Quarterly Report (10-q)

Date : 08/08/2019 @ 8:10PM
Source : Edgar (US Regulatory)
Stock : General Cannabis Corp. (QX) (CANN)
Quote : 1.02  -0.03 (-2.86%) @ 8:59PM

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 June 30, 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)

(303) 759-1300

(Registrant’s Telephone Number, Including Area Code)


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


Title of each class

 

Name of each exchange on which registered

 

Ticker symbol

N/A

 

N/A

 

N/A


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


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


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


Large accelerated filer  o

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


As of July 31, 2019, there were 39,302,752 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

16

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

22

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


 

 

June 30,

2019

(Unaudited)

 

December 31,

2018

ASSETS

 

 

 

 

Current Assets

 

 

 

 

Cash and cash equivalents

$

792,907

$

7,957,169

Accounts receivable, net

 

350,288

 

415,581

Prepaid expenses and other current assets

 

376,861

 

440,890

Inventory

 

151,764

 

123,263

Notes receivable, net – current portion

 

399,438

 

50,000

Total current assets

 

2,071,258

 

8,986,903

 

 

 

 

 

Note receivable, net

 

363,306

 

Operating lease right-of-use asset

 

122,075

 

Property and equipment, net

 

1,653,483

 

1,463,075

Intangible assets, net

 

3,812

 

42,247

Investment

 

250,000

 

250,000

Total Assets

$

4,463,934

$

10,742,225

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

Accounts payable and accrued expenses

$

762,505

$

525,692

Interest payable

 

42,553

 

Deferred revenue and customer deposits

 

457,199

 

391,290

Accrued stock payable

 

54,670

 

Notes payable, net of discount

 

1,106,000

 

5,273,906

Operating lease liability – current portion

 

83,525

 

Warrant derivative liability

 

2,014,560

 

Total current liabilities

 

4,521,012

 

6,190,888

 

 

 

 

 

Operating lease liability

 

38,550

 

  Total liabilities

 

4,559,562

 

6,190,888

 

 

 

 

 

Commitments and Contingencies (Note 8)

 

 

 

 

 

 

 

 

 

Stockholders’ (Deficit) Equity

 

 

 

 

Preferred stock, no par value; 5,000,000 shares authorized; no shares issued and outstanding at June 30, 2019 and December 31, 2018

 

 

Common Stock, $0.001 par value; 100,000,000 shares authorized; 39,302,752 and 36,222,752 shares issued and outstanding as of June 30, 2019 and December 31, 2018

 

39,303

 

36,223

Additional paid-in capital

 

59,061,513

 

56,303,061

Accumulated deficit

 

(59,196,444)

 

(51,787,947)

Total Stockholders’ (Deficit) Equity

 

(95,628)

 

4,551,337

Total Liabilities and Stockholders’ Equity

$

4,463,934

$

10,742,225


See Notes to condensed consolidated financial statements.


3




GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


 

 

Three months ended

June 30,

 

Six months ended

June 30,

 

 

2019

 

2018

 

2019

 

2018

REVENUES

 

 

 

 

 

 

 

 

Service

$

874,076

$

1,050,285

$

1,686,451

$

1,943,664

Rent and interest

 

27,775

 

 

42,596

 

Product Sales

 

455,014

 

64,256

 

1,017,107

 

113,359

Total revenues

 

1,356,865

 

1,114,541

 

2,746,154

 

2,057,023

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES

 

 

 

 

 

 

 

 

Cost of service revenues

 

625,477

 

807,257

 

1,286,211

 

1,588,288

Cost of goods sold

 

467,772

 

44,277

 

879,755

 

93,410

Selling, general and administrative

 

1,458,390

 

1,164,459

 

2,895,026

 

2,106,637

Share-based expense

 

752,467

 

1,204,921

 

2,244,963

 

2,963,492

Professional fees

 

482,798

 

347,352

 

1,057,959

 

892,462

Depreciation and amortization

 

56,348

 

37,592

 

99,283

 

70,533

Total costs and expenses

 

3,843,252

 

3,605,858

 

8,463,197

 

7,714,822

 

 

 

 

 

 

 

 

 

OPERATING LOSS

 

(2,486,387)

 

(2,491,317)

 

(5,717,043)

 

(5,657,799)

 

 

 

 

 

 

 

 

 

OTHER (INCOME) EXPENSE

 

 

 

 

 

 

 

 

Amortization of debt discount and equity
issuance costs

 

722,219

 

1,013,261

 

1,893,775

 

1,457,178

Interest expense, net

 

88,058

 

92,576

 

199,541

 

95,235

Gain on warrant derivative liability

 

(401,862)

 

 

(401,862)

 

Loss from Desert Created investment

 

 

72,143

 

 

119,972

Impairment of Desert Created investment

 

 

 

 

805,500

Total other expense , net

 

408,415

 

1,177,980

 

1,691,454

 

2,477,885

 

 

 

 

 

 

 

 

 

NET LOSS

$

(2,894,802)

$

(3,669,297)

$

(7,408,497)

$

(8,135,684)

 

 

 

 

 

 

 

 

 

Deemed dividend

$

(1,192,000)

$

$

(1,192,000)

$

 

 

 

 

 

 

 

 

 

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

$

(4,086,802)

$

(3,669,297)

$

(8,600,497)

$

(8,135,684)

 

 

 

 

 

 

 

 

 

PER SHARE DATA – Basic and diluted

 

 

 

 

 

 

 

 

Net loss per share

$

(0.11)

$

(0.10)

$

(0.23)

$

(0.23)

Weighted average number of common shares outstanding

 

37,254,071

 

35,574,099

 

38,032,533

 

34,876,133


See Notes to condensed consolidated financial statements.


