NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS, HISTORY AND PRESENTATION
Nature of Operations
General Cannabis Corp, a Colorado Corporation (the Company, we, us, our, or GCC) (formerly, Advanced Cannabis Solutions, Inc.), was incorporated on June 3, 2013, and provides services and products to the regulated cannabis industry. On June 6, 2018 we began trading on the OTCQX® Best Market after upgrading from the OTCQB® Venture Market. Our operations are segregated into the following four segments:
Security and Cash Transportation Services (Security Segment)
We provide advanced security, including on-site professionals and cash transport, to licensed cannabis cultivators, cannabis processing facilities and retail shops, under the business name Iron Protection Group (IPG) in California and Colorado, and security services to non-cannabis customers in Colorado, such as hotels, apartment buildings and retail, under the business name Mile High Protection Services (MHPS), which we acquired in August 2017.
Operations Consulting and Products (Operations Segment)
Through Next Big Crop (NBC), we deliver comprehensive consulting services to the cannabis industry that include obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and construction, and expansion of existing operations. During the first quarter of 2019, 76% of NBCs revenue was with one customer.
NBC oversees our wholesale equipment and supply business, operated under the name GC Supply, which provides turnkey sourcing and stocking services to cultivation, retail and infused products manufacturing facilities. Our products include building materials, equipment, consumables and compliance packaging. There are generally multiple suppliers for the products we sell; however, there are a limited number of manufacturers of certain high-tech cultivation equipment.
Consumer Goods and Marketing Consulting (Consumer Goods Segment)
Our apparel business, Chiefton, has two primary revenue streams. Chiefton Supply strives to create innovative, unique t-shirts, hats, hoodies and accessories. Our apparel is sold through our on-line shop, cannabis retailers, non-cannabis retailers, and specialty t-shirt and gift shops. Chiefton Design provides design, branding and marketing strategy consulting services to the cannabis industry, which frequently includes sourcing and selling customer-specific apparel and accessories.
Capital Investments and Real Estate (Investments Segment)
As a publicly traded company, we have access to capital that may not be available to businesses operating in the cannabis industry. Accordingly, we may provide debt or equity capital through (a) loans or revolving lines of credit, (b) leasing real estate we own, or (c) investing in businesses using cash or shares of our common stock.
Basis of Presentation
These unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange Commission (SEC), for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States of America (U.S. GAAP) can be condensed or omitted. The condensed consolidated balance sheet for the year ended December 31, 2018 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto of the Company for the year ended December 31, 2018 which were included in the annual report on Form 10-K filed by the Company on March 8, 2019.
In the opinion of management, these condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and notes thereto of the Company and include all adjustments, consisting only of normal recurring adjustments, considered necessary for the fair presentation of the Companys financial position and operating results. The results for the three months ended March 31, 2019 are not necessarily indicative of the operating results for the year ending December 31, 2019, or any other interim or future periods.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the results of GCC and its five wholly-owned subsidiary companies: (a) 6565 E. Evans Owner LLC, a Colorado limited liability company formed in 2014; (b) General Cannabis Capital Corporation, a Colorado corporation formed in 2015; (c) GC Security LLC (GCS), a Colorado limited liability company formed in 2015; (d) GC Corp., a Colorado corporation, originally formed in 2013 named ACS Corp; and (e) GC-NY Health LLC, a Delaware limited liability company formed in 2019. All intercompany accounts and transactions have been eliminated in consolidation.
7
Use of Estimates
The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Furthermore, when testing assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment charges may result.
Going Concern
The condensed consolidated financial statements have been prepared on a going concern basis, which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for at least the twelve months from the date these condensed consolidated financial statements are issued. Our cash of approximately $5.6 million is not sufficient to absorb our operating losses and retire our debt of $6.8 million. 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 condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Related Parties
Related parties are any entities or individuals that, through employment, ownership or other means, possess the ability to direct or cause the direction of the management and policies of the Company. We disclose related party transactions that are outside of normal compensatory agreements, such as salaries or board of director fees. We consider the following individuals / companies to be related parties:
·
Michael Feinsod
Chairman of our Board of Directors (Board).
