NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS, HISTORY AND PRESENTATION
Nature of Operations
General Cannabis Corp, a Colorado Corporation (the Company, we, us, our, or GCC) (formerly, Advanced Cannabis Solutions, Inc.), was incorporated on June 3, 2013, and provides services and products to the regulated cannabis industry. We currently trade on the OTCQB® Venture Market. As of March 31, 2020, our operations are segregated into the following two segments:
Operations Consulting and Products (Operations Segment)
Through Next Big Crop (NBC), we deliver comprehensive consulting services to the cannabis industry that include obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and construction, and expansion of existing operations. During the three months ended March 31, 2020 and 2019, 73% and 76% of NBCs revenue was with three customers and one customer, respectively.
NBC oversees our wholesale equipment and supply business, operated under the name GC Supply, which provides turnkey sourcing and stocking services to cultivation, retail and infused products manufacturing facilities. Our products include building materials, equipment, consumables and compliance packaging. There are generally multiple suppliers for the products we sell; however, there are a limited number of manufacturers of certain high-tech cultivation equipment.
Capital Investments (Investments Segment)
As a publicly traded company, we have access to capital that may not be available to businesses operating in the cannabis industry. Accordingly, we may provide debt or equity capital through (a) loans or revolving lines of credit and (b) investing in businesses using cash or shares of our common stock.
Discontinued Operations - Security and Cash Transportation Services (Security Segment)
We provided advanced security, including on-site professionals and cash transport, to licensed cannabis cultivators, cannabis processing facilities and retail shops, under the business name Iron Protection Group (IPG) in California and Colorado, and security services to non-cannabis customers in Colorado, such as hotels, apartment buildings and retail. On December 26, 2019, the board of directors and management made the strategic decision to investigate a possible buyer for the security segment and if no buyer could be found, cease operations of the security segment. We transferred all our Colorado security contracts and employees to a company on January 16, 2020, in exchange for which we will receive $1.00 per man hour worked on existing contracts for a period of one year. On February 6, 2020 we cancelled all our security contracts in California.
Discontinued Operations - Consumer Goods and Marketing Consulting (Consumer Goods Segment)
Our apparel business, Chiefton, had two primary revenue streams. Chiefton Supply strived to create innovative, unique t-shirts, hats, hoodies and accessories. Our apparel was sold through our on-line shop, cannabis retailers, non-cannabis retailers, and specialty t-shirt and gift shops. Chiefton Design provided design, branding and marketing strategy consulting services to the cannabis industry, which frequently included sourcing and selling customer-specific apparel and accessories. On December 26, 2019, the board of directors and management made the strategic move to cease operations of Chiefton. All operations of Chiefton were abandoned on December 31, 2019.
Our CBD retail business, STOA Wellness, opened in July of 2019. STOA Wellness offered a curated collection of high quality CBD products for athletes and general wellness. On December 26, 2019, the board of directors committed to a plan to cease operations of STOA Wellness. We transferred all assets of STOA Wellness to an individual on January 10, 2020, in exchange for the release on the outstanding lease of the STOA retail front.
Basis of Presentation
These unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange Commission (SEC), for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States of America (U.S. GAAP)
7
can be condensed or omitted. The condensed consolidated balance sheet for the year ended December 31, 2019 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto of the Company for the year ended December 31, 2019 which were included in the Annual Report on Form 10-K filed by the Company with the SEC on May 14, 2020.
In the opinion of management, these condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and notes thereto of the Company and include all adjustments, consisting only of normal recurring adjustments, considered necessary for the fair presentation of the Companys financial position and operating results. The results for the three months ended March 31, 2020 are not necessarily indicative of the operating results for the year ending December 31, 2020, or any other interim or future periods.
Use of Estimates
The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Furthermore, when testing assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment charges may result. In particular, the COVID-19 pandemic has adversely impacted and is likely to further adversely impact the Companys business and markets. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company's business, results of operations and financial condition, including revenues, expenses, reserves and allowances, fair value measurements and asset impairment charges, will depend on future developments that are highly uncertain and difficult to predict. These developments include, but are not limited to, the duration and spread of the pandemic, its severity in our markets and elsewhere, governmental actions to contain the spread of the pandemic and respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.
