Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

 

(Amendment No. 2)

 

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

 

For the fiscal year ended December 31, 2019

 

o         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 x

 

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 x

 

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 x   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 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 such files). Yes x   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. x

 

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

 

Large accelerated filer

o

Accelerated filer

o

Non-accelerated filer

x

Smaller reporting company

x

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 provided 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 x

 

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, 2019, was $31,638,715.

 

As of May 5, 2020, the Registrant had 40,281,881 issued and outstanding shares of common stock.

 

 

 


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EXPLANATORY NOTE

 

This Amendment No. 2 on Form 10-K/A (this “Amendment”) to the Annual Report on Form 10-K of General Cannabis Corp (the “Company”) for the fiscal year ended December 31, 2019 (the “Original Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”) on May 14, 2020 and amended by Amendment No.1 thereto filed with the SEC on June 22, 2020, is being filed to amend and restate our audited consolidated financial statements and related disclosures as of and for the year ended December 31, 2019.

 

Background of the Restatement

 

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 certain outstanding common stock warrants, which we refer to as the 2019 Warrants in this Amendment.

 

The error relates to the determination of the number of shares of common stock subject to the 2019 Warrants that were issued by the Company in May 2019, which 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.  At the time of issuance, the 2019 Warrants represented the right to purchase 3,000,000 shares of common stock at a per share exercise price of $1.30.  In the Company’s Form 10-K for the year ended December 31, 2019, the Company accounted for certain dilutive issuances of securities by the Company during 2019 by reflecting that the exercise price of such warrants had decreased to $0.45 per share as a result of the anti-dilution adjustment provisions contained in the warrants, but the Company did not correctly account for the increase in shares subject to such warrants resulting from the anti-dilution adjustment provisions contained in the warrants.  Such adjustment provisions increased the number of shares subject to the 2019 Warrants to 8,666,666 shares as of December 31, 2019.

 

The cumulative effect of the restatement on the Company’s financial statements is an increase in the derivative liability balance and a corresponding increase in loss on derivative instruments of $3.2 million at December 31, 2019. Refer to Item 8, Note 2 for further details regarding the amounts of the adjustments. These adjustments are non-cash and do not impact the Company’s revenue, operating expenses, operating income, cash flows or cash and cash equivalents as previously reported.

 

This Amendment amends the Original Filing only to the extent necessary to reflect the restatement. The following items in the Orignial Filing have been amended by the Amendment to reflect the restatement.:

 

·              Part I - Item 1A. Risk Factors

·              Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations;

·              Part II - Item 8. Financial Statements and Supplementary Data; and;

·              Part II - Item 9A. Controls and Procedures;

 

This Amendment also includes as exhibits, the required officer certifications from our Chief Executive Officer and Principal Accounting and Financial Officer dated as of the date of the Amendment.

 

Items in the Original Filing that have not been amended have been omitted from this Amendment. This Amendment is as of the date of the Original Filing on the Form 10-K and has not been updated to reflect events occurring subsequent to the date of the Original Filing other than those associated with the restatement of the Company’s audited consolidated financial statements.

 

ITEM 1A. RISK FACTORS.

 

There are no changes to Item 1A as disclosed in our originally filed Annual Report on Form 10-K for the year ended December 31, 2019 except for the addition of the following risk factor.

 

Risks Related to Our Common Stock

 

We have identified a material weakness in our internal control over financial reporting that resulted in the restatement of our consolidated financial statements included in this Annual Report on Form 10-K/A. This material weakness, uncorrected, could continue to affect adversely our ability to report our results of operations and financial condition accurately and in a timely manner.

 

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Our management is responsible for maintaining internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019, and identified a material weakness related to the failure to ensure timely application of the anti-dilution adjustment provisions contained in certain outstanding warrants. As a result of this material weakness, our management concluded that our internal control over financial reporting and our disclosure controls and procedures were not effective as of December 31, 2019. See Part II - Item 9A, “Controls and Procedures.”

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The effectiveness of any controls or procedures is subject to certain limitations, and as a result, there can be no assurance that our controls and procedures will detect all errors or fraud. A control can provide only reasonable, not absolute, assurance that the objectives of the control system will be attained. We also cannot assure you that other material weaknesses will not arise as a result of our past failure to maintain adequate internal controls and procedures or that circumvention of those controls and procedures will not occur. Additionally, even improved controls and procedures may not be adequate to prevent or identify errors or irregularities or ensure that our financial statements are prepared in accordance with generally accepted accounting principles. If we cannot maintain and execute adequate internal control over financial reporting or implement required new or improved controls that provide reasonable assurance of the reliability of the financial reporting and preparation of our financial statements for external use, we could suffer harm to our reputation, fail to meet our public reporting requirements on a timely basis, or be unable to report properly on our business and the results of our operations, and the market price of our securities could be materially adversely affected.

 

PART II

 

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.

 

Restatement

 

As discussed in the Explanatory Note to this Amended Filing, the Company is amending and restating its audited consolidated financial statements and related disclosures as of and for the years ended December 31, 2019, as included in Item 8, Note 2.  The Original Filing was filed with the Securities and Exchange Commission (“SEC”) on May 14, 2020, as amended by Amendment No. 1 thereto filed on June 22, 2020.

 

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.

 

Going Concern

 

The consolidated financial statements included elsewhere in this Form 10-K, 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 $224,994 as of December 31, 2019 is not sufficient to absorb our operating losses

 

and retire our debt of $2,330,351 and other obligations as they come due.  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

 

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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

 

As of December 31, 2019, we made the strategic decision to cease operations of Chiefton and STOA Wellness.  All operations were abandoned in January 2020.  Separately, we classified Iron Protection Group as held for sale as of December 31, 2019, in which the contracts of the Colorado division were sold in January 2020 and the remaining contracts in California have been abandoned.  The completed and planned divestiture of these non-core businesses has changed the way in which we evaluate performance and allocate resources.  As a result, during the year ended December 31, 2019, we revised our business segments, consistent with our management of the business and internal financial reporting structure.

 

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 consolidated financial statements and the notes thereto appearing in Item 8 in this Report.

 

Consolidated Results

 

 

 

Year ended December 31,

 

 

 

Percent

 

 

 

2019

 

2018

 

Change

 

Change

 

Revenues

 

$

3,666,346

 

$

1,737,256

 

$

1,929,090

 

111

%

Costs and expenses

 

(12,528,035

)

(12,308,231

)

(219,804

)

2

%

Other expense

 

(4,946,569

)

(5,564,335

)

617,766

 

(11

)%

Net loss from continuing operations

 

(13,808,258

)

(16,135,310

)

2,327,052

 

(14

)%

Loss from discontinued operations

 

(1,675,539

)

(838,448

)

(837,091

)

100

%

Net loss

 

$

(15,483,797

)

$

(16,973,758

)

$

1,489,961

 

(9

)%

 

The following discussion of our results of operations relates to our continuing operations.  See Note 4 to the consolidated financial statements for information concerning discontinued operations.