4




GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


 

 

Six months ended

June 30,

 

 

2019

 

2018

OPERATING ACTIVITIES

 

 

 

 

Net loss

$

(7,408,497)

$

(8,135,684)

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

 

 

 

 

Amortization of debt discount and equity issuance costs

 

1,893,775

 

1,457,178

Depreciation and amortization expense

 

99,283

 

70,533

Amortization of loan origination fees

 

(7,744)

 

Bad debt expense

 

103,262

 

110,615

Impairment of Desert Created investment

 

 

805,500

Loss from Desert Created investment

 

 

119,972

Gain on warrant derivative liability

 

(401,862)

 

Share-based expense

 

2,244,963

 

 2,963,492

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

(37,969)

 

(68,865)

Prepaid expenses and other assets

 

64,029

 

365,313

Inventory

 

(28,501)

 

(108,659)

Accounts payable and other current liabilities

 

345,275

 

(643,131)

Net cash used in operating activities:

 

(3,133,986)

 

(3,063,736)

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

Purchase of property and equipment

 

(243,256)

 

(187,203)

Lending on notes receivable

 

(705,000)

 

(585,000)

Investment in Desert Created

 

 

(50,000)

Net cash used in investing activities

 

(948,256)

 

(822,203)

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

Net proceeds from the sale of common stock and warrants

 

2,604,355

 

Proceeds from exercise of warrants

 

 

3,941,201

Proceeds from exercise of stock options

 

56,625

 

572,709

Proceeds from notes payable

 

 

7,500,000

Payments on notes payable

 

(5,743,000)

 

(1,621,250)

Payments on Infinity Note – related party

 

 

(1,370,126)

Net cash (used in) provided by financing activities

 

(3,082,020)

 

9,022,534

 

 

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

(7,164,262)

 

5,136,595

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

7,957,169

 

5,036,787

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

792,907

$

10,173,382

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION

 

 

 

 

Cash paid for interest

$

206,765

$

452,296

Cash paid for taxes

 

 

 

 

 

 

 

NON-CASH TRANSACTIONS

 

 

 

 

Deemed dividend from 8.5% Warrants repricing

$

1,192,000

$

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

 

154,200

 

8.5% Note principal used to exercise 8.5% Warrants

 

 

507,000

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

 

 

5,366,000

Issuance of common stock for accrued stock payable

 

 

321,860

Issuance of common stock and warrants for investment in Desert Created

 

 

979,000

Portion of Dope Media Note related to reimbursed legal fees

 

 

15,000


See Notes to condensed consolidated financial statements.


5




GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ (DEFICIT) EQUITY

FOR THE THREE MONTHS ENDED JUNE 30, 2019 AND 2018


 

 

Common Stock

 

Additional

 

Accumulated

 

 

 

 

Shares

 

Amount

 

Paid-in Capital

 

Deficit

 

Total

April 1, 2019

 

36,222,752

$

36,223

$

57,774,054

$

(56,301,642)

$

1,508,635

Sale of common stock, net of issuance costs

 

3,000,000

 

3,000

 

503,614

 

 

506,614

Common stock issued for property and equipment

 

5,000

 

5

 

7,995

 

 

8,000

Common stock issued upon exercise of stock options

 

75,000

 

75

 

56,550

 

 

56,625

Stock options granted to employees and consultants

 

 

 

719,300

 

 

719,300

Net loss

 

$

$

$

(2,894,802)

$

(2,894,802)

June 30,2019

 

39,302,752

 

39,303

 

59,061,513

 

(59,196,444)

 

(95,628)


 

 

Common Stock

 

Additional

 

Accumulated

 

 

 

 

Shares

 

Amount

 

Paid-in Capital

 

Deficit

 

Total

April 1, 2018

 

35,433,990

$

35,434

$

45,346,504

$

(39,280,576)

$

6,101,362

Warrants issued with the 8.5% Notes

 

 

 

5,366,000

 

 

5,366,000

Common stock issued upon exercise of warrants

 

411,786

 

411

 

888,785

 

 

889,196

Common stock issued upon exercise of stock options

 

99,551

 

100

 

129,289

 

 

129,389

Stock options and warrants granted to employees and consultants

 

 

 

1,112,425

 

 

1,112,425

Net loss

 

 

 

 

(3,669,297)

 

(3,669,297)

June 30, 2018

 

35,945,327

$

35,945

$

52,843,003

$

(42,949,873)

$

9,929,075


See Notes to condensed consolidated financial statements.


