restrictions imposed by Pershing LLC, or any other applicable clearing house, stock exchange or other authority, on trading in our common stock could  have a material adverse effect on the liquidity of our common stock.


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


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


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


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


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


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


Our stockholders may experience significant dilution.


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


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


18



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


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


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


ITEM 1B.   UNRESOLVED STAFF COMMENTS.


None.


ITEM 2.   PROPERTIES


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


Property Name

Location

Description

The Greenhouse

6565 E. Evans Ave.

Denver, CO 80224

A 16,056 square foot building that we currently use as our corporate headquarters.  This property was collateral for the 12% Notes and Infinity Note, which were paid off in January and February 2018, respectively.

 

ITEM 3.   LEGAL PROCEEDINGS


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


ITEM 4.   MINE SAFETY DISCLOSURES


Not applicable.


19



PART II


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

 

Market Information


On April 28, 2015, our common stock was uplisted and on May 6, 2015, resumed quotation on the OTC Market’s OTCQB.  Quotation of our stock on the OTC Bulletin Board began on August 15, 2013. Trading was suspended on March 28, 2014, due to a suspension of trading order issued by the SEC. From April 10, 2014 to April 27, 2015, our common stock was traded under the symbol “CANN” on an unsolicited basis in the grey market.  On June 6, 2018 we began trading on the OTCQX® Best Market after upgrading from the OTCQB® Venture Market.


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


Quarter ended

 

High

 

Low

December 31, 2018

$

3.99

$

1.46

September 30, 2018

 

4.51

 

2.15

June 30, 2018

 

5.75

 

2.00

March 31, 2018

 

11.19

 

2.03

December 31, 2017

 

6.48

 

1.10

September 30, 2017

 

2.12

 

1.30

June 30, 2017

 

2.44

 

1.12

March 31, 2017

 

3.38

 

1.89


Holders


As of February 28, 2019, we had approximately 62 holders of record of our common stock.  A substantially greater number of holders of the Company’s common stock are “street name” or beneficial holders, whose shares of record are held by banks, brokers and other financial institutions.  In addition, our Articles of Incorporation authorize the Board to issue up to 5,000,000 shares of preferred stock. The provisions in the Articles of Incorporation relating to the preferred stock allow directors to issue preferred stock with multiple votes per share and dividend rights, which would have priority over any dividends paid with respect to the holders of common stock. The issuance of preferred stock with these rights may make the removal of management difficult even if the removal would be considered beneficial to stockholders, generally, and will have the effect of limiting stockholder participation in certain transactions such as mergers or tender offers if these transactions are not favored by management.


Dividend Policy


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


20



Securities Authorized for Issuance under Equity Compensation Plans


The following table provides information regarding our equity compensation plans as of December 31, 2018:


Equity Compensation Plan Information


Plan Category

 

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

 

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

 

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

Equity compensation plans approved by security holders

 

9,173,380

(1)

 

$ 1.68

 

13,147,214

Equity compensation plans not approved by security holders

 

950,000

(2)

 

$ 2.19

 

Total

 

10,123,380

 

 

$ 1.73

 

13,147,214


(1)

On October 29, 2014, the Board authorized the adoption of and, on June 26, 2015, our stockholders ratified, our 2014 Equity Incentive Plan for the issuance of 10 million shares of our common stock and, in April 2018, stockholders approved an increase of 5 million shares of common stock that may be granted (the “Incentive Plan”).  The Incentive Plan provides for the issuance of up to 15 million shares of our common stock, and is designed to provide an additional incentive to executives, employees, directors and key consultants, aligning our long term interests with participants. Forfeited or expired issuances are returned to the shares that may be issued under the plan.  As of December 31, 2018, 1,852,786 stock options issued under the Incentive Plan have been exercised.

(2)

The equity compensation plans not approved by security holders include 900,000 options to purchase shares of our common stock granted to Mr. Feinsod, our Executive Chairman of our Board of Directors, on December 8, 2017, and 50,000 warrants to purchase shares of our common stock granted to non-employees for services.


Recent Sales of Unregistered Securities


On October 30, 2018, we issued 3,933 shares of our common stock, at a closing price of $2.67 per share for total consideration of $10,500, for a three month option to enter into a lease of 3,200 square feet of retail space in Greenvale, NY.


ITEM 6.   SELECTED FINANCIAL DATA


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


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


This Management’s Discussion and Analysis (“MD&A”) is intended to provide an understanding of our financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year.  This discussion should be read in conjunction with the Consolidated Financial Statements and related notes in Item 8 of this Report.


Cautionary Statement Regarding Forward-looking Statements


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


Overview


Through our reporting segments (Security, Operations, Consumer Goods, and Investments), we provide products, services and capital to the regulated cannabis industry and non-cannabis customers.


21



Developments in 2018


Security – Our security business, IPG, completed several initiatives in 2018: (a) expansion into the California market, (b) continued customer growth in Colorado, (c) adjusted bill rates to sustainable, profitable levels, and (d) implemented new hiring and retention programs to better manage personnel costs.


Operations – Our operations consulting business, NBC, accomplished several goals in 2018: (a) completed several successful license applications, which led to additional implementation consulting projects, (b) in December 2018 we proposed additional services to our largest customer, (c) expanded equipment sales, and (d) developed an on-line platform for additional product and equipment sales.


Consumer Goods – Our apparel and marketing consulting business, Chiefton, continued to evaluate market strategies in 2018, including: (a) evaluating the proper allocation of resources between Chiefton-branded clothing and customer-branded apparel, (b) assessing the benefit of launching a hemp clothing line versus using traditional materials, and (c) driving on-line sales.


Investments – Our Investments Segment expanded significantly in 2018: (a) a $250,000 investment in a point-of-sale system company, Flowhub, (b) multiple loans to companies in the cannabis industry, and (c) developing a strategy for even more debt and equity investments going into 2019.


Corporate – We continued to invest in our infrastructure in order to better serve our current customers and position ourselves for expansion through organic growth and acquisition.  In 2018, we added (a) a chief operating officer with extensive experience in the cannabis industry, (b) general counsel, and (c) a vice president of marketing.  We also successfully implemented new enterprise resource planning (“ERP”) software, which will integrate information flow throughout our organization.


2019 Outlook


We operate in a rapidly evolving and highly regulated industry.  We have been and will continue to be aggressive in executing acquisitions and other opportunities that we believe will benefit us in the long term.  We plan to leverage our breadth of services and resources to deliver a comprehensive, integrated solution to companies in the cannabis industry – from operational and compliance consulting to security and marketing to financing needs.


Our growth strategy for 2019 is as follows:


Security – Includes (a) continued expansion in California, (b) video surveillance, (c) guard training, and (d) implementing compliant security services for companies who recently obtained licenses.  We are also considering growth through acquisition, as well as expansion into new markets.


Operations – Includes (a) expanding our wholesale equipment and supply business to companies beyond our consulting clients via an online sales portal; (b) selling standard operating procedures through an online sales portal; and (c) pursuing opportunities to own and operate our own cannabis grow facility and dispensaries.  We also continue to assess acquisition targets that are complementary or expansive to our consulting business.


Consumer Goods – Includes pursuing relationships with non-cannabis national and regional apparel retailers and distributors, as well as expanding our product line nationwide within the cannabis industry.  We are also actively identifying and evaluating acquisition targets within the apparel and consumer goods space.  We are opening a CBD retail store in Long Island, NY, offering a curated collection of high quality CBD products for athletes and general wellness.  Our future plans include, where allowed, expanding the retail concept nationwide, mail order sales, and partnering with other retailers.


Investments – Includes (a) expanding our portfolio of loans, (b) potentially launching a loan origination and servicing business, and (c) investing in high-growth potential companies within the cannabis industry.


Going Concern


The consolidated financial statements have been prepared on a going concern basis, which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future.  Our cash of approximately $8.0 million is not sufficient to absorb our operating losses and retire our debt of $6,849,000.  The warrants associated with this debt, if exercised, would provide sufficient funds to retire the debt; however, there is no guarantee that these warrants


22



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


Results of Operations


The following tables set forth, for the periods indicated, statements of income data.  The tables and the discussion below should be read in conjunction with the accompanying consolidated financial statements and the notes thereto appearing in Item 8 in this Report.