·
Infinity Capital West, LLC (Infinity Capital)
An investment management company that was founded and is controlled by Michael Feinsod.
·
DB Arizona
A company that borrowed $825,000 from GC Finance Arizona. Prior to our purchase in June 2017, we did not possess the ability to influence DB Arizona and DB Arizona did not have the ability to influence us. We include DB Arizona as a related party due to our relationship with Michael Feinsod and Infinity Capital, and their relationship with DB Arizona.
Significant Accounting Policy Updates
Notes Receivable
We classify our notes receivable as held for investment, because we have the intent and ability to hold our notes receivable to maturity or settlement. 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 condensed 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 condensed consolidated statements of operations. We record an allowance for credit losses, as needed, using the current expected credit losses impairment model (CECL Model). The CECL Model requires us to consider relevant information about past events, current conditions, and reasonable and supportable forecasts of factors that affect the expected collectability of notes receivable. There is no probability of loss threshold that must be met prior to recording an allowance for credit losses under the CECL Model. We may assess notes receivable for impairment either on an aggregated basis, if they have sufficiently similar characteristics, or on an individual basis. Increases or decreases to the allowance for credit losses, if any, are included in net income in the condensed consolidated statements of operations.
Right-of-use Asset / Lease Liability
We adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02 Leases (Topic 842) during the first quarter of 2019. We first evaluate 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 determine 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 record 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 prior to 2019 met the short-term exemption, so modification to prior period results 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 as a right-of-use asset and a lease liability in the condensed consolidated balance sheet. We recognize expense on a straight-line basis over the life of the lease.
8
Recently Issued Accounting Standards
FASB ASU 2018-07 Compensation Stock Compensation (Topic 718) -
In June 2018, the FASB issued ASU 2018-07. This update is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to non-employees (for example, service providers, external legal counsel, suppliers, etc.). The ASU expands the scope of Topic 718, CompensationStock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This standard will be effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption of the standard is permitted. This ASU did not have a significant impact on our condensed consolidated financial statements and related disclosures.
FASB ASU 2017-04 Simplifying the Test for Goodwill Impairment (Topic 350)
In January 2017, the FASB issued 2017-04. The guidance removes Step Two of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting units carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The ASU is effective for annual reporting periods beginning after December 15, 2019, and for interim periods within those years, with early adoption permitted. We do not currently expect this ASU to have a significant impact on our condensed consolidated financial statements and related disclosures.
FASB ASU 2016-02 Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model, but has been updated to align with certain changes to the lessee model and the new revenue recognition standard. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We have adopted the above ASU as of January 1, 2019.
NOTE 2. INVESTMENTS AND ACQUISITIONS
Flowhub SAFE
On November 7, 2018, we invested $250,000 in Flowhub Holdings, LLC (Flowhub) through a simple agreement for future equity (the Flowhub SAFE). The Flowhub SAFE provides us with the right to either (a) future equity in Flowhub when it completes an equity financing, or (b) future equity in Flowhub or cash proceeds if there is a liquidity event. If there is an equity financing, Flowhub would issue to us (a) a number of standard preferred units equal to our investment divided by the price per share of the standard preferred units if the pre-money valuation is less than or equal to the valuation cap ($35 million); or (b) a number of safe preferred units equal to the purchase amount divided by the SAFE price, if the pre-money valuation is greater than the valuation cap. If there is a liquidity event, we will receive either (a) a cash payment equal to the purchase amount or (b) automatically receive a number of common units equal to the purchase amount divided by the liquidity price. Our investment in the Flowhub SAFE is included under investment on the condensed consolidated balance sheet and is shown as long-term because it is not readily convertible into cash.