6




GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ (DEFICIT) EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018


 

 

Common Stock

 

Additional

 

Accumulated

 

 

 

 

Shares

 

Amount

 

Paid-in Capital

 

Deficit

 

Total

January 1, 2019

 

36,222,752

$

36,223

$

56,303,061

$

(51,787,947)

$

4,551,337

Sale of common stock, net of issuance costs

 

3,000,000

 

3,000

 

503,614

 

 

506,614

Common stock issued for property and equipment

 

5,000

 

5

 

7,995

 

 

8,000

Common stock issued upon exercise of stock options

 

75,000

 

75

 

56,550

 

 

56,625

Stock options granted to employees and consultants

 

 

 

2,190,293

 

 

2,190,293

Net loss

 

 

 

 

(7,408,497)

 

(7,408,497)

June 30, 2019

 

39,302,752

$

39,303

$

59,061,513

$

(59,196,444)

$

(95,628)


 

 

Common Stock

 

Additional

 

Accumulated

 

 

 

 

Shares

 

Amount

 

Paid-in Capital

 

Deficit

 

Total

January 1, 2018

 

27,692,910

$

27,693

$

38,292,493

$

(34,814,189)

$

3,505,997

Common stock issued 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

Warrants issued with the 8.5% Notes

 

 

 

5,366,000

 

 

5,366,000

Common stock issued upon exercise of warrants

 

7,466,286

 

7,466

 

4,607,590

 

 

4,615,056

Common stock issued upon exercise of stock options

 

606,772

 

607

 

572,103

 

 

572,710

Stock options and warrants granted to employees and consultants

 

 

 

2,870,996

 

 

2,870,996

Net loss

 

 

 

 

(8,135,684)

 

(8,135,684)

June 30, 2018

 

35,945,327

$

35,945

$

52,843,003

$

(42,949,873)

$

9,929,075


See Notes to condensed consolidated financial statements.


7



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 6 months ended June 30, 2019, 76% of NBC’s revenue was with three customers.


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, opened in July of 2019.  STOA Wellness offers 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 believe that 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 and six months ended June 30, 2019 are not necessarily indicative of the operating results for the year ending December 31, 2019, or any other interim or future periods.


8



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 $800,000 is not sufficient to absorb our operating losses and repay our debt of $1.1 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 that we will be successful in such efforts.  Accordingly, there is substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.


Related Parties


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


·

Michael Feinsod – 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.


Summary of Significant Accounting Policies


Since the date of the Annual Report, there have been no material changes to the Company’s significant accounting policies, except as disclosed below.


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 loss 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)” on January 1, 2019.  We first evaluated our leases to determine whether they are classified as a finance lease or as an operating lease.  A lease is a finance lease if any of the following criteria are met: (a) ownership transfers, (b) the lease includes an option to purchase


9



the underlying asset, (c) the lease term is for the major part of the remaining economic life of the underlying asset, (d) the present value of the lease payments equals or exceeds the fair value of the underlying asset, or (e) the underlying asset is of a specialized nature that is expected to have no alternative use to the lessor at the end of the lease term.  All of our leases are classified as operating leases.  We then determined whether the short-term exemption applies; that is, is the lease term 12 months or less and does not include a purchase option whose exercise is reasonably certain.  If the short-term exemption applies then lease payments are recognized as expense and no asset or liability is recorded.  If the short-term exemption does not apply, then we recorded an operating lease right-of-use asset and a corresponding operating lease liability equal to the present value of the lease payments.  All of our leases entered into prior to 2019 met the short-term exemption, so modification to prior period financial position was is not required.  The two year commercial real estate lease we entered into in February 2019 did not meet the short-term exemption and, accordingly, we recorded the present value of the lease payments as a right-of-use asset and a lease liability in the condensed consolidated balance sheet.  We recognize rent expense on a straight-line basis over the life of the lease.


Fair Value of Financial Instruments


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


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


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


Level 1 – Quoted prices in active markets for identical assets or liabilities.  There are no fair valued assets or liabilities classified under Level 1 as of June 30, 2019 and December 31, 2018.


Level 2 – Observable prices that are based on inputs not quoted on active markets but corroborated by market data.  There are no fair valued assets or liabilities classified under Level 2 as of June 30, 2019 and December 31, 2018.


Level 3 – Unobservable inputs are used when little or no market data is available.  The fair value hierarchy gives the lowest priority to Level 3 inputs (see Note 9).


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


Level 3 Valuation Techniques:


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


The Company’s derivative liabilities are carried at fair value and were classified as Level 3 in the fair value hierarchy due to the use of significant unobservable inputs. In order to calculate fair value, the Company uses a standard Black-Scholes model.