 

Revenues

 

Revenue increased for our Operations and Investments Segments, offset by a loss from discontinued operations.  See Segment discussions below for further details.

 

Costs and expenses

 

 

 

Year ended December 31,

 

 

 

Percent

 

 

 

2019

 

2018

 

Change

 

Change

 

Cost of service revenues

 

$

858,714

 

$

1,055,593

 

$

(196,879

)

(19

)%

Cost of goods sold

 

1,608,386

 

400,097

 

1,208,289

 

302

%

Selling, general and administrative

 

4,379,800

 

3,411,724

 

968,076

 

28

%

Share-based compensation

 

3,966,621

 

5,995,007

 

(2,028,386

)

(34

)%

Professional fees

 

1,598,818

 

1,383,367

 

215,451

 

16

%

Depreciation and amortization

 

115,696

 

62,443

 

53,253

 

85

%

 

 

$

12,528,035

 

$

12,308,231

 

$

219,804

 

2

%

 

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

 

Selling, general and administrative expense increased in 2019 primarily due to increases for (a) salaries; (b) premiums for liability, and directors and officer’s insurance; (c) computer and internet costs; and (d) marketing costs.

 

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Share-based compensation included the following:

 

 

 

Year ended December 31,

 

 

 

Percent

 

 

 

2019

 

2018

 

Change

 

Change

 

Employee awards

 

$

3,040,497

 

$

3,626,271

 

$

(585,774

)

(16

)%

Consulting awards

 

85,683

 

306,466

 

(220,783

)

(72

)%

Feinsod Agreement

 

840,441

 

2,062,270

 

(1,221,829

)

(59

)%

 

 

$

3,966,621

 

$

5,995,007

 

$

(2,028,386

)

(34

)%

 

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 have increased slightly from 2018 due primarily to the cost of raising debt.

 

Depreciation and amortization expense increased due to normal depreciation expense for our ERP system.

 

Other Expense

 

 

 

Year ended December 31,

 

 

 

Percent

 

 

 

2019

 

2018

 

Change

 

Change

 

Amortization of debt discount

 

$

2,019,726

 

$

4,234,823

 

$

(2,215,097

)

(52

)%

Interest expense

 

345,371

 

323,557

 

21,814

 

7

%

Loss on derivative liability

 

2,204,172

 

 

2,204,172

 

100

%

Loss from Desert Created Investment

 

 

182,136

 

(182,136

)

(100

)%

Impairment of Desert Created Investment

 

 

823,819

 

(823,819

)

(100

)%

Gain/loss on extinguishment of debt

 

377,300

 

 

377,300

 

100

%

 

 

$

4,946,569

 

$

5,564,335

 

$

(617,766

)

(11

)%

 

Amortization of debt discount costs generally varies with our debt balance and, in 2019, includes $318,681 of costs associated with the 2019 Warrants (as defined below).  Interest expense varied between 2019 and 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. We recognized issuance costs in relation to the 2019 Warrants included in our registered direct offering in May 2019. 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. The loss on warrant derivative liability reflects the change in fair value of the 2019 Warrants.

 

Operations Consulting and Products

 

 

 

Year ended December 31,

 

 

 

Percent

 

 

 

2019

 

2018

 

Change

 

Change

 

Revenues

 

$

3,570,909

 

$

1,718,507

 

$

1,852,402

 

108

%

Costs and expenses

 

(3,372,174

)

(1,932,598

)

(1,439,576

)

74

%

 

 

$

198,735

 

$

(214,091

)

$

412,826

 

193

%

 

Increased revenues in 2019 primarily related to revenue from license application consulting; and an increase in product sales throughout 2019.  The higher margin is due to completed applications in the third and fourth quarters of 2019.  Costs and expenses increased in 2019 primarily due to increased product sales.

 

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Investments

 

 

 

Year ended December 31,

 

 

 

Percent

 

 

 

2019

 

2018

 

Change

 

Change

 

Revenues

 

$

95,437

 

$

18,749

 

$

76,688

 

409

%

Costs and expenses

 

(71,723

)

 

(71,723

)

100

%

Investment in Desert Created

 

 

(1,005,955

)

1,005,955

 

(100

)%

 

 

$

23,714

 

$

(987,206

)

$

1,010,920

 

(102

)%

 

The increase in revenues in 2019 is related to three new notes receivables that were executed during 2019.  All revenue is from interest and loan origination fees related to these new notes.  The investment in Desert Created includes an $823,819 impairment charge and our share of their net loss of $182,136.

 

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-basic and diluted excludes the impacts of interest expense, tax expense, depreciation and amortization, gain (loss) on its derivative liability, amortization of debt discount 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.

 

 

 

Year ended December 31,

 

 

 

2019

 

2018

 

Net loss attributable to common stockholders

 

$

(17,824,797

)

$

(16,973,758

)

Adjustment for loss from discontinued operations

 

1,675,539

 

838,448

 

Loss from continuing operations attributable to common stockholders

 

(16,149,258

)

(16,135,310

)

Adjustments:

 

 

 

 

 

Share-based expense

 

3,966,621

 

5,995,007

 

Depreciation and amortization

 

115,696

 

62,443

 

Impairment of Desert Created investment

 

 

823,819

 

Amortization of debt discount and equity issuance costs

 

2,019,726

 

4,234,823

 

Loss on extinguishment of debt

 

377,300

 

 

Interest expense

 

345,371

 

323,557

 

Loss on warrant derivative liability

 

2,204,172

 

 

Loss on investment of Desert Created

 

 

182,136

 

Total adjustments

 

9,028,886

 

11,621,785

 

Adjusted EBITDA

 

$

(7,120,372

)

$

(4,513,525

)

 

 

 

 

 

 

Per share – basic and diluted:

 

 

 

 

 

Net loss

 

$

(0.47

)

$

(0.49

)

Adjusted EBITDA

 

(0.20

)

(0.13

)

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

Net loss

 

38,106,781

 

34,938,978

 

Adjusted EBITDA

 

36,222,752

 

34,297,078

 

 

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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 acquisitions.

 

In September 2019, we completed a $1,506,000 private placement with certain accredited investors pursuant to the 2019 12% Notes and the 2019 12% Warrants”).  In July 2019, we completed a $855,000 private placement pursuant to the SBI Note.

