CANN TREES Corporation (QB)

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 June 30, 2020, our operations are segregated into the following three 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 6 months ended June 30, 2020 and 2019, 75% and 76% of NBC’s revenue was with four and three customers, 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.

Cultivation (“Cultivation Segment”)

Through our new acquisition of SevenFive Farm (“SevenFive”), we operate a licensed indoor cultivation facility. We believe our production capability is sufficient to meet the diverse needs of our recreational consumers in Colorado, from cost-effective, high-yield inputs to sophisticated and dried cannabis flower.

Capital Investments (“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 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, 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/A filed by the Company on July 7, 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 Company’s financial position and operating results. The results for the three and six months ended June 30, 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 Company’s 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 June 30, 2020, our cash balance of approximately $1.2 million is not sufficient to absorb our operating losses and repay our notes payable of $2.3 million, of which $1.7 million is short-term.  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:

Summary of Significant Accounting Policies

See our Annual Report on Form 10-K for the year ended December 31, 2019, as amended, for discussion of the Company’s significant accounting policies. Since the date of the Annual Report, there have been no material changes to the Company’s significant accounting policies.

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. BUSINESS ACQUISITION

On May 13, 2020, we received approval of the transaction and transfer of the Dalton Adventures, LLC (“Seller”) license from the Colorado Marijuana Enforcement Division. On May 25, 2020, we finalized the acquisition, pursuant to which we had acquired the assets of the Seller that constitute the business of SevenFive Farm, a cultivation facility in Boulder, Colorado, whereby we acquired fixed assets, inventory, a cultivation license and the tradename.  The purchase price paid by us to the Seller was 8,859,117 shares of common stock. The shares issued have not been registered and are restricted shares under applicable U.S. federal and state securities laws and their resale may be made only pursuant to registration under the Securities Act or an available exemption from registration. Accordingly, a downward adjustment of 15% is applied to the fair value of consideration due to a lack of marketability. The closing price of General Cannabis’ common stock on May 13^th, 2020, the date of license transfer, was $0.38 per share, as such, fair value of consideration is $2,861,495. Dalton Adventures, LLC may require us to repurchase in cash 25% of the shares issued to the owner of Dalton Adventures, LLC for a period up to one year or May 25, 2021, at a repurchase price equal to the same volume weighted average price (“VWAP”) used to determine the number of shares issued to the owner of Dalton Adventures, LLC at closing. In accordance with the agreement, we would be required to repurchase 2,214,779 shares at a price of $0.43 per share. The Company has recorded a stock put liability for the possibility of the buyback of these shares in the amount of $958,114.

We have not completed the allocation of the purchase price.  As of June 30, 2020, the condensed consolidated balance sheet includes a preliminary allocation of fixed assets, inventory, intangible assets and goodwill. Management anticipates completing the purchase price allocation as soon as possible, but no later than one year from the acquisition date.

The preliminary purchase price allocation is as follows:

The accompanying consolidated financial statements include the results of SevenFive from the date of acquisition for financial reporting purposes, May 13, 2020. The pro forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2019, are as follows:

The unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2019, or to project potential operating results as of any future date or for any future periods.

NOTE 3. 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 June 30, 2020 and December 31, 2019 and as discontinued operations as of June 30, 2020 and the operating results for the six months ended June 30, 2020 and 2019, respectively, are presented as discontinued operations.

Assets and liabilities of discontinued operations for the security segment included the following:

A breakdown of the discontinued operations is presented as follows:

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 and six months ended June 30, 2020 and 2019, respectively.

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 June 30, 2020 and December 31, 2019 and the operating results for the three and six months ended June 30, 2020 and 2019, respectively, are presented as discontinued operations.

Assets and liabilities of discontinued operations included the following:

A breakdown of the discontinued operations is presented as follows:

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 and six months ended June 30, 2020 and 2019.

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 $2,000 and $71,262, respectively, during the three months ended June 30, 2020 and 2019 and $53,571 and $103,182, respectively, during the six months ended June 30, 2020 and 2019.

