Quarterly Report (10-q)

Date : 05/08/2019 @ 4:16PM
Source : Edgar (US Regulatory)
Stock : General Cannabis Corp. (QX) (CANN)
Quote : 0.865  0.0 (0.00%) @ 12:41PM

Quarterly Report (10-q)


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549


FORM 10-Q


(Mark One)


þ

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period
ended March 31, 2019.

 

 

o

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


Commission file number:   000-54457


GENERAL CANNABIS CORP

(Exact name of registrant as specified in its charter)


Colorado

 

90-1072649

(State of incorporation)

 

(IRS Employer Identification No.)

 

6565 East Evans Avenue

Denver, CO 80224

(Address of principal executive offices) (Zip Code)


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


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


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


Large accelerated filer  o

Accelerated filer      þ

Non-accelerated filer    o

Smaller reporting company      þ

Emerging growth company      o


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


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


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


Title of each class

 

Name of each exchange on which registered

 

Ticker symbol

N/A

 

N/A

 

N/A


As of April 30, 2019, there were 36,247,752 issued and outstanding shares of the Company’s common stock.





GENERAL CANNABIS CORP

FORM 10-Q


TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements

3

Item 2.

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

17

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

21

Item 4.

Controls and Procedures

22

 

 

 

PART II. OTHER INFORMATION

23

 

 

 

Item 1.

Legal Proceedings

23

Item 1A.

Risk Factors

23

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

Item 3.

Defaults Upon Senior Securities

23

Item 4.

Mine Safety Disclosures

23

Item 5.

Other Information

23

Item 6.

Exhibits

23

 

 

 

 

Signatures

24




2



PART I.  FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS


GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED BALANCE SHEETS


 

 

March 31,

2019

(Unaudited)

 

December 31, 2018

ASSETS

 

 

 

 

Current Assets

 

 

 

 

Cash and cash equivalents

$

5,588,243

$

7,957,169

Accounts receivable, net

 

529,944

 

415,581

Prepaid expenses and other current assets

 

534,735

 

440,890

Inventory

 

103,035

 

123,263

Notes receivable, net – current portion

 

397,027

 

50,000

Total current assets

 

7,152,984

 

8,986,903

 

 

 

 

 

Note receivable, net

 

140,820

 

Operating lease right-of-use asset

 

141,350

 

Property and equipment, net

 

1,599,461

 

1,463,075

Intangible assets, net

 

23,135

 

42,247

Investment

 

250,000

 

250,000

Total Assets

$

9,307,750

$

10,742,225

 

 

 

 

 

LIABILITIES & STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

Accounts payable and accrued expenses

$

714,446

$

525,692

Interest payable

 

145,542

 

Deferred revenue and customer deposits

 

330,812

 

391,290

Accrued stock payable

 

21,503

 

Notes payable (net of discount)

 

6,445,462

 

5,273,906

Operating lease liability – current portion

 

83,525

 

Total current liabilities

 

7,741,290

 

6,190,888

 

 

 

 

 

Operating lease liability

 

57,825

 

Total liabilities

 

7,799,115

 

6,190,888

 

 

 

 

 

Commitments and Contingencies (Note 12)

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

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

 

 

Common Stock, $0.001 par value; 100,000,000 shares authorized; 36,222,752 shares issued and outstanding as of March 31, 2019 and December 31, 2018

 

36,223

 

36,223

Additional paid-in capital

 

57,774,054

 

56,303,061

Accumulated deficit

 

(56,301,642)

 

(51,787,947)

Total Stockholders’ Equity

 

1,508,635

 

4,551,337

 

 

 

 

 

Total Liabilities & Stockholders’ Equity

$

9,307,750

$

10,742,225



See Notes to condensed consolidated financial statements.