Desert Created Company LLC / DB Products Arizona, LLC
In January 2018, we entered into a limited liability company operating agreement with DNFC LLC (DNFC), pursuant to the formation of Desert Created Company LLC (Desert Created). Each party owned a 50% interest in Desert Created, which took over the assets and operations of DB Products Arizona, LLC (DB Arizona). Desert Created produces and distributes cannabis-infused edible products in Arizona. In connection with the formation of Desert Created, we contributed 75,000 shares of our common stock and warrants to purchase 75,000 shares of our common stock, at an exercise price of $2.00 per share, to members of DNFC (collectively, the DNFC Sellers). This pricing was agreed to in November 2017, however, the transaction did not close until January 2018. In the interim, our stock price increased substantially, which was the reason for the initial impairment noted below. In October 2018, we sold our 50% interest to DNFC for cash consideration of $23,045 and, accordingly, impaired the remaining balance.
The 75,000 shares of our common stock were valued at $461,000, based on the closing price per share of our common stock on January 24, 2018, or $7.23 per share, reduced by a discount of 15% due to the restrictions on the DNFC Sellers 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
|
9
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, consisted of the following and is included in prepaid expenses and other current assets on the condensed consolidated 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 3. ACCOUNTS RECEIVABLE AND CUSTOMER DEPOSITS
Our accounts receivable consisted of the following:
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
Accounts receivable
|
$
|
622,944
|
$
|
476,581
|
Less: Allowance for doubtful accounts
|
|
(93,000)
|
|
(61,000)
|
Total
|
$
|
529,944
|
$
|
415,581
|
We record bad debt expense when we conclude the credit risk of a customer indicates the amount due under the contract is not collectible. We recorded bad debt expense of $32,000 and $67,514, respectively, during the three months ended March 31, 2019 and 2018.
As of March 31, 2019 and December 31, 2018, prepaid expenses and other current assets includes $0 and $18,164 of unbilled revenue, respectively, representing amounts for services completed but not billed.
Our customer deposit liability had the following activity:
|
|
|
|
|
Amount
|
December 31, 2018
|
$
|
391,290
|
Additional deposits received
|
|
449,040
|
Less: Deposits recognized as revenue
|
|
(509,518)
|
March 31, 2019
|
$
|
330,812
|
NOTE 4. PREPAIDS AND OTHER CURRENT ASSETS
Our Prepaids and other current assets consist of the following:
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
Prepaid insurance
|
$
|
247,793
|
$
|
97,828
|
Prepaid product for resale
|
|
112,619
|
|
173,852
|
Other
|
|
174,323
|
|
169,210
|
|
$
|
534,735
|
$
|
440,890
|
NOTE 5. NOTES RECEIVABLE
As of March 31, 2019, our Notes receivable consisted of the following:
|
|
|
CCR Note
|
$
|
155,000
|
BB Note
|
|
100,000
|
BRB Note
|
|
300,000
|
Total principal
|
|
555,000
|
Unamortized loan origination fee
|
|
(17,153)
|
|
|
537,847
|
Less: Current portion
|
|
(397,027)
|
Long-term portion
|
$
|
140,820
|
10
In March 2019, we agreed to loan $375,000 to Consolidated C.R., LLC (CCR) pursuant to the terms of a convertible promissory note (CCR Note), bearing interest at 12% per annum, collateralized by virtually all of the assets of CCR and a maturity date of November 2020. We have a 90 day option to convert $250,000 of principal under the CCR Note into a 10% equity ownership of CCR. CCR is a vertically integrated medical cannabis company located in San Juan, Puerto Rico. As of March 31, 2019, we had loaned $155,000 to CCR under the CCR Note. The CCR Note included a loan origination fee of $15,000, which is being recognized as interest income over the term of the agreement. CCR is currently in the construction phase, which will continue up to and beyond the expiration of the conversion rights and $250,000 is equivalent to the fair value of a 10% equity ownership in CCR; accordingly, the conversion rights do not have any additional value beyond that of the principal amount of the note.
On January 3, 2019, we loaned $100,000 to Beacher Brewing, LLC (BB) pursuant to the terms of a promissory note (BB Note), bearing interest at 11% per annum and a maturity date of January 3, 2020.