Going Concern
The condensed consolidated financial statements have been prepared on a going concern basis, which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for at least the twelve months from the date these condensed consolidated financial statements are issued. As of March 31, 2020 our cash of approximately $600,000 is not sufficient to absorb our operating losses and repay our debt of $2.7 million. The warrants associated with this debt, if exercised in cash, would provide sufficient funds to retire the debt; however, there is no guarantee that these warrants will be exercised in cash or at all. Our ability to continue as a going concern is dependent upon our generating profitable operations in the future and / or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. Management believes that (a) we will be successful obtaining additional capital and (b) actions presently being taken to further implement our business plan and generate additional revenues provide opportunity for the Company to continue as a going concern. While we believe in the viability of our strategy to generate additional revenues and our ability to raise additional funds, there can be no assurances that we will be successful in such efforts. Accordingly, there is substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Related Parties
Related parties are any entities or individuals that, through employment, ownership or other means, possess the ability to direct or cause the direction of the management and policies of the Company. We disclose related party transactions that are outside of normal compensatory agreements, such as salaries or board of director fees. We consider the following individuals / companies to be related parties:
·
Michael Feinsod Executive Chairman of our Board of Directors (Board).
·
Infinity Capital West, LLC (Infinity Capital) An investment management company that was founded and is controlled by Michael Feinsod.
·
Peter Boockvar Audit committee chairman.
·
Seth Oster Board member
Significant Accounting Policy Updates
See our Annual Report on Form 10-K for the year ended December 31, 2019 for discussion of the Companys significant accounting policies. Since the date of the Annual Report, there have been no material changes to the Companys significant accounting policies.
8
Recently Issued Accounting Standards
FASB ASU 2019-12 Income Taxes (Topic 740) In December 2019, the Financial Accounting Standards Board (FASB) issued guidance which simplifies certain aspects of accounting for income taxes. The guidance is effective for interim and annual reporting periods beginning after December 15, 2020, and early adoption is permitted. We do not expect adoption of this ASU to have a material effect on our consolidated financial statements.
FASB ASU 2018-13 Fair Value Measurement (Topic 820)- In August 2018, the FASB issued new disclosure guidance on fair value measurement. This new guidance modifies the disclosure requirements on fair value measurements, including removal and modifications of various current disclosures as well as some additional disclosure requirements for Level 3 fair value measurements. Some of these disclosure changes must be applied prospectively while others retrospectively depending on requirement. We adopted ASU 2018-13 as of January 1, 2020. There was no material impact to our financial statements or disclosures.
NOTE 2. DISCONTINUED OPERATIONS
Security Segment
On December 26, 2019, our board of directors and management made the strategic decision to investigate a possible buyer for the Security Segment and if no buyer could be found, cease operations of the security segment. We transferred all our Colorado security contracts and employees to a company on January 16, 2020, in exchange for which we will receive $1.00 per man hour worked on existing contracts for a period of one year. On February 6, 2020 we cancelled all our security contracts in California. The assets and liabilities classified as held for sale for the security segment are presented separately in the balance sheet as of March 31, 2020 and December 31, 2019 and as discontinued operations as of March 31, 2020 and the operating results for the three months ended March 31, 2020 and 2019, respectively, are presented as discontinued operations.
Assets and liabilities of discontinued operations for the security segment included the following:
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2020
|
|
2019
|
Cash and cash equivalents
|
$
|
176,854
|
$
|
77,380
|
Accounts receivable, net
|
|
51,093
|
|
280,058
|
Prepaid expenses and other current assets
|
|
|
|
17,780
|
Current assets discontinued operations
|
$
|
227,947
|
$
|
375,218
|
|
|
|
|
|
Property and equipment, net
|
$
|
|
$
|
15,584
|
Noncurrent assets discontinued operations
|
$
|
|
$
|
15,584
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
19,097
|
$
|
88,309
|
Customer deposits
|
|
|
|
60,940
|
Current liabilities discontinued operations
|
$
|
19,097
|
$
|
149,249
|
A breakdown of the discontinued operations is presented as follows:
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
2020
|
|
2019
|
Service revenues
|
$
|
119,891
|
$
|
564,592
|
|
|
|
|
|
Cost of service revenues
|
|
88,599
|
|
449,937
|
Selling, general and administrative
|
|
147,761
|
|
206,967
|
Depreciation and amortization
|
|
2,174
|
|
21,632
|
Total costs and expenses
|
|
238,534
|
|
678,536
|
|
|
|
|
|
OPERATING LOSS
|
|
(118,643)
|
|
(113,944)
|
|
|
|
|
|
Interest expense, net
|
|
984
|
|
470
|
|
|
|
|
|
NET LOSS FROM DISCONTINUED OPERATIONS
|
$
|
(119,627)
|
$
|
(114,414)
|
9
The cash flows related to discontinued operations have not been segregated, and are included in the consolidated statements of cash flows. The following table provides selected information on cash flows related to discontinued operations for the three months ended March 31, 2020 and 2019, respectively.