10


Equity Instruments

 

Warrants with derivative features – When we raise capital by issuing warrants that do not have complex terms, they are recorded as additional paid in capital in our condensed consolidated balance sheet. When we issue warrants that have complex terms, such as a clause in which the warrant agreements contain a cash settlement provision whereby the holders could settle the warrants for cash upon a fundamental transaction that is considered outside of the control of management, such as a change of control, the warrants are considered to be a derivative that are recorded as a liability at fair value. The warrant derivative liability is adjusted to its fair value at the end of each reporting period, with the change being recorded as expense or gain. Equity issuance costs associated with a capital raise transaction are allocated between expense and additional paid-in capital based on the relative fair value of the instruments being issued. The expense is included in amortization of debt discount and equity issuance costs on the condensed consolidated statements of operations, and the equity allocation as a reduction of additional paid-in capital in our condensed consolidated balance sheet.


NOTE 2.   ACCOUNTS RECEIVABLE AND CUSTOMER DEPOSITS

 

Our accounts receivable consisted of the following:

 

 

June 30,

 

December 31,

 

 

2019

 

2018

Accounts receivable

$

516,288

$

476,581

Less:  Allowance for doubtful accounts

 

(166,000)

 

(61,000)

  Total

$

350,288

$

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 $71,262 and $43,101, respectively, during the three months ended June 30, 2019 and 2018 and $103,262 and $110,615, respectively, during the six months ended June 30, 2019 and 2018.


As of June 30, 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 deferred revenue and customer deposit liability had the following activity:

 

 

 

Amount

January 1, 2019

$

391,290

  Additional deposits received

 

942,136

  Less:  Deposits recognized as revenue

 

(876,227)

June 30, 2019

$

457,199


NOTE 3.   NOTES RECEIVABLE


As of June 30, 2019, our notes receivable consisted of the following:

 

CCR Note

$

375,000

BB Note

 

100,000

BRB Note

 

300,000

  Total principal

 

775,000

Unamortized loan origination fee

 

(12,256)

 

 

762,744

Less: Current portion

 

(399,438)

Long-term portion

$

363,306


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 had a 90 day option to convert $250,000 of principal under the CCR Note into a 10% equity ownership of CCR. This option was not exercised and has expired.  CCR is a vertically integrated medical cannabis company located in San Juan, Puerto Rico.  As of June 30, 2019, we had loaned $375,000, of which $155,000 was loaned in the first quarter, 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.


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 BRB Note was amended with an additional loan amount of $250,000 bearing an interest rate of 13% and a new maturity date of July 15, 2019.  On July 15, 2019, BRB Realty extended the maturity date, in accordance with the terms of the BRB Note, an additional six months with an increased interest rate to 15%.  The BRB Note included a loan origination fee of $5,000, which is being recognized as interest income over the term of the agreement.

 

11


NOTE 4.   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 applied ratably over the term of the lease.  As of June 30, 2019, the balance of the right-of-use asset and lease liability was $122,075.  Future remaining minimum lease payments were as follows:


Year ending December 31,

 

Amount

2019

$

42,000

2020

 

84,000

2021

 

7,000

 

 

133,000

Less:  Present value adjustment

 

(10,925)

Operating lease liability

$

122,075


NOTE 5.   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

 

54,670

 

20,248

June 30, 2019

$

54,670

 

20,248


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 6.   NOTES PAYABLE


Our notes payable consisted of the following:


 

 

June 30,

 

December 31

 

 

2019

 

2018

8.5% Notes

$

1,106,000

$

6,849,000

Unamortized debt discount

 

 –

 

(1,575,094)

 

 

1,106,000

 

5,273,906

Less: Current portion

 

(1,106,000)

 

(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.  During the second quarter this note was extended to be due June 1, 2019.  On June 6, 2019, we made payments of approximately $5.7 million, leaving approximately $1 million outstanding.  The current note is in default, however we are in the process of re-negotiating the note.  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 June 30, 2019 and 2018, respectively, amortization of debt discount includes $403,538 and $1,013,261. For the six months ended June 30, 2019 and 2018, amortization of debt discount expense was $1,575,094 and $1,457,178, respectively, 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 7.   WARRANT DERIVATIVE LIABILITY


The 2019 Warrants have been accounted for as a derivative liability. The 2019 Warrant agreements contain a cash settlement provision whereby the holders could settle the warrants for cash based on the Black-Scholes value, upon certain fundamental transactions, as defined in the 2019 Warrant agreement, that are considered outside of the control of management, such as a change of control.


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


 

 

May 31,

2019

 

June 30,

2019

Number of shares underlying the warrants

 

3,000,000

 

3,000,000

Fair market value of stock

$

0.95

$

0.81

Exercise price

$

1.30

$

1.30

Volatility

 

133%

 

133%

Risk-free interest rate

 

1.93%

 

1.76%

Warrant life (years)

 

5.00

 

4.92


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


 

 

Three months ended

June 30,

 

Six months ended

June 30,

 

 

2019

 

2018

 

2019

 

2018

Beginning balance

$

$

$

$

Recognition of warrant derivative liability on May 31, 2019

 

2,416,422

 

 

2,416,422

 

Change in fair value of warrants derivative liability

 

(401,862)

 

 

(401,862)

 