On December 13, 2018, we loaned $50,000 to BRB Realty, LLC (BRB) pursuant to the terms of a promissory note (BRB Note), bearing interest at 13% per annum and a maturity date of June 12, 2019. On January 19, 2019 the note was amended with an additional loan amount of $250,000 bearing an interest rate of 13% and a new maturity date of July 15, 2019. The BRB Note included a loan origination fee of $5,000, which is being recognized as interest income over the term of the agreement.
NOTE 6. OPERATING LEASE RIGHT-OF-USE ASSET / OPERATING LEASE LIABILITY
On February 1, 2019, we entered into a commercial real estate lease for 3,200 square feet of retail space in Greenvale, NY, with an initial term of two years and, at our option, two additional terms of five years each. Rent is $7,000 per month, as well as our portion of real estate taxes and common area maintenance. We determined the present value of the future lease payments using a discount rate of 8.5%, our incremental borrowing rate based on outstanding debt, resulting in an initial right-of-use asset and lease liability of $154,200, which are being amortized ratably over the term of the lease. As of March 31, 2019, the balance of the right-of-use asset and lease liability was $141,350. Future remaining minimum lease payments were as follows:
|
|
|
Year ending December 31,
|
|
Amount
|
2019
|
$
|
63,000
|
2020
|
|
84,000
|
2021
|
|
7,000
|
|
$
|
154,000
|
Less: Present value adjustment
|
|
(12,650)
|
Operating lease liability
|
$
|
141,350
|
NOTE 7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
Land
|
$
|
800,000
|
$
|
800,000
|
Buildings
|
|
508,104
|
|
508,104
|
Furniture, fixtures and equipment
|
|
374,397
|
|
317,741
|
Software
|
|
103,553
|
|
|
|
|
1,786,054
|
|
1,625,845
|
Less: Accumulated depreciation
|
|
(186,593)
|
|
(162,770)
|
|
$
|
1,599,461
|
$
|
1,463,075
|
Depreciation expense was $23,823 and $13,829, respectively, for the three months ended March 31, 2019 and 2018.
NOTE 8. INTANGIBLE ASSETS
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Estimated Life
(in years)
|
MHPS Customer relationships
|
$
|
100,000
|
$
|
85,074
|
$
|
14,926
|
|
2
|
MHPS Tradename
|
|
55,000
|
|
46,791
|
|
8,209
|
|
2
|
Intangible assets, net
|
$
|
155,000
|
$
|
131,865
|
$
|
23,135
|
|
|
11
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Estimated Life
(in years)
|
MHPS Customer relationships
|
$
|
100,000
|
$
|
72,744
|
$
|
27,256
|
|
2
|
MHPS Tradename
|
|
55,000
|
|
40,009
|
|
14,991
|
|
2
|
Intangible assets, net
|
$
|
155,000
|
$
|
112,753
|
$
|
42,247
|
|
|
Amortization expense was $19,112 and $19,112, respectively, for the three months ended March 31, 2019 and 2018. Future amortization expense will be $23,135 during the year ending December 31, 2019.
NOTE 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Our accounts payable and accrued expenses consist of the following:
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
Accounts payable
|
$
|
261,253
|
$
|
130,970
|
Accrued payroll, taxes and vacation
|
|
304,410
|
|
308,536
|
Other
|
|
148,783
|
|
86,186
|
|
$
|
714,446
|
$
|
525,692
|
NOTE 10. ACCRUED STOCK PAYABLE
The following tables summarize the changes in accrued common stock payable:
|
|
|
|
|
|
|
Amount
|
|
Number of
Shares
|
December 31, 2018
|
|
|
|
|
Employee stock award accrual
|
|
21,503
|
|
7,964
|
March 31, 2019
|
$
|
21,503
|
|
7,964
|
On January 31, 2019, we granted an employee $100,000 worth of our common stock, with half vesting over six months and half vesting over eighteen months. Based on a stock price of $2.70 on the date of grant, the employee would receive 37,038 shares of our common stock upon vesting. We are recognizing the value of the grant ratably over the vesting periods.