Consolidated Results


 

 

Year ended December 31,

 

 

 

Percent

 

 

2018

 

2017

 

Change

 

Change

Revenues

$

4,618,712

$

3,522,075

$

1,096,637

 

31%

Costs and expenses

 

(16,025,714)

 

(10,569,249)

 

(5,456,465)

 

52%

Other expense

 

(5,566,756)

 

(1,173,677)

 

(4,393,079)

 

374%

Net loss

$

(16,973,758)

$

(8,220,851)

$

(8,752,907)

 

106%


Revenues


Revenue increased for our Security, Operations and Marketing Segments, offset by a decrease in revenues in our Investments Segment.  See Segment discussions below for further details.


Costs and expenses


 

 

Year ended December 31,

 

 

 

Percent

 

 

2018

 

2017

 

Change

 

Change

Cost of service revenues

$

3,148,364

$

2,405,076

$

743,288

 

31%

Cost of goods sold

 

590,590

 

380,632

 

209,958

 

55%

Selling, general and administrative

 

4,617,634

 

2,842,543

 

1,775,091

 

62%

Share-based compensation

 

5,995,007

 

3,880,827

 

2,114,180

 

54%

Professional fees

 

1,524,615

 

712,589

 

812,026

 

114%

Depreciation and amortization

 

149,504

 

125,911

 

23,593

 

19%

Impairment of assets

 

 

221,671

 

(221,671)

 

(100)%

 

$

16,025,714

$

10,569,249

$

5,456,465

 

52%


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


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


Share-based compensation included the following:


 

 

Year ended December 31,

 

 

 

Percent

 

 

2018

 

2017

 

Change

 

Change

Employee awards

$

3,626,271

$

3,742,294

$

(116,023)

 

(3)%

Consulting awards

 

306,466

 

34,399

 

272,067

 

791%

Feinsod Agreement

 

2,062,270

 

104,134

 

1,958,136

 

1,880%

 

$

5,995,007

$

3,880,827

$

2,114,180

 

54%


23



Employee awards are issued under our 2014 Equity Incentive Plan, which was approved by shareholders on June 26, 2015, and expense varies primarily due to the number of stock options granted and the share price on the date of grant.  Consulting awards are granted to third parties in lieu of cash for services provided.  The Feinsod Agreement expense represents equity-based compensation pursuant to agreements with Michael Feinsod for serving as the Executive Chairman of our Board.  


Professional fees consist primarily of accounting and legal expenses, and increased in 2018 due to filing of registration statements, and an increase in legal fees associated with contracts and general public company matters.  The increase was also due to Sarbanes-Oxley (“SOX”) implementation that started in the first quarter and our Enterprise Resource Planning (“ERP”) system implementation that began in the second quarter.


Depreciation and amortization expense increased due to the amortization of MHPS intangibles and depreciation expense for several building improvements completed in the first quarter of 2018.


Impairment expense in 2017 consists of the write off of our notes receivable with DB Arizona.


Other Expense


 

 

Year ended December 31,

 

 

 

Percent

 

 

2018

 

2017

 

Change

 

Change

Amortization of debt discount

$

4,234,823

$

1,056,550

$

3,178,273

 

301%

Interest expense

 

325,978

 

313,130

 

12,848

 

4%

Loss from Desert Created Investment

 

182,136

 

 

182,136

 

100%

Impairment of Desert Created Investment

 

823,819

 

 

823,819

 

100%

Gain on sale of Pueblo property

 

 

(196,003)

 

196,003

 

(100)%

 

$

5,566,756

$

1,173,677

$

4,393,079

 

374%


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


Security and Cash Transportation Services


 

 

Year ended December 31,

 

 

 

Percent

 

 

2018

 

2017

 

Change

 

Change

Revenues

$

2,602,365

$

1,884,618

$

717,747

 

38%

Costs and expenses

 

(3,027,510)

 

(2,320,042)

 

(707,468)

 

30%

 

$

(425,145)

$

(435,424)

$

10,279

 

(2)%


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


Operations Consulting and Products


 

 

Year ended December 31,

 

 

 

Percent

 

 

2018

 

2017

 

Change

 

Change

Revenues

$

1,718,507

$

1,265,072

$

453,435

 

36%

Costs and expenses

 

(1,932,598)

 

(1,453,436)

 

(479,162)

 

33%

 

$

(214,091)

$

(188,364)

$

(25,727)

 

14%


24



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


Consumer Goods and Marketing Consulting


 

 

Year ended December 31,

 

 

 

Percent

 

 

2018

 

2017

 

Change

 

Change

Revenues

$

279,091

$

239,605

$

39,486

 

16%

Costs and expenses

 

(692,394)

 

(527,590)

 

(164,804)

 

31%

 

$

(413,303)

$

(287,985)

$

(125,318)

 

44%


The increase in revenues in 2018 was primarily attributable to 2018 first and second quarter sales to a national retailer and apparel sales at festivals and other events; whereas 2017 revenues were supported by design projects.  Costs and expenses vary with changes in product sales, product mix, and inventory adjustments.  Revenue derived from services has a higher margin than revenues derived from product sales.  In 2018, a larger percentage of revenues came from product sales, increasing the costs related to these sales.  Additionally, during the third quarter of 2018 we wrote off unsold inventory related to specific festivals and events.


Investments


 

 

Year ended December 31,

 

 

 

Percent

 

 

2018

 

2017

 

Change

 

Change

Revenues

$

18,749

$

132,780

$

(114,031)

 

(86)%

Costs and expenses

 

 

(277,114)

 

277,114

 

(100)%

Investment in Desert Created

 

(1,005,955)

 

 

(1,005,955)

 

(513)%

Gain on sale of Pueblo property

 

 

196,003

 

(196,003)

 

100%

 

$

(987,206)

$

51,669

$

(1,038,875)

 

(2011)%


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


Non-GAAP Financial Measures


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


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


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


25




 

 

Year ended December 31,

 

 

2018

 

2017

Net loss

$

(16,973,758)

$

(8,220,851)

Adjustments:

 

 

 

 

Share-based expense

 

5,995,007

 

3,880,827

Depreciation and amortization

 

149,504

 

125,911

Impairment of investment (2018) and loans (2017)

 

823,819

 

221,671

Amortization of debt discount

 

4,234,823

 

1,056,550

Interest expense

 

325,978

 

313,130

Loss on investment of Desert Created

 

182,136

 

Gain on sale of Pueblo property

 

 

(196,003)

Total adjustments

 

11,711,267

 

5,402,086

Adjusted EBITDA

$

(5,262,491)

$

(2,818,765)

 

 

 

 

 

Per share – basic and diluted:

 

 

 

 

Net loss

$

(0.49)

$

(0.40)

Adjusted EBITDA

 

(0.15)

 

(0.16)

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

Net loss

 

34,938,978

 

20,472,946

Adjusted EBITDA

 

34,297,078

 

17,193,371


Liquidity


Sources of liquidity


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


In April 2018, we completed a $7,500,000 private placement pursuant to a promissory note (“8.5% Notes”) and warrant purchase agreement (the “8.5% Agreement”) with certain accredited investors, bearing interest at 8.5%, with principal due May 1, 2019, and interest payable quarterly.  The proceeds were made available for general working capital purposes and acquisitions.


Sources and uses of cash


We had cash of approximately $8.0 million and $5.0 million, respectively, as of and December 31, 2018 and 2017.  Our cash flows from operating, investing and financing activities were as follows:


 

 

Year ended December 31,

 

 

2018

 

2017

Net cash used in operating activities

$

(5,726,207)

$

(3,204,994)

Net cash provided by (used in) investing activities

 

(568,266)

 

393,634

Net cash provided by financing activities

 

9,214,855

 

7,074,352


Net cash used in operating activities increased in 2018 by $2,521,213 compared to 2017, primarily due to a larger operating loss.  We have added personnel to our Operations Segment and Consumer Goods Segment in advance of growth opportunities, along with our Security Segment’s expansion into California.  We also continued to add personnel to our corporate infrastructure and expanded our corporate marketing efforts.  Where possible, we continue to use non-cash equity-based instruments to obtain consulting services and compensate employees.