 

In May 2019, we raised approximately $3 million by issuing three million shares of our common stock and the 2019 Warrants to purchase three million shares of our common stock (together “2019 Units”) in a registered direct offering for $1.00 per 2019 Unit.  The 2019 Warrants had an initial exercise price of $1.30 per share and are exercisable for five years from the date of issuance.  We received cash of $2,604,355, which is net of $395,645 of issuance costs. 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 certain dilutive issuances of securities by the Company during the fourth quarter of 2019, the exercise price of the 2019 Warrants decreased to $0.45 per share and the number of shares subject to the 2019 Warrants increased to 8,666,666 shares as of December 31, 2019.

 

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 $224,994 and $8.0 million, respectively, as of and December 31, 2019 and 2018.  Our cash flows from operating, investing and financing activities were as follows:

 

 

 

Year ended December 31,

 

 

 

2019

 

2018

 

Net cash used in operating activities

 

$

(5,328,661

)

$

(5,726,207

)

Net cash used in investing activities

 

(753,639

)

(568,266

)

Net cash provided by (used in) financing activities

 

(1,649,875

)

9,214,855

 

 

Net cash used in operating activities decreased in 2019 by $397,546 compared to 2018, primarily due to reduction of expenses and personnel.  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 2019 relates primarily to purchasing fixed assets, including the opening of STOA Wellness retail location.  In the 2018, we purchased fixed assets and invested in the Flowhub SAFE.

 

Net cash used in financing activities related to the payoff of the notes payable, offset by a capital raise in May 2019. Net cash provided by financing activities in 2018 related to the exercise of warrants and options offset by paying off debt.

 

Capital Resources

 

We have no material commitments for capital expenditures as of December 31, 2019.  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.

 

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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.

 

Accounting for Discontinued Operations

 

We regularly review underperforming assets to determine if a sale or disposal might be a better way to monetize the assets.  When an asset group is considered for sale or disposal, we review the transaction to determine if or when the entity qualifies as a discontinued operation in accordance with the criteria of FASB ASC Topic 205-20 “Discontinued Operations.”  The FASB has issued authoritative guidance that raises the threshold for disposals to qualify as discontinued operations.  Under this guidance, a discontinued operation is (1) a component of an entity or group of components that have been disposed of or are classified as held for sale and represent a strategic shift that has or will have a major effect on an entity’s operations and financial results, or (2) an acquired business that is classified as held for sale on the acquisition date.

 

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.

 

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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

 

On January 1, 2018, we adopted ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

 

The following five steps are applied to achieve that core principle:

 

·                  Step 1: Identify the contract with the customer;

 

·                  Step 2: Identify the performance obligations in the contract;

 

·                  Step 3: Determine the transaction price;

 

·                  Step 4: Allocate the transaction price to the performance obligations in the contract; and

 

·                  Step 5: Recognize revenue when the company satisfies a performance obligation.

 

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ITEM 8. REVISED AND RESTATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors of

General Cannabis Corp.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of General Cannabis Corp. (the “Company”) as of December 31, 2019,  the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”).  In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Explanatory Paragraph — Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1 the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise 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.

 

Restatement of Previously Issued Financial Statements

 

As disclosed in Note 2 to the accompanying consolidated financial statements, the Company has restated its financial statements for the year ended December 31, 2019 to correct an error.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

/s/ Marcum LLP

 

Marcum LLP

 

We have served as the Company’s auditor since 2019.

 

Melville, NY

May 14, 2020, except for the effects of the restatement disclosed in Note 2 to the consolidated financial statements as to which the date is July 6, 2020.

 

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GENERAL CANNABIS CORP

CONSOLIDATED BALANCE SHEETS

 

 

 

December 31,

 

 

 

2019
(Restated)

 

2018

 

ASSETS

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

122,390

 

$

7,604,562

 

Accounts receivable, net

 

85,204

 

116,622

 

Note receivable, net — current portion

 

375,000

 

50,000

 

Prepaid expenses and other current assets

 

546,970

 

421,579

 

Assets held for sale

 

375,218

 

649,775

 

Assets of discontinued operations

 

47,453

 

144,365

 

Total current assets

 

1,552,235

 

8,986,903

 

 

 

 

 

 

 

Note receivable, net

 

93,333

 

 

Property and equipment, net

 

1,507,327

 

1,439,067

 

Investment

 

250,000

 

250,000

 

Assets held for sale

 

15,584

 

66,255

 

Assets of discontinued operations

 

83,525

 

 

Total Assets

 

$

3,502,004

 

$

10,742,225

 

 

 

 

 

 

 

LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable and accrued expenses

 

$

1,221,194

 

$

442,707

 

Interest payable

 

93,375

 

 

Customer deposits

 

562,803

 

308,111

 

Accrued stock payable

 

80,657

 

 

Notes payable (net of discount)

 

2,230,684

 

5,273,906

 

Related party note payable (net of discount)

 

99,667

 

 

Warrant derivative liability

 

4,620,593

 

 

Liabilities held for sale

 

149,249

 

159,944

 

Liabilities of discontinued operations

 

207,993

 

6,220

 

Total current liabilities

 

9,266,216

 

6,190,888

 

 

 

 

 

 

 

Commitments and Contingencies (Note 13)

 

 

 

 

 

 

 

 

 

Stockholders’ Equity (Deficit)

 

 

 

 

 

Preferred stock, no par value; 5,000,000 shares authorized; no shares issued and outstanding at December 31, 2019 and 2018

 

 

 

Common Stock, $0.001 par value; 100,000,000 shares authorized; 39,497,480 shares and 36,222,752 shares issued and outstanding on December 31, 2019 and 2018, respectively

 

39,498

 

36,223

 

Additional paid-in capital

 

61,468,034

 

56,303,061

 

Accumulated deficit

 

(67,271,744

)

(51,787,947

)

Total Stockholders’ Equity (Deficit)

 

(5,764,212

)

4,551,337

 

 

 

 

 

 

 

Total Liabilities & Stockholders’ Equity (Deficit)

 

$

3,502,004

 

$

10,742,225

 

 

See Notes to consolidated financial statements.