NOTE 11. DEBT
Notes Payable
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
8.5% Notes
|
$
|
6,849,000
|
$
|
6,849,000
|
Unamortized debt discount
|
|
(403,538)
|
|
(1,575,094)
|
|
|
6,445,462
|
|
5,273,906
|
Less: Current portion
|
|
(6,445,462)
|
|
(5,273,906)
|
Long-term portion
|
$
|
|
$
|
|
8.5% Notes
In April 2018, we completed a $7,500,000 private placement pursuant to a promissory note (8.5% Notes) and warrant purchase agreement (the 8.5% Agreement) with certain accredited investors, bearing interest at 8.5%, with principal due May 1, 2019, and interest payable quarterly. In the event of default, the interest rate increases to 18%. The 8.5% Notes are collateralized by a security interest in substantially all of our assets. We may prepay the 8.5% Notes at any time, but in any event must pay at least one year of interest.
Subject to the terms and conditions of the 8.5% Agreement, each investor was granted fully-vested warrants equal to their note principal times 80%, or six million warrants, with an exercise price of $2.35 per share and a life of two years (the 8.5% Warrants). Should we issue any equity-based instruments at a price lower than the exercise price(s) of the 8.5% Warrants, other than under our Incentive Plan (as defined below), the exercise price(s) of the 8.5% Warrants will be adjusted to the lower price. If the shares underlying the 8.5% Warrants were not registered for resale on a registration statement within six months, we would have issued an additional warrant to each purchaser at the same exercise price for one-half of the shares covered by the initial 8.5% Warrants. A registration statement related to the 8.5% Warrants was declared effective on June 5, 2018. We may call the 8.5% Warrants at $0.01 per share if our stock trades above $8.00 per share for 15 consecutive days. The 8.5% Warrants may be exercised at the option of the holder by paying cash or by applying the amount due under the 8.5% Notes as consideration.
12
We received $7,500,000 of cash for issuing the 8.5% Notes. The relative fair value of the 8.5% Warrants was recorded as a debt discount and additional paid-in capital of $5,366,000. For the three months ended March 31, 2019, amortization of debt discount expense includes $1,171,556 from the 8.5% Notes. The 8.5% Notes are otherwise treated as conventional debt.
For purposes of determining the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the 8.5% Warrants as of April 2018, were:
|
|
Current stock price
|
$ 4.18
|
Exercise price
|
$ 2.35
|
Risk-free interest rate
|
2.46 %
|
Expected dividend yield
|
|
Expected term (in years)
|
2.0
|
Expected volatility
|
134 %
|
Number of iterations
|
5
|
NOTE 12. COMMITMENTS AND CONTINGENCIES
Legal
To the best of our knowledge and belief, no material legal proceedings of merit are currently pending or threatened.
NOTE 13. STOCKHOLDERS EQUITY
Share-based compensation
Share-based compensation expense consisted of the following:
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
2019
|
|
2018
|
Employee Awards
|
$
|
1,298,845
|
$
|
723,085
|
Consulting Awards
|
|
9,777
|
|
|
Feinsod Agreement
|
|
183,874
|
|
1,035,486
|
|
$
|
1,492,496
|
$
|
1,758,571
|
Employee Stock Options
On October 29, 2014, the Board authorized the adoption of and, on June 26, 2015, our stockholders ratified, our 2014 Equity Incentive Plan for the issuance of 10 million shares of our common stock and, in April 2018, stockholders approved an increase of 5 million shares of common stock that may be granted (the Incentive Plan). The Incentive Plan provides for the issuance of up to 15 million shares of our common stock and is designed to provide an additional incentive to executives, employees, directors and key consultants, aligning our long term interests with participants. A Registration Statement on Form S-8 for the initial 10 million shares automatically became effective in May 2016, and a Registration Statement on Form S-8 for the additional 5 million shares and 900,000 shares under the Feinsod Agreement automatically became effective in June 2018 (collectively, the Registration Statements). The Registration Statements relate to 15,000,000 shares of our common stock, which are issuable pursuant to or, upon exercise of, options that have been granted or may be granted under our Incentive Plan. As of March 31, 2019, there were 13,147,214 shares available to issue under the Incentive Plan.
