S-1/A 1 v243529_s1a.htm FORM S-1/A Unassociated Document
As filed with the Securities and Exchange Commission on December 21, 2011

Registration No. 333-172543


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549


Amendment No. 4
to
Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933


 
General Cannabis, Inc.
(Exact name of registrant as specified in its charter)


Nevada
8741
43-2041643
(State or other jurisdiction of
incorporation or organization
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification No.)


1300 Dove Street, Suite 100
Newport Beach, CA  92660
 
(855) 420-2262
(Address, including zip code, of registrant’s
principal executive offices)
(Telephone number, including area code)


James Pakulis, Chief Executive Officer
General Cannabis, Inc.
1300 Dove Street, Suite 100
Newport Beach, CA  92660
(855) 420-2262

(Name, address, including zip code, and telephone
number, including area code, of agent for service)

COPIES TO:

Brian A. Lebrecht, Esq.
The Lebrecht Group, APLC
9900 Research Drive
Irvine, CA  92618
(949) 635-1240


Approximate date of commencement of proposed sale to the public:
From time to time after this registration statement becomes effective.
 
 
 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 
Large accelerated filer
¨
Accelerated filer
¨
 
Non-accelerated filer
¨
Smaller reporting company
þ
(Do not check if a smaller reporting company)       


CALCULATION OF REGISTRATION FEE

Title of each
class of
securities to be
registered
 
Amount
to be
registered
   
Proposed
maximum
offering price
per share
   
Proposed
maximum
aggregate
offering price
   
Amount of
registration
fee
 
 Common Stock offered for sale
    5,000,000     $ 3.00     $ 15,000,000     $ 1741.50.00  
 Common Stock of certain selling shareholders
    4,397,500 (1)   $ 2.80 (2)   $ 12,313,000     $ 1,429.54  
Total Registration Fee
                          $ 3,171.04  

(1)
Consists of shares of common stock held by 30 selling shareholders.  Pursuant to Rule 416 of the Securities Act, this registration statement shall be deemed to cover additional securities (i) to be offered or issued in connection with any provision of any securities purported to be registered hereby to be offered pursuant to terms that provide for a change in the amount of securities being offered or issued to prevent dilution resulting from stock splits, stock dividends, or similar transactions and (ii) of the same class as the securities covered by this registration statement issued or issuable prior to completion of the distribution of the securities covered by this registration statement as a result of a split of, or a stock dividend paid with respect to, the registered securities.
(2)
The registration fee is calculated pursuant to Rule 457(c) of the Securities Act of 1933 based on the average of the high and low transaction prices on February 22, 2011.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 
 
 

 
 
The information in this prospectus is not complete and may be changed.  We may not sell these securities until the registration statement filed with the SEC is effective.  This prospectus is not an offer to sell and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
Subject to Completion, Dated December 20, 2011


PROSPECTUS

Up to 9,397,500 shares of common stock

GENERAL CANNABIS, INC.

We are hereby registering 5,000,000 shares, representing 5.7% of our outstanding common stock if all shares are sold, for sale by us to investors at a price of $3.00 per share.  We are also hereby registering up to 4,397,500 shares, representing approximately 5.3% of our current outstanding common stock, for sale by 30 of our existing shareholders.  This offering will terminate on the earlier of (i) when all 9,397,500 shares are sold or (ii) on the date which is three years after the effective date hereof, unless we terminate it earlier.

Investing in the common stock involves risks.  General Cannabis, Inc., while not a development stage company, is a company with limited operations, limited income, and limited assets, and you should not invest unless you can afford to lose your entire investment.  See “Risk Factors” beginning on page 4.  Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete.  Any representation to the contrary is a criminal offense.  Our common stock is governed under The Securities Enforcement and Penny Stock Reform Act of 1990, and as a result you may be limited in your ability to sell our stock.

Shares sold for our benefit will be sold at a price of $3.00 per share.  These shares will be offered by certain of our officers and directors, primarily, James Pakulis and Douglas Francis, our Chief Executive Officer and President, respectively, on a best efforts basis with no minimum.

Shares sold by selling stockholders will be sold by them on their own behalf at prevailing market prices or at privately negotiated prices.  The selling stockholders, and any participating broker-dealers, may be deemed to be “underwriters” within the meaning of the Securities Act of 1933, as amended, or the “Securities Act,” and any commissions or discounts given to any such broker-dealer may be regarded as underwriting commissions or discounts under the Securities Act.  General Cannabis, Inc. is not selling any of the shares held by selling stockholders and therefore will not receive any proceeds therefrom.  The selling stockholders have informed us that they do not have any agreement or understanding, directly or indirectly, with any person to distribute their common stock.

Our common stock is quoted on the OTCQX tier of the marketplace maintained by OTC Markets Group, Inc. under the symbol “CANA.”  The closing price of our common stock as reported by OTC Markets Group, Inc. on December 19, 2011 was $1.40.

The date of this prospectus is __________________, 2011
 
 
 

 
 
PROSPECTUS SUMMARY
 
GENERAL CANNABIS, INC.

We are a service provider to the medicinal cannabis industry through four different sectors:

 
·
media,
 
·
technology,
 
·
medical clinic management, and
 
·
marketing.

We are not engaged in the growing, harvesting, cultivation, possession, or distribution of cannabis.  Instead, we assist the physicians, dispensaries, and end-users within the medicinal cannabis industry in finding each other and in managing their businesses.

All of our operations are conducted through our wholly-owned subsidiaries, each of which is incorporated or qualified to do business in the states in which it does so.

Corporate Information

General Cannabis, Inc. was formed on July 14, 2003 in the State of Nevada as Tora Technologies, Inc.  On November 21, 2006, it changed its name to Makeup.com Limited, and on January 29, 1010, changed its name again to LC Luxuries Limited.  Finally, on November 5, 2010, the company changed it name to General Cannabis, Inc.

Our corporate headquarters are located at 1300 Dove Street, Suite 100, Newport Beach, California 92660, and our telephone number is (855) 420-2262.  Our website is http://www.generalcannabis.com/.  Information contained on our website is not incorporated into, and does not constitute any part of, this prospectus.
 
 
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The Offering

Securities Offered:
 
   
Shares Offered by General Cannabis:
We are registering to sell to new investors up to 5,000,000 shares of common stock.  We will sell these shares to new investors at $3.00 per share.
Shares Offered by
 
Selling Stockholders:
We are registering 4,397,500 shares for sale by 30 selling stockholders, all of which are existing holders of our common stock (see list of Selling Stockholders).

 
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RISK FACTORS

Any investment in our common stock involves a high degree of risk.  You should consider carefully the following information, together with the other information contained in this prospectus, before you decide to buy our common stock.  If one or more of the following events actually occurs, our business will suffer, and as a result our financial condition or results of operations will be adversely affected.  In this case, the market price, if any, of our common stock could decline, and you could lose all or part of your investment in our common stock.

We face risks in developing our products and services and eventually bringing them to market.  We also face risks that we will lose some, or all of our market share in existing businesses to competition, or we risk that our business model becomes obsolete.  The following risks are material risks that we face.  If any of these risks occur, our business, our ability to achieve revenues, our operating results and our financial condition could be seriously harmed.  We are not engaged in the growing, harvesting, cultivation, possession, or distribution of cannabis.  Instead, we assist the physicians, dispensaries, and end-users within the medicinal cannabis industry in finding each other.  The physicians and medical clinics are our direct clients.  However, other entities in the medicinal cannabis industry, such as dispensaries, may and do utilize our internet finder sites in order to procure business.

Risk Factors Related to the Business of the Company

Some of the business activities of some of our customers, while believed to be compliant with applicable state law, are illegal under federal law because they violate the Federal Controlled Substances Act.  If our customers are closed by law enforcement authorities, it will materially and adversely affect our business.

The medicinal cannabis industry is currently conducted in the 16 states, plus the District of Columbia, that have passed laws either decriminalizing or legalizing the medicinal use of cannabis.  However, under United States federal law, and more specifically the Federal Controlled Substances Act, the possession, use, cultivation, and transfer of cannabis is illegal.  Most of our customers are dispensaries that possess and transfer cannabis which we believe are for medical purposes, and we manage physician offices where patients, if warranted, receive a letter of recommendation from a physician permitting them to enter a dispensary and acquire medicinal cannabis, both of which are considered to be illegal under the Controlled Substances Act.  We do have customers that are not involved in the medicinal cannabis industry, although they are not material to our overall business.  The federal, and in some cases state, law enforcement authorities have frequently closed down dispensaries and investigated and/or closed physician offices that provide medicinal cannabis recommendations.  To the extent that an affected dispensary or physician office is a customer of ours, and that dispensary or physician office is closed, it will negatively affect our revenue, and to the extent that it prevents or discourages new dispensaries and physician offices from entering the medicinal cannabis industry, we will have fewer customers and thus it would have a material negative affect on our business and operations.
 
 
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Because the business activities of some of our customers is illegal under the Federal Controlled Substances Act, we may be deemed to be aiding and abetting illegal activities through the services that we provide to those customers.  As a result, we may be subject to enforcement actions by law enforcement authorities, which would materially and adversely affect our business.

Under United States federal law, and more specifically the Federal Controlled Substances Act, the possession, use, cultivation, and transfer of cannabis is illegal.  We provide services to customers that are engaged in those illegal businesses.  As a result, law enforcement authorities, in their attempt to regulate the illegal use of cannabis, may seek to bring an action or actions against us, including, but not limited, to a claim of aiding and abetting another’s criminal activities.  The federal aiding and abetting statute provides that anyone who “commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.”  18 U.S.C. §2(a).