 

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GENERAL CANNABIS CORP

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Year ended December 31,

 

 

 

2019
(Restated)

 

2018

 

REVENUES

 

 

 

 

 

Service

 

$

1,787,863

 

$

1,186,624

 

Rent and interest

 

95,437

 

18,749

 

Product sales

 

1,783,046

 

531,883

 

Total revenues

 

3,666,346

 

1,737,256

 

 

 

 

 

 

 

COSTS AND EXPENSES

 

 

 

 

 

Cost of service revenues

 

858,714

 

1,055,593

 

Cost of goods sold

 

1,608,386

 

400,097

 

Selling, general and administrative

 

4,379,800

 

3,411,724

 

Share-based expense

 

3,966,621

 

5,995,007

 

Professional fees

 

1,598,818

 

1,383,367

 

Depreciation and amortization

 

115,696

 

62,443

 

Total costs and expenses

 

12,528,035

 

12,308,231

 

 

 

 

 

 

 

OPERATING LOSS

 

(8,861,689

)

(10,570,975

)

 

 

 

 

 

 

OTHER (INCOME) EXPENSE

 

 

 

 

 

Amortization of debt discount and equity issuance costs

 

2,019,726

 

4,234,823

 

Loss on extinguishment of debt

 

377,300

 

 

Interest expense, net

 

345,371

 

323,557

 

Loss on warrant derivative liability

 

2,204,172

 

 

Loss from Desert Created investment

 

 

182,136

 

Impairment of Desert Created investment

 

 

823,819

 

Total other expense, net

 

4,946,569

 

5,564,335

 

 

 

 

 

 

 

NET LOSS FROM CONTINUING OPERATIONS

 

$

(13,808,258

)

$

(16,135,310

)

 

 

 

 

 

 

Loss from discontinued operations

 

(1,675,539

)

(838,448

)

 

 

 

 

 

 

NET LOSS

 

$

(15,483,797

)

$

(16,973,758

)

Deemed dividend

 

(2,341,000

)

 

 

 

 

 

 

 

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

$

(17,824,797

)

$

(16,973,758

)

 

 

 

 

 

 

PER SHARE DATA — Basic and diluted

 

 

 

 

 

Net loss from continuing operations per share

 

$

(0.36

)

$

(0.46

)

 

 

 

 

 

 

Net loss from discontinued operations per share

 

$

(0.04

)

$

(0.02

)

 

 

 

 

 

 

Net loss attributable to common stockholders per share

 

$

(0.47

)

$

(0.49

)

Weighted average number of common shares outstanding

 

38,106,781

 

34,938,978

 

 

See Notes to consolidated financial statements.

 

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GENERAL CANNABIS CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Year ended December 31,

 

 

 

2019
(Restated)

 

2018

 

OPERATING ACTIVITIES

 

 

 

 

 

Net loss

 

$

(15,483,797

)

$

(16,973,758

)

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

 

 

 

 

 

Amortization of debt discount and equity issuance costs

 

2,019,726

 

4,234,823

 

Loss on extinguishment of debt

 

377,300

 

 

Depreciation and amortization expense

 

196,247

 

149,504

 

Amortization of loan origination fees

 

(13,333

)

 

Bad debt expense

 

174,249

 

87,592

 

Impairment of assets

 

147,035

 

 

 

Loss on disposal of property and equipment

 

104,803

 

 

 

Impairment of Desert Created investment

 

 

823,819

 

Loss from Desert Created investment

 

 

182,136

 

Loss on warrant derivative liability

 

2,204,172

 

 

Share-based payments

 

3,966,621

 

5,995,007

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(101,766

)

(56,954

)

Prepaid expenses and other assets

 

(138,254

)

231,746

 

Inventory

 

(23,772

)

(88,494

)

Accounts payable and accrued liabilities

 

1,242,108

 

(311,628

)

Net cash used in operating activities:

 

(5,328,661

)

(5,726,207

)

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Purchase of property and equipment

 

(318,639

)

(241,311

)

Lending on notes receivable

 

(705,000

)

(650,000

)

Proceeds on notes receivable

 

270,000

 

600,000

 

Investment in Flowhub SAFE

 

 

(250,000

)

Investment in Desert Created

 

 

(50,000

)

Proceeds on investment in Desert Created

 

 

23,045

 

Net cash used in investing activities

 

(753,639

)

(568,266

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from sale of common stock and warrants

 

2,604,355

 

 

Proceeds from the exercise of warrants

 

 

3,985,197

 

Proceeds from exercise of stock options

 

188,770

 

721,034

 

Proceeds from notes payable

 

1,455,000

 

7,500,000

 

Payments on notes payable

 

(5,898,000

)

(1,621,250

)

Payments on Infinity Note — related party

 

 

(1,370,126

)

Net cash provided by (used in) financing activities

 

(1,649,875

)

9,214,855

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

(7,732,175

)

2,920,382

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

7,957,169

 

5,036,787

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

224,994

 

$

7,957,169

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION

 

 

 

 

 

Cash paid for interest

 

$

305,195

 

$

637,586

 

 

 

 

 

 

 

NON-CASH INVESTING & FINANCING ACTIVITIES

 

 

 

 

 

Deemed dividend from warrant repricing

 

$

2,603,000

 

$

 

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

 

154,200

 

 

12% Warrants recorded as a debt discount and loss on extinguishment of debt

 

392,000

 

 

SBI Warrants recorded as a debt discount and loss on extinguishment of debt

 

28,800

 

 

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

 

158,100

 

 

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

 

 

See Notes to consolidated financial statements.

 

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Table of Contents

 

GENERAL CANNABIS CORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

Common Stock

 

Additional

 

Accumulated

 

 

 

 

 

Shares

 

Amount

 

Paid-in Capital

 

Deficit

 

Total

 

January 1, 2018

 

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

 

Sale of common stock, net of issuance costs

 

3,000,000

 

3,000

 

503,614

 

 

506,614

 

Warrants issued with the 12% Notes

 

 

 

392,000

 

 

392,000

 

Warrants issued with the 15% Notes

 

 

 

158,100

 

 

158,100

 

Warrants issued with the SBI Note

 

 

 

28,800

 

 

28,800

 

Common stock issued for property and equipment

 

5,000

 

5

 

7,995

 

 

8,000

 

Common stock issued upon exercise of stock options

 

269,728

 

270

 

188,500

 

 

188,770

 

Stock options granted to employees and consultants

 

 

 

3,885,964

 

 

3,885,964

 

Net loss

 

 

 

 

 

 

 

(15,483,797

)

(15,483,797

)

December 31, 2019 (Restated)

 

39,497,480

 

$

39,498

 

$

61,468,034

 

$

(67,271,744

)

$

(5,764,212

)

 

See Notes to consolidated financial statements.

 

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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.  As of December 31, 2019, 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 2019 and 2018, 59% and 60% 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 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.

 

Held for Sale - 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. 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.  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, 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.  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 offers 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.