Net cash used in investing activities in 2018 relates primarily to purchasing fixed assets, including building improvements in 2018, and investing in the Flowhub SAFE.  In the 2017, we sold our Pueblo facility for approximately $580,000 in net proceeds, purchased GC Finance Arizona LLC for $106,000, and purchased fixed assets.


26



Net cash provided by financing activities in 2018 related to (a) exercise of warrants and options; (b) issuing our 8.5% Notes; and (c) paying off our 12% Notes and the Infinity Note.  Net cash provided in 2017 related primarily to (a) selling common stock and warrants; and (b) the exercise of warrants and options.


Capital Resources


We have no material commitments for capital expenditures as of December 31, 2018.  Part of our growth strategy, however, is to acquire businesses and real estate.  We also plan to continue the renovation of The Greenhouse in 2019.  We would fund such activity through cash on hand, the issuance of debt, common stock, warrants for our common stock or a combination thereof.


Off-balance Sheet Arrangements


We currently have no off-balance sheet arrangements.


Critical Accounting Policies


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


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


Purchase Accounting for Acquisitions


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


Impairment of Long-lived Assets


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


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


27



Debt with Equity-linked Features


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


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


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


Equity-based Payments


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


Revenue Recognition


We recognize revenue when the following criteria are met, which requires management’s judgment:


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


Each party’s rights regarding the goods or services have been identified – we have rights to payment when services are completed in accordance with the underlying contract, or for the sale of goods when custody is transferred to our customers either upon shipment to or receipt at our customers’ locations, with no right of return or further obligations.


The payment terms for the goods or services have been identified – prices are typically fixed, and no price protections or variables are offered.


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


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


ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS


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


28




ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Index to Consolidated Financial Statements


 

Page

Report of Independent Registered Public Accounting Firm

30

 

 

Consolidated Balance Sheets

32

 

 

Consolidated Statements of Operations

33

 

 

Consolidated Statements of Cash Flows

34

 

 

Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

35

 

 

Notes to Consolidated Financial Statements

36




29



Report of Independent Registered Public Accounting Firm



Board of Directors and Shareholders

General Cannabis Corp


Opinion on the consolidated financial statements and Internal Control Over Financial Reporting


We have audited the accompanying balance sheets of General Cannabis Corp (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations , changes in stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established by COSO.


Substantial Doubt About the Company’s Ability to Continue as a Going Concern


The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s cash balance of approximately $8.0 million is not sufficient to absorb the Company’s operating losses and retire their debt of $6,849,000 due May 1, 2019.  Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.


Basis for Opinion


The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Assessment of Internal Control over Financial Reporting under Item 9A. Our responsibility is to express an opinion on the entity’s consolidated financial statements and an opinion on the entity’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.


Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that responds to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


30




Definition and Limitations of Internal Control Over Financial Reporting


An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the entity; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the consolidated financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.



/s/ Hall & Company


Irvine, California


March 8, 2019



We have served as the Company's auditor since 2014.




31




GENERAL CANNABIS CORP

CONSOLIDATED BALANCE SHEETS


 

 

December 31,

 

 

2018

 

2017

ASSETS

 

 

 

 

Current Assets

 

 

 

 

Cash and cash equivalents

$

7,957,169

$

5,036,787

Accounts receivable, net

 

415,581

 

446,219

Note receivable

 

50,000

 

Prepaid expenses and other current assets

 

440,890

 

672,636

Inventory

 

123,263

 

34,769

Total current assets

 

8,986,903

 

6,190,411

 

 

 

 

 

Property and equipment, net

 

1,463,075

 

1,293,761

Intangible assets, net

 

42,247

 

119,754

Investment

 

250,000

 

Total Assets

$

10,742,225

$

7,603,926

 

 

 

 

 

LIABILITIES & STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

Accounts payable and accrued expenses

$

525,692

$

997,794

Interest payable

 

 

123,446

Customer deposits

 

391,290

 

107,370

Accrued stock payable

 

 

321,860

Notes payable (net of discount)

 

5,273,906

 

1,177,333

Infinity Note – related party

 

 

1,370,126

Total current liabilities

 

6,190,888

 

4,097,929

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

Preferred stock, no par value; 5,000,000 shares authorized; no shares issued and outstanding at December 31, 2018 and 2017

 

 

Common Stock, $0.001 par value; 100,000,000 shares authorized; 36,222,752 shares and 27,692,910 shares issued and outstanding on December 31, 2018 and 2017, respectively

 

36,223

 

27,693

Additional paid-in capital

 

56,303,061

 

38,292,493

Accumulated deficit

 

(51,787,947)

 

(34,814,189)

Total Stockholders’ Equity

 

4,551,337

 

3,505,997

 

 

 

 

 

Total Liabilities & Stockholders’ Equity

$

10,742,225

$

7,603,926


See Notes to consolidated financial statements.


32




GENERAL CANNABIS CORP

CONSOLIDATED STATEMENTS OF OPERATIONS


 

 

Year ended December 31,

 

 

2018

 

2017

REVENUES

 

 

 

 

Service

$

3,934,068

$

2,826,595

Rent and interest

 

18,749

 

132,780

Product sales

 

665,895

 

562,700

Total revenues

 

4,618,712

 

3,522,075

 

 

 

 

 

COSTS AND EXPENSES

 

 

 

 

Cost of service revenues

 

3,148,364

 

2,405,076

Cost of goods sold

 

590,590

 

380,632

Selling, general and administrative

 

4,617,634

 

2,842,543

Share-based expense

 

5,995,007

 

3,880,827

Professional fees

 

1,524,615

 

712,589

Depreciation and amortization

 

149,504

 

125,911

Impairment of Notes receivable – DB Arizona

 

 

221,671

Total costs and expenses

 

16,025,714

 

10,569,249

 

 

 

 

 

OPERATING LOSS

 

(11,407,002)

 

(7,047,174)

 

 

 

 

 

OTHER (INCOME) EXPENSE

 

 

 

 

Amortization of debt discount

 

4,234,823

 

1,056,550

Interest expense, net

 

325,978

 

313,130

Loss from Desert Created investment

 

182,136

 

Impairment of Desert Created investment

 

823,819

 

Gain on sale of Pueblo property

 

 

(196,003)

Total other expense , net

 

5,566,756

 

1,173,677

 

 

 

 

 

NET LOSS

$

(16,973,758)

$

(8,220,851)

 

 

 

 

 

PER SHARE DATA – Basic and diluted

 

 

 

 

Net loss per share

$

(0.49)

$

(0.40)

Weighted average number of common shares outstanding

 

34,938,978

 

20,472,946


See Notes to consolidated financial statements.


33




GENERAL CANNABIS CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS


 

 

Year ended December 31,

 

 

2018

 

2017

OPERATING ACTIVITIES

 

 

 

 

Net loss

$

(16,973,758)

$

(8,220,851)

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

operating activities:

 

 

 

 

Amortization of debt discount

 

4,234,823

 

1,056,550

Depreciation and amortization expense

 

149,504

 

125,911

Bad debt expense

 

87,592

 

82,615

Impairment of Notes receivable – DB Arizona

 

 

221,671

Impairment of Desert Created investment

 

823,819

 

Loss from Desert Created investment

 

182,136

 

Share-based payments

 

5,995,007

 

3,880,827

Gain on sale of Pueblo property

 

 

(196,003)

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

(56,954)

 

(358,589)

Prepaid expenses and other assets

 

231,746

 

(96,556)

Inventory

 

(88,494)

 

(26,788)

Accounts payable and accrued liabilities

 

(311,628)

 

326,219

Net cash used in operating activities:

 

(5,726,207)

 

(3,204,994)

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

Purchase of property and equipment

 

(241,311)

 

(53,689)

Net cash proceeds from sale of Pueblo property

 

 

579,823

Lending on notes receivable

 

(650,000)

 

(26,500)

Proceeds on notes receivable

 

600,000

 

Investment in Flowhub SAFE

 