Our business, and specifically the advertisements we sell for activities that may be deemed to be illegal under federal law, may be found to be in violation of this law, and the federal government could decide to bring an action against us.  As a result of such an action, we may be forced to cease operations and our investors could lose their entire investment.  Such an action would have a material negative effect on our business and operations.

We have a limited operating history and limited historical financial information upon which you may evaluate our performance.

You should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, are in their early stages of operations.  We may not successfully address all of the risks and uncertainties or successfully implement our existing and new products and services.  If we fail to do so, it could materially harm our business and impair the value of our common stock, resulting in a loss to shareholders.  Even if we accomplish these objectives, we may not generate the positive cash flows or profits we anticipate.  Although we were incorporated in Nevada in 2003, the vast majority of the business that we conduct now was started or acquired in 2010.  Unanticipated problems, expenses and delays are frequently encountered in establishing a new business and developing new products and services.  These include, but are not limited to, inadequate funding, lack of consumer acceptance, competition, product development, the inability to employ or retain talent, inadequate sales and marketing, and regulatory concerns.  The failure by us to meet any of these conditions would have a materially adverse effect upon us and may force us to reduce, curtail, or discontinue operations.  No assurance can be given that we can or will ever be successful in our operations and operate profitably.

If we are unable to meet our future capital needs, we may be required to reduce or curtail operations, or shut down completely.
 
To date we have relied on cash flow from operations and funding from a small group of individual investors, including James Pakulis, to fund operations.  We have limited cash liquidity and capital resources.  Our cash on hand as of December 31, 2010, was approximately $1.39 million.  For the year ended December 31, 2010, our total revenue was approximately $3.57 million, and our net income was $350,500, consisting of $414,400 of operating income, $1,100 in interest expense, and a $62,000 provision for Income Tax.  At September 30, 2011, our cash on hand was approximately $1.39 million, and for the nine months ended September 30, 2011, our total revenue was approximately $10.38 million, and our net income was approximately $1.28 million.
 
 
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Our future capital requirements will depend on many factors, including our ability to market our products successfully, cash flow from operations, locating and retaining talent, and competing market developments.  Our business model requires that we spend money (primarily on advertising and marketing) in order to generate revenue.  Based on our current financial situation we may have difficulty continuing our operations at their current level, or at all, if we do not raise additional financing in the near future.  Additionally, we would like to continue to acquire assets and operating businesses, which will likely require additional cash.  Although we currently have no specific plans or arrangements for acquisitions or financing, we intend to raise funds through private placements, public offerings or other financings.  Any equity financings would result in dilution to our then-existing stockholders.  Sources of debt financing may result in higher interest expense.  Any financing, if available, may be on unfavorable terms.  If adequate funds are not obtained, we may be required to reduce, curtail, or discontinue operations.  There is no assurance that our existing cash flow will be adequate to satisfy our existing operating expenses and capital requirements.

Because we face intense competition, we may not be able to operate profitably in our markets.

The market for the services that we offer is highly competitive.  The competition will most likely increase if more states permit the use of medicinal cannabis.  The increased competition may hinder our ability to successfully market our products and services.  We may not have the resources, expertise or other competitive factors to compete successfully in the future.  We expect to face additional competition from existing competitors and new market entrants in the future. Some of our competitors will have greater resources than we do.  As a result, these competitors may be able to:

 
·
develop and expand their product and service offerings more rapidly;
 
·
adapt to new or emerging changes in customer requirements more quickly;
 
·
take advantage of acquisition and other opportunities more readily; and
 
·
devote greater resources to the marketing and sale of their products and adopt
more aggressive pricing policies than we can.  See “The Company - Competition.”

If no additional states allow the medicinal use of cannabis, or if one or more states that currently allow it reverse their position, we may not be able to continue our growth, or the market for our products and services may decline.

Currently, sixteen states and the District of Columbia allow the use of medicinal cannabis.  There can be no assurance that number of states that allow the use of medicinal cannabis will grow, and if it does not, there can be no assurance that the sixteen existing states and/or the District of Columbia won’t reverse their position and disallow it.  If either of these things happens, then not only will the growth of our business be materially impacted, we may experience declining revenue as the market for our products and services declines.
  
If we are unable to attract and retain key personnel, we may not be able to compete effectively in our market.

Our success will depend, in part, on our ability to attract and retain key management, including primarily James Pakulis and Douglas Francis, but also our technical experts and sales and marketing personnel.  We attempt to enhance our management and technical expertise by recruiting qualified individuals who possess desired skills and experience in certain targeted areas.  We have also employed management from companies that we have acquired.  Our inability to retain employees and attract and retain sufficient additional employees, and information technology, engineering and technical support resources, could have a material adverse effect on our business, financial condition, results of operations and cash flows.  The loss of key personnel could limit our ability to develop and market our products.
 
 
6

 
  
Because our officers and directors control a large percentage of our common stock, they have the ability to influence matters affecting our shareholders.

Our officers and directors beneficially own over 69% of our outstanding common stock.  As a result, they have the ability to influence matters affecting our shareholders, including the election of our directors, the acquisition or disposition of our assets, and the future issuance of our shares.  Because they control such shares, investors may find it difficult to replace our directors and management if they disagree with the way our business is being operated.  Because the influence by these insiders could result in management making decisions that are in the best interest of those insiders and not in the best interest of the investors, you may lose some or all of the value of your investment in our common stock.  See “Principal Shareholders.”

We may not be able to effectively manage our growth and operations, which could materially and adversely affect our business.

We have, and may in the future, experience rapid growth and development in a relatively short period of time.  The management of this growth will require, among other things, continued development of our financial and management controls and management information systems, stringent control of costs, increased marketing activities, the ability to attract and retain qualified management personnel and the training of new personnel.  We intend to utilize outsourced resources, and hire additional personnel, in order to manage our expected growth and expansion.  Failure to successfully manage our possible growth and development could have a material adverse effect on our business and the value of our common stock.

In the states where medicinal cannabis is permitted, local laws and regulations could adversely affect our clients, including causing some of them to close, which would materially and adversely affect our business.

Even in areas where the medicinal use of cannabis is legal under state law, there are also local laws and regulations that affect our clients.  For example, in some cities or counties a medical cannabis dispensary is prohibited from being located within a certain distance from schools or churches.  These local laws and regulations may cause some of our customers to close, impacting our revenue and having a material effect on our business and operations.  In addition, the enforcement of identical rules or regulations as it pertains to medicinal cannabis may vary from municipality to municipality, or city to city.

Our websites are visible in jurisdictions where medicinal use of cannabis is not permitted, and as a result we may be found to be violating the laws of those jurisdictions.

Internet websites are visible by people everywhere, not just in jurisdictions where the activities described therein are considered legal.  As a result, we may face legal action from a state or other jurisdiction against us for engaging in activity illegal in that state or jurisdiction.
 
 
7

 
 
Our industry is experiencing rapid growth and consolidation that may cause us to lose key relationships and intensify competition.
 
The medicinal cannabis industry is undergoing rapid growth and substantial change.  This includes new states that may allow medicinal use of marijuana.  This has resulted in increasing consolidation and formation of strategic relationships.  For example, we have already consolidated several businesses in the medicinal cannabis industry, and we have entered into strategic advertising relationships with a laboratory that tests cannabis.  A cancellation of our relationship with this group or any group that we form a relationship in the future may have a negative impact on the company because it could limit our advertising exposure or the number of customers that use our websites.  We make no assurance that any relationship we have established will continue.

Acquisitions or other consolidating transactions that don’t involve us could nevertheless harm us in a number of ways, including:

 
we could lose strategic relationships if our strategic partners are acquired by or enter into relationships with a competitor (which could cause us to lose access to distribution, content, technology and other resources);
 
The relationship between us and the strategic partner may deteriorate and cause an adverse effect on our business;
 
we could lose customers if competitors or users of competing technologies consolidate with our current or potential customers; and
 
our current competitors could become stronger, or new competitors could form, from consolidations.

Any of these events could put us at a competitive disadvantage, which could cause us to lose customers, revenue and market share.  Consolidation could also force us to expend greater resources to meet new or additional competitive threats, which could also harm our operating results.

We rely on the continued reliable operation of third parties’ systems and networks and, if these systems and networks fail to operate or operate poorly, our business and operating results will be harmed.

Our operations are in part dependent upon the continued reliable operation of the information systems and networks of third parties.  These include a variety of service providers including web browsers sites such as Google or MSN in which the majority of our customers locate us, internet and telephone providers or other communication providers such as for cell phone and texting.  If these third parties do not provide reliable operation, our ability to service our customers will be impaired and our business, reputation and operating results could be harmed.

The Internet and our network are subject to security risks that could harm our business and reputation and expose us to litigation or liability.

Online commerce and communications depend on the ability to transmit confidential information and licensed intellectual property securely over private and public networks.  Any compromise of our ability to transmit and store such information and data securely, and any costs associated with preventing or eliminating such problems, could damage our business, hurt our ability to distribute products and services and collect revenue, threaten the proprietary or confidential nature of our technology, harm our reputation, and expose us to litigation or liability.  We also may be required to expend significant capital or other resources to protect against the threat of security breaches or hacker attacks or to alleviate problems caused by such breaches or attacks.  Any successful attack or breach of our security could hurt consumer demand for our products and services, and expose us to consumer class action lawsuits and harm our business.