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
2020
|
|
2019
|
Receivables
|
|
228,965
|
|
46,418
|
Prepaids and other
|
|
17,780
|
|
(11,471)
|
Depreciation and amortization
|
|
2,174
|
|
21,632
|
Capital expenditures
|
|
|
|
(1,331)
|
Accounts payable and accrued expenses
|
|
(69,212)
|
|
(50,323)
|
Customer deposits
|
|
(60,940)
|
|
14,816
|
Consumer Goods Segment
On December 26, 2019, our board of directors and management made the strategic move to cease operations of Chiefton. On December 26, 2019, our board of directors committed to a plan to cease operations of STOA Wellness. We transferred all assets of STOA Wellness to an individual on January 10, 2020, in exchange for the release on the outstanding lease of the STOA retail front. The assets and liabilities classified as discontinued operations for the consumer goods segment are presented separately in the balance sheet as of March 31, 2020 and December 31, 2019 and the operating results for the three months ended March 31, 2020 and 2019, respectively, are presented as discontinued operations.
Assets and liabilities of discontinued operations included the following:
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2020
|
|
2019
|
Cash and cash equivalents
|
$
|
3,955
|
$
|
25,223
|
Accounts receivable, net
|
|
|
|
7,836
|
Prepaid expenses and other current assets
|
|
|
|
14,394
|
Current assets discontinued operations
|
|
3,955
|
|
47,453
|
|
|
|
|
|
Right to use asset
|
$
|
|
$
|
83,525
|
Noncurrent assets discontinued operations
|
$
|
|
$
|
83,525
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
104,120
|
$
|
124,468
|
Operating lease liability current portion
|
|
|
|
83,525
|
Current liabilities discontinued operations
|
$
|
104,120
|
$
|
207,993
|
A breakdown of the discontinued operations is presented as follows:
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
2020
|
|
2019
|
Product Revenues
|
$
|
33
|
$
|
29,775
|
Cost of service revenues
|
|
|
|
24,022
|
Cost of goods sold
|
|
|
|
23,909
|
Selling, general and administrative
|
|
33,264
|
|
176,118
|
Professional fees
|
|
|
|
35,106
|
Depreciation and amortization
|
|
|
|
1,899
|
Total costs and expenses
|
|
33,264
|
|
261,054
|
|
|
|
|
|
OPERATING LOSS
|
|
(33,231)
|
|
(231,279)
|
|
|
|
|
|
NET LOSS FROM DISCONTINUED OPERATIONS
|
$
|
(33,231)
|
$
|
(231,279)
|
10
The cash flows related to discontinued operations have not been segregated, and are included in the consolidated statements of cash flows. The following table provides selected information on cash flows related to discontinued operations for the three months ended March 31, 2020 and 2019.
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
2020
|
|
2019
|
Receivables
|
|
7,836
|
|
10,944
|
Prepaids and other
|
|
14,394
|
|
(23,425)
|
Inventory
|
|
|
|
20,227
|
Depreciation and amortization
|
|
|
|
1,899
|
Capital expenditures
|
|
|
|
(42,703)
|
Accounts payable and accrued expenses
|
|
(20,348)
|
|
(31,236)
|
Customer deposits
|
|
|
|
(17,539)
|
NOTE 3. ACCOUNTS RECEIVABLE AND CUSTOMER DEPOSITS
Our accounts receivable consisted of the following:
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2020
|
|
2019
|
Accounts receivable
|
$
|
176,930
|
$
|
196,204
|
Less: Allowance for doubtful accounts
|
|
(111,000)
|
|
(111,000)
|
Total
|
$
|
65,930
|
$
|
85,204
|
We record bad debt expense when we conclude the credit risk of a customer indicates the amount due under the contract is not collectible. We recorded bad debt recovery of $508 during the three months ended March 31, 2020 and bad debt expense of $20,000 during the three months ended March 31, 2019.
