UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549


FORM 10-Q

(Mark One)


þ

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2020.

 

 

o

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


Commission file number:   000-54457


GENERAL CANNABIS CORP

(Exact name of registrant as specified in its charter)


Colorado

 

90-1072649

(State of incorporation)

 

(IRS Employer Identification No.)

 

6565 East Evans Avenue

Denver, CO 80224

(Address of principal executive offices) (Zip Code)

 

(303) 759-1300

(Registrant’s Telephone Number, Including Area Code)


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


Title of each class

 

Name of each exchange
on which registered

 

Ticker symbol

N/A

 

N/A

 

N/A


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


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


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


Large accelerated filer  o

Smaller reporting company     þ

Non-accelerated filer    þ

Emerging growth company     o

Accelerated filer     o

 


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


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


As of June 25, 2020, there were 56,116,869 issued and outstanding shares of the Company’s common stock.





Explanatory Note


The Company is relying on the U.S. Securities and Exchange Commission March 25, 2020 Order Pursuant to Section 36 of the Exchange Act (Release No. 34-88465 (“Order”) in delaying the filing of this Quarterly Report for the three months ended March 31, 2020 due to circumstances related to the COVID-19 pandemic. In particular, COVID-19 has caused limited access to the Company’s facilities and disrupted normal interactions with its accounting personnel, auditors and others involved in the preparation of this Quarterly Report. The filing of this Quarterly Report on the date hereof will be considered a timely filing under the Order.






GENERAL CANNABIS CORP

FORM 10-Q


TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

3

Item 2.

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

17

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

21

Item 4.

Controls and Procedures

21

 

 

 

PART II. OTHER INFORMATION

23

 

 

 

Item 1.

Legal Proceedings

23

Item 1A.

Risk Factors

23

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

Item 3.

Defaults Upon Senior Securities

23

Item 4.

Mine Safety Disclosures

23

Item 5.

Other Information

23

Item 6.

Exhibits

24

 

 

 

 

Signatures

25




2




PART I.  FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS


GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED BALANCE SHEETS


 

 

March 31,
2020
(Unaudited)

 

December 31,
2019

ASSETS

 

 

 

 

Current Assets

 

 

 

 

Cash and cash equivalents

$

594,480

$

122,390

Accounts receivable, net

 

65,930

 

85,204

Notes receivable, net – current portion

 

470,820

 

375,000

Prepaid expenses and other current assets

 

840,922

 

546,970

Assets held for sale

 

 

375,218

Assets of discontinued operations

 

231,902

 

47,453

Total current assets

 

2,204,054

 

1,552,235

 

 

 

 

 

Note receivable, net

 

 

93,333

Property and equipment, net

 

204,623

 

1,507,327

Investment

 

250,000

 

250,000

Assets held for sale

 

 

15,584

Assets of discontinued operations

 

 

83,525

Total Assets

$

2,658,677

$

3,502,004

 

 

 

 

 

LIABILITIES & STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

Accounts payable and accrued expenses

$

1,280,602

$

1,221,194

Interest payable

 

92,340

 

93,375

Customer deposits

 

893,604

 

562,803

Accrued stock payable

 

60,900

 

80,657

Notes payable (net of discount)

 

2,640,434

 

2,230,684

Related party note payable (net of discount)

 

99,667

 

99,667

Warrant derivative liability

 

3,162,733

 

4,620,594

Liabilities held for sale

 

 

149,249

Liabilities of discontinued operations

 

123,217

 

207,993

Total current liabilities

 

8,353,497

 

9,266,216

 

 

 

 

 

Commitments and Contingencies (Note 8)

 

 

 

 

 

 

 

Stockholders’ Equity (Deficit)

 

 

 

 

Preferred stock, no par value; 5,000,000 shares authorized; no shares issued and outstanding at March 31, 2020 and December 31, 2019

 

 

Common Stock, $0.001 par value; 100,000,000 shares authorized; 40,281,881 shares and 39,497,480 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively.

 

40,282

 

39,498

Additional paid-in capital

 

63,550,821

 

61,468,034

Accumulated deficit

 

(69,285,923)

 

(67,271,744)

Total Stockholders’ Deficit

 

(5,694,820 )

 

(5,764,212 )

Total Liabilities & Stockholders’ Equity (Deficit)

$

2,658,677

$

3,502,004



See Notes to condensed consolidated financial statements.



3




GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


 

 

Three months ended
March 31,

 

 

2020

 

2019

REVENUES

 

 

 

 

Service

$

308,386

$

247,783

Rent and interest

 

16,729

 

14,821

Product sales

 

1,339,073

 

532,318

Total revenues

 

1,664,188

 

794,922

 

 

 

 

 

COSTS AND EXPENSES

 

 

 

 

Cost of service revenues

 

192,567

 

186,775

Cost of goods sold

 

1,231,413

 

388,074

Selling, general and administrative

 

1,039,934

 

1,053,551

Share-based expense

 

572,574

 

1,492,496

Professional fees

 

597,036

 

540,055

Depreciation and amortization

 

31,913

 

19,404

Total costs and expenses

 

3,665,437

 

3,680,355

 

 

 

 

 

OPERATING LOSS

 

(2,001,249)

 

(2,885,433)

 

 

 

 

 

OTHER (INCOME) EXPENSE

 

 

 

 

Amortization of debt discount

 

66,321

 

1,171,556

Loss on extinguishment of debt

 

1,137,428

 

Interest expense, net

 

171,048

 

111,013

Gain on warrant derivative liability

 

(1,375,620)

 

Gain on sale of building

 

(139,105)

 

 

Total other (income) expense, net

 

(139,928)

 

1,282,569

 

 

 

 

 

NET LOSS FROM CONTINUING OPERATIONS

$

(1,861,321)

$

(4,168,002)

 

 

 

 

 

Loss from discontinued operations

 

(152,858)

 

(345,693)

 

 

 

 

 

NET LOSS

$

(2,014,179)

$

(4,513,695)

 

 

 

 

 

PER SHARE DATA – Basic and diluted

 

 

 

 

Net loss from continuing operations per share

$

(0.05)

$

(0.12)

Net loss from discontinued operations per share

$

(0.00)

$

(0.01)

Net loss per common share

$

(0.05)

$

(0.12)

Weighted average number of common shares outstanding

 

39,694,890

 

36,222,752



See Notes to condensed consolidated financial statements.