(250,000)

 

Investment in Desert Created

 

(50,000)

 

Proceeds on investment in Desert Created

 

23,045

 

Purchase of GC Finance Arizona LLC

 

 

(106,000)

Net cash (used in) provided by investing activities

 

(568,266)

 

393,634

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

Proceeds from sale of common stock and common stock warrants

 

 

3,750,000

Proceeds from the exercise of warrants

 

3,985,197

 

3,048,796

Proceeds from exercise of stock options

 

721,034

 

275,556

Proceeds from notes payable

 

7,500,000

 

Payments on notes payable

 

(1,621,250)

 

Payments on Infinity Note – related party

 

(1,370,126)

 

Net cash provided by financing activities

 

9,214,855

 

7,074,352

 

 

 

 

 

NET INCREASE IN CASH

 

2,920,382

 

4,262,992

CASH, BEGINNING OF PERIOD

 

5,036,787

 

773,795

CASH, END OF PERIOD

$

7,957,169

$

5,036,787

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION

 

 

 

 

Cash paid for interest

$

637,586

$

195,760

 

 

 

 

 

NON-CASH TRANSACTIONS

 

 

 

 

8.5% Note principal used to exercise 8.5% Warrants

$

651,000

$

8.5% Warrants recorded as debt discount and additional paid-in capital

 

5,366,000

 

Issuance of common stock for accrued stock payable

 

321,860

 

Issuance of common stock and warrants for investment in Desert Created

 

979,000

 

12% Note principal used to exercise 12% Warrants

 

 

878,750

12% Note principal used to participate in Fall 2018 Capital Raise

 

 

250,000

Acquisition of MHPS – accrued stock payable

 

 

155,000

Taxes for stock options included in other assets and accrued expenses

 

 

499,587


See Notes to consolidated financial statements.


34




GENERAL CANNABIS CORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)


 

 

 

 

Additional

 

 

 

 

 

 

Common Stock

 

Paid-in

 

Accumulated

 

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Total

December 31, 2016

 

17,193,371

$

17,193

$

26,385,924

$

(26,593,338)

$

(190,221)

Common stock and warrants issued with Fall 2018 capital raise

 

4,000,000

 

4,000

 

3,996,000

 

 

4,000,000

Common stock issued upon exercise of warrants for debt

 

5,479,017

 

5,478

 

3,247,272

 

 

3,252,750

Warrants issued for services

 

 

 

8,959

 

 

8,959

Common stock issued for services

 

8,000

 

8

 

25,432

 

 

25,440

Stock options granted to employees

 

 

 

3,742,294

 

 

3,742,294

Stock options under Feinsod Agreement

 

 

 

104,134

 

 

104,134

Common stock issued upon exercise of stock options

 

1,012,522

 

1,014

 

782,478

 

 

783,492

Net loss

 

 

 

 

(8,220,851)

 

(8,220,851)

December 31, 2017

 

27,692,910

 

27,693

 

38,292,493

 

(34,814,189)

 

3,505,997

Common stock issued upon exercise of warrants for debt

 

7,546,286

 

7,547

 

4,795,510

 

 

4,803,057

Common stock issued upon exercise of stock options

 

731,264

 

731

 

720,303

 

 

721,034

Common stock issued for MHPS acquisition

 

104,359

 

104

 

154,896

 

 

155,000

Common stock and warrants issued for Desert Created acquisition

 

75,000

 

75

 

978,925

 

 

979,000

Common stock issued for services

 

72,933

 

73

 

234,928

 

 

235,001

Stock options granted to employees

 

 

 

3,626,271

 

 

3,626,271

Stock options under Feinsod Agreement

 

 

 

2,062,270

 

 

2,062,270

Warrants issued for services

 

 

 

71,465

 

 

71,465

Warrants issued with the 8.5% notes

 

 

 

5,366,000

 

 

5,366,000

Net loss

 

 

 

 

(16,973,758)

 

(16,973,758)

December 31, 2018

 

36,222,752

$

36,223

$

56,303,061

$

(51,787,947)

$

4,551,337


See Notes to consolidated financial statements.


35



GENERAL CANNABIS CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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 June 6, 2018 we began trading on the OTCQX® Best Market after upgrading from the OTCQB® Venture Market.  Our operations are segregated into the following four segments:


Security and Cash Transportation Services (“Security Segment”)


We provide advanced security, including on-site professionals and cash transport, to licensed cannabis cultivators, cannabis processing facilities and retail shops, under the business name Iron Protection Group (“IPG”) in California and Colorado, and security services to non-cannabis customers in Colorado, such as hotels, apartment buildings and retail, under the business name Mile High Protection Services (“MHPS”), which we acquired in August 2017.


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 2018, 60% of NBC’s revenue was with one customer.


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.


Consumer Goods and Marketing Consulting (“Consumer Goods Segment”)


Our apparel business, Chiefton, has two primary revenue streams.  Chiefton Supply strives to create innovative, unique t-shirts, hats, hoodies and accessories. Our apparel is sold through our on-line shop, cannabis retailers, non-cannabis retailers, and specialty t-shirt and gift shops.  Chiefton Design provides design, branding and marketing strategy consulting services to the cannabis industry, which frequently includes sourcing and selling customer-specific apparel and accessories.


Capital Investments and Real Estate (“Investments Segment”)


As a publicly traded company, we have access to capital that may not be available to businesses operating in the cannabis industry.  Accordingly, we may provide debt or equity capital through (a) loans or revolving lines of credit, (b) leasing real estate we own, or (c) investing in businesses using cash or shares of our common stock.


Basis of Presentation


The accompanying consolidated financial statements include the results of GCC and its four wholly-owned subsidiary companies: (a) 6565 E. Evans Owner LLC, a Colorado limited liability company formed in 2014; (b) General Cannabis Capital Corporation, a Colorado corporation formed in 2015; (c) GC Security LLC (“GCS”), a Colorado limited liability company formed in 2015; and (d) GC Corp., a Colorado corporation, originally formed in 2013 under ACS Corp. In 2015, the name was changed to GC Corp. Intercompany accounts and transactions have been eliminated.


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


36



Going Concern


The consolidated financial statements have been prepared on a going concern basis, which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future.  Our cash of approximately $8.0 million is not sufficient to absorb our operating losses and retire our debt of $6,849,000.  The warrants associated with this debt, if exercised, would provide sufficient funds to retire the debt; however, there is no guarantee that these warrants will be exercised.  Our ability to continue as a going concern is dependent upon our generating profitable operations in the future and / or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. Management believes that (a) we will be successful obtaining additional capital and (b) actions presently being taken to further implement our business plan and generate additional revenues provide opportunity for the Company to continue as a going concern.  While we believe in the viability of our strategy to generate additional revenues and our ability to raise additional funds, there can be no assurances to that effect.  Accordingly, there is substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.


Significant Accounting Policies


Cash and Cash Equivalents


Cash and cash equivalents include cash on hand, deposits with banks, and investments that are highly liquid and have maturities of three months or less at the date of purchase.  We maintain our cash balances in financial institutions that, from time to time, may exceed amounts insured by the Federal Deposit Insurance Corporation ($250,000 as of December 31, 2018).


Inventory


Our inventory consists of finished goods, including apparel and supplies for the cannabis market. Inventory is stated at the lower of cost or market (net realizable value), using average cost to determine cost. We monitor inventory cost compared to selling price in order to determine if a lower of cost or market reserve is necessary.


Property and Equipment


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


Business Combinations


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


Intangible Assets


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


Impairment of Long-lived Assets


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


37



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


Investments


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


We record investments that do not qualify for treatment under the equity method at fair value, unless there is no readily determinable fair value.  We record at cost equity investments that do not have readily determinable fair value and assess for impairment at each reporting period.  We are able to switch to fair value at our option.   


Debt


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


Debt with warrants – When we issue debt with warrants, we treat the warrants as a debt discount, record as a contra-liability against the debt, and amortize the balance over the life of the underlying debt as amortization of debt discount expense in the consolidated statements of operations.  The offset to the contra-liability is recorded as additional paid in capital in our consolidated balance sheets.  If the debt is retired early, the associated debt discount is then recognized immediately as amortization of debt discount expense in the consolidated statement of operations.  The debt is treated as conventional debt.