Ending balance

$

2,014,560

$

$

2,014,560

$


NOTE 8.   COMMITMENTS AND CONTINGENCIES


Legal


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


NOTE 9.   STOCKHOLDERS’ EQUITY


2019 Capital Raise


On May 31, 2019 we received gross proceeds of $3 million by issuing three million shares of our common stock and three million warrants (“2019 Warrants”) to purchase shares of our common stock (together “2019 Units”) in a registered direct offering for $1.00 per 2019 Unit.  The 2019 Warrants have an exercise price of $1.30 per share and are exercisable for five years from the date of issuance. We received cash of $2,604,355 which is net of $395,645 of issuance costs, of which $318,681 is included as amortization of debt discount and equity issuance costs and $76,964 is included as a reduction of additional paid in capital. We used a portion of the net proceeds from the issuance of the 2019 Units to pay down the 8.5% Notes by $5,743,000, leaving $1,106,000 outstanding.


13




Share-based compensation


We use the fair value method to account for stock-based compensation.  We recorded $752,467 and $1,204,921 in compensation expense for the three months ended June 30, 2019 and 2018, respectively and $2,244,963 and $2,963,492 for the six months ended June 30, 2019 and 2018, respectively. This includes expense related to options issued in prior years for which the requisite service period for those options includes the current period as well as options issued in the current period.  The fair value of these instruments was calculated using the Black-Scholes option pricing method.  


As of June 30, 2019, there was approximately $2,886,358 of total unrecognized compensation expense related to unvested Employee Awards, which is expected to be recognized over a weighted-average period of nine months.


Warrants


On May 31, 2019, we issued the 2019 Units at $1.00, which triggered the “down round” feature specified in the 8.5% Warrants.  As required by ASU 2017-11 “Earnings per Share (Topic 206)”, we calculated the difference between the 8.5% Warrants’ fair value on the date the down round feature was triggered using the original exercise price and the new exercise price.  The difference in fair value of the effect of the down round feature is reflected in our condensed consolidated financial statements as a deemed dividend and as a reduction to income available to common stockholders in the basic earnings per share calculation.  


The underlying assumptions used in the binomial lattice model to determine the fair value of the 8.5% Warrants were:


 

Pre-Trigger

 

Post-Trigger

Current stock price

$  0.95

 

$  0.95

Exercise price

$  2.35

 

$  1.00

Risk-free interest rate

2.21 %

 

2.21 %

Expected dividend yield

 

Expected term (in years)

0.89

 

0.89

Expected volatility

123%

 

123%

Number of iterations

5

 

5


NOTE 10.   SUBSEQUENT EVENTS


On July 18, 2019, we entered into a Promissory Note Purchase Agreement with SBI Investments LLC, 2014-1 (the “SBI”), (the “SBI Purchase Agreement”), pursuant to which we issued to SBI a Promissory Note (the “SBI Note”) in the aggregate principal face value amount of $850,000, with an original issuance discount of approximately 12%. The SBI Note bears interest at the rate of 10% per annum. The principal amount, including accrued but unpaid interest thereon, is due and payable on October 18, 2019. The SBI Purchase Agreement and related SBI Note contain certain events of default upon which, if uncured, may accelerate the due date and payment of the principal amount, including all accrued but unpaid interest.


NOTE 11.   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.


Three months ended June 30


2019

 

Security

 

Operations

 

Consumer

Goods

 

Investments

 

Total

Services

$

507,556

$

366,520

$

$

$

874,076

Rent and interest

 

 

 

 

27,775

 

27,775

Product

 

 

426,122

 

28,892

 

 

455,014

  Total Revenues

 

507,556

 

792,642

 

28,892

 

27,775

 

1,356,865

Costs and expenses

 

(594,336)

 

(859,236)

 

(388,688)

 

(1,648)

 

(1,843,908)

 

$

(86,780)

$

(66,594)

$

(359,796)

$

26,127

 

(487,043)

Corporate

 

 

 

 

 

 

 

 

 

(2,407,759)

 

 

 

 

 

 

 

 

Net loss

$

(2,894,802)


14




2018

 

Security

 

Operations

 

Consumer

Goods

 

Investments

 

Total

Service

$

614,281

$

391,185

$

44,819

$

$

1,050,285

Product

 

 

11,102

 

53,154

 

 

64,256

  Total revenue

 

614,281

 

402,287

 

97,973

 

 

1,114,541

Costs and expenses

 

(745,457)

 

(459,268)

 

(182,679)

 

 

(1,387,404)

Investment in Desert Created

 

 

 

 

(72,143)

 

(72,143)

 

$

(131,176)

$

(56,981)

$

(84,706)

$

(72,143)

 

(345,006)

Corporate

 

 

 

 

 

 

 

 

 

(3,324,291)

 

 

 

 

 

 

 

 

Net loss

$

(3,669,297)


Six months ended June 30


2019

 

Security

 

Operations

 

Consumer

Goods

 

Investments

 

Total

Services

$

1,072,148

$

614,303

$

$

$

1,686,451

Rent and interest

 

 

 

 

42,596

 

42,596

Product

 

 

958,440

 

58,667

 

 