4




GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


 

 

Three months ended
March 31,

 

 

2020

 

2019

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

Net loss

$

(2,014,179)

$

(4,513,695)

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

 

 

 

 

Amortization of debt discount

 

66,321

 

1,171,556

Depreciation and amortization expense

 

34,087

 

42,935

Amortization of loan origination fees

 

(2,487)

 

(2,847)

Bad debt expense

 

51,572

 

32,000

Share-based payments

 

572,574

 

1,492,496

Gain on warrant derivative liability

 

(1,375,620)

 

Loss on extinguishment of debt

 

1,137,428

 

Gain on discontinued operations

 

5,183

 

Gain on sale of building

 

(139,105)

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

204,502

 

(146,363)

Prepaid expenses and other assets

 

(261,778)

 

(93,845)

Inventory

 

 

20,228

Accounts payable and accrued liabilities

 

238,674

 

273,818

Net cash used in operating activities:

 

(1,482,828)

 

(1,723,717)

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

Purchase of property and equipment

 

(3,011)

 

(160,209)

Proceeds on sale of building

 

1,421,134

 

Lending on notes receivable

 

 

(485,000)

Net cash provided by (used in) investing activities

 

1,418,123

 

(645,209)

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

Proceeds from the exercise of warrants

 

90,000

 

Proceeds from notes payable

 

1,500,000

 

Payments on notes payable

 

(975,000)

 

Net cash provided by financing activities

 

615,000

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

550,295

 

(2,368,926)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

224,994

 

7,957,169

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

775,289

$

5,588,243

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION

 

 

 

 

Cash paid for interest

$

173,067

$

2,153

Cash paid for taxes

 

 

 

 

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

Operating lease right-of-use asset / Operating lease liability

$

$

154,200

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

 

167,163

 

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

 

668,336

 

Debt converted to equity

 

250,000

 

Beneficial conversion feature

 

233,500

 

Issuance of common stock to an employee

 

100,000

 


See Notes to condensed consolidated financial statements.



5




GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019


 

 

Common Stock

 

Additional

 

Accumulated

 

 

 

 

Shares

 

Amount

 

Paid-in Capital

 

Deficit

 

Total

January 1, 2020

 

39,497,480

$

39,498

$

61,468,034

$

(67,271,744)

$

(5,764,212)

Warrants issued with the 15% Notes

 

 

 

835,499

 

 

835,499

Common stock issued upon exercise of warrants

 

200,000

 

200

 

172,041

 

 

172,241

Common stock issued to an employee for services

 

42,735

 

43

 

99,957

 

 

100,000

Common stock issued upon conversion of debt

 

541,666

 

541

 

249,459

 

 

250,000

Expense in relation to beneficial conversion feature

 

 

 

233,500

 

 

233,500

Stock options granted to employees and Consultants

 

 

 

492,331

 

 

492,331

Net loss

 

 

 

 

(2,014,179)

 

(2,014,179)

March 31, 2020

 

40,281,881

$

40,282

$

63,550,821

$

(69,285,923)

$

(5,694,820)


 

 

Common Stock

 

Additional

 

Accumulated

 

 

 

 

Shares

 

Amount

 

Paid-in Capital

 

Deficit

 

Total

January 1, 2019

 

36,222,752

$

36,223

$

56,303,061

$

(51,787,947)

$

4,551,337

Stock options granted to employees and Consultants

 

 

 

1,470,993

 

 

1,470,993

Net loss

 

 

 

 

(4,513,695)

 

(4,513,695)

March 31, 2019

 

36,222,752

$

36,223

$

57,774,054

$

(56,301,642)

$

1,508,635



See Notes to condensed consolidated financial statements.



6




GENERAL CANNABIS CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


NOTE 1.   NATURE OF OPERATIONS, HISTORY AND PRESENTATION


Nature of Operations


General Cannabis Corp, a Colorado Corporation (the “Company,” “we,” “us,” “our,” or “GCC”) (formerly, Advanced Cannabis Solutions, Inc.), was incorporated on June 3, 2013, and provides services and products to the regulated cannabis industry. We currently trade on the OTCQB® Venture Market. As of March 31, 2020, our operations are segregated into the following two segments:


Operations Consulting and Products (“Operations Segment”)

 

Through Next Big Crop (“NBC”), we deliver comprehensive consulting services to the cannabis industry that include obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and construction, and expansion of existing operations.  During the three months ended March 31, 2020 and 2019, 73% and 76% of NBC’s revenue was with three customers and one customer, respectively.


NBC oversees our wholesale equipment and supply business, operated under the name “GC Supply,” which provides turnkey sourcing and stocking services to cultivation, retail and infused products manufacturing facilities. Our products include building materials, equipment, consumables and compliance packaging.  There are generally multiple suppliers for the products we sell; however, there are a limited number of manufacturers of certain high-tech cultivation equipment.


Capital Investments (“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 and (b) investing in businesses using cash or shares of our common stock.


Discontinued Operations - Security and Cash Transportation Services (“Security Segment”)

 

We provided 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. On December 26, 2019, the board of directors and management made the strategic decision to investigate a possible buyer for the security segment and if no buyer could be found, cease operations of the security segment. We transferred all our Colorado security contracts and employees to a company on January 16, 2020, in exchange for which we will receive $1.00 per man hour worked on existing contracts for a period of one year.  On February 6, 2020 we cancelled all our security contracts in California.


Discontinued Operations - Consumer Goods and Marketing Consulting (“Consumer Goods Segment”)


Our apparel business, Chiefton, had two primary revenue streams.  Chiefton Supply strived to create innovative, unique t-shirts, hats, hoodies and accessories. Our apparel was sold through our on-line shop, cannabis retailers, non-cannabis retailers, and specialty t-shirt and gift shops.  Chiefton Design provided design, branding and marketing strategy consulting services to the cannabis industry, which frequently included sourcing and selling customer-specific apparel and accessories.  On December 26, 2019, the board of directors and management made the strategic move to cease operations of Chiefton.  All operations of Chiefton were abandoned on December 31, 2019.


Our CBD retail business, STOA Wellness, opened in July of 2019.  STOA Wellness offered a curated collection of high quality CBD products for athletes and general wellness.  On December 26, 2019, the board of directors committed to a plan to cease operations of STOA Wellness.  We transferred all assets of STOA Wellness to an individual on January 10, 2020, in exchange for the release on the outstanding lease of the STOA retail front.  


Basis of Presentation


These unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange Commission (“SEC”), for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States of America (“U.S. GAAP”)



7



can be condensed or omitted. The condensed consolidated balance sheet for the year ended December 31, 2019 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.  The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto of the Company for the year ended December 31, 2019 which were included in the Annual Report on Form 10-K filed by the Company with the SEC on May 14, 2020.


In the opinion of management, these condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and notes thereto of the Company and include all adjustments, consisting only of normal recurring adjustments, considered necessary for the fair presentation of the Company’s financial position and operating results. The results for the three months ended March 31, 2020 are not necessarily indicative of the operating results for the year ending December 31, 2020, or any other interim or future periods.


Use of Estimates


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


Going Concern


The condensed consolidated financial statements have been prepared on a going concern basis, which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for at least the twelve months from the date these condensed consolidated financial statements are issued.  As of March 31, 2020 our cash of approximately $600,000 is not sufficient to absorb our operating losses and repay our debt of $2.7 million.  The warrants associated with this debt, if exercised in cash, would provide sufficient funds to retire the debt; however, there is no guarantee that these warrants will be exercised in cash or at all.  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 that we will be successful in such efforts.  Accordingly, there is substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.