 

Basis of Presentation

 

The accompanying consolidated financial statements include the results of GCC and its ten 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

 

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Colorado limited liability company formed in 2015; (d) GC-NY Health, LLC, a New York limited liability company formed in 2019; (e) Standard Cann, Inc., a Colorado corporation formed in 2019; (f) Cannasseur, LLC, a Colorado limited liability company formed in 2019; (g) Cannasseur Dispensary, LLC, a limited liability company formed in 2019; (h) Cannasseur Cultivation, LLC, a limited liability company formed in 2019; (i) Cannasseur Extraction, LLC, a limited liability company formed in 2019 and (j) GC Corp., a Colorado corporation, originally formed in 2013 under the name 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.

 

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 $225,000 as of December 31, 2019, is not sufficient to absorb our operating losses and retire our debt of approximately $2,330,000.  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, 2019).

 

Inventory

 

Our inventory consists of finished goods, including apparel and supplies for the cannabis market.  Inventory is stated at the lower of cost (net realizable value), using average cost to determine cost. We monitor inventory cost compared to selling price in order to determine if a write down to net realizable value is necessary.  In December 2019, we ceased all operations of Chiefton and determined we would be ceasing operations of STOA in January 2020.  As a result, we wrote down all of the remaining inventory to $0 as of December 31, 2019.  We recognized $147,035 in expense as a result of this write down of inventory and is included in loss on discontinued operations on the statement of operations.

 

Accounts Receivable, net

 

Accounts receivable are recorded at the original invoiced amount due from our customers less an allowance for any potential uncollectible amounts.  We control credit risk related to accounts receivable through credit approvals, credit limits and monitoring processes.  In making the determination of the appropriate allowance for doubtful accounts, management considers prior experience with customers, analysis of accounts receivable aging reports, changes in customer payment patterns, and historical write-offs.  The allowance for doubtful accounts totaled $111,000 and $9,000 as of December 31, 2019 and 2018, respectively.  The amounts charged to operations and write-offs were immaterial for the periods presented.

 

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Notes Receivable

 

Notes receivable consist primarily of amounts due to us related to the financing of different business ventures.  Direct loan origination costs we incur are netted with loan origination fees we receive and the net amount, loan origination fees or costs, is included in notes receivable on the consolidated balance sheets.  The loan origination fees or costs are amortized over the term of the underlying note receivable and included in interest income in the consolidated statements of operations.  We report notes receivable at the principal balance outstanding less an allowance for losses.  We monitor the financial condition of the notes receivable and record provisions for estimated losses when we believe it is probable that the holders of the notes receivable will be unable to make their required payments.  We charge interest at a fixed rate and interest income is calculated by applying the effective rate to the outstanding principal balance.

 

Right-of-use Asset / Lease Liability

 

We adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02 “Leases (Topic 842)” on January 1, 2019, which requires all assets and liabilities arising from leases to be recognized in our consolidated balance sheets.  In July 2018, the FASB added an optional transition method which the Company elected upon adoption of the new standard. This allowed us to recognize and measure leases existing at January 1, 2019 without restating comparative information. In addition, the Company elected to apply the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carry forward the historical lease classification.  We first evaluated our leases to determine whether they are classified as a finance lease or as an operating lease.  A lease is a finance lease if any of the following criteria are met: (a) ownership transfers, (b) the lease includes an option to purchase the underlying asset, (c) the lease term is for the major part of the remaining economic life of the underlying asset, (d) the present value of the lease payments equals or exceeds the fair value of the underlying asset, or (e) the underlying asset is of a specialized nature that is expected to have no alternative use to the lessor at the end of the lease term.  All of our leases are classified as operating leases.  We then determined whether the short-term exemption applies; that is, is the lease term 12 months or less and does not include a purchase option whose exercise is reasonably certain.  If the short-term exemption applies then lease payments are recognized as expense and no asset or liability is recorded.  If the short-term exemption does not apply, then we recorded an operating lease right-of-use asset and a corresponding operating lease liability equal to the present value of the lease payments.  All of our leases entered into prior to 2019 met the short-term exemption, so modification to prior period financial position was is not required.  The two-year commercial real estate lease we entered into in February 2019 did not meet the short-term exemption and, accordingly, we recorded the present value of the lease payments of $83,525, as a right-of-use asset and a lease liability in the consolidated balance sheet.  We recognize operating lease expense on a straight-line basis over the life of the lease.

 

Property and Equipment, net

 

Property and equipment are recorded at historical cost, less accumulated depreciation.  Major additions and improvements are capitalized, while replacements, maintenance and repairs, which do not improve or extend the life of the respective assets, are expensed as 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, software and vehicles.  Land is not depreciated.  When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations.

 

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 and are fully amortized as of December 31, 2019.

 

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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.

 

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 undiscounted 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.

 

Modification of Debt - When we change the terms of existing notes payable, we evaluate the amendments under ASC 470-50, Debt Modification and Extinguishment to determine whether the change should be treated as a modification or as a debt extinguishment.  This evaluation includes analyzing whether there are significant and consequential changes to the economic substance of the note.  If the change is deemed insignificant then the change is considered a debt modification, whereas if the change is substantial the change is reflected as a debt extinguishment.

 

Fair Value of Financial Instruments

 

U.S. generally accepted accounting principles (“GAAP”) requires disclosing the fair value of financial instruments to the extent practicable for financial instruments which are recognized or unrecognized in the consolidated balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.

 

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In assessing the fair value of financial instruments, the Company uses a variety of methods and assumptions, which are based on estimates of market conditions and risks existing at the time. For certain instruments, including accounts receivable and accounts payable, the Company estimated that the carrying amount approximated fair value because of the short maturities of these instruments. All debt is based on current rates at which the Company could borrow funds with similar remaining maturities and approximates fair value.

 

GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use on unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs consist of items that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is described below:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities.  There are no fair valued assets or liabilities classified under Level 1 as of December 31, 2019 and 2018.

 

Level 2 — Observable prices that are based on inputs not quoted on active markets but corroborated by market data.  There are no fair valued assets or liabilities classified under Level 2 as of December 31, 2019 and 2018.

 

Level 3 — Unobservable inputs are used when little or no market data is available.  The fair value hierarchy gives the lowest priority to Level 3 inputs (see Note 12).

 

Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, which reports to the Chief Financial Officer, determines its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance department and are approved by the Chief Financial Officer.

 

Level 3 Valuation Techniques:

 

Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate. The Company deems financial instruments which do not have fixed settlement provisions to be derivative instruments. In accordance with GAAP the fair value of these warrants is classified as a liability on the Company’s consolidated balance sheets because, according to the terms of the warrants, a fundamental transaction could give rise to an obligation of the Company to pay cash to its warrant holders. Such instruments do not have fixed settlement provisions and have also been recorded as derivative liabilities. Corresponding changes in the fair value of the derivative liabilities are recognized in earnings on the Company’s consolidated statements of operations in each subsequent period.