1,017,107

  Total Revenues

 

1,072,148

 

1,572,743

 

58,667

 

42,596

 

2,746,154

Costs and expenses

 

(1,273,342)

 

(1,536,617)

 

(649,742)

 

(41,723)

 

(3,501,424)

 

$

(201,194)

$

36,126

$

(591,075)

$

873

 

(755,270)

Corporate

 

 

 

 

 

 

 

 

 

(6,653,227)

 

 

 

 

 

 

 

 

Net loss

$

(7,408,497)


2018

 

Security

 

Operations

 

Consumer

Goods

 

Investments

 

Total

Service

$

1,166,258

$

679,318

$

98,088

$

$

1,943,664

Product

 

 

28,983

 

84,376

 

 

113,359

  Total revenue

 

1,166,258

 

708,301

 

182,464

 

 

2,057,023

Costs and expenses

 

(1,503,946)

 

(879,743)

 

(381,553)

 

 

(2,765,242)

Investment in Desert Created

 

 

 

 

(925,472)

 

(925,472)

 

$

(337,688)

$

(171,442)

$

(199,089)

$

(925,472)

 

(1,633,691)

Corporate

 

 

 

 

 

 

 

 

 

(6,501,993)

 

 

 

 

 

 

 

 

Net loss

$

(8,135,684)


 

 

June 30,

 

December 31,

Total assets

 

2019

 

2018

Security

$

493,621

$

723,878

Operations

 

192,415

 

134,786

Consumer Goods

 

290,463

 

144,365

Investments

 

374,524

 

300,000

Corporate

 

3,112,911

 

9,439,196

 

$

4,463,934

$

10,742,225


15



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 six months ended June 30, 2019, 76% of NBC’s revenue was with three customers.


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, opened in July of 2019.  STOA Wellness offers 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.


16



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 elsewhere in this Report.


Consolidated Results


 

 

Three months ended June 30,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Revenues

$

1,356,865

$

1,114,541

$

242,324

 

22%

Costs and expenses

 

(3,843,252)

 

(3,605,858)

 

(237,394)

 

7%

Other expense

 

(408,415)

 

(1,177,980)

 

769,565

 

(65)%

Net loss

$

(2,894,802)

$

(3,669,297)

$

774,495

 

(21)%


 

 

Six months ended June 30,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Revenues

$

2,746,154

$

2,057,023

$

689,131

 

34%

Costs and expenses

 

(8,463,197)

 

(7,714,822)

 

(748,375)

 

10%

Other expense

 

(1,691,454)

 

(2,477,885)

 

786,431

 

(32)%

Net loss

$

(7,408,497)

$

(8,135,684)

$

727,187

 

(9)%


Revenues


Revenue increased for our Security, Operations 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 June 30,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Cost of service revenues

$

625,477

$

807,257

$

(181,780)

 

(23)%

Cost of goods sold

 

467,772

 

44,277

 

423,495

 

956%

Selling, general and administrative

 

1,458,390

 

1,164,459

 

293,931

 

25%

Share-based compensation

 

752,467

 

1,204,921

 

(452,454)

 

(38)%

Professional fees

 

482,798

 

347,352

 

135,446

 

39%

Depreciation and amortization

 

56,348

 

37,592

 

18,756

 

 50%

 

$

3,843,252

$

3,605,858

$

237,394

 

7%


 

 

Six months ended June 30,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Cost of service revenues

$

1,286,211

$

1,588,288

$

(302,077)

 

(19)%

Cost of goods sold

 

879,755

 

93,410

 

786,345

 

842%

Selling, general and administrative

 

2,895,026

 

2,106,637

 

788,389

 

37%

Share-based compensation

 

2,244,963

 

2,963,492

 

(718,529)

 

(24)%

Professional fees

 

1,057,959

 

892,462

 

165,497

 

19%

Depreciation and amortization

 

99,283

 

70,533

 

28,750

 

 41%

 

$

8,463,197

$

7,714,822

$

748,375

 

10%


Cost of service revenues typically fluctuates with the changes in revenue for our Operations and Security Segments, while these costs are relatively fixed for Chiefton Design within our Consumer Goods Segment.  Cost of goods sold varies with changes in product sales, including a significant increase in products sold by our Operations Segment, which have smaller margins than products 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; (c) computer and internet costs; and (d) marketing costs.


17



Share-based compensation included the following:


 

 

Three months ended June 30,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Employee awards

$

555,124

$

687,142

$

(132,018)

 

(19)%

Consulting awards

 

11,426

 

163,965

 

(152,539)

 

(93)%

Feinsod Agreement

 

185,917

 

353,814

 

(167,897)

 

(47)%

 

$

752,467

$

1,204,921

$

(452,454)

 

(38)%


 

 

Six months ended June 30,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Employee awards

$

1,853,969

$

1,410,227

$

443,742

 

31%

Consulting awards

 

21,203

 

163,965

 

(142,762)

 

(87)%

Feinsod Agreement

 

369,791

 

1,389,300

 

(1,019,509)

 

(73)%

 

$

2,244,963

$

2,963,492

$

(718,529)

 

(24)%


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 have increased slightly from 2019 due primarily to the cost of raising capital.