Related Parties


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


·

Michael Feinsod – Executive 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.

·

Peter Boockvar – Audit committee chairman.

·

Seth Oster – Board member


Significant Accounting Policy Updates


See our Annual Report on Form 10-K for the year ended December 31, 2019 for discussion of the Company’s significant accounting policies. Since the date of the Annual Report, there have been no material changes to the Company’s significant accounting policies.



8



Recently Issued Accounting Standards


FASB ASU 2019-12 – “Income Taxes (Topic 740)” – In December 2019, the Financial Accounting Standards Board (“FASB”) issued guidance which simplifies certain aspects of accounting for income taxes.  The guidance is effective for interim and annual reporting periods beginning after December 15, 2020, and early adoption is permitted.  We do not expect adoption of this ASU to have a material effect on our consolidated financial statements.


FASB ASU 2018-13 – “Fair Value Measurement (Topic 820)”-  In August 2018, the FASB issued new disclosure guidance on fair value measurement. This new guidance modifies the disclosure requirements on fair value measurements, including removal and modifications of various current disclosures as well as some additional disclosure requirements for Level 3 fair value measurements. Some of these disclosure changes must be applied prospectively while others retrospectively depending on requirement.  We adopted ASU 2018-13 as of January 1, 2020.  There was no material impact to our financial statements or disclosures.


NOTE 2.  DISCONTINUED OPERATIONS


Security Segment


On December 26, 2019, our board of directors and management made the strategic decision to investigate a possible buyer for the Security Segment and if no buyer could be found, cease operations of the security segment. We transferred all our Colorado security contracts and employees to a company on January 16, 2020, in exchange for which we will receive $1.00 per man hour worked on existing contracts for a period of one year.  On February 6, 2020 we cancelled all our security contracts in California.  The assets and liabilities classified as held for sale for the security segment are presented separately in the balance sheet as of March 31, 2020 and December 31, 2019 and as discontinued operations as of March 31, 2020 and the operating results for the three months ended March 31, 2020 and 2019, respectively, are presented as discontinued operations.


Assets and liabilities of discontinued operations for the security segment included the following:


 

 

March 31,

 

December 31,

 

 

2020

 

2019

Cash and cash equivalents

$

176,854

$

77,380

Accounts receivable, net

 

51,093

 

280,058

Prepaid expenses and other current assets

 

 

17,780

Current assets discontinued operations

$

227,947

$

375,218

 

 

 

 

 

Property and equipment, net

$

$

15,584

Noncurrent assets discontinued operations

$

$

15,584

 

 

 

 

 

Accounts payable and accrued expenses

$

19,097

$

88,309

Customer deposits

 

 

60,940

Current liabilities discontinued operations

$

19,097

$

149,249


A breakdown of the discontinued operations is presented as follows:


 

 

Three months ended
March 31,

 

 

2020

 

2019

Service revenues

$

119,891

$

564,592

 

 

 

 

 

Cost of service revenues

 

88,599

 

449,937

Selling, general and administrative

 

147,761

 

206,967

Depreciation and amortization

 

2,174

 

21,632

Total costs and expenses

 

238,534

 

678,536

 

 

 

 

 

OPERATING LOSS

 

(118,643)

 

(113,944)

 

 

 

 

 

Interest expense, net

 

984

 

470

 

 

 

 

 

NET LOSS FROM DISCONTINUED OPERATIONS

$

(119,627)

$

(114,414)




9



The cash flows related to discontinued operations have not been segregated, and are included in the consolidated statements of cash flows.  The following table provides selected information on cash flows related to discontinued operations for the three months ended March 31, 2020 and 2019, respectively.


 

 

Three months ended
March 31,

 

 

2020

 

2019

Receivables

 

228,965

 

46,418

Prepaids and other

 

17,780

 

(11,471)

Depreciation and amortization

 

2,174

 

21,632

Capital expenditures

 

 

(1,331)

Accounts payable and accrued expenses

 

(69,212)

 

(50,323)

Customer deposits

 

(60,940)

 

14,816


Consumer Goods Segment


On December 26, 2019, our board of directors and management made the strategic move to cease operations of Chiefton.  On December 26, 2019, our board of directors committed to a plan to cease operations of STOA Wellness.  We transferred all assets of STOA Wellness to an individual on January 10, 2020, in exchange for the release on the outstanding lease of the STOA retail front.  The assets and liabilities classified as discontinued operations for the consumer goods segment are presented separately in the balance sheet as of March 31, 2020 and December 31, 2019 and the operating results for the three months ended March 31, 2020 and 2019, respectively, are presented as discontinued operations.


Assets and liabilities of discontinued operations included the following:


 

 

March 31,

 

December 31,

 

 

2020

 

2019

Cash and cash equivalents

$

3,955

$

25,223

Accounts receivable, net

 

 

7,836

Prepaid expenses and other current assets

 

 

14,394

Current assets discontinued operations

 

3,955

 

47,453

 

 

 

 

 

Right to use asset

$

$

83,525

Noncurrent assets discontinued operations

$

$

83,525

 

 

 

 

 

Accounts payable and accrued expenses

$

104,120

$

124,468

Operating lease liability – current portion

 

 

83,525

Current liabilities discontinued operations

$

104,120

$

207,993


A breakdown of the discontinued operations is presented as follows:


 

 

Three months ended
March 31,

 

 

2020

 

2019

Product Revenues

$

33

$

29,775

Cost of service revenues

 

 

24,022

Cost of goods sold

 

 

23,909

Selling, general and administrative

 

33,264

 

176,118

Professional fees

 

 

35,106

Depreciation and amortization

 

 

1,899

Total costs and expenses

 

33,264

 

261,054

 

 

 

 

 

OPERATING LOSS

 

(33,231)

 

(231,279)

 

 

 

 

 

NET LOSS FROM DISCONTINUED OPERATIONS

$

(33,231)

$

(231,279)




10



The cash flows related to discontinued operations have not been segregated, and are included in the consolidated statements of cash flows.  The following table provides selected information on cash flows related to discontinued operations for the three months ended March 31, 2020 and 2019.


 

 

Three months ended
March 31,

 

 

2020

 

2019

Receivables

 

7,836

 

10,944

Prepaids and other

 

14,394

 

(23,425)

Inventory

 

 

20,227

Depreciation and amortization

 

 

1,899

Capital expenditures

 

 

(42,703)

Accounts payable and accrued expenses

 

(20,348)

 

(31,236)

Customer deposits

 

 

(17,539)


NOTE 3.   ACCOUNTS RECEIVABLE AND CUSTOMER DEPOSITS


Our accounts receivable consisted of the following:


 

 

March 31,

 

December 31,

 

 

2020

 

2019

Accounts receivable

$

176,930

$

196,204

Less:   Allowance for doubtful accounts

 

(111,000)

 

(111,000)

Total

$

65,930

$

85,204


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 recovery of $508 during the three months ended March 31, 2020 and bad debt expense of $20,000 during the three months ended March 31, 2019.