3



GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


 

 

Three months ended

March 31,

 

 

2019

 

2018

REVENUES

 

 

 

 

Service

$

812,375

$

893,379

Rent and interest

 

14,821

 

Product sales

 

562,093

 

49,103

Total revenues

 

1,389,289

 

942,482

 

 

 

 

 

COSTS AND EXPENSES

 

 

 

 

Cost of service revenues

 

660,734

 

752,474

Cost of goods sold

 

411,983

 

77,690

Selling, general and administrative

 

1,436,636

 

942,178

Share-based expense

 

1,492,496

 

1,758,571

Professional fees

 

575,161

 

545,110

Depreciation and amortization

 

42,935

 

32,941

Total costs and expenses

 

4,619,945

 

4,108,964

 

 

 

 

 

OPERATING LOSS

 

(3,230,656)

 

(3,166,482)

 

 

 

 

 

OTHER EXPENSE

 

 

 

 

Amortization of debt discount

 

1,171,556

 

443,917

Interest expense, net

 

111,483

 

2,659

Loss from Desert Created investment

 

 

47,829

Impairment of Desert Created investment

 

 

805,500

Total other expense , net

 

1,283,039

 

1,299,905

 

 

 

 

 

NET LOSS

$

(4,513,695)

$

(4,466,387)

 

 

 

 

 

PER SHARE DATA – Basic and diluted

 

 

 

 

 Net loss per common share

$

(0.12)

$

(0.14)

 

 

 

 

 

Weighted average number of shares outstanding

 

36,222,752

 

32,034,298



See Notes to condensed consolidated financial statements.



4



GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


 

 

Three months ended

March 31,

 

 

2019

 

2018

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

Net loss

$

(4,513,695)

$

(4,466,387)

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

 

 

 

 

Amortization of debt discount

 

1,171,556

 

443,917

Depreciation and amortization expense

 

42,935

 

32,941

Amortization of loan origination fees

 

(2,847)

 

 

Bad debt expense

 

32,000

 

67,514

Impairment of Desert Created investment

 

 

805,500

Loss from Desert Created investment

 

 

47,829

Share-based expense

 

1,492,496

 

1,758,571

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

(146,363)

 

10,353

Prepaid expenses and other assets

 

(93,845)

 

458,051

Inventory

 

20,228

 

(85,435)

Accounts payable and accrued liabilities

 

273,818

 

(340,731)

Net cash used in operating activities:

 

(1,723,717)

 

(1,267,877)

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

Purchase of property and equipment

 

(160,209)

 

(139,056)

Lending on note receivable

 

(485,000)

 

Net cash used in investing activities

 

(645,209)

 

(139,056)

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

Proceeds from exercise of warrants

 

 

3,559,000

Proceeds from exercise of stock options

 

 

443,321

Payments on notes payable

 

 

(1,621,250)

Payments on Infinity Note – related party

 

 

(1,370,126)

Net cash provided by financing activities

 

 

1,010,945

 

 

 

 

 

NET DECREASE IN CASH

 

(2,368,926)

 

(395,988)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

7,957,169

 

5,036,787

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

5,588,243

$

4,640,799

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION

 

 

 

 

Cash paid for interest

$

2,153

$

202,749

Cash paid for taxes

$

$

 

 

 

 

 

NON-CASH TRANSACTIONS

 

 

 

 

 

 

 

 

 

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

$

154,200

$

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 condensed consolidated financial statements.



5



GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018


 

 

 

 

Additional

 

 

 

 

 

 

Common Stock

 

Paid-in

 

Accumulated

 

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Total

January 1, 2019

 

36,222,752

$

36,223

$

56,303,061

$

(51,787,947)

$

4,551,337

Stock options granted to employees and consultants

 

 

 

1,470,993

 

 

1,470,993

Net loss

 

 

 

 

(4,513,695)

 

(4,513,695)

March 31, 2019

 

36,222,752

$

36,223

$

57,774,054

$

(56,301,642)

$

1,508,635



 

 

 

 

Additional

 

 

 

 

 

 

Common Stock

 

Paid-in

 

Accumulated

 

 

 

 

Shares

 

Amount

 

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

 

7,054,500

 

7,055

 

3,718,805

 

 

3,725,860

Common stock issued upon exercise of stock options

 

507,221

 

507

 

442,814

 

 

443,321

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

Stock options granted to employees and consultants

 

 

 

1,758,571

 

 

1,758,571

Net loss

 

 

 

 

(4,466,387)

 

(4,466,387)

March 31, 2018

 

35,433,990

$

35,434

$

45,346,504

$

(39,280,576)

$

6,101,362



See Notes to condensed consolidated financial statements.