Our deferred revenue and customer deposit liability had the following activity:

NOTE 5. INVENTORY

As of June 30, 2020, and December 31, 2019, the Company had $152,469 and $0, respectively, of total inventory. Approximately $142,469 represents work-in-process and $10,000 represents raw materials. The Company records inventory at the lower of net realizable value or cost which is determined by the FIFO inventory valuation method. As of June 30, 2020, the Company did not recognize any impairment for obsolescence within its inventory.

In March 2019, we agreed to loan an aggregate of up to $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 substantially all of the assets of CCR and subject to a maturity date of September 2020. As of May 30, 2019, we had loaned the entire available amount of $375,000 to CCR pursuant to the CCR Note. CCR is a vertically integrated medical cannabis company located in San Juan, Puerto Rico. As of June 30, 2020, the outstanding amount of the loan was $375,000. The CCR Note included a loan origination fee of $15,000, which is being recognized as interest income over the term of the agreement. As of June 30, 2020, this loan is in default. A notice of default was sent to the borrower in April 2020. As we have a first priority security interest in substantially all of the assets of CCR, and since the CCR Note is in default we have recognized an allowance in the amount of $125,000 for the quarter ended June 30, 2020.

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 an initial 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 final maturity date of the BB Note to January 3, 2021.

NOTE 7. OPERATING LEASE RIGHT-OF-USE ASSET / OPERATING LEASE LIABILITY

On May 13, 2020, we entered into a commercial real estate lease with a related party (see Note 13) for 17,000 square feet of greenhouse space in Boulder, CO, with an initial term of five years and, at our option, two additional terms of five years each. Rent is $30,000 per month with 1.5% annual escalations, as well as our portion of real estate taxes. We determined the present value of the future lease payments using a discount rate of 12% over a 15 year term, our incremental borrowing rate based on outstanding debt, resulting in an initial right-of-use asset and lease liability of $2,721,069 which are being applied ratably over the term of the lease. As of June 30, 2020, the balance of the right-of-use asset and lease liability was $2,697,802 and $2,703,130, respectively. Future remaining minimum lease payments were as follows:

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 June 30, 2020, none of the stock had been issued.

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. The first closing occurred on May 29, 2020, in which 2,008,536 shares of common stock were granted. On June 3, 2020, the second closing occurred in which we granted 3,477,278 shares of common stock. As of June 30, 2020, none of the stock had been issued. We issued the stock in July 2020. We have included this accrued stock in our earnings per share calculations in the condensed consolidated statement of operations. See Note 12 for further details of the stock transaction.

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. If at any time, the borrower issues or sells any shares of common stock for a consideration per share less than the conversion price in effect on the date of such issuance, the holder shall have the right to utilize the price per share of the dilutive issuance as the conversion price for such conversion. On May 29, 2020, we issued shares at $0.40 per share, and as such, the conversion price was decreased to a floor of $0.40 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 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 six months ended June 30, 2020, SBI converted $934,000 aggregate principal amount of the Convertible Note and approximately $23,000 of accrued interest into 2,215,892 shares of our common stock.

15% Notes

In December 2019, we completed a private placement 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 June 30, 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. The exercise price of these 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 15% Warrants. As a result of such subsequent issuances of securities by the Company during the second quarter of 2020, the exercise price of the 15% Warrants had decreased to $0.40 per share, resulting in a $98,000 deemed dividend as of June 30, 2020.

We received $300,000 of cash in December 2019 and an additional $525,000 of cash during 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 June 30, 2020, amortization of debt discount expense was $72,516, from the 15% Notes. For the six months ended June 30, 2020, amortization of debt discount expense was $138,837, from the 15% notes. The 15% Notes are otherwise treated as conventional debt.