 
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We may be unable to adequately protect our proprietary rights.

Our ability to compete partly depends on the superiority, uniqueness and value of our intellectual property and technology, including both internally developed technology and technology licensed from third parties.  To the extent we are able to do so, in order to protect our proprietary rights, we will rely on a combination of trademark, copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions.  Despite these efforts, any of the following occurrences may reduce the value of our intellectual property:

 
Our applications for trademarks and copyrights relating to our business may not be granted and, if granted, may be challenged or invalidated;
 
Issued trademarks and registered copyrights may not provide us with any competitive advantages;
 
Our efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology;
 
Our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those we develop; or
 
Another party may obtain a blocking patent and we would need to either obtain a license or design around the patent in order to continue to offer the contested feature or service in our products.

We may be forced to litigate to defend our intellectual property rights, or to defend against claims by third parties against us relating to intellectual property rights.

We may be forced to litigate to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of other parties’ proprietary rights.  Any such litigation could be very costly and could distract our management from focusing on operating our business.  The existence and/or outcome of any such litigation could harm our business.

Further, because the content of much of our intellectual property concerns cannabis and other activities that are not legal in some state jurisdictions, we may face additional difficulties in defending our intellectual property rights.

Interpretation of existing laws that did not originally contemplate the Internet could harm our business and operating results.

The application of existing laws governing issues such as property ownership, copyright and other intellectual property issues to the Internet is not clear.  Many of these laws were adopted before the advent of the Internet and do not address the unique issues associated with the Internet and related technologies.  In many cases, the relationship of these laws to the Internet has not yet been interpreted.  New interpretations of existing laws may increase our costs, require us to change business practices or otherwise harm our business.
 
 
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It is not yet clear how laws designed to protect children that use the Internet may be interpreted, and such laws may apply to our business in ways that may harm our business.

The Child Online Protection Act and the Child Online Privacy Protection Act impose civil and criminal penalties on persons distributing material harmful to minors (e.g., obscene material) over the Internet to persons under the age of 17, or collecting personal information from children under the age of 13.  We do not knowingly distribute harmful materials to minors or collect personal information from children under the age of 13.  The manner in which these Acts may be interpreted and enforced cannot be fully determined, and future legislation similar to these Acts could subject us to potential liability if we were deemed to be non-compliant with such rules and regulations, which in turn could harm our business.

We may be subject to market risk and legal liability in connection with the data collection capabilities of our products and services.

Many of our products are interactive Internet applications that by their very nature require communication between a client and server to operate.  To provide better consumer experiences and to operate effectively, our products send information to our servers.  Many of the services we provide also require that a user provide certain information to us.  We post an extensive privacy policy concerning the collection, use and disclosure of user data involved in interactions between our client and server products.

Because we are in the cannabis industry, we have a difficult time obtaining the various insurances that are desired to operate our business, which may expose us to additional risk and financial liabilities.

Insurance that is otherwise readily available, such as workers compensation, general liability, and directors and officers insurance, is more difficult for us to find, and more expensive, because we engaged in the medicinal cannabis industry.  Thus far, we have been successful in finding such policies, however it is at a cost that is higher than other businesses.  There are no guarantees that we will be able to find such insurances in the future, or that the cost will be affordable to us.  If we are forced to go without such insurances, it may prevent us from entering into certain business sectors, may inhibit our growth, and may expose us to additional risk and financial liabilities.

Risks Related To Our Common Stock

As a result of published articles and research reports, and television interviews by our Chief Executive Officer that mentioned our offering, we may have violated Section 5 of the Securities Act, and may have to rescind sales of our securities pursuant to this Prospectus.

Section 5 of the Securities Act prohibits the offer and sale of the securities included in this Prospectus prior to the effectiveness of the registration statement of which this Prospectus is a part.  During the time that this Prospectus was under review by the Commission, several articles and research reports were published that referenced us, the medicinal cannabis industry, and this offering.  In addition, our Chief Executive Officer, James Pakulis, participated in television interviews with Fox News and MSNBC that discussed the company, the medicinal cannabis industry, and this offering.  It is possible that these public communications could be considered an offer of securities in violation of Section 5.  If they were deemed to be an offer in violation of Section 5 by the Commission or a state securities regulator, they could force us to make a rescission offer to some or all of the purchasers of the securities.  At the time of a rescission offer, we may or may not have the resources to fund the repurchase of the securities, and it may have a detrimental effect on our business and operations.
 
 
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Our common stock is listed for quotation on the OTCQX tier of the marketplace maintained by OTC Markets Group, Inc., which may make it more difficult for investors to resell their shares due to suitability requirements.

Our common stock is currently quoted on the OTCQX tier of the marketplace maintained by OTC Markets Group, Inc.  Broker-dealers often decline to trade in over the counter stocks given the market for such securities are often limited, the stocks are more volatile, and the risk to investors is greater.  These factors may reduce the potential market for our common stock by reducing the number of potential investors.  This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of their shares.  This could cause our stock price to decline.

If we are unable to pay the costs associated with being a public, reporting company, we may not be able to continue trading on the OTCQX and/or we may be forced to discontinue operations.

We expect to have significant costs associated with being a public, reporting company, which may raise substantial doubt about our ability to continue trading on the OTCQX and/or continue as a going concern.  These costs include compliance with the Sarbanes-Oxley Act of 2002, which will be difficult given the limited size of our management, and we will have to rely on outside consultants.  Accounting controls, in particular, are difficult and can be expensive to comply with.

Our ability to continue trading on the OTCQX and/or continue as a going concern will depend on positive cash flow, if any, from future operations and on our ability to raise additional funds through equity or debt financing.  If we are unable to achieve the necessary product sales or raise or obtain needed funding to cover the costs of operating as a public, reporting company, our common stock may be deleted from the OTCQX and/or we may be forced to discontinue operations.

We do not intend to pay dividends in the foreseeable future.

We do not intend to pay any dividends in the foreseeable future.  We do not plan on making any cash distributions in the manner of a dividend or otherwise.  Our Board presently intends to follow a policy of retaining earnings, if any.

We have the right to issue additional common stock and preferred stock without consent of stockholders.  This would have the effect of diluting investors’ ownership and could decrease the value of their investment.

We have additional authorized, but unissued shares of our common stock that may be issued by us for any purpose without the consent or vote of our stockholders that would dilute stockholders’ percentage ownership of our company.

In addition, our certificate of incorporation authorizes the issuance of shares of preferred stock, the rights, preferences, designations and limitations of which may be set by the Board of Directors.  Our certificate of incorporation has authorized issuance of up to 20,000,000 shares of preferred stock in the discretion of our Board.  The shares of authorized but undesignated preferred stock may be issued upon filing of an amended certificate of incorporation and the payment of required fees; no further stockholder action is required.  If issued, the rights, preferences, designations and limitations of such preferred stock would be set by our Board and could operate to the disadvantage of the outstanding common stock.  Such terms could include, among others, preferences as to dividends and distributions on liquidation.
 
 
11

 

Our President and Chief Executive Officer will eventually be permitted to sell some of their stock, which may have a negative effect on our stock price and ability to raise additional capital, and may make it difficult for investors to sell their stock at any price.

Douglas Francis and James Pakulis, our President and Chief Executive Officer, respectively, are the owners of an aggregate of 57,804,579 shares of our common stock, representing over 69% of our total issued shares.  On October 17, 2011, we entered into a Lock-Up Agreement with each of them that prevents them from selling any of their securities until the earlier to occur of (i) three months after effectiveness of the registration statement of which this prospectus is a part, (b) we are no longer selling our securities in a primary sale pursuant to the registration statement, or (c) the closing sale price for our common stock is over $3.00 for twenty (20) consecutive trading days.  Once one or more of these conditions are satisfied, either of them may be able to sell up to 1% of our outstanding stock (currently approximately 831,000 shares) every 90 days in the open market pursuant to Rule 144, which may have a negative effect on our stock price and may prevent us from obtaining additional capital.  In addition, if either of them are selling their stock into the open market, it may make it difficult or impossible for investors to sell their stock at any price.

Our common stock is governed under The Securities Enforcement and Penny Stock Reform Act of 1990.

The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock.  The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions.  Such exceptions include any equity security listed on NASDAQ and any equity security issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three years, (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three years, or (iii) average annual revenue of at least $6,000,000, if such issuer has been in continuous operation for less than three years.  Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.
 
 
12

 
 
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

We have made forward-looking statements in this prospectus, including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” that are based on our management’s beliefs and assumptions and on information currently available to our management.  Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation, and the effects of competition.  Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions.  These statements are only predictions and involve known and unknown risks and uncertainties, including the risks outlined under “Risk Factors” and elsewhere in this prospectus.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievement.  We are not under any duty to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results, unless required by law.
 
 
13

 
 
USE OF PROCEEDS

This prospectus relates to shares of our common stock that may be offered and sold from time to time by the selling stockholders.  We will not receive any proceeds from the sale of shares of common stock by the selling stockholders in this offering.  However, if we are able to sell the entire 5,000,000 shares we will receive up to $15,000,000 from the sale of common stock we are registering at $3.00 per share, in an offering conducted by our officers and directors.