 

The Company’s derivative liabilities are carried at fair value and were classified as Level 3 in the fair value hierarchy due to the use of significant unobservable inputs.

 

Extinguishment of Notes Payable

 

When we change the terms of existing notes payable subsequent to the maturity date, we evaluate the amendments under ASC 470-50, Debt Modification and Extinguishment to determine whether the change should be treated as a debt extinguishment or as a debt modification. This evaluation includes analyzing whether there are significant and consequential changes to the economic substance of the note. If the change is deemed insignificant then the change is considered a debt modification, whereas if the change is substantial the change is reflected as a debt extinguishment. If determined to be a debt extinguishment, the difference between the fair value of the new instrument compared to the original instrument is reflected as a gain or loss on extinguishment of debt.

 

Warrants Instruments

 

Warrants with derivative features — When we raise capital by issuing warrants that do not have complex terms, they are recorded as additional paid in capital in our consolidated balance sheet.  When we issue warrants that have complex terms, such as a clause in which the warrant agreements contain a cash settlement provision whereby the holders could settle the warrants for cash upon a fundamental transaction that is considered outside of the control of management, such as a change of control, the warrants are considered to be a derivative that are recorded as a liability at fair value.  The warrant derivative liability is adjusted to its fair value at the end of each reporting period, with the change being recorded as other expense or gain.

 

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Revenue Recognition

 

We have two main revenue streams: (i) product sales; and (ii) licensing and consulting.

 

Product sales are recorded at the time that control of the products is transferred to customers. In evaluating the timing of the transfer of control of products to customers, we consider several indicators, including significant risks and rewards of products, our right to payment, and the legal title of the products. Based on the assessment of control indicators, sales are generally recognized when products are delivered to customers.

 

Revenue from licensing and consulting services is recognized when our obligations to our client are fulfilled which is determined when milestones in the contract are achieved.

 

ASC Topic 606 is a comprehensive revenue recognition model that requires revenue to be recognized when control of the promised goods or services are transferred to our customers at an amount that reflects the consideration that we expect to receive. Application of ASC Topic 606 requires us to use more judgment and make more estimates than under former guidance. Application of ASC Topic 606 requires a five-step model applicable to all product offerings revenue streams as follows:

 

Identification of the contract, or contracts, with a customer

 

A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and, (iii) we determine that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.

 

We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit or financial information pertaining to the customer.

 

Identification of the performance obligations in the contract

 

Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract.

 

When a contract includes multiple promised goods or services, we apply judgment to determine whether the promised goods or services are capable of being distinct and are distinct within the context of the contract. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation.

 

Determination of the transaction price

 

The transaction price is determined based on the consideration to which we will be entitled to receive in exchange for transferring goods or services to our customer. We estimate any variable consideration included in the transaction price using the expected value method that requires the use of significant estimates for discounts, cancellation periods, refunds and returns. Variable consideration is described in detail below.

 

Allocation of the transaction price to the performance obligations in the contract

 

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative Stand-Alone Selling Price (“SSP,”) basis. We determine SSP based on the price at which the performance obligation would be sold separately. If the SSP is not observable, we estimate the SSP based on available information, including market conditions and any applicable internally approved pricing guidelines.

 

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Recognition of revenue when, or as, we satisfy a performance obligation

 

We recognize revenue at the point in time that the related performance obligation is satisfied by transferring the promised goods or services to our customer.

 

Principal versus Agent Considerations

 

When another party is involved in providing goods or services to our customer, we apply the principal versus agent guidance in ASC Topic 606 to determine if we are the principal or an agent to the transaction. When we control the specified goods or services before they are transferred to our customer, we report revenue gross, as principal. If we do not control the goods or services before they are transferred to our customer, revenue is reported net of the fees paid to the other party, as agent. Our evaluation to determine if we control the goods or services within ASC Topic 606 includes the following indicators:

 

We are primarily responsible for fulfilling the promise to provide the specified good or service.

 

When we are primarily responsible for providing the goods and services, such as when the other party is acting on our behalf, we have indication that we are the principal to the transaction. We consider if we may terminate our relationship with the other party at any time without penalty or without permission from our customer.

 

We have risk before the specified good or service have been transferred to a customer or after transfer of control to the customer.

 

We may commit to obtaining the services of another party with or without an existing contract with our customer. In these situations, we have risk of loss as principal for any amount due to the other party regardless of the amount(s) we earn as revenue from our customer.

 

The entity has discretion in establishing the price for the specified good or service.

 

We have discretion in establishing the price our customer pays for the specified goods or services.

 

Contract Liabilities

 

Contract liabilities consist of customer advance payments and billings in excess of revenue recognized. We may receive payments from our customers in advance of completing our performance obligations. We record contract liabilities equal to the amount of payments received in excess of revenue recognized, including payments that are refundable if the customer cancels the contract according to the contract terms. Contract liabilities have been historically recorded as current liabilities on our consolidated financial statements when the time to fulfill the performance obligations under terms of our contracts is less than one year. We have no Long-term contract liabilities which would represent the amount of payments received in excess of revenue earned, including those that are refundable, when the time to fulfill the performance obligation is greater than one year.

 

Share-based Payments

 

Employee and non-employee awards — We account for share-based compensation in accordance with the fair value recognition provisions of ASC 718, Compensation — Stock Compensation, and ASC 505, Equity, which require all share-based payments to employees and non-employees, including grants of employee stock options, to be recognized as an expense in the consolidated financial statements based on their fair values.  The fair value of stock options is estimated using the Black-Scholes option pricing formula that requires assumptions for expected volatility, expected dividends, the risk-free interest rate and the expected term of the option.  Stock options generally vest in one year. The Company accounts for forfeitures of share-based grants as they occur.  If any of the assumptions used in the Black-Scholes model or the anticipated number of shares to be awarded change significantly, share-based compensation expense may differ materially in the future from that recorded in the current period.

 

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.

 

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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 are 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 and would be recorded in income tax expense. Our assessment of tax positions as of December 31, 2019 and 2018, determined that there were no material uncertain tax positions.

 

In general, the tax returns for the years ending December 31, 2016 through 2018 are open to examination by federal and state authorities.

 

Reportable Segments

 

Our reporting segments consist of:  a) Operations Consulting and Products; and b) 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 — 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

 

·                  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.

 

Recently Issued Accounting Standards

 

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

 

FASB ASU 2018-013 — “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. This guidance is required to be adopted by the Company beginning in fiscal year 2020, with early adoption permitted. We did not early adopt this guidance. The adoption of these changes is not expected to have an impact on our consolidated financial statements other than disclosures.