In May 2020, three of the note holders agreed to extend the terms of their notes to a new maturity date of January 31, 2022. The amount of these notes totaled $600,000. The extension of the note terms resulted in a debt extinguishment of the remaining note discount in the amount of $48,908. In addition, if the majority of the note holders extend the maturity date to January 31, 2022, then the expiration dates for the note holders warrants will each be extended by one year. If the majority of the note holders do not extend, the expiration date for the warrants for the note holders that did extend will be changed to December 31, 2023. Further, the subscription agreement between the Company and Hershey Strategic Capital, LP and Shore Ventures III, LP (the “Investor”) provides that the Company shall, during the 90-day period ending September 1, 2020 endeavor to cause the existing holders of such promissory notes to extend the maturity date of such notes to a date that is not earlier than January 31, 2022.  If, at the end of such 90-day period, all of the existing notes have not been amended to extend the maturity dates thereof, then, in the absence of a waiver from the Investor to the contrary, the Company shall issue to the Investor additional warrants to purchase shares of common stock. See Note 12, “2020 Capital Raise”.  

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 were:

NOTE 10. 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 May 2020, we issued securities at a price lower than the $0.45 per share above. As a result, the exercise price of the 2019 Warrants decreased to $0.40 per share and the number of shares subject to the 2019 Warrants increased to 9,591,614 shares of common stock.

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. During the three months ended June 30, 2020, one of the warrants holders exercised 2,137,726 warrants into 373,340 shares of our common stock through cashless exercises. We booked an adjustment to the derivative liability of $821,538 as a result. As of June 30, 2020, there were 7,453,888 of these warrants outstanding.

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

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:

NOTE 11.   COMMITMENTS AND CONTINGENCIES

Legal

Michael Feinsod recently resigned as our Executive Chairman, claiming that his resignation was for “Good Reason” under the terms of his employment agreement.  If it is ultimately determined that his resignation was, in fact, for “Good Reason”, rather than a voluntary act absent “Good Reason”, it could enable certain potential claims for entitlements under his employment agreement, as well as for the vesting of his unvested options and/or for the extension of the term within which he can exercise his options in the future. Having reviewed the matter, however, we do not believe that Mr. Feinsod’s resignation was for “Good Reason”. Accordingly, we believe that Mr. Feinsod’s resignation was voluntary, and that any such potential claims, if asserted, would be without foundation. Although the outcome of legal proceedings is subject to uncertainty, the Company will vigorously defend any future claims made by Mr. Feinsod alleging a “Good Reason” resignation.

On August 18, 2020, two investors of certain promissory notes and common stock purchase warrants of General Cannabis Corp. (the “Company”), filed a lawsuit against the Company and its current Board of Directors seeking, principally, rescission rights and the associated return of their outstanding investment of $145,000. Based upon our preliminary evaluation of the matter, we have concluded that the Company remains in compliance with the terms of the notes that are not otherwise due until January 2021, and that the lawsuit has no merit. The Company intends to vigorously defend the matter. Nevertheless, due to the early stage of the proceeding, we are unable to express an opinion as to the likely outcome of the matter.

NOTE 12.   STOCKHOLDERS’ EQUITY

2020 Capital Raise

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 a purchase price of $0.56 per share.  At the second closing, which occurred on June 3, 2020, we sold to the Investor $1,385,000, representing 3,447,278 shares of common stock and warrants to purchase 2,607,958 shares of common stock for a purchase price of $0.56 per share.  Subsequent to June 30, 2020, the third closing occurred, in which there was a sale of $815,000 of the securities. This represented 2,076,196 shares of common stock and warrants to purchase 1,534,647 shares of common stock for a purchase price of $0.56 per share. The warrants were recorded as equity and equity issuance costs in the amount of $1,738,032. Notwithstanding the foregoing, the subscription agreement provides that the Investor’s investment shall not exceed 20% or more of the common stock (or securities convertible into or exercisable for common stock) or the voting power of the Company on a post-transaction basis.