We do not intend to engage any broker/dealers for the sale of the shares, and thus do not expect to pay any sales commissions, in which event, if all shares are sold, the net proceeds to us would be $15,000,000 based on an offering price of $3.00 per share.  However, if we do decide to pay sales commissions, the net proceeds (at an offering price of $3.00 per share and potential sales commissions of up to 10% of the gross proceeds) from the sale of all the shares which we intend to offer to new investors would then be a maximum of $13,500,000.  Furthermore, we will have paid expenses in connection with the registration and sale of the common stock by the selling security holders, who may be deemed to be underwriters in connection with their offering of shares.

These proceeds would be received from time to time as sales of these shares are made by us.  As set forth in the following table, we will use those proceeds primarily for the acquisition of Internet intellectual property and revenue generating businesses, plus additional staffing needs, with the remainder used for general working capital for operations.  We intend to use the proceeds in the following order of priority:

   
Assumed Offering (1)
   
Maximum Offering
 
Description of Use
 
Amount
   
Percent
   
Amount
   
Percent
 
                         
Internet Domain Name Acquisitions
  $ 2,000,000       40 %   $ 5,000,000       33.3 %
                                 
Business Acquisitions
    1,000,000       20 %     6,000,000       40.0 %
                                 
Staffing Needs
    500,000       10 %     1,500,000       10.0 %
                                 
Working Capital
    1,500,000       30 %     2,500,000       16.7 %
                                 
Total (2)
  $ 5,000,000       100.0 %   $ 15,000,000       100.0 %

 
(1)
Assumes that we raise $5,000,000 in this offering.  This offering is conducted on a best efforts basis with no minimum; therefore, we could raise less than $5,000,000.
 
(2)
The Offering is being sold by our officers and directors, who will not receive any compensation for their efforts.  No sales fees or commissions will be paid to such officers or directors.  Shares may be sold by registered broker or dealers who are members of the NASD and who enter into a Participating Dealer Agreement with us.  Such brokers or dealers may receive commissions up to ten percent (10%) of the price of the Shares sold.

The above budgeted amounts are only for initial working purposes since we do not know how much we will need to spend on these items.  Even if we are able to sell the maximum shares and we are not able to sufficiently expand operations and increase revenues, we do not know how long these funds will last, and we have no other specific plans for raising additional funds.  The portion of any net proceeds not immediately required will be invested in certificates of deposit or similar short-term interest bearing instruments.
 
 
14

 

DETERMINATION OF OFFERING PRICE

Our management has established the price of $3.00 per share based upon their estimates of the market value of General Cannabis, Inc. and the price at which potential investors might be willing to purchase the shares offered.

We are registering up to 4,397,500 shares for resale by existing holders of our common stock.  These shares may be sold by the selling stockholder at prevailing market prices or privately negotiated prices on any over the counter quotation medium or inter-dealer quotation system.
 
 
15

 

SELLING SECURITY HOLDERS

The following table provides information with respect to shares offered by the selling stockholders:

Selling stockholder
 
Shares for
sale
   
Shares before
offering
   
Percent before
offering
   
Shares after
offering
   
Percent
after
offering (1)
 
                               
Ardelu Trust (2)
    200,000       200,000       <1 %     -       -  
Steven J. Baldwin
    20,000       20,000       <1 %     -       -  
Robert S. Wrinkle
    2,000       2,000       <1 %     -       -  
Harvey L. & Harlene F. Backman Rev Fam Tr (3)
    36,000       36,000       <1 %     -       -  
James A. & Jenifer A. Ryan
    1,000       1,000       <1 %     -       -  
Mark & Analee Reutlinger (Community Property)
    100,000       100,000       <1 %     -       -  
Mircha Panduru
    5,000       5,000       <1 %     -       -  
Ronald L. Webb
    3,000       3,000       <1 %     -       -  
Raphael A. Morris
    100,000       100,000       <1 %     -       -  
Robert and Leonora Turkovich, JT
    30,000       30,000       <1 %     -       -  
Robert M. Phillps
    1,000       1,000       <1 %     -       -  
Sherrie L. Backman
    20,000       20,000       <1 %     -       -  
Brian Fritz
    15,000       15,000       <1 %     -       -  
Penelope S. McTaggart
    50,000       50,000       <1 %     -       -  
David E. Backman
    10,000       10,000       <1 %     -       -  
Monty M. Elkins 1995 Trust (4)
    4,500       4,500       <1 %     -       -  
Ronnie Colsen
    50,000       50,000       <1 %     -       -  
Mark Oring
    25,000       25,000       <1 %     -       -  
Craig R. Jonov
    100,000       100,000       <1 %     -       -  
Kim Opler
    375,000       375,000       <1 %     -       -  
Donald B. Lashley
    125,000       125,000       <1 %     -       -  
Millennium Trust Company, LLC FBO Sherrie Backman Roth IRA
    30,000       30,000       <1 %     -       -  
Revyv, LLC (5)
    250,000       500,000       <1 %     250,000    
<1%
 
Synergistic Resources, LLC (6)
    2,000,000       2,000,000       2.41 %     -       -  
Justin Hartfield (7)
    250,000       8,200,000       9.86 %     7,950,000       9.0 %
Keith Hoerling (7)
    250,000       8,200,000       9.86 %     7,950,000       9.0 %
Millennium Trust Company, LLC FBO David E Backman Roth IRA #90GP29016
    50,000       50,000       <1 %     -       -  
Nina Beatrice Rung-Hoch
    120,000       120,000       <1 %     -       -  
The Lebrecht Group, APLC (8)
    100,000       100,000       <1 %     -       -  
Adnant, LLC (9)
    75,000       75,000       <1 %     -       -  
                                         
Total
    4,397,500       20,547,500       22.1 %     16,150,000       18.0 %

 
(1)
Based on 88,140,256 shares outstanding, which includes the 5,000,000 shares offered for sale to new investors by us in this offering.  This offering is on a best-efforts basis with no minimum, therefore, we could sell less than 5,000,000 shares being offered to new investors.
 
(2)
The trust is controlled by Randall Delue.
 
 
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(3)
The trust is controlled by Harvey L. & Harlene F. Backman, its Trustees.
 
(4)
The trust is controlled by Monty M. Elkins, its Trustee.
 
(5)
Revyv, LLC is controlled by James Johnson, Robert Johnson, and David Johnson, its members.  James Johnson and David Johnson were formerly employed by our wholly-owned subsidiary, General Management Solutions, Inc.
 
(6)
Synergistic Resources, LLC is controlled by Brent Inzer, its manager.  Brent Inzer is employed by us.
 
(7)
All shares of stock held by Mr. Hartfield and Mr. Hoerling (whether included in this registration statement or not) are subject to a written lock-up agreement whereby none of the shares may be sold prior to June 30, 2011, up to twenty five percent (25%) of the shares may be sold beginning on June 30, 2011, and the remaining shares may be sold beginning on November 30, 2011.  Mr. Hartfield and Mr. Hoerling are employed by us.
 
(8)
The Lebrecht Group, APLC is our legal counsel.  Voting and dispositive control for securities owned by The Lebrecht Group, APLC is with Brian A. Lebrecht.
 
(9)
Adnant, LLC is controlled by Sabas Carrillo, its manager.  Mr. Carrillo provides services to us as an independent contractor in the areas of accounting and financial statement preparation.

 
17

 

PLAN OF DISTRIBUTION

We, through our officers and directors, intend to offer up to 5,000,000 shares at a price of $3.00 per share to potential investors.  We have not at this point engaged any broker-dealers licensed by The Financial Industry Regulatory Authority for the sale of these shares and presently have no intention to do so.  If we engaged any broker-dealers, they may be acting as underwriters for the offering of these shares.

Our officers and directors intend to seek to sell the common stock to be sold by us in this offering by contacting persons with whom they have had prior contact who have expressed interest in us, and by seeking additional persons who may have interest through various methods such as mail, telephone, and email.  Any solicitations by mail, telephone, or email will be preceded by or accompanied by a copy of this Prospectus.  We do not intend to offer the securities over the Internet or through general solicitation or advertising.  Our officers and directors are relying on an exemption from registration as a broker-dealer pursuant to Rule 3a4-1 of the Securities Exchange Act of 1934 in that they are not statutorily disqualified, are not associated with a broker or dealer, are not receiving compensation related to these transactions, and perform substantial other duties for us.

Our common stock is quoted on the OTCQX tier of the marketplace maintained by OTC Markets Group, Inc. under the symbol “CANA.”  The selling stockholders will be able to sell their shares referenced under “Selling Security Holders” from time to time at prevailing market prices or in privately negotiated sales.  Any securities sold in brokerage transactions will involve customary brokers’ commissions.

We will pay all expenses in connection with the registration and sale of the common stock by the selling security holders, who may be deemed to be underwriters in connection with their offering of shares.  The estimated expenses of issuance and distribution are set forth below:

Registration Fees
Approximately
  $ 7,900  
Transfer Agent Fees
Approximately
 
500
 
Costs of Printing and Engraving
Approximately
    500  
Legal Fees
Approximately
    45,000  
Accounting and Audit Fees
Approximately
    35,000  
Total
    $ 88,900  

Under the securities laws of certain states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers.  The selling stockholders are advised to ensure that any underwriters, brokers, dealers or agents effecting transactions on behalf of the selling stockholders are registered to sell securities in all fifty states.  In addition, in certain states the shares of common stock may not be sold unless the shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and we have complied with them.  The selling stockholders and any brokers, dealers or agents that participate in the distribution of common stock may be considered underwriters, and any profit on the sale of common stock by them and any discounts, concessions or commissions received by those underwriters, brokers, dealers or agents may be considered underwriting discounts and commissions under the Securities Act of 1933.
 