Our customer deposit liability had the following activity:
|
|
|
|
|
Amount
|
December 31, 2019
|
$
|
562,803
|
Additional deposits received
|
|
1,768,090
|
Less: Deposits recognized as revenue
|
|
(1,437,289)
|
March 31, 2020
|
$
|
893,604
|
NOTE 4. NOTES RECEIVABLE
Our notes receivable consisted of the following:
|
|
|
|
|
|
|
March 31,
|
|
December 31
|
|
|
2020
|
|
2019
|
CCR Note
|
$
|
375,000
|
$
|
375,000
|
BB Note
|
|
100,000
|
|
100,000
|
Total Principal
|
|
475,000
|
|
475,000
|
Unamortized loan origination fee
|
|
(4,180)
|
|
(6,667)
|
|
|
470,820
|
|
468,333
|
Less: Current portion
|
|
(470,820)
|
|
(375,000)
|
Long-term portion
|
$
|
|
$
|
93,333
|
In March 2019, we agreed to loan $375,000 to Consolidated C.R., LLC (CCR) pursuant to the terms of a convertible promissory note (CCR Note), bearing interest at 12% per annum, collateralized by virtually all of the assets of CCR and a maturity date of September 2020. Interest is due on the first of every month starting in November 2019. CCR is a vertically integrated medical cannabis company located in San Juan, Puerto Rico. As of March 31, 2020, we had loaned an aggregate of $375,000 to CCR pursuant to the CCR Note. The CCR Note included a loan origination fee of $15,000, which is being recognized as interest income over the term of the agreement.
11
On January 3, 2019, we loaned $100,000 to Beacher Brewing, LLC (BB) pursuant to the terms of a promissory note (BB Note), bearing interest at 11% per annum and a maturity date of January 3, 2020. Interest is due in advance at the beginning of each quarter. On December 13, 2019, we agreed to extend the maturity date of the BB Note to January 3, 2021.
NOTE 5. ACCRUED STOCK PAYABLE
The following tables summarize the changes in accrued common stock payable:
|
|
|
|
|
|
|
Amount
|
|
Number of
Shares
|
December 31, 2019
|
$
|
80,657
|
|
34,469
|
Employee stock issuance
|
|
(80,657)
|
|
(34,469)
|
Consultant stock award accrual
|
|
60,900
|
|
100,000
|
March 31, 2020
|
$
|
60,900
|
|
100,000
|
On January 29, 2019, we granted an employee $100,000 worth of our common stock, with 50% vesting on July 29, 2019 and the remaining amount vesting over eighteen months. Based on a stock price of $2.34 on the date of grant, the employee would receive 42,736 shares of our common stock upon vesting. We are recognizing the value of the grant ratably over the vesting periods. In February 2020, the vesting was accelerated, and we issued all of the common stock associated with this transaction.
On February 18, 2020 we granted a consultant 100,000 fully vested shares for consulting services. Based on a stock price of $0.61 on the date of grant, the consultant will receive $60,900 worth of our common stock. As of March 31, 2020, none of the stock had been issued.
NOTE 6. NOTES PAYABLE
Our notes payable consisted of the following:
|
|
|
|
|
|
|
March 31,
|
|
December 31
|
|
|
2020
|
|
2019
|
2019 12% Notes
|
$
|
|
$
|
1,506,000
|
SBI Note
|
|
684,000
|
|
750,000
|
15% Notes
|
|
2,231,000
|
|
200,000
|
Related party note payable
|
|
100,000
|
|
100,000
|
Unamortized debt discount
|
|
(274,899)
|
|
(225,649)
|
|
|
2,740,101
|
|
2,330,351
|
Less: Current portion
|
|
(2,740,101)
|
|
(2,330,351)
|
Long-term portion
|
$
|
|
$
|
|
SBI Debt
In July 2019, we completed a $855,000 private placement pursuant to a promissory note (SBI Note) with SBI Investments LLC, 2014-1 (SBI), bearing interest at 10% with principal due on October 18, 2019. On October 18, 2019, SBI agreed to an extension of the maturity date of the SBI Note to November 1, 2019. On November 1, 2019, SBI agreed to another extension of the maturity date to November 15, 2019. On November 15, 2019, SBI agreed to another extension of the maturity date to November 29, 2019 with an increase in principal amount of the note from $855,000 to $905,000. On November 27, 2019, SBI agreed to an extension of the maturity date to December 13, 2019. On December 13, 2019, SBI agreed to extend the maturity date to December 20, 2019. On December 30, 2019 SBI agreed to extend the maturity date of the note to January 31, 2020, upon the payment of $195,911, of which $40,911 was for accrued interest and $155,000 towards the outstanding principal of the SBI Note.