13
Share-based compensation costs for award grants to employees and directors (Employee Awards) are recognized on a straight-line basis over the service period for the entire award, with the amount of compensation cost recognized at any date equaling at least the portion of the award that is vested. The following summarizes the Black-Scholes assumptions used for Employee Awards granted during the three months ended March 31, 2019:
|
|
|
Exercise price
|
$
|
2.37
|
Stock price on date of grant
|
$
|
2.37
|
Volatility
|
|
130%
|
Risk-free interest rate
|
|
2.60%
|
Expected life (years)
|
|
3.0
|
Dividend yield
|
|
|
The following summarizes Employee Awards activity:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-average Exercise Price per Share
|
|
Weighted-average Remaining Contractual Term
(in years)
|
|
Aggregate Intrinsic Value
|
Outstanding at December 31, 2018
|
|
9,173,380
|
$
|
1.68
|
|
|
|
|
Granted
|
|
538,380
|
|
2.37
|
|
|
|
|
Forfeited or expired
|
|
(28,360)
|
|
2.55
|
|
|
|
|
Outstanding at March 31, 2019
|
|
9,683,400
|
|
1.72
|
|
5.7
|
$
|
5,721,000
|
Exercisable at March 31, 2019
|
|
7,571,855
|
$
|
1.27
|
|
6.1
|
$
|
5,713,000
|
As of March 31, 2019, there was approximately $2,924,520 of total unrecognized compensation expense related to unvested Employee Awards, which is expected to be recognized over a weighted-average period of nine months.
Consulting Services
As needed, we may issue warrants to third parties in exchange for consulting services. Stock-based compensation costs for award grants to third parties for consulting services (Consulting Awards) are recognized on a straight-line basis over the service period for the entire award, with the amount of compensation cost recognized at any date equaling at least the portion of the award that is vested.
The fair value of each warrant grant is estimated using Black-Scholes. We use historical data to estimate the expected price volatility. The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of valuation for the estimated life of the option. The following summarizes the Black-Scholes assumptions used for Consulting Awards granted during the three months ended March 31, 2019:
|
|
|
Exercise price
|
$
|
2.37
|
Stock price, date of valuation
|
$
|
2.37
|
Volatility
|
|
130%
|
Risk-free interest rate
|
|
2.60%
|
Expected life (years)
|
|
5.0
|
Dividend yield
|
|
|
The following summarizes Consulting Awards activity:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-average Exercise Price per Share
|
|
Weighted-average Remaining Contractual Term
(in years)
|
|
Aggregate Intrinsic Value
|
Outstanding at December 31, 2018
|
|
50,000
|
$
|
2.53
|
|
|
|
|
Granted
|
|
25,000
|
|
2.37
|
|
|
|
|
Outstanding and exercisable at
March 31, 2019
|
|
75,000
|
$
|
2.48
|
|
0.7
|
$
|
8,500
|
14
Feinsod Employment Agreement
On December 8, 2017, we entered into an agreement (the Feinsod Agreement) with Michael Feinsod for his continued service as our Executive Chairman of our Board of Directors. Pursuant to the agreement, Mr. Feinsod received (a) 600,000 stock options that vest on the anniversary date of the agreement for the next three years, or 200,000 per year (Time-based Options); and (b) three tranches of 100,000 stock options that vest when our stock price has an average trading price for 20 days of $3.50, $5.00 and $6.50 (Market-based Options). The options have an exercise price of $3.45 per share and a ten-year life. These options were not issued under the Incentive Plan; however, the underlying shares were included in the Registration Statement on Form S-8 that automatically became effective in June 2018. During the quarter ended March 31, 2018, the $3.50 and $5.00 Market-based Options vested and, accordingly, the expense associated with those options was recognized immediately.
DB Option Agreement warrants
In order to extend the DB Option Agreement with Infinity Capital, in March 2016 we granted Infinity Capital warrants to purchase 100,000 shares of our common stock at an exercise price of $0.67 per share with a five year life. All 100,000 warrants were still outstanding as of March 31, 2019.