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


Fair Value Measurements


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


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


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


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


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


38



Revenue Recognition


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


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


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


We recognize revenue when the following criteria are met:


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


Each party’s rights regarding the goods or services have been identified – we have rights to payment when services are completed in accordance with the underlying contract, or for the sale of goods when custody is transferred to our customers either upon shipment to or receipt at our customers’ locations, with no right of return or further obligations.


The payment terms for the goods or services have been identified – prices are typically fixed, and no price protections or variables are offered.


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


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


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


Share-based Payments


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


39



stock option. For awards that are recognized when a performance condition is probable, the fair value is estimated at each reporting date. The cost ultimately recognized is the fair value of the equity award on the date the performance condition is achieved. Accordingly, the expense recognized may change between interim reporting dates and the date the performance condition is achieved.


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

 

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


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


Shipping and Handling


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


Income Taxes


We recognize deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the income tax and financial reporting carrying amount of our assets and liabilities. We monitor our deferred tax assets and evaluate the need for a valuation allowance based on the estimate of the amount of such deferred tax assets that we believe do not meet the more-likely-than-not recognition criteria. We also evaluate whether we have any uncertain tax positions and would record a reserve if we believe it is more-likely-than-not our position would not prevail with the applicable tax authorities. Our assessment of tax positions as of December 31, 2018 and 2017, determined that there were no material uncertain tax positions.


Reportable Segments


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


Related Parties


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


·

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

·

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

·

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


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Recently Issued Accounting Standards


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


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


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 has been 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 15, 2018, including interim periods within those fiscal years. As of December 31, 2018, we do not have any material leases, so adoption of this ASU will not have a significant impact on our consolidated results of operations, cash flows and financial position.


NOTE 2.     INVESTMENTS AND ACQUISITIONS


Flowhub SAFE


On November 7, 2018, we invested $250,000 in Flowhub Holdings, LLC (“Flowhub”) through a simple agreement for future equity (the “Flowhub SAFE”). The Flowhub SAFE provides us with the right to either (a) future equity in Flowhub when it completes an equity financing, or (b) future equity in Flowhub or cash proceeds if there is a liquidity event. If there is an equity financing, Flowhub would issue to us (a) a number of standard preferred units equal to our investment divided by the price per share of the standard preferred units if the pre-money valuation is less than or equal to the valuation cap ($35 million); or (b) a number of safe preferred units equal to the purchase amount divided by the valuation cap ($35 million), if the pre-money valuation is greater than the valuation cap. If there is a liquidity event, we will receive either (a) a cash payment equal to the purchase amount or (b) automatically receive a number of common units equal to the purchase amount divided by the liquidity price.  Our investment in the Flowhub SAFE is included under investment on the consolidated balance sheet and is shown as long-term because it is not readily convertible into cash.


Desert Created Company LLC / DB Products Arizona, LLC


In January 2018, we entered into a limited liability company operating agreement with DNFC LLC (“DNFC”), pursuant to the formation of Desert Created Company LLC (“Desert Created”).  Each party owned a 50% interest in Desert Created, which took over the assets and operations of DB Products Arizona, LLC (“DB Arizona”).  Desert Created produces and distributes cannabis-infused edible products in Arizona.  In connection with the formation of Desert Created, we contributed 75,000 shares of our common stock and warrants to purchase 75,000 shares of our common stock, at an exercise price of $2.00 per share, to members of DNFC (collectively, the “DNFC Sellers”).  This pricing was agreed to in November 2017, however, the transaction did not close until January 2018.  In the interim, our stock price increased substantially, which was the reason for the initial impairment noted below.  In October 2018, we sold our 50% interest to DNFC for cash consideration of $23,045 and, accordingly, impaired the remaining balance.


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


41



The purchase price allocation was as follows:


Common Stock

$

461,000

Warrants

 

518,000

Initial investment in Desert Created

$

979,000

 

 

 

Fair value of Desert Created

$

347,000

Percentage ownership

 

50%

Fair value of 50% of Desert Created

 

173,500

Initial investment in Desert Created

 

979,000

Initial impairment

$

805,500


The income and losses related to Desert Created were recognized using the equity method of accounting. The value of the investment as of December 31, 2018, consists of the following and is included in prepaid expenses and other current assets on the balance sheet:


Initial investment in Desert Created

$

979,000

Initial impairment

 

(805,500)

Additional investment

 

50,000

Net loss

 

(182,136)

Additional impairment

 

(18,319)

Proceeds from sale of investment

 

(23,045)

December 31, 2018

$


We loaned $26,500 to DB Arizona during the year ended December 31, 2017.  In June 2017, we purchased 100% of the ownership interests in GC Finance Arizona LLC (“GC Finance Arizona”) from Infinity Capital for $106,000 in cash.  GC Finance Arizona holds a 50% ownership interest in DB Arizona, an $825,000 loan to DB Arizona, and no liabilities.  We expected future positive cash flows, if any, would first go towards paying the holders of DB Arizona’s notes payable.  Accordingly, we allocated the entire consideration of $106,000 to the note receivable from DB Arizona.  During the quarter ended December 31, 2017, DB Arizona’s operations were taken over by Desert Created and, as a result, we impaired the full amount of our notes receivable from DB Arizona.


Mile High Protection Services


On August 18, 2017, we entered into an Asset Purchase Agreement (the “Mile High APA”) with Mile High Protection Services LLC, a Colorado limited liability company, and its sole member (together “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 vested over a six-month period. The Mile High APA contained certain provisions that required 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 were due upon vesting.  Seller also agreed to a three year non-compete agreement.


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


The purchase price allocation was as follows:


Intangible assets:


Customer relationships

$

100,000

Tradename

 

55,000

 

$

155,000


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


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


 

 

Year ended December 31,

 

 

2017

 

 

(Unaudited)

Total revenues

$

4,103,416

Net loss

 

(8,305,855)

Net loss per common share:

 

 

Basic and diluted

$

(0.41)


NOTE 3.  ACCOUNTS RECEIVABLE AND CUSTOMER DEPOSITS


Our accounts receivable consisted of the following:


 

 

December 31,

 

 

2018

 

2017

Accounts receivable

$

476,581

$

586,219

Less:  Allowance for doubtful accounts

 

(61,000)

 

(140,000)

   Total

$

415,581

$

446,219


We record bad debt expense when we conclude the credit risk of a customer indicates the amount due under the contract is not collectible.  We recorded bad debt expense of $87,592 and $82,615, respectively, during the years ended December 31, 2018 and 2017.


As of December 31, 2018, prepaid expenses and other current assets includes $18,164 of unbilled revenue, representing amounts for services completed but not billed.


Our customer deposit liability had the following activity:


 

 

Amount

December 31, 2017

$

107,370

Additional deposits received

 

1,249,274

Less:  Deposits recognized as revenue

 

(965,354)

December 31, 2018

$

391,290


NOTE 4.  NOTE RECEIVABLE


On December 13, 2018, we loaned $50,000 to BRB Realty, LLC (“BRB”) pursuant to the terms of a promissory note (“BRB Note”), bearing interest at 13% per annum and a maturity date of June 12, 2019.  On January 19, 2019 the note was amended with an additional loan amount of $250,000 bearing an interest rate of 13% and a new maturity date of July 15, 2019.


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


43



NOTE 5.  PREPAIDS AND OTHER CURRENT ASSETS


Our Prepaids and other current assets consist of the following:


 

 

December 31,

 

 

2018

 

2017

Prepaid insurance

$

97,828

$

53,498

Employee receivable – payroll tax withholding for stock option exercise

 

 

499,587

Prepaid product for resale

 

173,852

 

Other

 

169,210

 

119,551

 

$

440,890

$

672,636


NOTE 6.  PROPERTY AND EQUIPMENT


Property and equipment consisted of the following:


 

 

December 31,

 

 

2018

 

2017

Land

$

800,000

$

800,000

Buildings

 

508,104

 

423,104

Furniture, fixtures and equipment

 

317,741

 

161,430

 

 

1,625,845

 

1,384,534

Less:  Accumulated depreciation

 

(162,770)

 

(90,773)

 

$

1,463,075

$

1,293,761


Depreciation expense was $71,997 and $65,282, respectively, for the years ended December 31, 2018 and 2017.