 
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The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock.  The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions.  Such exceptions include any equity security listed on NASDAQ and any equity security issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three years, (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three years, or (iii) average annual revenue of at least $6,000,000, if such issuer has been in continuous operation for less than three years.  Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.

In accordance with Regulation M under the Securities Exchange Act of 1934, neither we nor the selling stockholders (other than our officers and directors who will sell shares of common stock on our behalf, and then only in compliance with Regulation M) may bid for, purchase or attempt to induce any person to bid for or purchase, any of our common stock while we or they are selling stock in this offering.  Neither we nor any of the selling stockholders intends to engage in any passive market making or undertake any stabilizing activity for our common stock.  None of the selling stockholders will engage in any short selling of our securities.  We have been advised that under the rules and regulations of the FINRA, any broker-dealer may not receive discounts, concessions, or commissions in excess of 10% in connection with the sale of any securities registered hereunder.

On October 17, 2011, we entered into a Lock-Up Agreement with James Pakulis and Douglas Francis that prevents them from selling any of their securities until the earlier to occur of (i) three months after effectiveness of the registration statement of which this prospectus is a part, (b) we are no longer selling our securities in a primary sale pursuant to the registration statement, or (c) the closing sale price for our common stock is over $3.00 for twenty (20) consecutive trading days.

 
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DESCRIPTION OF SECURITIES

Our authorized capital stock consists of 200,000,000 shares of common stock, par value $0.001, and 20,000,000 shares of preferred stock, par value $0.001.  As of the date of this Registration Statement, there are 83,140,256 shares of our common stock issued and outstanding, and no shares of preferred stock issued or outstanding.

Common Stock.  Each shareholder of our common stock is entitled to a pro rata share of cash distributions made to shareholders, including dividend payments.  The holders of our common stock are entitled to one vote for each share of record on all matters to be voted on by shareholders.  There is no cumulative voting with respect to the election of our directors or any other matter.  Therefore, the holders of more than 50% of the shares voted for the election of those directors can elect all of the directors.  The holders of our common stock are entitled to receive dividends when and if declared by our Board of Directors from funds legally available therefore.  Cash dividends are at the sole discretion of our Board of Directors.  In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining available for distribution to them after payment of our liabilities and after provision has been made for each class of stock, if any, having any preference in relation to our common stock.  Holders of shares of our common stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to our common stock.

Preferred Stock.  We are authorized to issue 20,000,000 shares of preferred stock.  The rights, privileges, and preferences of our preferred stock can be set by our Board of Directors without further shareholder approval.  We have not authorized or established any series’ of preferred stock, and none are anticipated.  There are no shares of preferred stock issued or outstanding.  The availability or issuance of these shares could delay, defer, discourage or prevent a change in control.

Dividend Policy.  We have not declared or paid a cash dividend on our capital stock in our last two fiscal years and we do not expect to pay cash dividends on our common stock in the foreseeable future.  We currently intend to retain our earnings, if any, for use in our business.  Any dividends declared in the future will be at the discretion of our Board of Directors and subject to any restrictions that may be imposed by our lenders.

Options, Warrants and Convertible Securities.  On November 19, 2010, we entered into an Agreement and Plan of Reorganization and Merger pursuant to which we acquired 100% of the membership interests of WeedMaps, LLC, a Nevada limited liability company.  In addition to the consideration paid, the two principals of WeedMaps, LLC can collectively earn up to an aggregate of Sixteen Million (16,000,000) additional shares of our common stock pursuant to certain earn-out provisions in the Purchase Agreement.

Pursuant to the terms of a marketing services agreement with Crystal Research Associated, LLC dated October 5, 2010, we issued four-year warrants to acquire 250,000 shares of our common stock at $4.00 per share.

INTEREST OF NAMED EXPERTS AND COUNSEL

The Lebrecht Group, APLC serves as our legal counsel in connection with this offering.  The Lebrecht Group owns 100,000 shares of our common stock.
 
 
20

 

DESCRIPTION OF BUSINESS

We provide a focused variety of services to the medicinal cannabis industry.  More specifically, we provide services in four different sectors:

 
·
media,
 
·
technology,
 
·
medical clinic management, and
 
·
marketing.

We are not engaged in the growing, harvesting, cultivation, possession, or distribution of cannabis.  Instead, we assist the physicians, dispensaries, and end-users in the medicinal cannabis industry in finding each other and in advertising their businesses.  We were incorporated in the State of Nevada in 2003.

The Medicinal Cannabis Industry

Sixteen states, plus the District of Columbia, have adopted laws that exempt patients from state criminal penalties who use medicinal cannabis under a physician’s supervision.  These are collectively generally referred to as the states that have de-criminalized medicinal cannabis, although there is a subtle difference between de-criminalization and legalization, and each state’s laws are different.  The states are as follows (in alphabetical order):

 
·
Alaska,
 
·
Arizona,
 
·
California,
 
·
Colorado,
 
·
Delaware
 
·
District of Columbia,
 
·
Hawaii,
 
·
Maine,
 
·
Michigan,
 
·
Montana,
 
·
Nevada,
 
·
New Jersey,
 
·
New Mexico,
 
·
Oregon,
 
·
Rhode Island,
 
·
Vermont, and
 
·
Washington.

Medical cannabis decriminalization is generally referred to as the removal of all criminal penalties for the private possession and use of cannabis by adults, including cultivation for personal use and casual, nonprofit transfers of small amounts.  Legalization is generally referred to as the development of a legally controlled market for cannabis, where consumers purchase from a safe, legal, and regulated source.

The United States federal government regulates drugs through the Controlled Substances Act (21 U.S.C. § 811), which places controlled substances, including cannabis, in a schedule.  Cannabis is classified as a Schedule I drug, which is viewed as highly addictive and having no medical value.  Doctors may not prescribe cannabis for medical use under federal law, however they can recommend its use under the First Amendment.  In 2010, the United States Veterans Affairs Department clarified that veterans using medicinal cannabis will not be denied services or other medications that are denied to those using illegal drugs.
 
 
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Our Principal Services

Our principal services are offered through the following wholly owned subsidiaries.

WeedMaps Media, Inc.

WeedMaps Media, Inc. is our wholly-owned subsidiary, and its primary operation is the Internet website, www.weedmaps.com.  Weedmaps.com is an online finder site service that allows patients to find local medical cannabis dispensaries, which are also referred to as collectives.  Dispensaries are locations where patients who have received letters of recommendation from a health care provider can purchase medicinal cannabis, as well as a variety of other non-cannabis related items including, but not limited to, apparel accessories, posters, bumper stickers, concert tickets, books and musical CD’s.

WeedMaps.com specializes in search engine optimization (SEO) for widely used medical cannabis industry search terms.  The dispensaries pay a fee to WeedMaps in order to subscribe to the various services available.  WeedMaps.com has an estimated six million page views per month.  Weedmaps.com generates income by providing the dispensary owner a variety of advertising choices, including gold, silver and bronze advertising packages.  The Gold Listing comes up first on the Google Map, first on the Regional Listing Page, and first on the Featured Five Slide Bar and also has a large distinctive red icon on the Google map all of which, taken together, allow for heightened visibility.  The Silver Listing comes up second on the Regional listing Page, second on the Featured Five Slide Bar and has a large distinctive blue icon on the Google map allowing for heightened visibility.  The Bronze listing comes up third on the Regional Listing Page and third on the Featured Five Slide Bar.  The preferred positions convert at higher click through rate to the customer’s actual listing page.  On average, the click through rate for a premium listing compared to a standard listing in their geographical regions is 4-to-1 for a Gold, 3-to-1 for a Silver and 2-to-1 for a Bronze.  Predicated on the select package, WeedMaps markets the respective dispensary online, and advertises their products.

We do not receive varying revenue amounts based on our three advertising package tiers.  In general, customers typically remain in the same advertising tier month-to-month.  The revenue, or the price of each advertising package tier, is predicated on several internal factors that taken together determine the price of the three tiers within a certain region, which for example include, but are not limited to, a certain region’s population, site traffic, listing density, and reasonable distances of travel for consumers.  Said differently, advertising package tier pricing differs from region to region (i.e. Gold tier in Region A will differ to Region B), but does not typically vary within the same region (i.e. Gold tier in Region A typically remains the same month-to-month).

On a daily basis WeedMaps also promotes “WeedFreebies” on the website.  This is a form of advertising in which a dispensary pays a fee and is allowed to donate a product from their dispensary which is advertised on the WeedMaps website.  The dispensary receives additional promotion on the website in the form of banner advertising.  The donated products are delivered to the recipients in one of two methods depending on the geographic location of the recipient.  If the recipient is located near the retail establishment of the donor sponsor, then the recipient will pick up the donated product directly from the sponsor.  If the recipient is not located near the retail establishment of the donor sponsor, then the donated product is sent via a third party courier service.
 
 
22

 
 
We take possession of the donated product only if we need to photograph the product for the games display, or if it is to be shipped.  For our customers to participate in this promotion they must pay a fee in order to be allowed to donate a product, each of our customers that have donated a product has delivered the product to the winning recipient.  However, should one of our customers fail to deliver the prize to the winning recipient, the winning recipient is supplied with a gift card from us in the amount of the value of the prize.

WeedMaps has a variety of other income streams including providing video content to the dispensary, and photo packages.

General Health Solutions, Inc.