Other Expense


 

 

Three months ended June 30,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Amortization of debt discount and equity issuance costs

$

722,219

$

1,013,261

$

(291,042)

 

(29)%

Interest expense

 

88,058

 

92,576

 

(4,518)

 

(5)%

Loss from Desert Created investment

 

 

72,143

 

(72,143)

 

(100)%

Gain on warrant derivative liability

 

(401,862)

 

 

(401,862)

 

(100)%

 

$

408,415

$

1,177,980

$

(769,565)

 

(65)%


 

 

Six months ended June 30,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Amortization of debt discount and equity issuance costs

$

1,893,775

$

1,457,178

$

436,597

 

30%

Interest expense

 

199,541

 

95,235

 

104,306

 

110%

Loss from Desert Created investment

 

 

119,972

 

(119,972)

 

(100)%

Impairment of Desert Created investment

 

 

805,500

 

(805,500)

 

(100)%

Gain on warrant derivative liability

 

(401,862)

 

 

(401,862)

 

(100)%

 

$

1,691,454

$

2,477,885

$

(786,431)

 

(32)%


Amortization of debt discount and equity issuance costs generally varies with our debt balance and, in 2019, includes $318,681 of equity issuance costs from the 2019 Warrants. Interest expense varied between 2019 and 2018 due to the payoff of the 12% Notes in January 2018, the payoff of the Infinity Note in February 2018, and the issuance of the 8.5% Notes in April 2018. We recognized equity issuance costs in conjunction with our registered direct offering in May 2019. The loss on investment in Desert Created is our 50% share of the net loss of Desert Created during the three quarters September 30, 2018. The impairment of Desert Created occurred primarily because the agreement was priced in November 2017, however, the transaction did not close until January 2018. In the interim, our stock price increased substantially, thus the consideration we paid, in equity instruments, was higher than the fair value of the investment received. In October 2018, we sold our 50% interest to DNFC for cash consideration of $23,045 and, accordingly, impaired the remaining balance. The gain on warrant derivative liability reflects the change in fair value of the 2019 Warrants.


18



Security and Cash Transportation Services


 

 

Three months ended June 30,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Revenues

$

507,556

$

614,281

$

(106,725)

 

(17)%

Costs and expenses

 

(594,337)

 

(745,457)

 

151,120

 

(20)%

 

$

(86,781)

$

(131,176)

$

44,395

 

(34)%


 

 

Six months ended June 30,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Revenues

$

1,072,148

$

1,166,258

$

(94,110)

 

(8)%

Costs and expenses

 

(1,273,342)

 

(1,503,946)

 

230,604

 

(15)%

 

$

(201,194)

$

(337,688)

$

136,494

 

(40)%


Revenues decreased in 2019 primarily from the loss of several clients in 2019.  Costs and expenses typically vary with changes in revenue, however, the decrease in 2019 compared to 2018 was due primarily to lower overtime hours, along with a decrease in legal fees in 2019.


Operations Consulting and Products


 

 

Three months ended June 30,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Revenues

$

792,642

$

402,287

$

390,355

 

97%

Costs and expenses

 

(859,236)

 

(459,268)

 

(399,968)

 

87%

 

$

(66,594)

$

(56,981)

$

(9,613)

 

17%


 

 

Six months ended June 30,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Revenues

$

1,572,743

$

708,301

$

864,442

 

122%

Costs and expenses

 

(1,536,617)

 

(879,743)

 

(656,874)

 

75%

 

$

36,126

$

(171,442)

$

207,568

 

(121)%


Increased revenues in 2019 primarily related to increased product sales and license application success fees, offset by a decrease in recurring consulting fees.  The higher margin is due to a success fee received in the first quarter and product orders with higher margins associated with their contracts. 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 June 30,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Revenues

$

28,892

$

97,973

$

(69,081)

 

(71)%

Costs and expenses

 

(388,688)

 

(182,679)

 

(206,009)

 

113%

 

$

(359,796)

$

(84,706)

$

(275,090)

 

325%


 

 

Six months ended June 30,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Revenues

$

58,667

$

182,464

$

(123,797)

 

(68)%

Costs and expenses

 

(649,742)

 

(381,553)

 

(268,189)

 

70%

 

$

(591,075)

$

(199,089)

$

(391,986)

 

197%


The decrease in revenues is due to no revenue from custom design projects in 2019 and a decrease in product sales.  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 expense due to the opening of the STOA Wellness retail location in New York.