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


NOTE 7.   INTANGIBLE ASSETS


Intangible Assets


Intangible assets consisted of the following:


December 31, 2018

 

Gross

 

Accumulated Amortization

 

Net

 

Estimated Life

(in years)

MHPS Customer relationships

$

100,000

$

72,744

$

27,256

 

2

MHPS Tradename

 

55,000

 

40,009

 

14,991

 

2

   Intangible assets, net

$

155,000

$

112,753

$

42,247

 

 


December 31, 2017

 

Gross

 

Accumulated Amortization

 

Net

 

Estimated Life

(in years)

MHPS Customer relationships

$

100,000

$

22,739

$

77,261

 

2

MHPS Tradename

 

55,000

 

12,507

 

42,493

 

2

   Intangible assets, net

$

155,000

$

35,246

$

119,754

 

 


Amortization expense was $77,507 and $60,629 for the years ended December 31, 2018 and 2017.  Future amortization expense will be $42,247 during the year ending December 31, 2019.


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NOTE 8.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES


Our accounts payable and accrued expenses consist of the following:


 

 

December 31,

 

 

2018

 

2017

Accounts payable

$

130,970

$

192,204

Accrued payroll, taxes and vacation

 

308,536

 

243,659

Payroll tax liability for stock option exercises

 

 

519,278

Property taxes and other

 

86,186

 

42,653

 

$

525,692

$

997,794


NOTE 8.  ACCRUED STOCK PAYABLE


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


 

 

Amount

 

Number of Shares

December 31, 2016

$

 

Acquisition of MHPS – accrual

 

155,000

 

104,359

Warrant exercises – accrual

 

166,860

 

154,500

December 31, 2017

 

321,860

 

258,859

Acquisition of MHPS – accrual

 

(155,000)

 

(104,359)

Warrant exercises – accrual

 

(166,860)

 

(154,500)

December 31, 2018

$

 


NOTE 9.    DEBT


Notes Payable


 

 

December 31,

 

 

2018

 

2017

8.5% Notes

$

6,849,000

$

12% Notes

 

 

1,621,250

Unamortized debt discount

 

(1,575,094)

 

(443,917)

 

 

5,273,906

 

1,177,333

Less: Current portion

 

(5,273,906)

 

(1,177,333)

Long-term portion

$

$


8.5% Notes


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


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


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We received $7,500,000 of cash for issuing the 8.5% Notes.  The relative fair value of the 8.5% Warrants was recorded as a debt discount and additional paid-in capital of $5,366,000.  During the year ended December 31, 2018, amortization of debt discount expense includes $3,790,906 from the 8.5% Notes.  The 8.5% Notes are otherwise treated as conventional debt.


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


Current stock price

$

4.18

Exercise price

$

2.35

Risk-free interest rate

 

2.46%

Expected dividend yield

 

Expected term (in years)

 

2.0

Expected volatility

 

134 %

Number of iterations

 

5


12% Notes


The 12% Notes (as defined below) were paid off in January 2018. We recognized the remaining debt discount amortization expense of $443,917 in January as a result of the pay off.


In September 2016, we completed a $3,000,000 private placement pursuant to a promissory note and warrant purchase agreement (the “12% Agreement”) with certain accredited investors, bearing interest at 12%, with principal due September 21, 2018, and interest payable quarterly (each such note, a “12% Note,” and collectively, the “12% Notes”).  In the event of default, the interest rate would increase to 18%.  The 12% Notes were collateralized by a security interest in substantially all of our assets.  We could 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 had an exercise price of $0.35 per share and the other 4.5 million warrants had an exercise price of $0.70 per share.  Had we issued any equity-based instruments at a price lower than the exercise price(s) of the 12% Warrants, other than under our Incentive Plan, the exercise price(s) of the 12% Warrants would have been adjusted to the lower price.  The participants in the Fall 2018 Capital Raise (Note 12) waived this provision for that offering.  The 12% Warrants were exercisable 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 was no effective registration statement for the 12% Warrants within six months of being granted, the holder could exercise on a cashless basis.  The registration statement related to the 12% Warrants was declared effective on December 23, 2016.  If our common stock closed above $5.00 for ten consecutive days, we could call the warrants, giving the warrant holders 30 days to exercise.  We called the warrants during the three months ended March 31, 2018, and all holders elected to exercise.


We received $2,450,000 of cash for issuing the 12% Notes.  $300,000 of 10% Notes and $250,000 of the 14% Greenhouse Mortgage were converted into 12% Notes.  We concluded that these conversions met the criteria for a debt extinguishment and, accordingly, recorded a loss on extinguishment of $1,728,280 during the year ended December 31, 2016.  The loss on extinguishment represents the fair value of the 12% Warrants issued to the previous 10% Note holders and the 14% Greenhouse Mortgage lender.  The initial fair value of the 12% Warrants not associated with the conversions was recorded as a debt discount of $1,855,000.  The 12% Notes are otherwise treated as conventional debt.


Infinity Note – Related Party


This note was paid in full in February 2018. In February 2015, we issued a senior secured note to Infinity Capital, as amended in April 2015, bearing interest at 5% payable monthly in arrears commencing September 30, 2015, until the maturity date of August 31, 2015 (the “Infinity Note”). On December 31, 2016, the Infinity Note was amended to aggregate principal and interest and extend the due date of principal and interest to September 21, 2018.  The Infinity Note was collateralized by a security interest in substantially all of our assets. Interest expense for the Infinity Note for the years ended December 31, 2018 and 2017, was $9,272 and $51,239, respectively.


NOTE 10.   COMMITMENTS AND CONTINGENCIES


Legal


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


46



NOTE 11.  DEFERRED TAXES


The components of net deferred tax assets are as follows:


 

 

December 31,

 

 

2018

 

2017

Net operating loss carryforwards

$

5,383,012

$

3,446,733

Equity-based instruments

 

5,004,624

 

3,648,787

Long-lived assets and other

 

555,138

 

427,779

Deferred tax asset valuation allowance

 

(10,942,774)

 

(7,523,299)

 

$

$


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


 

 

Year ended December 31,

 

 

2018

 

2017

Income tax benefit at statutory rate

$

(3,564,489)

$

(2,795,089)

State income tax benefit, net of Federal benefit

 

(620,849)

 

(251,213)

Equity-based instruments

 

(326,242)

 

(312,589)

Amortization of debt discount

 

1,044,210

 

391,513

Tax Cuts and Jobs Act rate change

 

 

991,223

Other

 

47,895

 

(242,781)

Valuation allowance

 

3,419,475

 

2,218,936

 

$

$


NOTE 12.   STOCKHOLDERS’ EQUITY


Share-based compensation


Share-based compensation expense consisted of the following:


 

 

Year ended December 31,

 

 

2018

 

2017

Employee Awards

$

3,626,271

$

3,742,294

Consulting Awards

 

306,466

 

34,399

Feinsod Agreement

 

2,062,270

 

104,134

 

$

5,995,007

$

3,880,827


Employee Stock Options


On October 29, 2014, the Board authorized the adoption of and, on June 26, 2015, our stockholders ratified, our 2014 Equity Incentive Plan for the issuance of 10 million shares of our common stock and, in April 2018, stockholders approved an increase of 5 million shares of common stock that may be granted (the “Incentive Plan”). The Incentive Plan provides for the issuance of up to 15 million shares of our common stock and is designed to provide an additional incentive to executives, employees, directors and key consultants, aligning our long term interests with participants. A Registration Statement on Form S-8 for the initial 10 million shares automatically became effective in May 2016, and a Registration Statement on Form S-8 for the additional 5 million shares and 900,000 shares under the Feinsod Agreement automatically became effective in June 2018 (collectively, the “Registration Statements”). The Registration Statements relate to 15,000,000 shares of our common stock, which are issuable pursuant to or, upon exercise of, options that have been granted or may be granted under our Incentive Plan. As of December 31, 2018, there were 13,147,214 shares available to issue under the Incentive Plan.