General Health Solutions, Inc. (dba CannaCenters.com) is our wholly-owned subsidiary, and through a contractual arrangement with a professional medical corporation, manages medical cannabis clinics.  The medical clinics managed by General Health Solutions are all located throughout California.  Individuals that believe they may benefit from medical cannabis schedule a doctor’s appointment at one of the clinics throughout the state to be seen by a California licensed physician.  After the medical evaluation, if the physician believes the patient suffers from any of the symptoms or ailments as defined by law, the physician provides the patient a Letter Of Recommendation (LOR).  The LOR allows the patient to visit an independent dispensary, and after their LOR is verified, the patient is permitted to enter the dispensary and purchase any number of cannabis and non-cannabis related products.

General Health Solutions, Inc. receives compensation from the professional medical corporation, and handles all billing, collections, administrative functions and marketing, leaving the physician to focus his or her time on medical treatment and evaluation of patients.  General Health Solutions provides marketing on behalf of the professional medical corporation.  The web based advertising generates telephone calls from potential patients interested in scheduling a doctor’s appointment.  The call center operated by General Health Solutions averages approximately 800 incoming calls per day, and sets between 150 and 250 appointments per day, resulting in approximately 4,000 patients seen per month.  Gross revenues for the clinics under management were over $4 million in 2010.  We have recently re-branded this part of business under the name of CannaCenters and CannaCenters.com.

General Marketing Solutions, Inc.

General Marketing Solutions, Inc. is our wholly-owned subsidiary, and its primary operation is the Internet website, www.cannabiscenters.com.   Though primarily in the development stage, the website aids prospective patients in finding physicians across the country that support and recommend medicinal cannabis.  There is a patient verification system which verifies the authenticity of the patient’s Letter Of Recommendation.  This is an internal control system designed to validate the status of a patient to law enforcement, dispensaries and other interested parties, as well as a social media platform for users.
 
 
23

 

General Merchant Solutions, Inc.

Prior to August 1, 2011, General Merchant Solutions supplied dispensaries with credit card processing services, however, due to market conditions (specifically lack of reliable financing) we felt it to be in our best interests to discontinue providing merchant services to dispensaries.  The remaining credit card processing business proved to be only nominally profitable, and on October 31, 2011, General Merchant Solutions discontinued all retail credit card processing operations.  The entity is held as an entity in good standing with no operations.

General Management Solutions, Inc.

General Management Solutions, Inc., is our wholly-owned subsidiary that oversees and provides all of the human resources issues for employees including hiring, terminating, and employee benefits.

Other Subsidiaries

We have two additional wholly-owned subsidiaries whose operations are relatively inactive at this time, namely General Processing Corporation, CannaCenters Corporation (dba CannaCenters), and a third subsidiary, LV Luxuries Incorporated (which operated as makeup.com), whose operations have been discontinued.  As of right now we have no imminent or specific plans for either of the entities and they are held as corporations in good standing with no operations.
 
 
24

 
 
 
 
25

 
 
Recent Acquisitions

WeedMaps, LLC

On November 19, 2010, we entered into an Agreement and Plan of Reorganization and Merger (the “WeedMaps Purchase Agreement”) pursuant to which we acquired 100% of the membership interests of WeedMaps, LLC, a Nevada limited liability company (“WeedMaps”), pursuant to the terms of which WeedMaps, LLC was merged with and into WeedMaps Media, Inc. (“Merger Sub”), our wholly-owned subsidiary (the “Merger”).  Prior to the Merger, General Cannabis was deemed to be a non-operating public shell corporation with nominal net assets and WeedMaps was a private operating company with significant operations.  For accounting purposes the transaction is considered to be a reverse merger treated as a recapitalization of General Cannabis where General Cannabis is the surviving legal entity and the accounting acquiree, and WeedMaps is considered to be the accounting acquirer and the legal acquiree.  The assets and liabilities of WeedMaps are recorded at their historical cost with the equity structure of General Cannabis.  No goodwill was recorded in the transaction.  General Cannabis was deemed a continuation of the business of WeedMaps and the historical financial statements of WeedMaps became the historical financial statements of General Cannabis.

See Note 3 Recapitalization in the financials statements filed herewith for a discussion regarding the elimination of the historical results of operation and the accumulated deficit of General Cannabis including its wholly owned subsidiary, LV Luxuries Incorporated, as a result of the Merger and the associated reverse merger accounting and recapitalization of General Cannabis.

The total purchase price was $54,962,269, which pursuant to the WeedMaps Purchase Agreement consisted of:

 
i.
the issuance of 16,400,000 shares of common stock to two individuals, Justin Hartfield (“Hartfield”) and Keith Hoerling (“Hoerling”) (“Hartfield” and “Hoerling” together as “Sellers”), which shares were issued on January 20, 2011;

 
ii.
the issuance of Secured Promissory Notes with the aggregate principal amount of $3,600,000, in the form of four $900,000 principal amount 0.35% Secured Promissory Notes, two issued to each of the Sellers, half of which principal matures on June 30, 2012, and half of which principal matures on January 10, 2013; and

 
iii.
up to an aggregate of 16,000,000 additional shares of common stock pursuant to certain Earn-out Provisions in the WeedMaps Purchase Agreement.

Pursuant to the WeedMaps Purchase Agreement, the Earn-out Provisions provide that for a period of three years following the acquisition of WeedMaps, LLC, each of the Sellers will be eligible to earn and be issued a certain number of shares of common stock based upon the following formula as follows:

 
i.
In year one following the acquisition of WeedMaps, LLC each of the Sellers will be eligible to earn and be issued 3,000,000 shares of common stock on January 31, 2012, if the gross revenues of Merger Sub (WeedMaps, LLC was merged with and into WeedMaps Media, Inc. (“Merger Sub”)), for the fiscal year ended December 31, 2011 are at least 20% higher than they were for the fiscal year ended December 31, 2010. If the 2011 gross revenues of Merger Sub are at least 10%, but less than 20%, higher than the 2010 gross revenues, then the number of shares to be issued shall be reduced to 1,250,000 shares to each of the Sellers. If the 2011 gross revenues of Merger Sub are less than 10% higher than the 2010 gross revenues, then no shares shall be issued hereunder.

 
26

 

 
ii.
In year two following the acquisition of WeedMaps, LLC each of the Sellers will be eligible to earn and be issued 3,000,000 shares of common stock on January 31, 2013, if the gross revenues of Merger Sub for the fiscal year ended December 31, 2012 are at least 20% higher than they were for the fiscal year ended December 31, 2011. If the 2012 gross revenues of Merger Sub are at least 10%, but less than 20%, higher than the 2011 gross revenues, then the number of shares to be issued shall be reduced to 1,250,000 shares to each of the Sellers. If the 2012 gross revenues of Merger Sub are less than 10% higher than the 2011 gross revenues, then no shares shall be issued.

 
iii.
In year three following the acquisition of WeedMaps, LLC each of the Sellers will be eligible to earn and be issued 2,000,000 shares of common stock on January 31, 2014, if the gross revenues of Merger Sub for the fiscal year ended December 31, 2013 are at least 20% higher than they were for the fiscal year ended December 31, 2012. If the 2012 gross revenues of Merger Sub are at least 10%, but less than 20%, higher than the 2013 gross revenues, then the number of shares to be issued shall be reduced to 1,250,000 shares to each of the Sellers. If the 2013 gross revenues of Merger Sub are less than 10% higher than the 2012 gross revenues, then no shares shall be issued.
 
Based on our current cash position and recent growth in our operations, we anticipate that we will make payments on the scheduled dates for the notes and that in the event we are unable to do so, we have the flexibility to pursue other strategies with the debt holders such as refinancing the debt, extending the payment dates, and/or converting the debt into common stock.

All of the shares of common stock issued or to be issued to Hartfield and Hoerling are subject to the terms of a Lock-Up Agreement whereby none of the shares may be sold prior to June 30, 2011, up to twenty five percent (25%) of the shares may be sold beginning on June 30, 2011, and the remaining shares may be sold beginning on November 30, 2011.

Also on November 19, 2010, we entered into at-will employment agreements with each of Hartfield and Hoerling, with compensation to each of Thirty Thousand Dollars ($30,000) per month.

This business is now operated as WeedMaps Media, Inc.

Synergistic Resources, LLC

On December 3, 2010, we entered into a Reorganization and Asset Acquisition Agreement pursuant to which we acquired substantially all the assets of Synergistic Resources, LLC, a California limited liability company.  The assets consisted primarily of the intellectual property and established marketing associated with the name Marijuana Medicine Evaluation Centers, including its website (www.marijuanamedicine.com), and the assignment of a Management Services Agreement pursuant to which we initially managed twelve (12) medicinal cannabis clinics (we now manage 10).  As consideration for the purchase, we issued an aggregate of Two Million (2,000,000) shares of our common stock, and paid Fifty Thousand Dollars ($50,000) cash, to Synergistic Resources.  Also effective on December 3, 2010, we entered into an at-will employment agreement with Brent Inzer, the sole manager and member of Synergistic Resources, with compensation of Fifteen Thousand Dollars ($15,000) per month.

 
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This business is now operated as General Health Solutions, Inc.

Revyv, LLC

On January 11, 2011, we entered into a Reorganization and Asset Acquisition Agreement  pursuant to which we acquired substantially all the assets of Revyv, LLC.  The assets consisted primarily of the intellectual property associated with the name CannabisCenters, including its website (www.cannabiscenters.com), its related physician software and patient verification system, and numerous existing contracts.  As consideration for the purchase, which closed on January 13, 2011, we issued an aggregate of Five Hundred Thousand (500,000) shares of our common stock to Revyv, LLC or its assigns.  Effective on January 10, 2011, we entered into an at-will employment agreement with each of James Johnson and David Johnson, each of which are members of Revyv, LLC.  The compensation due to each was $12,500 per month.  Neither James Johnson nor David Johnson are currently employed by us.