Our customer deposit liability had the following activity:


 

 

Amount

December 31, 2019

$

562,803

Additional deposits received

 

1,768,090

Less:  Deposits recognized as revenue

 

(1,437,289)

March 31, 2020

$

893,604


NOTE 4.  NOTES RECEIVABLE


Our notes receivable consisted of the following:


 

 

March 31,

 

December 31

 

 

2020

 

2019

CCR Note

$

375,000

$

375,000

BB Note

 

100,000

 

100,000

Total Principal

 

475,000

 

475,000

Unamortized loan origination fee

 

(4,180)

 

(6,667)

 

 

470,820

 

468,333

Less: Current portion

 

(470,820)

 

(375,000)

Long-term portion

$

$

93,333


In March 2019, we agreed to loan $375,000 to Consolidated C.R., LLC (“CCR”) pursuant to the terms of a convertible promissory note (“CCR Note”), bearing interest at 12% per annum, collateralized by virtually all of the assets of CCR and a maturity date of September 2020.  Interest is due on the first of every month starting in November 2019.  CCR is a vertically integrated medical cannabis company located in San Juan, Puerto Rico.  As of March 31, 2020, we had loaned an aggregate of $375,000 to CCR pursuant to the CCR Note.  The CCR Note included a loan origination fee of $15,000, which is being recognized as interest income over the term of the agreement.




11



On January 3, 2019, we loaned $100,000 to Beacher Brewing, LLC (“BB”) pursuant to the terms of a promissory note (“BB Note”), bearing interest at 11% per annum and a maturity date of January 3, 2020.  Interest is due in advance at the beginning of each quarter.  On December 13, 2019, we agreed to extend the maturity date of the BB Note to January 3, 2021.  


NOTE 5.  ACCRUED STOCK PAYABLE


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


 

 

Amount

 

Number of
Shares

December 31, 2019

$

80,657

 

34,469

Employee stock issuance

 

(80,657)

 

(34,469)

Consultant stock award – accrual

 

60,900

 

100,000

March 31, 2020

$

60,900

 

100,000


On January 29, 2019, we granted an employee $100,000 worth of our common stock, with 50% vesting on July 29, 2019 and the remaining amount vesting over eighteen months.  Based on a stock price of $2.34 on the date of grant, the employee would receive 42,736 shares of our common stock upon vesting.  We are recognizing the value of the grant ratably over the vesting periods. In February 2020, the vesting was accelerated, and we issued all of the common stock associated with this transaction.  


On February 18, 2020 we granted a consultant 100,000 fully vested shares for consulting services.  Based on a stock price of $0.61 on the date of grant, the consultant will receive $60,900 worth of our common stock.   As of March 31, 2020, none of the stock had been issued.


NOTE 6.  NOTES PAYABLE


Our notes payable consisted of the following:


 

 

March 31,

 

December 31

 

 

2020

 

2019

2019 12% Notes

$

$

1,506,000

SBI Note

 

684,000

 

750,000

15% Notes

 

2,231,000

 

200,000

Related party note payable

 

100,000

 

100,000

Unamortized debt discount

 

(274,899)

 

 (225,649)

 

 

2,740,101

 

2,330,351

Less: Current portion

 

(2,740,101)

 

(2,330,351)

Long-term portion

$

$


SBI Debt


In July 2019, we completed a $855,000 private placement pursuant to a promissory note (“SBI Note”) with SBI Investments LLC, 2014-1 (“SBI”), bearing interest at 10% with principal due on October 18, 2019.  On October 18, 2019, SBI agreed to an extension of the maturity date of the SBI Note to November 1, 2019. On November 1, 2019, SBI agreed to another extension of the maturity date to November 15, 2019.  On November 15, 2019, SBI agreed to another extension of the maturity date to November 29, 2019 with an increase in principal amount of the note from $855,000 to $905,000.  On November 27, 2019, SBI agreed to an extension of the maturity date to December 13, 2019.  On December 13, 2019, SBI agreed to extend the maturity date to December 20, 2019.  On December 30, 2019 SBI agreed to extend the maturity date of the note to January 31, 2020, upon the payment of $195,911, of which $40,911 was for accrued interest and $155,000 towards the outstanding principal of the SBI Note.  


On February 18, 2020, we entered into a promissory note exchange agreement with SBI pursuant to which the original SBI Note was exchanged for a new convertible promissory note (the “Convertible Note”).  The Convertible Note has a principal amount of $934,000, an interest rate of 10% per annum and a maturity date of February 18, 2021.  The Convertible Note may be converted at the option of SBI into shares of common stock at a conversion price equal to 80% of the Market Price; provided that the conversion price shall in no event be less than $0.45 per share.  The exchange of the SBI Note for the Convertible Note is treated as a debt extinguishment.  The additional $184,000 of principal was treated as a debt extinguishment and included in our condensed consolidated statement of operations.  We determined that the Convertible Note should be accounted for in accordance with FASB ASC 470-20 which addresses “Accounting for Convertible Securities with Beneficial Conversion Features”.  The beneficial conversion feature is calculated at its intrinsic value (that is, the difference between the conversion price of $0.49 at the date of the note issuance and the fair value of the common stock into which the debt is convertible at the commitment date, per share being $0.61, multiplied by the number of shares into which the debt is convertible).  The valuation of the beneficial conversion feature recorded



12



cannot be greater than the face value of the note issued.  We recorded $233,500 as additional paid in capital and as a debt extinguishment and included in our condensed consolidated statement of operations. During the quarter ended March 31, 2020, SBI converted $250,000 aggregate principal amount of the Convertible Note into 541,666 shares of our common stock.


15% Notes


In December 2019, we completed a private placement of with certain accredited investors pursuant to an unsecured promissory note (the “15% Notes”) with an aggregate principal amount of $300,000.  In February and March 2020, we completed private placements with certain accredited investors, including holders of $1,506,000 aggregate principal amount of our 2019 12% Notes (as defined below), of 15% Notes with an aggregate principal amount of $2,031,000 in exchange for $525,000 of new funding and the cancellation of $1,506,000 aggregate principal amount of the 2019 12% Notes.  The 15% Notes have an annual interest rate of 15% and mature on January 31, 2021.  The 15% Notes provide that they shall be repaid in full out of the proceeds of any new debt or equity capital raise with net proceeds of more than $5,000,000.  In connection with the issuance of the 15% Notes, each holder of 15%Notes received three warrants (i.e., a 2020 A Warrant, a 2020 B Warrant and a 2020 C Warrant) to acquire shares of common stock at an exercise price equal to $0.45 per share, with the number of shares subject to each warrant equal to one share for each $1.00 of principal amount of 15% Notes issued to the noteholder.  The 2020 A Warrants have an expiration date of December 31, 2020, the 2020 B Warrants have an expiration date of December 31, 2021, and the 2020 C Warrants have an expiration date of December 31, 2022 (collectively, the “15% Warrants”).  By way of example, if an investor was issued a 15% Note with a principal amount of $250,000, such noteholder would receive a 2020 A Warrant to purchase 250,000 shares of common stock, a 2020 B Warrant to purchase 250,000 shares of common stock and a 2020 C Warrant to purchase 250,000 shares of common stock.  Accordingly, as of March 31, 2020, the Company has issued 15% Warrants to purchase a total of 6,993,000 shares of common stock to the holders of 15% Notes.  