47



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:


 

 

Year ended December 31,

 

 

2018

 

2017

Exercise price

 

$1.71 – 7.17

 

$1.34 – 4.23

Stock price on date of grant

 

$1.71 – 7.17

 

$1.34 – 4.23

Volatility

 

131 – 140%

 

140 – 153%

Risk-free interest rate

 

2.1 – 2.9%

 

1.4 – 2.3%

Expected life (years)

 

3.0

 

3.0 – 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

 

1,496,100

 

2.29

 

 

 

 

Exercised

 

(1,012,522)

 

0.78

 

 

 

 

Forfeited or expired

 

(596,700)

 

1.19

 

 

 

 

Outstanding at December 31, 2017

 

8,705,278

 

1.28

 

 

 

 

Granted

 

2,160,525

 

3.41

 

 

 

 

Exercised

 

(731,264)

 

0.99

 

 

 

 

Forfeited or expired

 

(961,159)

 

2.47

 

 

 

 

Outstanding at December 31, 2018

 

9,173,380

 

1.68

 

6.0

$

3,934,000

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2018

 

7,133,905

$

1.18

 

6.7

$

3,934,000


Based on our estimated forfeiture rates, we expect 2,023,563 Employee Awards will vest.  As of December 31, 2018, there was approximately $3,281,291 of total unrecognized compensation expense related to unvested Employee Awards, which is expected to be recognized over a weighted-average period of ten months.


Consulting Services


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


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


 

 

Year ended December 31,

 

 

2018

 

2017

Exercise price

$

3.08

$

1.40

Stock price, date of valuation

$

3.08

$

1.40

Volatility

 

134%

 

128%

Risk-free interest rate

 

2.3%

 

1.7%

Expected life (years)

 

2.0

 

2.0

Dividend yield

 

 


48



The following summarizes Consulting Awards activity:


 

 

Number of Shares

 

Weighted-average Exercise Price per Share

 

Weighted-average Remaining Contractual Term

(in years)

 

Aggregate Intrinsic Value

Outstanding at December 31, 2016

 

157,500

$

1.96

 

 

 

 

Granted

 

10,000

 

1.40

 

 

 

 

Forfeited or expired

 

(40,000)

 

3.62

 

 

 

 

Outstanding at December 31, 2017

 

127,500

 

2.40

 

 

 

 

Granted

 

35,000

 

3.08

 

 

 

 

Exercised

 

(75,000)

 

1.31

 

 

 

 

Forfeited or expired

 

(37,500)

 

1.66

 

 

 

 

Outstanding and exercisable at
December 31, 2018

 

50,000

 

2.53

 

1.3

$

4,000


We granted 25,000 shares of common stock with a fair value of $92,500 to a non-employee for consulting services, which were issued in July 2018.  Additionally, we granted 47,933 shares of common stock with a fair value of $142,500 to non-employees for consulting services, which were issued in October 2018.


Feinsod Employment Agreement


On December 8, 2017, we entered into an agreement (the “Feinsod Agreement”) with Michael Feinsod for his continued service as our Executive Chairman of our Board of Directors. Pursuant to the agreement, Mr. Feinsod received (a) 600,000 stock options that vest on the anniversary date of the agreement for the next three years, or 200,000 per year (“Time-based Options”); and (b) three tranches of 100,000 stock options that vest when our stock price has an average trading price for 20 days of $3.50, $5.00 and $6.50 (“Market-based Options”). The options have an exercise price of $3.45 per share and a ten-year life. These options were not issued under the Incentive Plan; however, the underlying shares were included in the Registration Statement on Form S-8 that automatically became effective in June 2018. During the quarter ended March 31, 2018, the $3.50 and $5.00 Market-based Options vested and, accordingly, the expense associated with those options was recognized immediately.


DB Option Agreement warrants


In order to extend the DB Option Agreement with Infinity Capital, in March 2016 we granted Infinity Capital warrants to purchase 100,000 shares of our common stock at an exercise price of $0.67 per share with a five year life.  All 100,000 warrants were still outstanding as of December 31, 2018.


IPG Acquisition Warrants


In connection with the IPG acquisition in 2015, we issued to IPG 500,000 fully-vested warrants to purchase a) 250,000 shares of our common stock at $4.50 per share, (the “IPG $4.50 Warrants”), and b) 250,000 shares of our common stock at $5.00 per share (the “IPG $5.00 Warrants”) (collectively, the “IPG Warrants”). All of these warrants expired unexercised during the quarter ended March 31, 2018.


49



Warrants with Debt


The following summarizes warrants issued with debt activity:


 

 

Number of Shares

 

Weighted-average Exercise Price per Share

 

Weighted-average Remaining Contractual Term

(in years)

 

Aggregate Intrinsic Value

Outstanding at December 31, 2016

 

9,025,843

$

0.63

 

 

 

 

Granted

 

(5,633,517)

 

0.61

 

 

 

 

Cancelled

 

(40,626)

 

1.16

 

 

 

 

Outstanding at December 31, 2017

 

3,351,700

 

0.65

 

 

 

 

Granted

 

6,000,000

 

2.35

 

 

 

 

Exercised

 

(3,316,786)

 

0.77

 

 

 

 

Expired

 

(42,700)

 

5.00

 

 

 

 

Outstanding and exercisable at
December 31, 2018

 

5,992,214

 

2.26

 

1.3

$

186,620


Fall 2017 Capital Raise


During the year ended December 31, 2017, in a private placement we raised $4 million of equity by issuing four million shares of our common stock and four million warrants (“Fall 2017 Warrants”) to purchase shares of our common stock (together “Units”) for $1.00 per Unit.  The Fall 2017 Warrants had an exercise price of $0.50 per share and were exercisable for two years.  If our common stock closed above $5.00 for ten consecutive days, we could call the warrants, giving the warrant holders 10 days to exercise.  During the quarter ended March 31, 2018, we called the warrants and all were exercised.  In consideration for the sale of the Units, we received $3,750,000 in cash and extinguished $250,000 of 12% Notes.


NOTE 13.  NET LOSS PER SHARE


Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the reporting period.  Diluted net loss per share is computed similarly to basic loss per share, except that it includes the potential dilution that could occur if dilutive securities are exercised.


Outstanding stock options and common stock warrants are considered anti-dilutive because we are in a net loss position.  Accordingly, the number of weighted average shares outstanding for basic and fully diluted net loss per share are the same.


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


 

 

December 31,

 

 

2018

 

2017

Stock options

 

10,073,380

 

9,605,278

Warrants

 

6,217,214

 

8,119,200

Accrued stock payable

 

 

258,859

 

 

16,290,594

 

17,983,337


NOTE 14.   SUBSEQUENT EVENTS


On January 7, 2019, Robert Frichtel retired as Chief Executive Officer of General Cannabis Corp. and provided his resignation to the Company’s Board of Directors on such date. Mr. Frichtel will continue to serve on the Company’s Board of Directors. On January 7, 2019, the Board appointed Michael Feinsod, the Chairman of the Board, as interim Chief Executive Officer of the Company.


In January 2019, we loaned an additional $250,000 to BRB Realty, LLC pursuant to the terms of a senior secured note (“BRB Note”), bearing interest at 13% per annum and a maturity date of July 15, 2019.


50



On February 1, 2019, we entered into a commercial real estate lease for 3,200 square feet of retail space in Greenvale, NY, with an initial term of two years and, at our option, two additional terms of five years each (the “Greenvale Lease”).  Rent will be $7,000 per month, as well as our portion of real estate taxes and common area maintenance.


In March 2019, we agreed to loan $375,000 to Consolidated C.R., LLC (“CCR”) in the form of a convertible promissory note, bearing interest at 12%, collateralized by virtually all of the assets of CCR, with a term of 18 months (the “CCR Note”). We have a 90 day option to convert $250,000 of principal under the CCR Note into a 10% equity ownership in CCR. CCR is a vertically integrated medical cannabis company located in San Juan, Puerto Rico.