This business is now operated as General Marketing Solutions, Inc.
 
Marijuana.com

On November 18, 2011, we entered into a Domain Name Purchase Agreement with an unrelated party for the purchase of “marijuana.com.”  Pursuant to the terms of the Agreement, the purchase price was $4,250,000, payable $125,000 on the date of execution of the Agreement, and the remaining balance over sixty nine (69) consecutive months beginning on January 18, 2012 pursuant to a Non-Recourse Secured Promissory Note of the same date (the “Note”).

Divestitures

On February 1, 2010, we sold the domain name makeup.com, its associated domain names and certain intellectual property rights associated with these domain names for $2,000,000, of which we paid $200,000 in fees related to the sale, which resulted in proceeds to us of $1,800,000.  We were in the business of selling beauty products, such as makeup and perfume, on the internet through the makeup.com website.

Intellectual Property

Our intellectual property portfolio is an important part of our business.  We currently own over 250 Internet domain names related to the cannabis industry.  We currently have one trademark.  We use a combination of trademark, copyright, trade secret and other intellectual property laws, and confidentiality agreements to protect our intellectual property.  Our employees and independent contractors are required to sign agreements acknowledging that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property, and assigning to us any ownership that they may claim in those works.  Despite our precautions, it may be possible for third parties to obtain and use without consent intellectual property that we own.  Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
 
 
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From time to time, we may encounter disputes over rights and obligations concerning intellectual property.  While we believe that our product and service offerings do not infringe the intellectual property rights of any third party, we cannot assure you that we will prevail in any intellectual property dispute.  If we do not prevail in such disputes, we may lose some or all of our intellectual property protection, be enjoined from further sales of the applications determined to infringe the rights of others, and/or be forced to pay substantial royalties to a third party.

Competition

We know that there is intense competition in the medicinal cannabis industry.  However, because of the conflict of federal laws and state laws, and because most of the participants in the industry are privately held, publicly available information is difficult to find.  A CNBC article1 estimated the total cannabis market at between $35 and $45 billion.  There are over 1,200 cannabis dispensaries in California alone, and over 200 medical clinics that will issue a medical cannabis recommendation.

The following is a list of known competitive referral websites for either dispensaries or clinics:

 
·
Pot Locator (http://www.potlocator.com/)
 
·
THC Finder (http://www.thcfinder.com/)
 
·
GPS 420 (http://www.gps420.com/)
 
·
Marijuana Dispensaries 411 (http://www.gps420.com/)
 
·
WeedTracker (http://weedtracker.com/cannabis/)
 
·
Los Angeles Cannabis Clubs (http://www.losangelescannabisclubs.com/)
 
·
Leaf Ly (http://www.leafly.com/explore)
 
·
Sticky Guide (http://www.stickyguide.com/)
 
·
LA Weed Maps (http://caweedmaps.com/)
 
·
Cannagen (http://cannagen.com/)
 
·
Dispensary Finder (http://www.dispensaryfinder.com/)
 
·
Herban Tracker (http://herbantracker.com/)
 
·
Roll it Up (http://www.rollitup.org/colorado-patients/334363-new-dispensary-finder-website.html)
 
·
MMJ Finder (http://mmjfinder.com/)
 
·
Daily Buds (http://www.dailybuds.com/)
 
·
Kush Pages (http://kushpages.com/)

Research and Development

We have not spent a material amount on research and development activities.

Our Employees

We have 82 full-time employees and/or contractors working in our office, three of which are our officers, 54 of which are engaged in marketing, publishing and development, and 28 of which are engaged in administrative functions.
  

http://www.cnbc.com/id/36179677?__source=usatoday|marijuana&par=usatoday&loc=interstitialskip
 
 
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ORGANIZATION WITHIN LAST FIVE YEARS
 
General Cannabis, Inc. was formed on July 14, 2003 in the State of Nevada as Tora Technologies, Inc.  On November 21, 2006, it changed its name to Makeup.com Limited, and on January 29, 1010, changed its name again to LC Luxuries Limited.  Finally, on November 5, 2010, the company changed its name to General Cannabis, Inc.

DESCRIPTION OF PROPERTY

Our executive offices are located in Newport Beach, California, at 1300 Dove Street, Newport Beach, CA 92660.  Our office space is approximately 20,332 square feet pursuant to a three year lease that began in March 2011 and ends on January 31, 2014.  The lease is at a rate of $39,647.40 per month with payments beginning in August 2011, with standard increases annually.
 
LEGAL PROCEEDINGS

We are not a party to or otherwise involved in any legal proceedings.

In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions.  The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations.  However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.

INDEX TO FINANCIAL STATEMENTS

Consolidated Balance Sheet as of September 30, 2011 (unaudited) and December 31, 2010 (audited)
 
F-1
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010
 
F-2
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010
 
F-3
Notes to Financial Statements
 
F-4 to F-15
     
Report of Independent Registered Public Accounting Firm
 
F-16
Restated Consolidated Balance Sheet as of December 31, 2010 and 2009
 
F-17
Restated Consolidated Statements of Operations for the Years Ended December 31, 2010 and 2009
 
F-18
Restated Consolidated Statements of Cash Flows for the Years Ended December 31, 2010 and 2009
 
F-19
Restated Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2010 and 2009
 
F-20
Notes to Financial Statements
 
F-21 to F-38
 
 
30

 
 
SELECTED FINANCIAL DATA

General Cannabis, Inc.
 
For the Nine
Months Ended
September 30,
   
For the Years Ended
December 31,
 
   
2011
   
2010
   
2009
 
   
(unaudited)
   
(audited)
   
(audited)
 
                   
Statement of Operations Data:
                 
                   
Total revenues
  $ 10,382,121     $ 3,576,484     $ 94,823  
Operating income
    2,136,518       414381       21,879  
                         
Net income
    1,283,731       350,495       21,879  
                         
Balance Sheet Data:
                       
                         
Cash and cash equivalents
  $ 1,387,113     $ 1,388,574     $ 16,513  
Current assets
    1,609,214       2,492,911       25,213  
Total assets
    7,942,870       7,639,862       543,598  
                         
Current liabilities
  $ 1,059,804     $ 1,287,023     $ 3,334  
Total liabilities
    22,627,073       22,862,269       3,334  
Total stockholders’ equity (deficit)
    (14,684,203 )     (16,509,430 )     21,879  
                         
Total dividends per common share
  $ -     $ -     $ -  
 
 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Disclaimer Regarding Forward Looking Statements

You should read the following discussion in conjunction with our financial statements and the related notes and other financial information included in this Form S-1.  In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.  Our actual results could differ materially.  Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form S-1, particularly in the Section titled Risk Factors.

Although the forward-looking statements in this Registration Statement reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them.  Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements.  You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

Summary Overview

We are a service provider to the medicinal cannabis industry.  We are not engaged in the growing, harvesting, cultivation, possession, or distribution of cannabis.  Instead, we assist the physicians, dispensaries, and end-users within the medicinal cannabis industry in finding each other and in advertising their businesses.  All of our operations are conducted through our wholly-owned subsidiaries.
 
Approximately 82% of our 2011 revenue is generated by WeedMaps Media, Inc., which is a finder website that aids consumers in finding medicinal cannabis dispensaries.  The dispensaries pay a fee to WeedMaps Media in order to post, on WeedMaps.com, their dispensary information.

Approximately 17% of our 2011 revenue is generated by General Health Solutions, Inc. which, through a contractual arrangement with a professional medical corporation, manages medical cannabis clinics.

In February 2010, we sold most of our then-existing domain names and intellectual property to a third party, although we did continue to manage our third-party merchant card services.

Recapitalization

See Note 3 Recapitalization for a discussion regarding the elimination of the historical results of operation and the accumulated deficit of General Cannabis including its wholly owned subsidiary, LV Luxuries Incorporated, as a result of the Merger and the associated reverse merger accounting and recapitalization of General Cannabis.
 
 
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Reliance on Strategic Partners

The medicinal cannabis industry is undergoing rapid growth and substantial change, such as new states that are allowing medicinal use of marijuana, and an increase in businesses servicing the industry, which has resulted in increasing consolidation and formation of strategic relationships.  A cancellation of our relationship with one or more of these groups may have a negative impact on the company.  We expect this consolidation and strategic partnering to continue.  Acquisitions or other consolidating transactions could harm us in a number of ways, including:
 
 
we could lose strategic relationships if our strategic partners are acquired by or enter into relationships with a competitor (which could cause us to lose access to distribution, content, technology and other resources);
 
The relationship between us and the strategic partner may deteriorate and cause an adverse effect on our business;
 
we could lose customers if competitors or users of competing technologies consolidate with our current or potential customers; and
 
our current competitors could become stronger, or new competitors could form, from consolidations.

Any of these events could put us at a competitive disadvantage, which could cause us to lose customers, revenue and market share.  Consolidation could also force us to expend greater resources to meet new or additional competitive threats, which could also harm our operating results.

Our operations are in part dependent upon the continued reliable operation of the information systems and networks of third parties.  If these third parties do not provide reliable operation, our ability to service our customers will be impaired and our business, reputation and operating results could be harmed.