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


For purposes of determining the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the 15% Warrants as of March 2020, were:


Current stock price

$  0.45 - 0.67

Exercise price

$  0.45

Risk-free interest rate

0.68 - 1.62 %

Expected dividend yield

Expected term (in years)

0.84 – 3.06

Expected volatility

112 - 119 %


2019 12% Notes


In September 2019, we completed a private placement with certain accredited investors, including holders of $1,106,000 aggregate principal amount of our 8.5% Notes, pursuant to (a) a senior unsecured promissory note, bearing interest at 12% payable quarterly, with principal due October 31, 2020, with an option for us to extend the due date to October 31, 2021 (“2019 12% Notes”) and (b) warrants with an exercise price of $1.30 per share and a life of 1.1 years; however, if we prepay the 2019 12% Notes at any time the life extends to October 31, 2022 (“2019 12% Warrants”) (combined the “2019 12% Agreements”).  Pursuant to the 2019 12% Agreements, we could prepay the 2019 12% Notes at any time, but in any event were required to pay at least one year of interest.


In February 2020, we issued $1,506,000 aggregate principal amount of 15% Notes to the holders of the outstanding 12% Notes in exchange for the cancellation of the outstanding 12% Notes.


Loan on Building


On January 8, 2020 we entered a $975,000 deed of trust (the “Mortgage Loan”) secured by a first mortgage lien on the property located in Denver, Colorado.  The Mortgage Loan matures on December 31, 2020 and accrues interest at a rate of equal to the greater of 5.25% in excess of the Prime Rate or 10% per annum, payable on a monthly basis.  This loan was paid in full on March 20, 2020 with the sale of our building.   




13



NOTE 7.  WARRANT DERIVATIVE LIABILITY


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

 

In February 2020, one of the warrant holders exercised 200,000 warrants. We received $90,000 in cash for the exercise and booked an adjustment to the derivative liability of $82,241 as a result of the transaction. As of March 31, 2020 there were 8,466,666 of these warrants outstanding.


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


 

 

May 31, 2019

 

March 31, 2020

Number of shares underlying the warrants

 

3,000,000

 

8,466,666

Fair market value of stock

$

0.95

$

0.47

Exercise price

$

1.30

$

0.45

Volatility

 

133%

 

122%

Risk-free interest rate

 

1.93%

 

0.37%

Warrant life (years)

 

5.00

 

4.16

 

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

 

 

Three months ended
March 31,

 

 

2020

 

2019

Beginning balance as of December 31

$

4,620,593

$

Warrant exercise

 

(82,241)

 

Change in fair value of warrants derivative liability

 

(1,375,619)

 

Ending balance

$

3,162,733

$


NOTE 8.   COMMITMENTS AND CONTINGENCIES


Legal


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


NOTE 9.   STOCKHOLDERS’ EQUITY


2019 Capital Raise


On May 31, 2019 we received gross proceeds of $3 million by issuing three million shares of our common stock and three million warrants to purchase shares of our common stock in a registered direct offering for $1.00 per 2019 Unit. The 2019 Warrants had an exercise price of $1.30 per share at issuance and are exercisable for five years from the date of issuance. The number of shares issuable pursuant to the warrants granted under the 2019 Warrants, as well as the exercise price of those warrants, is subject to adjustment as a result of certain future equity issuances of securities by the Company at a price below the then-effective exercise price of the 2019 Warrants. As a result of such subsequent issuances of securities by the Company during the fourth quarter of 2019, the exercise price of the 2019 Warrants had decreased to $0.45 per share and the number of shares subject to the 2019 Warrants had increased to 8,666,666 shares of common stock as of December 31, 2019. As of March 31, 2020, there were 8,466,666 of these warrants outstanding.


We received cash of $2,604,355 which is net of $395,645 of issuance costs. Of the gross proceeds, we recorded $2,416,422 as a warrant derivative liability, as discussed in Note 7.


Share-based compensation


We use the fair value method to account for stock-based compensation.  We recorded $572,574 and $1,492,496 in compensation expense, for the three months ended March 31, 2020 and 2019, respectively.  This includes expense related to options issued in prior years for which the requisite service period for those options includes the current period as well as options issued in the current period.  The fair value of these instruments was calculated using the Black-Scholes option pricing method.  


As of March 31, 2020, there was approximately $605,729 of total unrecognized compensation expense related to unvested Employee Awards, which is expected to be recognized over a weighted-average period of eleven months.


14


Feinsod Employment Agreement


On August 6, 2019, we entered into an agreement (the “Feinsod Agreement”) with Michael Feinsod for his service as Chief Executive Officer.  Pursuant to the agreement, Mr. Feinsod received 1,000,000 stock options that vest when our stock price has a trading price of equal to or above $4.51 per share for five consecutive days.  The options have an exercise price of $0.83 per share and a ten-year life.  These options were issued under the Incentive Plan.  The options were valued using the Monte Carlo method. For the three months ended March 31, 2020, we recognized approximately $57,000 of share-based compensation expense related to these options.   


The underlying assumptions used in the Monte Carlo simulations to determine the fair value of options were:


 

August 6, 2019

Current stock price

$  0.83

Exercise price

$  0.83

Vesting goal

$  4.51

Risk-free interest rate

1.73%

Expected term (in years)

10

Expected volatility

123%


NOTE 10.   SEGMENT INFORMATION


Our operations are organized into two segments: Operations Consulting and Products; and Capital Investments.  All revenue originates, and all assets are located in the United States.  Segment information is presented in accordance with ASC 280, "Segments Reporting." This standard is based on a management approach that requires segmentation based upon the Company’s internal organization and disclosure of revenue and certain expenses based upon internal accounting methods. The Company’s financial reporting systems present various data for management to run the business, including internal profit and loss statements prepared on a basis not consistent with GAAP. The following information is presented net of discontinued operations. For more information see Note 3.