On February 18, 2020, we entered into a promissory note exchange agreement with SBI pursuant to which the original SBI Note was exchanged for a new convertible promissory note (the Convertible Note). The Convertible Note has a principal amount of $934,000, an interest rate of 10% per annum and a maturity date of February 18, 2021. The Convertible Note may be converted at the option of SBI into shares of common stock at a conversion price equal to 80% of the Market Price; provided that the conversion price shall in no event be less than $0.45 per share. The exchange of the SBI Note for the Convertible Note is treated as a debt extinguishment. The additional $184,000 of principal was treated as a debt extinguishment and included in our condensed consolidated statement of operations. We determined that the Convertible Note should be accounted for in accordance with FASB ASC 470-20 which addresses Accounting for Convertible Securities with Beneficial Conversion Features. The beneficial conversion feature is calculated at its intrinsic value (that is, the difference between the conversion price of $0.49 at the date of the note issuance and the fair value of the common stock into which the debt is convertible at the commitment date, per share being $0.61, multiplied by the number of shares into which the debt is convertible). The valuation of the beneficial conversion feature recorded
12
cannot be greater than the face value of the note issued. We recorded $233,500 as additional paid in capital and as a debt extinguishment and included in our condensed consolidated statement of operations. During the quarter ended March 31, 2020, SBI converted $250,000 aggregate principal amount of the Convertible Note into 541,666 shares of our common stock.
15% Notes
In December 2019, we completed a private placement of with certain accredited investors pursuant to an unsecured promissory note (the 15% Notes) with an aggregate principal amount of $300,000. In February and March 2020, we completed private placements with certain accredited investors, including holders of $1,506,000 aggregate principal amount of our 2019 12% Notes (as defined below), of 15% Notes with an aggregate principal amount of $2,031,000 in exchange for $525,000 of new funding and the cancellation of $1,506,000 aggregate principal amount of the 2019 12% Notes. The 15% Notes have an annual interest rate of 15% and mature on January 31, 2021. The 15% Notes provide that they shall be repaid in full out of the proceeds of any new debt or equity capital raise with net proceeds of more than $5,000,000. In connection with the issuance of the 15% Notes, each holder of 15%Notes received three warrants (i.e., a 2020 A Warrant, a 2020 B Warrant and a 2020 C Warrant) to acquire shares of common stock at an exercise price equal to $0.45 per share, with the number of shares subject to each warrant equal to one share for each $1.00 of principal amount of 15% Notes issued to the noteholder. The 2020 A Warrants have an expiration date of December 31, 2020, the 2020 B Warrants have an expiration date of December 31, 2021, and the 2020 C Warrants have an expiration date of December 31, 2022 (collectively, the 15% Warrants). By way of example, if an investor was issued a 15% Note with a principal amount of $250,000, such noteholder would receive a 2020 A Warrant to purchase 250,000 shares of common stock, a 2020 B Warrant to purchase 250,000 shares of common stock and a 2020 C Warrant to purchase 250,000 shares of common stock. Accordingly, as of March 31, 2020, the Company has issued 15% Warrants to purchase a total of 6,993,000 shares of common stock to the holders of 15% Notes.
We received $300,000 of cash in December 2019 and an additional $525,000 of cash January 2020 through March 2020 for issuing the 15% Notes. The relative fair value of the new funding on the 15% Warrants was recorded as a debt discount and additional paid-in capital of $333,056. The relative fair value of the cancellation of the outstanding indebtedness was recorded as an extinguishment of debt and additional paid-in capital of $668,335. For the three months ended March 31, 2020 and 2019, amortization of debt discount expense was $69,159 and $0, respectively, from the 15% Notes. The 15% Notes are otherwise treated as conventional debt.