6



GENERAL CANNABIS CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1.   NATURE OF OPERATIONS, HISTORY AND PRESENTATION

 

Nature of Operations

 

General Cannabis Corp, a Colorado Corporation (the “Company,” “we,” “us,” “our,” or “GCC”) (formerly, Advanced Cannabis Solutions, Inc.), was incorporated on June 3, 2013, and provides services and products to the regulated cannabis industry.  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 NBC’s revenue was with one customer.

 

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

 

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

 

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

 

Capital Investments and Real Estate (“Investments Segment”)

 

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

 

Basis of Presentation

 

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 Company’s 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, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This standard will be effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption of the standard is permitted. 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 unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.  The ASU is effective for annual reporting periods beginning after December 15, 2019, and for interim periods within those years, with early adoption permitted.  We do not currently expect this ASU to have a significant impact on our 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 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


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



ITEM 2.   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 Condensed Consolidated Unaudited Financial Statements contained in this Quarterly Report on Form 10-Q and the Condensed Consolidated Financial Statements and related notes and MD&A of Financial Condition and Results of Operations appearing in our Annual Report on Form 10-K as of and for the years ended December 31, 2018 and 2017. The results of operations for an interim period may not give a true indication of results for future interim periods or for the year.


Cautionary Statement Regarding Forward Looking Statements


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


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


Our Products, Services and Customers

 

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


Security and Cash Transportation Services (“Security Segment”)

 

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


Operations Consulting and Products (“Operations Segment”)

 

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


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


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


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


Our CBD retail business, STOA Wellness, is expected to open its first store in Spring 2019.  STOA Wellness will offer a curated collection of high quality CBD products for athletes and general wellness.


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.


17



 

Results of Operations

 

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


Consolidated Results


 

 

Three months ended March 31,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Revenues

$

1,389,289

$

942,482

$

446,807

 

47%

Costs and expenses

 

(4,619,945)

 

(4,108,964)

 

(510,981)

 

12%

Other expense

 

(1,283,039)

 

(1,299,905)

 

16,866

 

(1)%

Net loss

$

(4,513,695)

$

(4,466,387)

$

(47,308)

 

1%


Revenues


Revenue increased for our Security, Operation Consulting and Investments segments, offset by a decrease in revenues in our Consumer Goods Segment.  See Segment discussions below for further details.


Costs and expenses


 

 

Three months ended March 31,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Cost of service revenues

$

660,734

$

752,474

$

(91,740)

 

(12)%

Cost of goods sold

 

411,983

 

77,690

 

334,293

 

430%

Selling, general and administrative

 

1,436,636

 

942,178

 

494,458

 

52%

Share-based compensation

 

1,492,496

 

1,758,571

 

(266,075)

 

(15)%

Professional fees

 

575,161

 

545,110

 

30,051

 

6%

Depreciation and amortization

 

42,935

 

32,941

 

9,994

 

 30%

 

$

4,619,945

$

4,108,964

$

510,981

 

12%


Cost of service revenues typically fluctuates with the changes in revenue for our Operation Consulting and Security Segments, while these costs are relatively fixed for our Consumer Goods Segment.  Cost of goods sold varies with changes in product sales, including an increase in products sold by our Operation Consulting Segment, which have smaller margins than apparel sold by our Consumer Goods Segment. 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 officers insurance; and (c) computer and internet costs.


Share-based compensation included the following:


 

 

Three months ended March 31,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Employee awards

$

1,298,845

$

723,085

$

575,760

 

80%

Consulting awards

 

9,777

 

 

9,777

 

100%

Feinsod Agreement

 

183,874

 

1,035,486

 

(851,612)

 

(82)%

 

$

1,492,496

$

1,758,571

$

(266,075)

 

(15)%


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 share-based compensation pursuant to agreements with Michael Feinsod for serving as the Executive Chairman of our Board.  


Professional fees consist primarily of accounting and legal expenses and stayed static from 2018 to 2019.