Three months ended March 31


2020

 

Operations

 

Investments

 

Total

Services

$

308,386

$

$

308,386

Rent and interest

 

 

16,729

 

16,729

Product

 

1,339,073

 

 

1,339,073

Total Revenues

 

1,647,459

 

16,729

 

1,664,188

Costs and expenses

 

(1,616,487)

 

 

(1,616,487)

 

$

30,972

$

16,729

 

47,701

Corporate

 

 

 

 

 

(1,909,022)

 

 

 

 

Net loss

$

(1,861,321)


2019

 

Operations

 

Investments

 

Total

Services

$

247,783

$

$

247,783

Rent and interest

 

 

14,821

 

14,821

Product

 

532,318

 

 

532,318

Total revenue

 

780,101

 

14,821

 

794,922

Costs and expenses

 

(677,381)

 

(40,075)

 

(717,456)

 

$

102,720

$

(25,254)

 

77,466

Corporate

 

 

 

 

 

(4,245,468)

 

 

 

 

Net loss

$

(4,168,002)


 

 

March 31,

 

December 31,

Total assets

 

2020

 

2019

Operations

$

709,578

$

441,841

Investments

 

522,369

 

402,988

Corporate

 

1,194,828

 

2,135,395

 

$

2,426,775

$

2,980,224


15



NOTE 11.   SUBSEQUENT EVENTS


On April 7, 2020, we entered into an Asset Purchase Agreement (the “Agreement”) with The Organic Seed, LLC, doing business under the name Cannasseur (the “Seller”), pursuant to which we agreed to acquire the assets of the Seller which includes a recreational retail dispensary, a 12,000 square foot light deprivation greenhouse, and a manufacturing facility based in Pueblo West, Colorado.  The Agreement provides the purchase price to acquire Cannasseur is $2,350,000 (the “Purchase Price”). The purchase price will be paid by issuing to the Seller shares of common stock of the Company equal to the purchase price divided by the volume weighted average per share price of the Company’s shares for 30 consecutive trading days ending on the second trading day prior to the closing (the “VWAP”); provided that if the VWAP exceeds $0.55 per share, then the VWAP will equal $0.55 per share for purposes of the foregoing calculation; and if the VWAP is less than $0.45 per share, then the VWAP will be adjusted to equal $0.45 for the purposes of the foregoing calculation. The closing is subject to approval of the transaction by the Colorado Marijuana Enforcement Division, as well as other customary closing conditions.


On May 25, 2020, following receipt of approval of the transaction by the Colorado Marijuana Enforcement Division, we closed the acquisition of Dalton Adventures, LLC, pursuant to which the we had acquired the assets of Dalton Adventures, LLC that constitute the business of SevenFive Farm, a cultivation facility in Boulder, Colorado.  The purchase price paid by us to the Dalton Adventures, LLC was 8,859,117 shares of common stock.  Dalton Adventures, LLC may require us to repurchase in cash 25% of the shares issued to Dalton Adventures, LLC at the closing at a repurchase price equal to the same VWAP used to determine the number of shares issued to Dalton Adventures, LLC at closing.  


On May 29, 2020, we entered into a subscription agreement with Hershey Strategic Capital, LP and Shore Ventures III, LP (collectively, the “Investor”) with respect to the sale of shares of common stock and warrants to purchase common stock (collectively, the “securities”).  The sales of the securities to the Investor consists of a minimum of $2,185,000 of securities and a maximum of $3,000,000 of securities, as described further below.  The purchase price of the securities at each closing is as follows: (i) the purchase price of each share of common stock is $0.3983 per share, and (ii) for each one dollar invested by the Investor, the Investor receives a warrant to purchase a number of shares of common stock equal to 75% of the number of shares of common stock purchased by the Investor at an exercise price per share equal to $0.5565.  The warrants have a term of five years. The subscription agreement provides for the sale of securities in three closings.  At the first closing, which occurred on May 29, 2020, we sold $800,000 of securities to the Investor, representing 2,008,536 shares of common stock and warrants to purchase 1,506,402 shares of common stock. At the second closing, which occurred on June 3, 2020, we sold to the Investor $1,385,000 of the securities at the same price sold in the first closing.  A third closing will be held with respect to the sale of $815,000 of the securities if Adam Hershey, the managing member of the Investor, is “Approved for Suitability” within one year of the date of the subscription agreement by State of Colorado’s Marijuana Enforcement Division (“MED”).   Accordingly, a total of 7,532,010 shares of common stock and warrants to purchase 5,649,007 shares of common stock may be sold pursuant to the subscription agreement with the Investor.



16




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


This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide an understanding of our financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year.  This discussion should be read in conjunction with the Condensed Consolidated Unaudited Financial Statements contained in this Quarterly Report on Form 10-Q and the Condensed Consolidated Financial Statements and related notes and MD&A appearing in our Annual Report on Form 10-K for the year ended December 31, 2019. The results of operations for an interim period may not give a true indication of results for future interim periods or for the year.


Cautionary Statement Regarding Forward Looking Statements


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


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


COVID-19


The recent outbreak of the novel coronavirus disease (“COVID-19”), was labeled a global pandemic by the World Health Organization in March 2020 and has led to material and adverse impacts on the U.S. and global economies and created widespread uncertainty, including locations where we do business. As of the date of this Quarterly Report on Form 10-Q, we have not experienced significant disruption in our operations as a result of the COVID-19 pandemic and are conducting business with modifications to employee travel and employee work locations, among other modifications. We will continue to actively monitor the development of the COVID-19 pandemic and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, clients, partners, and stockholders.


The full extent of the pandemic, related business and travel restrictions, governmental regulations and changes to consumer behavior intended to reduce its spread are uncertain as of the date of this Quarterly Report on Form 10-Q, and the timing of the peak of the pandemic and its ultimate impact on the U.S. and global economies remains uncertain.  Therefore, the full extent to which the COVID-19 pandemic may impact our results of operations, liquidity or financial position is uncertain.  In addition, the COVID-19 pandemic has had and is likely to continue to have adverse effects on our clients, suppliers and third-party business partners. Management continues to monitor the impact that the COVID-19 pandemic is having on the Company and the economies in which we operate.  We anticipate that our liquidity may be materially impacted by the COVID-19 pandemic and we expect that the effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods.


Our Products, Services and Customers

 

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


Operations Consulting and Products (“Operations Segment”)

 

Through Next Big Crop (“NBC”), we deliver comprehensive consulting services to the cannabis industry that include obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and construction, and expansion of existing operations.  During the three months ended March 31, 2020 and 2019, 73% and 76% of NBC’s revenue was with three customers and one customer, respectively.


NBC oversees our wholesale equipment and supply business, operated under the name “GC Supply,” which provides turnkey sourcing and stocking services to cultivation, retail and infused products manufacturing facilities. Our products include building materials, equipment, consumables and compliance packaging.  There are generally multiple suppliers for the products we sell; however, there are a limited number of manufacturers of certain high tech cultivation equipment.



17




NBC provides a competitive advantage as we plan to evaluate and operate licensed cultivation facilities.


Capital Investments (“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, or (b) investing in businesses using cash or shares of our common stock.


Results of Operations

 

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


Consolidated Results


 

 

Three months ended March 31,

 

 

 

Percent

 

 

2020

 

2019

 

Change

 

Change

Revenues

$

1,664,188

$

794,922

$

869,266

 

109%

Costs and expenses

 

(3,665,437)

 

(3,680,355)

 

14,918

 

0%

Other income (expense)

 

139,928

 

(1,282,569)

 

1,422,497

 

(111)%

Net loss from continuing operations

 

(1,861,321)

 

(4,168,002)

 

2,306,681

 

(55)%

Loss from discontinued operations

 

(152,858)

 

(345,693)

 

192,835

 

(56)%

Net loss

$

(2,014,179)

$

(4,513,695)

$

2,499,516

 

(55)%


Revenues


Revenue increased for both our Operation Consulting and Investments segments. See Segment discussions below for further details.