Warrants with Debt
No warrants were exercised or forfeited during the three months ended March 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-average Exercise Price per Share
|
|
Weighted-average Remaining Contractual Term
(in years)
|
|
Aggregate Intrinsic Value
|
Outstanding and exercisable at March 31, 2019
|
|
5,992,214
|
$
|
2.26
|
|
1.1
|
$
|
316,820
|
Fall 2017 Capital Raise
During the year ended December 31, 2017, in a private placement we raised $4 million of equity by issuing four million shares of our common stock and four million warrants (Fall 2017 Warrants) to purchase shares of our common stock (together Units) for $1.00 per Unit. The Fall 2017 Warrants had an exercise price of $0.50 per share and were exercisable for two years. If our common stock closed above $5.00 for ten consecutive days, we could call the warrants, giving the warrant holders 10 days to exercise. During the quarter ended March 31, 2018, we called the warrants and all were exercised. In consideration for the sale of the Units, we received $3,750,000 in cash and extinguished $250,000 of 12% Notes.
NOTE 14. SUBSEQUENT EVENTS
In April 2019, we funded the remaining $220,000 of the CCR Note.
In May 2019, we paid off $2,378,000 in principal of our 8.5% Notes and amended the agreements to extend the maturity date to June 1, 2019 for the remaining $4,471,000 in principal.
NOTE 15. SEGMENT INFORMATION
Our operations are organized into four segments: Security and Cash Transportation Services; Operations Consulting and Products; Consumer Goods and Marketing Consulting; and Capital Investments and Real Estate. All revenue originates, and all assets are located in the United States. We have revised our disclosure to correspond to the information provided to the chief operating decision maker.
15
Three months ended March 31
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
Security
|
|
Operations
|
|
Consumer
Goods
|
|
Investments
|
|
Total
|
Service
|
$
|
564,592
|
$
|
247,783
|
$
|
|
$
|
|
$
|
812,375
|
Rent and interest
|
|
|
|
|
|
|
|
14,821
|
|
14,821
|
Product
|
|
|
|
532,318
|
|
29,775
|
|
|
|
562,093
|
Total Revenues
|
|
564,592
|
|
780,101
|
|
29,775
|
|
14,821
|
|
1,389,289
|
Costs and expenses
|
|
(679,006)
|
|
(677,381)
|
|
(261,054)
|
|
(40,075)
|
|
(1,657,516)
|
|
$
|
(114,414)
|
$
|
102,720
|
$
|
(231,279)
|
$
|
(25,254)
|
|
(268,227)
|
Corporate
|
|
|
|
|
|
|
|
|
|
(4,245,468)
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(4,513,695)
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
Security
|
|
Operations
|
|
Consumer
Goods
|
|
Investments
|
|
Total
|
Service
|
$
|
551,977
|
$
|
288,133
|
$
|
53,269
|
$
|
|
$
|
893,379
|
Product
|
|
|
|
17,881
|
|
31,222
|
|
|
|
49,103
|
Total revenue
|
|
551,977
|
|
306,014
|
|
84,491
|
|
|
|
942,482
|
Costs and expenses
|
|
(758,489)
|
|
(420,475)
|
|
(198,874)
|
|
|
|
(1,377,838)
|
Investment in Desert Created
|
|
|
|
|
|
|
|
(853,329)
|
|
(853,329)
|
|
$
|
(206,512)
|
$
|
(114,461)
|
$
|
(114,383)
|
$
|
(853,329)
|
|
(1,288,685)
|
Corporate
|
|
|
|
|
|
|
|
|
|
(3,177,702)
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(4,466,387)
|
|
|
|
|
|
Total assets
|
|
March 31,
2019
|
|
December 31,
2018
|
Security
|
$
|
831,804
|
$
|
723,878
|
Operations
|
|
402,440
|
|
134,786
|
Consumer Goods
|
|
185,672
|
|
144,365
|
Investments
|
|
139,242
|
|
300,000
|
Corporate
|
|
7,748,592
|
|
9,439,196
|
|
$
|
9,307,750
|
$
|
10,742,225
|
16