For purposes of determining the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the 15% Warrants as of March 2020, were:
|
|
Current stock price
|
$ 0.45 - 0.67
|
Exercise price
|
$ 0.45
|
Risk-free interest rate
|
0.68 - 1.62 %
|
Expected dividend yield
|
|
Expected term (in years)
|
0.84 3.06
|
Expected volatility
|
112 - 119 %
|
2019 12% Notes
In September 2019, we completed a private placement with certain accredited investors, including holders of $1,106,000 aggregate principal amount of our 8.5% Notes, pursuant to (a) a senior unsecured promissory note, bearing interest at 12% payable quarterly, with principal due October 31, 2020, with an option for us to extend the due date to October 31, 2021 (2019 12% Notes) and (b) warrants with an exercise price of $1.30 per share and a life of 1.1 years; however, if we prepay the 2019 12% Notes at any time the life extends to October 31, 2022 (2019 12% Warrants) (combined the 2019 12% Agreements). Pursuant to the 2019 12% Agreements, we could prepay the 2019 12% Notes at any time, but in any event were required to pay at least one year of interest.
In February 2020, we issued $1,506,000 aggregate principal amount of 15% Notes to the holders of the outstanding 12% Notes in exchange for the cancellation of the outstanding 12% Notes.
Loan on Building
On January 8, 2020 we entered a $975,000 deed of trust (the Mortgage Loan) secured by a first mortgage lien on the property located in Denver, Colorado. The Mortgage Loan matures on December 31, 2020 and accrues interest at a rate of equal to the greater of 5.25% in excess of the Prime Rate or 10% per annum, payable on a monthly basis. This loan was paid in full on March 20, 2020 with the sale of our building.
13
NOTE 7. WARRANT DERIVATIVE LIABILITY
On May 31, 2019 we received gross proceeds of $3 million by issuing three million shares of our common stock and three million warrants (2019 Warrants) to purchase shares of our common stock (together 2019 Units) in a registered direct offering for $1.00 per 2019 Unit (combined the 2019 Capital Raise). The 2019 Warrants, issued with the 2019 Capital Raise, are accounted for as a derivative liability. The 2019 Warrant agreements contain a cash settlement provision whereby the holders could settle the warrants for cash based on the Black-Scholes value, upon certain fundamental transactions, as defined in the 2019 Warrant agreement, that are considered outside of the control of management, such as a change of control. The original exercise price of the 2019 Warrants was $1.30 per share. The 2019 Warrants contain certain anti-dilution adjustment provisions with respect to subsequent issuances of securities by the Company at a price below the exercise price of such warrants. As a result of such subsequent issuances of securities by the Company during 2019, the exercise price of the 2019 Warrants had decreased to $0.45 per share and the number of shares subject to the 2019 Warrants had increased to 8,666,666 shares of common stock as of December 31, 2019.
In February 2020, one of the warrant holders exercised 200,000 warrants. We received $90,000 in cash for the exercise and booked an adjustment to the derivative liability of $82,241 as a result of the transaction. As of March 31, 2020 there were 8,466,666 of these warrants outstanding.
The following are the key assumptions that were used to determine the fair value of the 2019 Warrants:
|
|
|
|
|
|
|
May 31, 2019
|
|
March 31, 2020
|
Number of shares underlying the warrants
|
|
3,000,000
|
|
8,466,666
|
Fair market value of stock
|
$
|
0.95
|
$
|
0.47
|
Exercise price
|
$
|
1.30
|
$
|
0.45
|
Volatility
|
|
133%
|
|
122%
|
Risk-free interest rate
|
|
1.93%
|
|
0.37%
|
Warrant life (years)
|
|
5.00
|
|
4.16
|
The following table sets forth a summary of the changes in the fair value of the warrant derivative liability, our Level 3 financial liabilities that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
2020
|
|
2019
|
Beginning balance as of December 31
|
$
|
4,620,593
|
$
|
|
Warrant exercise
|
|
(82,241)
|
|
|
Change in fair value of warrants derivative liability
|
|
(1,375,619)
|
|
|
Ending balance
|
$
|
3,162,733
|
$
|
|
NOTE 8. COMMITMENTS AND CONTINGENCIES
Legal
From time to time, the Company is a party to various litigation matters incidental to the conduct of its business. The Company is not presently a party to any legal proceedings that would have a material adverse effect on its business, operating results, financial condition or cash flows.