The subscription agreement also provides the Investor with certain participation rights in future financings of the Company until the one-year anniversary of the second closing.  The subscription agreement further provides that the Company shall, during the 90-day period immediately following the second closing, which ends on September 1, 2020 (the “negotiation period”), endeavor to cause the existing holders of the promissory notes of the Company having an outstanding balance in the amount of approximately $2,331,000 as of June 1, 2020 that are due on or about January 31, 2021, to extend the maturity date of such notes to a date that is not earlier than January 31, 2022. As of June 30, 2020, $600,000 of the $2,331,000 outstanding notes have extended the maturity date.  If, at the end of such 90-day negotiation period, all of the existing notes have not been amended to extend the maturity dates thereof, then the Company shall issue to the Investor additional warrants to purchase shares of common stock.  Any such additional warrants will be for a number of shares of common stock based on the dollar amount of the outstanding balance (as of the first closing) of the existing notes that were not extended, with each one dollar of existing notes that were not extended representing one share subject to such additional warrant.  The exercise price of any such additional warrants will be equal to 100% of the 30-day volume weighted average price of the Company’s common stock on the last day of the negotiation period, provided that such exercise price shall not be lower than $0.45 per share nor higher than $0.56 per share.

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. In May 2020, we issued securities at a price lower than the $0.45 per share above. As a result, the exercise price of the 2019 Warrants decreased to $0.40 per share and the number of shares subject to the 2019 Warrants increased to 9,591,614 shares of common stock. This down round adjustment is recorded through the mark to market adjustment made as of June 30, 2020 and is recorded as a gain/loss on warrant derivative liability on the condensed consolidated statement of operations. As of June 30, 2020, there were 7,453,888 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 10.

Share-based compensation

We use the fair value method to account for stock-based compensation. We recorded $434,367 and $752,467 in compensation expense, for the three months ended June 30, 2020 and 2019, respectively, and $926,698 and $2,244,963, for the six months ended June 30, 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.

The following summarizes Employee Awards activity:

As of June 30, 2020, there was approximately $404,262 of total unrecognized compensation expense related to unvested Employee Awards, which is expected to be recognized over a weighted-average period of eleven months.

NOTE 13.   RELATED PARTY TRANSACTIONS

On June 3, 2020, the Company entered into a consulting agreement with Adam Hershey, a board member and investor, pursuant to which he would act as a strategic consultant for the Company, including providing assistance with the sourcing and evaluation of M&A deals, strategic capital and strategic partnerships or joint ventures. Mr. Hershey is paid an initial monthly rate of $8,333 for the services, subject to certain adjustments.  We have spent $8,333 for the three and six months ended June 30, 2020. In addition, the subscription agreement between the Company and Hershey Strategic Capital, LP and Shore Ventures III, LP (the “Investor”) provides that the Company shall, during the 90-day period ending September 1, 2020 endeavor to cause the existing holders of the promissory notes of the Company having an outstanding balance in the amount of approximately $2,331,000 as of June 1, 2020 that are due on or about January 31, 2021, to extend the maturity date of such notes to a date that is not earlier than January 31, 2022.  If, at the end of such 90-day period, all of the existing notes have not been amended to extend the maturity dates thereof, then, in the absence of a waiver from the Investor to the contrary, the Company shall issue to the Investor additional warrants to purchase shares of common stock. See Note 12, “2020 Capital Raise”.

We currently have a lease agreement with Dalton Adventures, LLC in which we rent 17,000 square foot of greenhouse space in Boulder, CO for $33,680 a month, of which $30,000 is base rent and $3,680 is in relation to property taxes. The owner of Dalton Adventures, LLC is a principal shareholder of the Company. We have spent approximately $81,000 for the three and six months ended June 30, 2020.

We currently have a note payable to one of our board members in the amount of $100,000. This note is included in the 15% Notes discussed in Note 9. We have paid approximately $4,000 in interest for the three and six months ended June 30, 2020.

NOTE 14.   SEGMENT INFORMATION

Our operations are organized into three segments: Operations Consulting and Products; Cultivation; 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 Company’s internal organization and disclosure of revenue and certain expenses based upon internal accounting methods. The Company’s 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 regarding discontinued operations see Note 3.

Three months ended June 30

Six months ended June 30