Costs and expenses


 

 

Three months ended March 31,

 

 

 

Percent

 

 

2020

 

2019

 

Change

 

Change

Cost of service revenues

$

192,567

$

186,775

$

5,792

 

3%

Cost of goods sold

 

1,231,413

 

388,074

 

843,339

 

217%

Selling, general and administrative

 

1,039,934

 

1,053,551

 

(13,617)

 

(1)%

Share-based compensation

 

572,574

 

1,492,496

 

(919,922)

 

(62)%

Professional fees

 

597,036

 

540,055

 

56,981

 

11%

Depreciation and amortization

 

31,913

 

19,404

 

12,509

 

 64%

 

$

3,665,437

$

3,680,355

$

(14,918)

 

0%


Cost of service revenues typically fluctuates with the changes in revenue for our Operation Consulting Segment.  Cost of goods sold varies with changes in product sales, including an increase in products sold by our Operation Consulting Segment, which have smaller margin. See Segment discussions below for further details.


Selling, general and administrative expense stayed relatively static for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.


Share-based compensation included the following:


 

 

Three months ended March 31,

 

 

 

Percent

 

 

2020

 

2019

 

Change

 

Change

Employee awards

$

342,248

$

1,298,845

$

(956,597)

 

(74)%

Consulting awards

 

71,015

 

9,777

 

61,238

 

626%

Feinsod Agreement

 

159,311

 

183,874

 

(24,563)

 

(13)%

 

$

572,574

$

1,492,496

$

(919,922)

 

(62)%


18



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.  The decrease in expense for the three month ended March 31, 2020 as compared to March 31, 2019 is due to the restructuring we did at the end of 2019 and beginning of 2020.  We decreased our employee count by over 50% resulting in a sharp decrease in employee award expense.  Consulting awards are granted to third parties in lieu of cash for services provided.  The Feinsod Agreement expense represents share-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 for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019 due to legal and accounting fees spent on acquisitions.


Other Expense


 

 

Three months ended March 31,

 

 

 

Percent

 

 

2020

 

2019

 

Change

 

Change

Amortization of debt discount and equity issuance costs

$

66,321

$

1,171,556

$

(1,105,235)

 

(94)%

Interest expense

 

171,048

 

111,013

 

60,035

 

54%

Gain on derivative liability

 

(1,375,620)

 

 

(1,375,620)

 

(100)%

Loss on extinguishment of debt

 

1,137,428

 

 

1,137,428

 

100%

Gain on sale of building

 

(139,105)

 

 

(139,105)

 

(100)%

 

$

(139,928)

$

1,282,569

$

(1,422,497)

 

(111)%


Amortization of debt discount was lower in 2020 compared to 2019, due to the April 2018 debt paid off in the second quarter of 2019.  This was offset slightly by new debt issued in the third and fourth quarters of 2019 and the first quarter of 2020.  Interest expense increased in 2019 due to the new debt entered in the third and fourth quarters of 2019 and the first quarter of 2020.  The gain on warrant derivative liability reflects the change in the fair value of the 2019 Warrants.  The loss on extinguishment of debt is due to the conversion and extension of the SBI debt and the exchange of the 12% Notes into the 15% Notes.  The gain on the sale of the building is the gain we recognized as a result of the sale of our building in March 2020.


Operations Consulting and Products


 

 

Three months ended March 31,

 

 

 

Percent

 

 

2020

 

2019

 

Change

 

Change

Revenues

$

1,647,459

$

780,101

$

867,358

 

111%

Costs and expenses

 

(1,616,487)

 

(677,381)

 

(939,106)

 

139%

 

$

30,972

$

102,720

$

(71,748)

 

70%


Increased revenues in 2020 are primarily related to increased product sales and license application fees, offset by a decrease in recurring consulting fees. Costs and expenses increased in 2020 due to increased product sales, offset by a reduction in employee costs.


Investments


 

 

Three months ended March 31,

 

 

 

Percent

 

 

2020

 

2019

 

Change

 

Change

Revenues

$

16,729

$

14,821

$

1,908

 

13%

Costs and expenses

 

 

(40,075)

 

40,075

 

(100)%

 

$

16,729

$

(25,254)

$

41,983

 

(166)%


The slight increase in revenues in 2020 is related to a full quarter of interest revenue in 2020 as compared to 2019.  All revenue is from interest and loan origination fees related to these new notes.  The expense in 2019 was legal fees incurred for the new notes receivable agreements.


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, as well as potential loans, investments, and business and real property acquisitions.



19



In May and June 2020, we received $2,185,000 in cash by issuing 5,485,814 shares of our common stock and 4,114,360 warrants to purchase common stock.


During January through March of 2020, we received $525,000 in cash in a private placement with certain accredited investors pursuant to the 15% Notes.


Sources and uses of cash


We had cash of $775,289 and $224,994, respectively, as of March 31, 2020 and December 31, 2019.  Our cash flows from operating, investing and financing activities were as follows:


 

 

Three months ended March 31,

 

 

2020

 

2019

Net cash used in operating activities

$

(1,482,828)

$

(1,723,717)

Net cash provided by (used in) investing activities

 

1,418,123

 

(645,209)

Net cash provided by financing activities

$

615,000

$


Net cash used in operating activities decreased in 2020 by $240,889 compared to 2019, primarily due to a reduction of cash-based expenses, such as salaries for reduced personnel.


Net cash provided by investing activities in 2020 relates primarily to the sale of our building in March 2020.  2019 related primarily to issuing notes receivable, along with purchasing fixed assets.  


Net cash provided by financing activities in 2020 is in relation to exercises of warrants and new debt, offset by debt payments.


Capital Resources


We have no material commitments for capital expenditures as of March 31, 2020.  Part of our growth strategy, however, is to acquire businesses.  We would fund such activity through cash on hand, the issuance of debt, common stock, warrants for our common stock or a combination thereof.


Non-GAAP Financial Measures


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


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


20



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


 

 

Three months ended
March 31,

 

 

2020

 

2019

Net loss

$

(2,014,179)

$

(4,513,695)

Adjustment for loss from discontinued operations

 

152,858

 

345,693

Loss from continuing operations attributable to common stockholders

 

(1,861,321)

 

(4,168,002)

Adjustments:

 

 

 

 

Acquisition-related expense

 

308,196

 

Share-based expense

 

572,574

 

1,492,496

Depreciation and amortization

 

31,913

 

19,404

Amortization of debt discount

 

66,321

 

1,171,556

Interest expense

 

171,048

 

111,013

Loss on extinguishment of debt

 

1,137,428

 

Gain on sale of building

 

(139,105)

 

Gain on warrant derivative liability

 

(1,375,620)

 

Total adjustments

 

722,755

 

2,794,469

Adjusted EBITDA

$

(1,088,566)

$

(1,373,533)

 

 

 

 

 

Per share:

 

 

 

 

Net loss – Basic and Diluted

$

(0.05)

$

(0.12)

Adjusted EBITDA – Basic and Diluted

 

(0.03)

 

(0.04)

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

Net loss – Basic and Diluted

 

39,694,890

 

36,222,752

Adjusted EBITDA – Basic and Diluted

 

39,497,480

 

36,222,752


Off-balance Sheet Arrangements


We currently have no off-balance sheet arrangements.