NOTE 9. STOCKHOLDERS EQUITY
2019 Capital Raise
On May 31, 2019 we received gross proceeds of $3 million by issuing three million shares of our common stock and three million warrants to purchase shares of our common stock in a registered direct offering for $1.00 per 2019 Unit. The 2019 Warrants had an exercise price of $1.30 per share at issuance and are exercisable for five years from the date of issuance. The number of shares issuable pursuant to the warrants granted under the 2019 Warrants, as well as the exercise price of those warrants, is subject to adjustment as a result of certain future equity issuances of securities by the Company at a price below the then-effective exercise price of the 2019 Warrants. As a result of such subsequent issuances of securities by the Company during the fourth quarter of 2019, the exercise price of the 2019 Warrants had decreased to $0.45 per share and the number of shares subject to the 2019 Warrants had increased to 8,666,666 shares of common stock as of December 31, 2019. As of March 31, 2020, there were 8,466,666 of these warrants outstanding.
We received cash of $2,604,355 which is net of $395,645 of issuance costs. Of the gross proceeds, we recorded $2,416,422 as a warrant derivative liability, as discussed in Note 7.
Share-based compensation
We use the fair value method to account for stock-based compensation. We recorded $572,574 and $1,492,496 in compensation expense, for the three months ended March 31, 2020 and 2019, respectively. This includes expense related to options issued in prior years for which the requisite service period for those options includes the current period as well as options issued in the current period. The fair value of these instruments was calculated using the Black-Scholes option pricing method.
As of March 31, 2020, there was approximately $605,729 of total unrecognized compensation expense related to unvested Employee Awards, which is expected to be recognized over a weighted-average period of eleven months.
14
Feinsod Employment Agreement
On August 6, 2019, we entered into an agreement (the Feinsod Agreement) with Michael Feinsod for his service as Chief Executive Officer. Pursuant to the agreement, Mr. Feinsod received 1,000,000 stock options that vest when our stock price has a trading price of equal to or above $4.51 per share for five consecutive days. The options have an exercise price of $0.83 per share and a ten-year life. These options were issued under the Incentive Plan. The options were valued using the Monte Carlo method. For the three months ended March 31, 2020, we recognized approximately $57,000 of share-based compensation expense related to these options.
The underlying assumptions used in the Monte Carlo simulations to determine the fair value of options were:
|
|
|
August 6, 2019
|
Current stock price
|
$ 0.83
|
Exercise price
|
$ 0.83
|
Vesting goal
|
$ 4.51
|
Risk-free interest rate
|
1.73%
|
Expected term (in years)
|
10
|
Expected volatility
|
123%
|
NOTE 10. SEGMENT INFORMATION
Our operations are organized into two segments: Operations Consulting and Products; and Capital Investments. All revenue originates, and all assets are located in the United States. Segment information is presented in accordance with ASC 280, "Segments Reporting." This standard is based on a management approach that requires segmentation based upon the Companys internal organization and disclosure of revenue and certain expenses based upon internal accounting methods. The Companys financial reporting systems present various data for management to run the business, including internal profit and loss statements prepared on a basis not consistent with GAAP. The following information is presented net of discontinued operations. For more information see Note 3.