 

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NOTE 2.  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 certain outstanding common stock warrants, which are referred to as the 2019 Warrants herein.  The error relates to the determination of the number of shares of common stock subject to the 2019 Warrants that were issued by the Company in May 2019, which 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.  At the time of issuance, the 2019 Warrants represented the right to purchase 3,000,000 shares of common stock at a per share exercise price of $1.30.  In the Company’s Form 10-K for the year ended December 31, 2019, the Company accounted for certain dilutive issuances of securities by the Company during 2019 by reflecting that the exercise price of such warrants had decreased to $0.45 per share as a result of the anti-dilution adjustment provisions contained in the warrants, but the Company did not correctly account for the increase in shares subject to such warrants resulting from the anti-dilution adjustment provisions contained in the warrants.  Such adjustment provisions increased the number of shares subject to the 2019 Warrants to 8,666,666 shares as of December 31, 2019.

 

The cumulative effect of the restatement on the Company’s financial statements is an increase in the derivative liability balance and a corresponding increase in loss on derivative instruments of $3.2 million at December 31, 2019. These adjustments are non-cash and do not impact the Company’s revenue, operating expenses, operating income, cash flows or cash and cash equivalents as previously reported.

 

The effects of the restatement on the consolidated balance sheets are summarized in the following table:

 

 

 

December 31, 2019

 

 

 

As Originally Reported

 

Adjustments

 

As Restated

 

ASSETS

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

122,390

 

$

 

$

122,390

 

Accounts receivable, net

 

85,204

 

 

85,204

 

Note receivable, net — current portion

 

375,000

 

 

375,000

 

Prepaid expenses and other current assets

 

546,970

 

 

546,970

 

Assets held for sale

 

375,218

 

 

375,218

 

Assets of discontinued operations

 

47,453

 

 

47,453

 

Total Current Assets

 

$

1,552,235

 

 

$

1,552,235

 

 

 

 

 

 

 

 

 

Note receivable, net

 

93,333

 

 

93,333

 

Property and equipment, net

 

1,507,327

 

 

1,507,327

 

Investment

 

250,000

 

 

250,000

 

Assets held for sale

 

15,584

 

 

15,584

 

Assets of discontinued operations

 

83,525

 

 

83,525

 

Total Assets

 

$

3,502,004

 

$

 

$

3,502,004

 

 

 

 

 

 

 

 

 

LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

1,221,194

 

$

 

$

1,221,194

 

Interest payable

 

93,375

 

 

93,375

 

Customer deposits

 

562,803

 

 

562,803

 

Accrued stock payable

 

80,657

 

 

80,657

 

Notes payable (net of discount)

 

2,230,684

 

 

2,230,684

 

Related party note payable (net of discount)

 

99,667

 

 

99,667

 

Warrant derivative liability

 

1,599,436

 

3,201,157

 

4,620,593

 

Liabilities held for sale

 

149,249

 

 

149,249

 

Liabilities of discontinued operations

 

207,993

 

 

207,993

 

Total current liabilities

 

$

6,245,058

 

$

3,201,157

 

$

9,266,216

 

Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

Common Stock

 

39,498

 

 

39,498

 

Additional paid-in capital

 

61,468,034

 

 

61,468,034

 

Accumulated deficit

 

(64,250,586

)

(3,201,157

)

(67,271,744

)

Total Stockholders’ Equity (Deficit)

 

$

(2,743,054

)

$

(3,201,157

)

$

(5,764,212

)

Total Liabilities & Stockholders’ Equity (Deficit)

 

$

3,502,004

 

$

 

$

3,502,004

 

 

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The effects of the restatement on the consolidated statements of operations and comprehensive income/loss are summarized in the following table:

 

 

 

Year Ended December 31, 2019

 

 

 

As Originally Reported

 

Adjustments

 

As Restated

 

Revenues

 

 

 

 

 

 

 

Services

 

$

1,787,863

 

$

 

$

1,787,863

 

Rent and interest

 

95,437

 

 

95,437

 

Product sale

 

1,783,046

 

 

1,783,046

 

Total revenues

 

3,666,346

 

 

3,666,346

 

Costs and Expenses

 

 

 

 

 

 

 

Cost of service revenues

 

858,714

 

 

858,714

 

Cost of goods sold

 

1,608,386

 

 

1,608,386

 

Selling, general, and administrative

 

4,379,800

 

 

4,379,800

 

Share-based expense

 

3,966,621

 

 

3,966,621

 

Professional fees

 

1,598,818

 

 

1,598,818

 

Depreciation and amortization

 

115,696

 

 

115,696

 

Total costs and expenses

 

12,528,035

 

 

12,528,035

 

 

 

 

 

 

 

 

 

Operating Loss

 

(8,861,689

)

 

(8,861,689

)

Other (Income) Expense

 

 

 

 

 

 

 

Amortization of debt discount and equity issuance costs

 

2,019,726

 

 

2,019,726

 

Loss on extinguishment of debt

 

377,300

 

 

377,300

 

Interest expense, net

 

345,371

 

 

345,371

 

(Gain) loss on warrant derivative liability

 

(816,916

)

3,201,157

 

2,204,172

 

Total other expense, net

 

1,925,411

 

3,201,157

 

4,946,569

 

 

 

 

 

 

 

 

 

Net Loss from Continuing Operations

 

$

(10,787,100

)

$

(3,201,157

)

$

(13,808,258

)

Loss from discontinued operations

 

(1,675,539

)

 

(1,675,539

)

Net Loss

 

$

(12,462,639

)

$

(3,201,157

)

$

(15,483,797

)

Deemed dividend

 

(2,341,000

)

 

(2,341,000

)

Net Loss Attributable to Common Stockholders

 

$

(14,803,639

)

$

(3,201,157

)

$

(17,824,797

)

 

 

 

 

 

 

 

 

Per Share Data — Basic and diluted

 

 

 

 

 

 

 

Net loss from continuing operations

 

$

(0.28

)

$

(0.08

)

$

(0.36

)

Net loss from discontinued operations

 

$

(0.04

)

$

 

$

(0.04

)

Net loss attributable to common stockholders per share

 

$

(0.39

)

$

(0.08

)

$

(0.47

)

Weighted average number of common shares outstanding

 

38,106,781

 

 

38,106,781

 

 

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Table of Contents

 

The effects of the restatement on the consolidated statement of cash flows are summarized in the following table:

 

 

 

December 31, 2019

 

 

 

As Originally Reported

 

Adjustments

 

As Restated

 

Operating Activities

 

 

 

 

 

 

 

Net loss

 

$

(12,462,639

)

$

(3,201,157

)

$

(15,483,797

)

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

 

 

 

 

 

 

 

Amortization of debt discount and equity issuance costs

 

2,019,726

 

 

2,019,726

 