Critical Accounting Policies

 

Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates used to prepare the condensed financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, and Note 1 to the Condensed Consolidated Financial Statements in this Form 10-Q.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


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


ITEM 4.  CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures


We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial and Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.




21



We carried out an evaluation under the supervision and with the participation of management, including our Principal Executive Officer and Principal Financial and Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2020, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer have concluded that, our disclosure controls and procedures were not effective as of March 31, 2020 because of a material weakness in our internal control over financial reporting as more fully described in Part II - Item 9A of the Annual Report on Form 10-K/A for the year ended December 31, 2019.

 

Restatement of Consolidated Financial Statements


On July 1, 2020, the audit committee of the board of directors and management of the Company concluded that the Company’s previously issued audited consolidated financial statements for the year ended December 31, 2019, should no longer be relied upon because of an error in the Company’s accounting for the 2019 Warrants. As previously described, the error relates to the determination of the number of shares of common stock subject to the 2019 Warrants as of December 31, 2019 as a result of certain anti-dilution adjustment provisions contained in the 2019 Warrants. This Amendment restates the Company’s audited consolidated financial statements for the year ended December 31, 2019 to correctly account for the anti-dilution adjustment provisions contained in the 2019 Warrants.


Changes in Internal Control over Financial Reporting

 

Management recognizes the Company’s operations and business have been disrupted to an unprecedented degree due to the conditions surrounding the COVID-19 pandemic spreading throughout the United States. These disruptions have resulted in limited access to the Company’s facilities and have interfered with management’s ability to work with its independent accountants, professional advisors and support staff in order to complete the Company’s financial statements and related disclosures. Management is also making necessary changes to the Company’s internal control environment and policies and procedures to improve the overall effectiveness of the Company’s internal control in light of the disruptions caused by the ongoing COVID-19 pandemic.


Remediation Plan

 

Management has developed a remediation plan to address the material weakness. Implementation of the remediation plan consists of redesigning existing quarterly control procedures to enhance management’s accounting for any derivative or convertible securities issued by the Company. Management believes the foregoing efforts will effectively remediate the material weakness. As the Company continues to evaluate and work to improve its internal control over financial reporting, management may execute additional measures to address potential control deficiencies or modify the remediation plan described above. Management will continue to review and make necessary changes to the overall design of the Company’s internal control environment, as well as to policies and procedures to improve the overall effectiveness of internal control over financial reporting.


22




PART II.  OTHER INFORMATION


ITEM 1.    LEGAL PROCEEDINGS


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


ITEM 1A.  RISK FACTORS


Except as described below, as of the date of this report, there have been no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.  


The Company’s business, results of operations and financial condition may be adversely affected by pandemic infectious diseases, particularly the recent novel coronavirus strain known as COVID-19.


Pandemic infectious diseases, such as the current COVID-19 strain, may adversely impact the Company’s business, consolidated results of operations and financial condition. The global spread of COVID-19 has created significant volatility and uncertainty and economic disruption. The extent to which COVID-19 impacts the Company’s business, operations and financial results will depend on numerous evolving factors that the Company may not be able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic on economic activity and actions taken in response; the effect on the Company’s customers and customer demand for the Company’s services, products and solutions; the Company’s ability to sell and provide its services and solutions, including as a result of travel restrictions and people working from home; the ability of the Company’s customers to pay for the Company’s services and solutions; and any closures of the Company’s offices and the offices and facilities of the Company’s customers. COVID-19, as well as measures taken by governmental authorities to limit the spread of this virus, may interfere with the ability of the Company’s employees, suppliers, and other business providers to carry out their assigned tasks or supply materials or services at ordinary levels of performance relative to the requirements of the Company’s business, which may cause the Company to materially curtail certain of its business operations. Any of these events could materially adversely affect the Company’s business, financial condition, results of operations and/or stock price.


The loss of one of our largest customers, or a significant reduction in the revenue we generate from these customers, could materially adversely affect our revenue, profitability and results of operations.


Revenue from our largest customers have historically accounted for a significant amount of our business.  For instance, during the first quarter of 2020, 73% of NBC’s revenue was with three customers, which comprised approximately 72% of our total consolidated revenue for such quarter. During the first quarter of 2020, approximately 19% of our revenue was derived from the delivery of services, for which we have contracts, and approximately 80% was derived from the sale of products. Generally, our agreements with our customers for services allow them to terminate service with a limited notification period, while product sales agreements do not include any minimum or continuing obligations to purchase our products.  We cannot assure you that our largest customers will not terminate services or cease purchasing our products in favor of other service and/or product providers, significantly reduce orders, or seek price reductions in the future.  Any such event could have a material adverse effect on our revenue, profitability and results of operations.


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


None.


ITEM 3.    DEFAULTS UPON SENIOR SECURITIES


None.


ITEM 4.    MINE SAFETY DISCLOSURES


Not applicable.


ITEM 5.   OTHER INFORMATION


None.


23



ITEM 6.  EXHIBITS


Exhibits

 

Description

10.1

 

Deed of Trust Note between 6565 E Evans Ave LLC and W Financial REIT, Ltd., incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed January 14, 2020

10.2

 

Form of Unsecured Promissory Note, dated February 21, 2020, issued by the Company to certain investors, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 24, 2020

10.3

 

Form of 2020 A Warrant, 2020 B Warrant and 2020 C Warrant, dated February 21, 2020, issued by the Company to certain investors, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed February 24, 2020

10.4

 

Exchange Agreement between the Company and SBI Investments LLC, 2014-1, dated as of February 18, 2020, incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed February 24, 2020

10.5

 

Convertible Promissory Note, dated February 18, 2020, issued by the Company to SBI Investors LLC, 2014-1, incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed February 24, 2020

10.6

 

Subscription Agreement entered into as of May 31, 2020 by the Company, Hershey Strategic Capital, LP and Shore Ventures III, LP, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 1, 2020

10.7

 

Form of Warrant, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed June 1, 2020

10.8**

 

Consultant Agreement, dated June 3, 2020, by and between the Company and Adam Hersey

31.1

 

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

 

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document


**   Filed herewith.  




24




SIGNATURES


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


 

GENERAL CANNABIS CORP

 

 

 

Date: July 6, 2020

 

/s/ Steve Gutterman

 

 

Steve Gutterman, Chief Executive Officer

 

 

Principal Executive Officer

 

 

 

 

 

/s/ Jessica Bast

 

 

Jessica Bast, Principal Financial and Accounting Officer




25


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