NOTE 15.   SEGMENT INFORMATION


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


Year ended December 31


2018

 

Security

 

Operations

 

Consumer

Goods

 

Investments

 

Total

Services

$

2,602,365

$

1,186,624

$

145,079

$

$

3,934,068

Rent and interest

 

 

 

 

18,749

 

18,749

Product

 

 

531,883

 

134,012

 

 

665,895

Total Revenues

 

2,602,365

 

1,718,507

 

279,091

 

18,749

 

4,618,712

Costs and expenses

 

(3,027,510)

 

(1,932,598)

 

(692,394)

 

 

(5,652,502)

Investment in Desert Created

 

 

 

 

(1,005,955)

 

(1,005,955)

 

$

(425,145)

$

(214,091)

$

(413,303)

$

(987,206)

 

(2,039,745)

Corporate

 

 

 

 

 

 

 

 

 

(14,934,013)

 

 

 

 

 

 

 

 

Net loss

$

(16,973,758)


2017

 

Security

 

Operations

 

Consumer

Goods

 

Investments

 

Total

Services

$

1,884,618

$

790,000

$

151,977

$

$

2,826,595

Rent and interest

 

 

 

 

132,780

 

132,780

Product

 

 

475,072

 

87,628

 

 

562,700

Total Revenues

 

1,884,618

 

1,265,072

 

239,605

 

132,780

 

3,522,075

Costs and expenses

 

(2,320,042)

 

(1,453,436)

 

(527,590)

 

(277,114)

 

(4,578,182)

Gain on sale

 

 

 

 

196,003

 

196,003

 

$

(435,424)

$

(188,364)

$

(287,985)

$

51,669

 

(860,104)

Corporate

 

 

 

 

 

 

 

 

 

(7,360,747)

 

 

 

 

 

 

 

 

Net loss

$

(8,220,851)


 

 

December 31,

Total assets

 

2018

 

2017

Security

$

723,878

$

488,299

Operations

 

134,786

 

231,670

Consumer Goods

 

144,365

 

57,833

Investments

 

300,000

 

Corporate

 

9,439,196

 

6,826,124

 

$

10,742,225

$

7,603,926


51



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


None.


ITEM 9A.   CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures


We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the 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 December 31, 2018, the end of the period covered by this report. Based on that evaluation, our Principal Executive Officer and Principal Financial and Accounting Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2018.


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 December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013). Based on management’s assessment, management concluded that its internal control over financial reporting was effective as of December 31, 2018, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.


Our independent registered public accounting firm, Hall & Company, has issued an audit report on our internal controls over financial reporting, which appears in Part II, Item 8 of this Annual Report on Form 10-K.


52



Remediation of Previous Material Weaknesses


During the year ended December 31, 2018, we implemented the initiatives described below:


·

Performed a risk assessment and mapped our processes to control objectives.

·

Documented our controls and procedures in accordance with COSO, identified gaps and, where necessary, implemented additional controls.

·

Evaluated our entity-level controls, identified gaps, and updated our processes and documentation.

·

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

·

Evaluated our system controls and, as needed, implemented additional controls.

·

Established appropriate levels of segregation of duties as part of our overall assessment and implementation of internal control processes and procedures.


Changes in Internal Control over Financial Reporting


We made the following changes to our internal control over financial reporting during the year ended December 31, 2018:


·

Implemented additional entity-level controls.

·

Implemented comprehensive manual controls over the review and approval of significant transactions, including revenues and expenses.

·

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

·

Hired a certified public accountant as our accounting manager.

·

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

·

Added additional levels of review and segregation of duties for transactions, account reconciliations and journal entries.


ITEM 9B.   OTHER INFORMATION


None.


53



PART III


ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE


The information required by this item is set forth under the headings “Board of Directors,” “Corporation Governance and Board Matters,” and “Executive Officers” in our 2019 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2018, in connection with the solicitation of proxies for our 2019 annual meeting of shareholders and is incorporated herein by reference.


ITEM 11.   EXECUTIVE COMPENSATION


The information required by this item is set forth under the heading “Executive Officer and Director Compensation” in our 2019 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2018, in connection with the solicitation of proxies for our 2019 annual meeting of shareholders and is incorporated herein by reference.


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


The information required by this item is set forth under the heading “Security Ownership and Certain Beneficial Owners and Management” in our 2019 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2018, in connection with the solicitation of proxies for our 2019 annual meeting of shareholders and is incorporated herein by reference.


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE


The information required by this item is set forth under the headings “Certain Relationships and Related Transactions,” Board of Directors” and “Corporate Governance and Board Matters” in our 2018 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2018, in connection with the solicitation of proxies for our 2019 annual meeting of shareholders and is incorporated herein by reference.


ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES


The information required by this item is set forth under the heading “Audit Information” in our 2019 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2018, in connection with the solicitation of proxies for our 2019 annual meeting of shareholders and is incorporated herein by reference.


PART IV


ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES


The following Exhibits are filed with this Report:


Exhibit Number

 

Exhibit Name

1

 

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

2.1

 

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

2.2

 

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

3.1

 

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

3.2

 

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

3.3

 

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

3.4

 

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


54




3.5

 

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

3.6

 

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

3.7

 

Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.1 to our Form 8-K filed on February 1, 2017)

4.1

 

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

4.2

 

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

4.3

 

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

4.4

 

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

4.5

 

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

4.6

 

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

10.1

 

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

10.2

 

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

10.3

 

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

10.4

 

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

10.5

 

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

10.6

 

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

10.7

 

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

10.8

 

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

10.9

 

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

10.10

 

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

10.11

 

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

10.12

 

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

10.13

 

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

10.14

 

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

10.15

 

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

10.16

 

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

10.17

 

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

10.18

 

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

10.19

 

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

10.20

 

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


55




10.21

 

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

10.22

 

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

10.23

 

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

10.24

 

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

10.25

 

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

10.26

 

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

10.27

 

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

10.28

 

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

10.29

 

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

10.30

 

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

10.31

 

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

10.32

 

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

10.33

 

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

10.34

 

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

10.35

 

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

10.36

 

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

10.37

 

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

10.38

 

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

10.39

 

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

10.40

 

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

10.41

 

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

10.42

 

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

10.41

 

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

10.42

 

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

10.43

 

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

10.44

 

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

10.45

 

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

10.46

 

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

10.47

 

Separation Letter and Release, between the Company and Shelly Whitson (Incorporated by reference to Exhibit 10.1 to our Form 10-Q filed on November 8, 2018)

10.48

 

Amended and Restated 2014 Equity Incentive Plan (Incorporated by reference to Exhibit 10.2 to our Form 10-Q filed on November 8, 2018)

10.49

 

Agreement with Flowhub Holdings, LLC Safe dated November 5, 2018 (Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on November 9, 2018)


56




14.1

 

Code of Ethics

21.1*

 

Subsidiaries

23.1*

 

Consent of Hall & Company

31.1*

 

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

31.2*

 

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

32.1*

 

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

101

 

XBRL Interactive Data Files


(*)   Filed herewith.

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



57




SIGNATURES


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


Signature

 

Title

 

Date

 

 

 

 

 

/s/ Michael Feinsod

 

Principal Executive Officer

 

March 8, 2019

Michael Feinsod

 

 

 

 


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


Signature

 

Title

 

Date

 

 

 

 

 

/s/ Michael Feinsod

 

Principal Executive Officer and Chairman of the

 

March 8, 2019

Michael Feinsod

 

Board of Directors

 

 

 

 

 

 

 

/s/ Brian Andrews

 

Chief Financial Officer, Principal Financial and

 

March 8, 2019

Brian Andrews

 

Accounting Officer

 

 

 

 

 

 

 

/s/ Robert Frichtel

 

Director

 

March 8, 2019

Robert Frichtel

 

 

 

 

 

 

 

 

 

/s/ Peter Boockvar

 

Director

 

March 8, 2019

Peter Boockvar

 

 

 

 

 

 

 

 

 

/s/ Mark Green

 

Director

 

March 8, 2019

Mark Green

 

 

 

 

 

 

 

 

 

/s/ Duncan Levin

 

Director

 

March 8, 2019

Duncan Levin

 

 

 

 



58


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