18



 

Other Expense


 

 

Three months ended March 31,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Amortization of debt discount

$

1,171,556

$

443,917

$

727,639

 

164%

Interest expense

 

111,483

 

2,659

 

108,824

 

4,093%

Loss from Desert Created investment

 

 

 

47,829

 

(47,829)

 

(100)%

Impairment of Desert Created investment

 

 

805,500

 

(805,500)

 

(100)%

 

$

1,283,039

$

1,299,905

$

(16,866)

 

(1)%


Amortization of debt discount was higher in 2019 compared to 2018, because our outstanding debt was higher during the first quarter of 2019 compared to 2018. Interest expense varied increased in 2019 due to the payoff of the 12% Notes in January 2018, the payoff of the Infinity Note in February 2018, and the issuance of the 8.5% Notes in April 2018. The loss on investment in Desert Created is our 50% share of the net loss of Desert Created during the three quarters September 30, 2018.  The impairment of Desert Created occurred primarily because the agreement was priced in November 2017, however, the transaction did not close until January 2018.  In the interim, our stock price increased substantially, thus the consideration we paid, in equity instruments, was higher than the fair value of the investment received.  In October 2018, we sold our 50% interest to DNFC for cash consideration of $23,045 and, accordingly, impaired the remaining balance.


Security and Cash Transportation Services


 

 

Three months ended March 31,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Revenues

$

564,592

$

551,977

$

12,615

 

2%

Costs and expenses

 

(679,006)

 

(758,489)

 

79,483

 

(10)%

 

$

(114,414)

$

(206,512)

$

92,098

 

(45)%


Revenues increased in 2019 primarily from increasing the average revenue rate per hour in the second half of 2018, offset by a net decrease in overall guard hours.  Costs and expenses typically vary with changes in revenue, however, the decrease in 2019 compared to 2018 was due primarily lower overtime hours, along with a decrease in legal fees in 2019.


Operations Consulting and Products


 

 

Three months ended March 31,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Revenues

$

780,101

$

306,014

$

474,087

 

155%

Costs and expenses

 

(677,381)

 

(420,475)

 

(256,906)

 

61%

 

$

102,720

$

(114,461)

$

217,181

 

(190)%


Increased revenues in 2019 primarily related to increased product sales and license application success fees, offset by a decrease in recurring consulting fees. Costs and expenses increased in 2019 due to increased product sales, offset by a reduction in employee costs.


Consumer Goods and Marketing Consulting

 

 

Three months ended March 31,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Revenues

$

29,775

$

84,491

$

(54,716)

 

(65)%

Costs and expenses

 

(261,054)

 

(198,874)

 

(62,180)

 

31%

 

$

(231,279)

$

(114,383)

$

(116,896)

 

102%


The decrease in revenues is due to no revenue from custom design projects in 2019, while product sales were flat.  Costs and expenses vary with changes in product sales, product mix, and inventory adjustments.  Revenue derived from services has a higher margin than revenues derived from product sales.  In 2019, a larger percentage of revenues came from product sales, increasing the costs related to these sales. Additionally, there was an increase in personnel in the first quarter of 2019.


19



 

Investments

 

 

Three months ended March 31,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Revenues

$

14,821

$

$

14,821

 

100%

Costs and expenses

 

(40,075)

 

 

(40,075)

 

100%

Investment in Desert Created

 

 

(853,329)

 

853,329

 

(100)%

 

$

(25,254)

$

(853,329)

$

828,075

 

(97)%


The increase in revenues in 2019 is related to three new notes receivables that were executed during the three months ended March 31, 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.


Liquidity

 

Sources of liquidity


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


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


Sources and uses of cash


We had cash of approximately $5.6 million and $8.0 million, respectively, as of March 31, 2019 and December 31, 2018.  Our cash flows from operating, investing and financing activities were as follows:


 

 

Three months ended

March 31,

 

 

2019

 

2018

Net cash used in operating activities

$

(1,723,717)

$

(1,267,877)

Net cash used in investing activities

 

(645,209)

 

(139,056)

Net cash provided by financing activities

$

$

1,010,945


Net cash used in operating activities increased in 2019 by $455,840 compared to 2018, primarily due to additional cash-based expenses, such as salaries for additional personal.