19



Investments


 

 

Three months ended June 30,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Revenues

$

27,775

$

$

27,775

 

100%

Costs and expenses

 

(1,648)

 

 

(1,648)

 

(100)%

Investment in Desert Created

 

 

(72,143)

 

72,143

 

(100)%

 

$

26,127

$

(72,143)

$

98,270

 

(136)%


 

 

Six months ended June 30,

 

 

 

Percent

 

 

2019

 

2018

 

Change

 

Change

Revenues

$

42,596

$

$

42,596

 

100%

Costs and expenses

 

(41,723)

 

 

(41,723)

 

(100)%

Investment in Desert Created

 

 

(925,472)

 

925,472

 

(100)%

 

$

873

$

(925,472)

$

926,345

 

(100)%


The increase in revenues in 2019 is related to three new notes receivables that were executed during the six months ended June 30, 2019.  All revenue is from interest and loan origination fees related to these new notes.  The investment in Desert Created includes an $805,500 impairment charge and our share of their net loss of $119,972.


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 May 2019, we raised approximately $3 million by issuing three million shares of our common stock and three million warrants (“2019 Warrants”) to purchase shares of our common stock (together “2019 Units”) in a registered direct offering for $1.00 per 2019 Unit.  The 2019 Warrants have an exercise price of $1.30 per share and are exercisable for five years from the date of issuance.  We received cash of $2,604,355 which is net of $395,645 of issuance costs.  


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. During the second quarter this note was extended to be due June 1, 2019.  On June 6, 2019, we made payments of approximately $5.7 million, leaving approximately $1 million outstanding.  The current note is in default, however we are in the process of re-negotiating the note. The proceeds were made available for general working capital purposes and acquisitions.


Sources and uses of cash


We had cash of approximately $800,000 and $8.0 million, respectively, as of June 30, 2019 and December 31, 2018.  Our cash flows from operating, investing and financing activities were as follows:


 

 

Six months ended June 30,

 

 

2019

 

2018

Net cash used in operating activities

$

(3,133,986)

$

(3,063,736)

Net cash used in investing activities

 

(948,256)

 

(822,203)

Net cash (used in) provided by financing activities

 

(3,082,020)

 

9,022,534


Net cash used in operating activities increased in 2019 by $70,250 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 used in financing activities related to the payoff of the notes payable, offset by a capital raise done in May 2019. Net cash provided by financing activities in 2018 related to the exercise of warrants and options offset by paying off debt.


20



Capital Resources


We have no material commitments for capital expenditures as of June 30, 2019.  Part of our growth strategy, however, is to acquire businesses and real estate, and provide debt or equity capital to third parties.  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) attributable to common stockholders calculated in accordance with GAAP, adjusted for the impact of share-based expense, depreciation and amortization, impairment of investments, amortization of debt discounts and equity issuance costs, interest expense, income taxes and certain other non-cash items; divided by (b) the weighted average shares outstanding, adjusted for the shares related to the calculation of Adjusted EBITDA. Below we have provided a reconciliation of Adjusted EBITDA per share to the most directly comparable GAAP measure.


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


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


 

 

Three months ended

June 30,

 

Six months ended

June 30,

 

 

2019

 

2018

 

2019

 

2018

Net loss attributable to common stockholders

$

(4,086,802)

$

(3,669,297)

$

(8,600,497)

$

(8,135,684)

Adjustments:

 

 

 

 

 

 

 

 

Share-based expense

 

752,467

 

1,204,921

 

2,244,963

 

2,963,492

Depreciation and amortization

 

56,348

 

37,592

 

99,283

 

70,533

Amortization of debt discount and equity
issuance costs

 

722,219

 

1,013,261

 

1,893,775

 

1,457,178

Interest expense

 

88,058

 

92,576

 

199,541

 

95,235

Gain on warrant derivative liability

 

(401,862)

 

 

(401,862)

 

Loss on investment in Desert Created

 

 

72,143

 

 

119,972

Impairment of Desert Created investment

 

 

 

 

805,500

Total adjustments

 

1,217,230

 

2,420,493

 

4,035,700

 

5,511,910

Adjusted EBITDA

$

(2,869,572)

$

(1,248,804)

$

(4,564,797)

$

(2,623,774)

 

 

 

 

 

 

 

 

 

Per share:

 

 

 

 

 

 

 

 

Net loss – Basic and Diluted

$

(0.11)

$

(0.10)

$

(0.23)

$

(0.23)

Adjusted EBITDA – Basic and Diluted

 

(0.08)

 

(0.04)

 

(0.12)

 

(0.08)

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

Net loss – Basic and Diluted

 

37,254,071

 

35,574,099

 

38,032,533

 

34,876,133

Adjusted EBITDA – Basic and Diluted

 

36,222,752

 

34,952,423

 

37,001,214

 

34,257,927


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.


21



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


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


ITEM 4.  CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures


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


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 June 30, 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 June 30, 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 June 30, 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 June 30, 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 second quarter of 2019, 76% of NBC’s revenue was with three customers, which comprised approximately 44% of our total consolidated revenue for such quarter.  During the second quarter of 2019, approximately 64% of our revenue was derived from the delivery of services, for which we have contracts, and approximately 34% 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

 

4.1

Form of Warrant, incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed June 4, 2019.

10.1

Form of Securities Purchase Agreement, dated May 31, 2019, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed June 4, 2019.

10.2

Registrant’s Current Report on Form 8-K filed July 24, 2019.

10.3

Report on Form 8-K filed July 24, 2019.

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: August 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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