Loss on extinguishment of debt

 

377,300

 

 

377,300

 

Depreciation and amortization expense

 

196,247

 

 

196,247

 

Amortization of loan origination fees

 

(13,333

)

 

(13,333

)

Bad debt expense

 

174,249

 

 

174,249

 

Impairment of assets

 

147,035

 

 

147,035

 

Loss on disposal of property and equipment

 

104,803

 

 

104,803

 

(Gain) loss on warrant derivative liability

 

(816,986

)

3,201,157

 

2,204,172

 

Share-based payments

 

3,966,621

 

 

3,966,621

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(101,766

)

 

(101,766

)

Prepaid expenses and other assets

 

(138,254

)

 

(138,254

)

Inventory

 

(23,772

)

 

(23,772

)

Accounts payable and accrued liabilities

 

1,242,108

 

 

1,242,108

 

Net cash used in operating activities:

 

(5,328,661

)

 

(5,328,661

)

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

Purchase of property and equipment

 

(318,639

)

 

(318,639

)

Lending on notes receivable

 

(705,000

)

 

(705,000

)

Proceeds on notes receivable

 

270,000

 

 

270,000

 

Net cash used in investing activities

 

(753,639

)

 

(753,639

)

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from sale of common stock and warrants

 

2,604,355

 

 

2,604,355

 

Proceeds from exercise of stock options

 

188,770

 

 

188,770

 

Proceeds from notes payable

 

1,455,000

 

 

1,455,000

 

Payments on notes payable

 

(5,898,000

)

 

(5,898,000

)

Payments on Infinity Note — related party

 

 

 

 

Net cash provided by (used in) financing activities

 

(1,649,875

)

 

(1,649,875

)

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

(7,732,175

)

 

(7,732,175

)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

7,957,169

 

 

7,957,169

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

224,994

 

$

 

$

224,994

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

Cash paid for interest

 

$

305,195

 

$

 

$

305,195

 

 

 

 

 

 

 

 

 

NON-CASH INVESTING & FINANCING ACTIVITIES

 

 

 

 

 

 

 

Deemed dividend from warrant repricing

 

$

2,603,000

 

$

 

$

2,603,000

 

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

 

154,200

 

 

154,200

 

12% Warrants recorded as a debt discount and loss on extinguishment of debt

 

392,000

 

 

392,000

 

SBI Warrants recorded as a debt discount and loss on extinguishment of debt

 

28,800

 

 

28,800

 

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

 

158,100

 

 

158,100

 

 

NOTE 3.   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

 

26


Table of Contents

 

the Flowhub SAFE is recorded on the cost method of accounting and included under investment on the consolidated balance sheet and is shown as long-term, as 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.

 

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

 

$

 

 

NOTE 4.  DISCONTINUED OPERATIONS

 

Security Segment

 

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.  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 and the operating results for the years ended December 31, 2019 and 2018 are presented as discontinued operations.

 

27


Table of Contents

 

Assets and liabilities of discontinued operations held for sale included the following:

 

 

 

December 31,

 

 

 

2019

 

2018

 

Cash and cash equivalents

 

$

77,380

 

$

352,607

 

Accounts receivable, net

 

280,058

 

277,857

 

Prepaid expenses and other current assets

 

17,780

 

19,311

 

Current assets held for sale

 

$

375,218

 

$

649,775

 

 

 

 

 

 

 

Property and equipment, net

 

$

15,584

 

$

24,008

 

Intangibles

 

 

42,247

 

Noncurrent assets held for sale

 

$

15,584

 

$

66,255

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

88,309

 

$

78,065

 

Customer deposits

 

60,940

 

81,879

 

Current liabilities held for sale

 

$

149,249

 

$

159,944

 

 

A breakdown of the discontinued operations is presented as follows:

 

 

 

Year ended December 31,

 

 

 

2019

 

2018

 

Service revenues

 

$

2,118,732

 

$

2,602,365

 

 

 

 

 

 

 

Cost of service revenues

 

1,650,823

 

2,033,544

 

Cost of goods sold

 

 

4,373

 

Selling, general and administrative

 

877,795

 

795,381

 

Professional fees

 

4,219

 

104,730

 

Depreciation and amortization

 

51,654

 

87,061

 

Total costs and expenses

 

2,584,491

 

3,025,089

 

 

 

 

 

 

 

OPERATING LOSS

 

(465,759

)

(422,724

)

 

 

 

 

 

 

Interest expense, net

 

3,422

 

2,421

 

 

 

 

 

 

 

NET LOSS FROM DISCONTINUED OPERATIONS

 

$

(469,181

)

$

(425,145

)

 

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 2019 and 2018.

 

 

 

Year ended December 31,

 

 

 

2019

 

2018

 

Receivables

 

(2,201

)

(86,373

)

Prepaids and other

 

10,951

 

(7,715

)

Depreciation and amortization

 

51,654

 

87,061

 

Capital expenditures

 

(2,556

)

(11,139

)

Accounts payable and accrued expenses

 

10,244

 

2,479

 

Customer deposits

 

(20,939

)

60,878

 

 

Consumer Goods Segment

 

On December 26, 2019, the board of directors and management made the strategic move to cease operations of Chiefton.  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.  The assets and liabilities classified as discontinued operations for the consumer goods segment are presented separately in the balance sheet and the operating results for the years ended December 31, 2019 and 2018 are presented as discontinued operations.

 

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Table of Contents

 

Assets and liabilities of discontinued operations included the following:

 

 

 

December 31,

 

 

 

2019

 

2018

 

Cash and cash equivalents

 

$

25,223

 

$

 

Accounts receivable, net

 

7,836

 

21,102

 

Prepaid expenses and other current assets

 

14,394

 

 

Inventory

 

 

123,263

 

Current assets discontinued operations

 

$

47,453

 

$

144,365

 

 

 

 

 

 

 

Right to use asset

 

$

83,525

 

$

 

Noncurrent assets discontinued operations

 

$

83,525

 

$

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

124,468

 

$

4,920

 

Customer deposits

 

 

1,300

 

Operating lease liability — current portion

 

83,525

 

 

Current liabilities discontinued operations

 

$

207,993

 

$

6,220

 

 

A breakdown of the discontinued operations is presented as follows:

 

 

 

Year ended December 31,

 

 

 

2019

 

2018

 

Service

 

$

 

$

145,079

 

Product

 

222,220

 

134,012

 

Total Revenues

 

222,220

 

279,091

 

 

 

 

 

 

 

Cost of service revenues

 

 

59,227

 

Cost of goods sold

 

223,354

 

186,120

 

Selling, general and administrative

 

833,742

 

410,529

 

Professional fees

 

110,064

 

36,518