Net cash used in investing activities in 2019 relates primarily to issuing notes receivable, along with purchasing fixed assets.  2018 expenditures were for fixed assets.


Net cash provided by financing activities in 2018 related to exercise of warrants and options offset by paying off debt.


Capital Resources


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


Non-GAAP Financial Measures


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


20



 

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


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


 

 

Three months ended

March 31,

 

 

2019

 

2018

Net loss

$

(4,513,695)

$

(4,466,387)

Adjustments:

 

 

 

 

Share-based expense

 

1,492,496

 

1,758,571

Depreciation and amortization

 

42,935

 

32,941

Amortization of debt discount

 

1,171,556

 

443,917

Interest expense

 

111,483

 

2,659

Loss on investment in Desert Created

 

 

47,829

Impairment of Desert Created investment

 

 

805,500

Total adjustments

 

2,818,470

 

3,091,417

Adjusted EBITDA

$

(1,695,225)

$

(1,374,970)

 

 

 

 

 

Per share:

 

 

 

 

Net loss – Basic and Diluted

$

(0.12)

$

(0.14)

Adjusted EBITDA – Basic and Diluted

 

(0.05)

 

(0.04)

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

Net loss – Basic and Diluted

 

36,222,752

 

32,034,298

Adjusted EBITDA – Basic and Diluted

 

36,222,752

 

31,452,077


Off-balance Sheet Arrangements  


We currently have no off-balance sheet arrangements.


Critical Accounting Policies

 

Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates used to prepare the condensed financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended December 31, 2018, and Note 1 to the Condensed Consolidated Financial Statements in this Form 10-Q.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


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


21



 

ITEM 4.  CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures


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


We carried out an evaluation under the supervision and with the participation of management, including our Principal Executive Officer and Principal Financial and Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2019, the end of the period covered by this report. Based on that evaluation, our Principal Executive Officer and Principal Financial and Accounting Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2019.

 

Internal Control over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by the Board, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:


·

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

·

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures of are being made only in accordance with authorizations of our management and directors; and

·

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.


Because of inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


Assessment of Internal Control over Financial Reporting


Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013). Based on management’s assessment, management concluded that its internal control over financial reporting was effective as of March 31, 2019, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.


Changes in Internal Control over Financial Reporting

 

None.


22



PART II.  OTHER INFORMATION


ITEM 1.    LEGAL PROCEEDINGS


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


ITEM 1A.  RISK FACTORS


Except as described below, as of the date of this report, there have been no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.


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


Revenue from our largest customers have historically accounted for a significant amount of our business. For instance, during the first quarter of 2019, 76% of NBC’s revenue was with one customer, which comprised approximately 42% of our total consolidated revenue for such quarter. During the first quarter of 2019, approximately 58% of our revenue was derived from the delivery of services, for which we have contracts, and approximately 40% was derived from the sale of products. Generally, our agreements with our customers for services allow them to terminate service with a limited notification period, while product sales agreements do not include any minimum or continuing obligations to purchase our products. We cannot assure you that our largest customers will not terminate services or cease purchasing our products in favor of other service and/or product providers, significantly reduce orders, or seek price reductions in the future. Any such event could have a material adverse effect on our revenue, profitability and results of operations.


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


None.


ITEM 3.    DEFAULTS UPON SENIOR SECURITIES


None.


ITEM 4.    MINE SAFETY DISCLOSURES


Not applicable.


ITEM 5.   OTHER INFORMATION


None.


ITEM 6.  EXHIBITS


Exhibits

 

31.1

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

31.2

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

32.1

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

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document


23



SIGNATURES


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


 

GENERAL CANNABIS CORP

 

 

 

Date: May 8, 2019

 

/s/ Michael Feinsod

 

 

Michael Feinsod, Chief Executive Officer

 

 

Principal Executive Officer

 

 

 

 

 

/s/ Brian Andrews

 

 

Brian Andrews, Chief Financial Officer

 

 

Principal Financial and Accounting Officer


24


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