Three months ended March 31
|
|
|
|
|
|
|
2020
|
|
Operations
|
|
Investments
|
|
Total
|
Services
|
$
|
308,386
|
$
|
|
$
|
308,386
|
Rent and interest
|
|
|
|
16,729
|
|
16,729
|
Product
|
|
1,339,073
|
|
|
|
1,339,073
|
Total Revenues
|
|
1,647,459
|
|
16,729
|
|
1,664,188
|
Costs and expenses
|
|
(1,616,487)
|
|
|
|
(1,616,487)
|
|
$
|
30,972
|
$
|
16,729
|
|
47,701
|
Corporate
|
|
|
|
|
|
(1,909,022)
|
|
|
|
|
Net loss
|
$
|
(1,861,321)
|
|
|
|
|
|
|
|
2019
|
|
Operations
|
|
Investments
|
|
Total
|
Services
|
$
|
247,783
|
$
|
|
$
|
247,783
|
Rent and interest
|
|
|
|
14,821
|
|
14,821
|
Product
|
|
532,318
|
|
|
|
532,318
|
Total revenue
|
|
780,101
|
|
14,821
|
|
794,922
|
Costs and expenses
|
|
(677,381)
|
|
(40,075)
|
|
(717,456)
|
|
$
|
102,720
|
$
|
(25,254)
|
|
77,466
|
Corporate
|
|
|
|
|
|
(4,245,468)
|
|
|
|
|
Net loss
|
$
|
(4,168,002)
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
Total assets
|
|
2020
|
|
2019
|
Operations
|
$
|
709,578
|
$
|
441,841
|
Investments
|
|
522,369
|
|
402,988
|
Corporate
|
|
1,194,828
|
|
2,135,395
|
|
$
|
2,426,775
|
$
|
2,980,224
|
15
NOTE 11. SUBSEQUENT EVENTS
On April 7, 2020, we entered into an Asset Purchase Agreement (the Agreement) with The Organic Seed, LLC, doing business under the name Cannasseur (the Seller), pursuant to which we agreed to acquire the assets of the Seller which includes a recreational retail dispensary, a 12,000 square foot light deprivation greenhouse, and a manufacturing facility based in Pueblo West, Colorado. The Agreement provides the purchase price to acquire Cannasseur is $2,350,000 (the Purchase Price). The purchase price will be paid by issuing to the Seller shares of common stock of the Company equal to the purchase price divided by the volume weighted average per share price of the Companys shares for 30 consecutive trading days ending on the second trading day prior to the closing (the VWAP); provided that if the VWAP exceeds $0.55 per share, then the VWAP will equal $0.55 per share for purposes of the foregoing calculation; and if the VWAP is less than $0.45 per share, then the VWAP will be adjusted to equal $0.45 for the purposes of the foregoing calculation. The closing is subject to approval of the transaction by the Colorado Marijuana Enforcement Division, as well as other customary closing conditions.
On May 25, 2020, following receipt of approval of the transaction by the Colorado Marijuana Enforcement Division, we closed the acquisition of Dalton Adventures, LLC, pursuant to which the we had acquired the assets of Dalton Adventures, LLC that constitute the business of SevenFive Farm, a cultivation facility in Boulder, Colorado. The purchase price paid by us to the Dalton Adventures, LLC was 8,859,117 shares of common stock. Dalton Adventures, LLC may require us to repurchase in cash 25% of the shares issued to Dalton Adventures, LLC at the closing at a repurchase price equal to the same VWAP used to determine the number of shares issued to Dalton Adventures, LLC at closing.
On May 29, 2020, we entered into a subscription agreement with Hershey Strategic Capital, LP and Shore Ventures III, LP (collectively, the Investor) with respect to the sale of shares of common stock and warrants to purchase common stock (collectively, the securities). The sales of the securities to the Investor consists of a minimum of $2,185,000 of securities and a maximum of $3,000,000 of securities, as described further below. The purchase price of the securities at each closing is as follows: (i) the purchase price of each share of common stock is $0.3983 per share, and (ii) for each one dollar invested by the Investor, the Investor receives a warrant to purchase a number of shares of common stock equal to 75% of the number of shares of common stock purchased by the Investor at an exercise price per share equal to $0.5565. The warrants have a term of five years. The subscription agreement provides for the sale of securities in three closings. At the first closing, which occurred on May 29, 2020, we sold $800,000 of securities to the Investor, representing 2,008,536 shares of common stock and warrants to purchase 1,506,402 shares of common stock. At the second closing, which occurred on June 3, 2020, we sold to the Investor $1,385,000 of the securities at the same price sold in the first closing. A third closing will be held with respect to the sale of $815,000 of the securities if Adam Hershey, the managing member of the Investor, is Approved for Suitability within one year of the date of the subscription agreement by State of Colorados Marijuana Enforcement Division (MED). Accordingly, a total of 7,532,010 shares of common stock and warrants to purchase 5,649,007 shares of common stock may be sold pursuant to the subscription agreement with the Investor.
16