Three and Nine Months Ended September 30, 2011 compared to the Three and Nine Months Ended September 30, 2010

During the year ended December 31, 2010, we completed two acquisitions that significantly increased our revenue and our operations.  The acquisitions are operated now as WeedMaps Media, Inc. and General Health Solutions, Inc.

During the nine months ended September 30, 2011, we completed another acquisition which is operated now as General Marketing Solutions, Inc.

Results of Operations

Revenue and Operating Expenses

Our sales, total revenue, total operating expenses and operating income for the three and nine months ended September 30, 2011, compared to the three and nine months ended September 30, 2010, were as follows:
 
 
33

 

   
9 Months
Ended 
September 30,
2011
   
3 Months
Ended
September 30,
2011
   
9 Months
Ended
September 30,
2010
   
3 Months
Ended
September 30,
2010
 
                         
Sales
  $ 10,382,121     $ 4,126,195     $ 2,011,187     $ 944,121  
Total revenue
    10,382,121       4,126,195       2,011,187       944,121  
Total operating expenses
    8,069,583       3,327,756       1,514,126       529,816  
                                 
Operating income
  $ 2,136,518     $ 758,200     $ 497,061     $ 414,305  

The increase in sales, from $944,121 for the three months ended September 30, 2010 to $4,126,195 for the three months ended September 30, 2011, an increase of 337%, and from $2,011,187 for the nine months ended September 30, 2010 to $10,382,121 for the nine months ended September 30, 2011, an increase of 416%, is primarily attributable to a significant increase in our listing fee revenue generated by our subsidiary, WeedMaps Media, Inc., which is a result of an increase in the number of customers and an increase in the number of ‘listing packages’ offered to customers.

WeedMaps Media, Inc., which is a medical-cannabis industry-focused, marketing and media company, had revenues of $3,574,858 and $8,494,394 for the three and nine months ended September 30, 2011, respectively, and $944,121 and $2,011,187 for the three and nine months ended September 30, 2010, respectively.

General Health Solutions, Inc., which through a contractual arrangement with a professional medical corporation, manages medical cannabis clinics, had revenues of $549,646 and $1,799,018 for the three and nine months ended September 30, 2011, respectively.  The Company did not record any revenues for General Health Solutions for three and nine months ended September 30, 2010 since it was prior to the acquisition of Synergistic Resources, LLC during December 2010.

Our operating expenses as a percentage of sales increased from 56% for the three months ended September 30, 2010, to 81% for the three months ended September 30, 2011, and increased from 75% for the nine months ended September 30, 2010 to 78% for the nine months ended September 30, 2011.  This is a result of hiring technology specialists for our research and development department.  Specifically, this includes the retention of additional coders, programmers and engineers whose responsibilities include, but are not limited, to developing software and additional finder sites.  In addition, we have recently hired media related personnel for the creation of pre and post video production.

The increase in operating expenses, from $529,816 for the three months ended September 30, 2010 to $3,327,756 for the three months ended September 30, 2011, an increase of 528%, and from $1,514,126 for the nine months ended September 30, 2010 to $8,069,583 for the nine months ended September 30, 2011, an increase of 433%, is also attributable, almost exclusively, to support our efforts to expand our operations during the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010, which was accompanied by increases in salaries and employee benefits, increases in professional fees which included fees for legal and accounting work as well as expenses related to our Securities and Exchange Commission filings and for fees paid to consultants related to business development, investor relations, sales contract work, increases in general and administrative expenses primarily attributable to non-cash amortization expense associated with our recent acquisitions, and expenses associated with moving into our new offices and the associated leasehold improvements and purchases of office furniture and equipment.  Non-cash amortization expense was $110,800 during the nine months ended September 30, 2011 as compared to zero during the nine months ended September 30, 2010.  The increase in non-cash amortization expense is associated with our recent acquisitions.
 
 
34

 

Our operating expenses as a percentage of sales increased from 56% for the three months ended September 30, 2010, to 81% for the three months ended September 30, 2011, and increased from 75% for the nine months ended September 30, 2010 to 78% for the nine months ended September 30, 2011.
 
Our revenue increased by 416% during the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010 and our operating expenses increased by 433% during the same period resulting in an increase in our operating income from $497,061 for the nine months ended September 30, 2010 to $2,136,518 for the nine months ended September 30, 2011, an increase of 330%.  Our revenues increased by 337% for the three months ended September 30, 2011, as compared to the three months ended September 30, 2010, while our operating expenses increased significantly by 528% during the same period, resulting in an increase in our operating income from $414,305 to $758,200, an increase of 83%.

Liquidity and Capital Resources

Our cash, current assets, intangible assets, total assets, current liabilities, and total liabilities as of September 30, 2011 and December 31, 2010 were as follows:

   
September 30,
2011
(unaudited)
   
December 31,
2010
(audited)
   
Percentage
Change
 
                   
Cash
  $ 1,387,113     $ 1,388,574    
<1
Total current assets
    1,609,214       1,104,337       46 %
                         
Intangible assets:
                       
Management contract
    1,341,420       1,424,297       -6 %
Domain names
    663,559       23,076       2776 %
Goodwill
    3,204,941       2,718,538       18 %
Total intangible assets
    5,209,920       4,165,911       25 %
                         
Total assets
    7,942,870       7,639,862       4 %
                         
Total current liabilities
    1,383,804       1,287,023       8 %
Total long term liabilities
    21,567,269       22,862,269       -6 %
Total liabilities
  $ 22,951,073     $ 24,149,292       -5 %
 
We had a nominal decrease in cash from $1,388,574 at December 31, 2010 to $1,387,113 at September 30, 2011, a decrease of $1,461.

Our intangible assets at September 30, 2011 consist almost entirely of assets acquired in the previously discussed WeedMaps, Synergistic Resources, and Revyv acquisitions.  The assets consist primarily of a management contract and domains.  These assets are necessary for our growth.  The balance is goodwill which represents the premium paid for the acquisitions.
 
 
35

 

Our current liabilities increased from $1,287,023 at December 31, 2010 to $1,383,804 at September 30, 2011, an increase of $97,000, primarily as a result of an increase in accrued liabilities arising from non-cash accrual of a $324,000 tax provision during the three months ended September 30, 2011, for a total tax provision of $853,000 for the nine months ended September 30, 2011 which was partially offset by a decrease arising from the termination of the three-year Consulting Agreement entered into by the Company and Douglas Francis, our President.  See Note 4 Other Current Assets in the Footnotes to the Financial Statements for information regarding the Employment Agreement entered into by the Company and Mr. Francis contemporaneously with the Termination Agreement.

Our total long term liabilities decreased from $22,862,269 at December 31, 2010 to $21,567,269 at September 30, 2011, and is primarily as a result of a decrease in long term liabilities arising from payments on notes payables to related parties. See Note 4 Other Current Assets in the Footnotes to the Financial Statements for information regarding the Employment Agreement entered into by the Company and Mr. Francis contemporaneously with the Termination Agreement.

Cash Requirements

We had approximately $1.4 million in cash and cash equivalents as of September 30, 2011.  Our operating income for the three months ended September 30, 2011 was $2,136,518.  We anticipate that our revenues will continue to increase and that our revenues will continue to be enough to fund our existing operations.  However, there is no assurance that our existing cash flow will continue to be adequate to satisfy our operating expenses and capital requirements.

Sources and Uses of Cash

Operations

We had net cash from operating activities of $1,914,000 for the nine months ended September 30, 2011, as compared to $593,000 for the nine months ended September 30, 2010.  For the nine months ended September 30, 2011, the net cash provided by operating activities consisted primarily of net income of $1,284,000, an increase in accounts payable and accrued liabilities of $97,000, an increase in prepaid expenses and deposits of $569,000, plus non-cash amortization and depreciation expense of $111,000 and 51,000, respectively.  For the nine months ended September 30, 2010, the net cash provided by operating activities consisted primarily of net income (including discontinued operations) of $497,000 an increase in accounts payable and accrued liabilities of $51,000, a decrease in prepaid expenses and deposits of $45,000, plus non-cash depreciation expense of $112,000.

Investments

We had net cash used in investing activities of $620,000 for the nine months ended September 30, 2011, as compared to $121,000 for the nine months ended September 30, 2010.  For the nine months ended September 30, 2011, the net cash used in investing activities was primarily related to purchases of furniture and computers and other equipment of $472,000, plus purchases of intangible assets of $149,000.  For the nine months ended September 30, 2010, the net cash from investment activities was primarily a result of purchases of furniture and computers and other equipment of $113,000, plus purchases of intangible assets of $8,100.
  
 
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Financing

We had net cash used in financing activities of $1,295,000 for the nine months ended September 30, 2011, as compared to $18,000 for the nine months ended September 30, 2010.  For the nine months ended September 30, 2011, our net cash used in financing activities consisted solely of payments on note payable to related parties.  For the nine months ended September 30, 2010, our net cash used in financing activities was as a result of convertible notes of $18,000.

Debt Instruments, Guarantees, and Related Covenants

We have no disclosure required by this Item.

Critical Accounting Estimates

Goodwill

In accordance with Goodwill and Other Intangible Assets, goodwill is defined as the excess of the purchase price over the fair value assigned to individual assets acquired and liabilities assumed and is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis in the Company's fourth fiscal quarter or more frequently if indicators of impairment exist.  The performance of the test involves a two-step process.  The first step of the impairment test involves comparing the fair value of the Company's reporting units with each respective reporting unit's carrying amount, including goodwill. The fair value of reporting units is generally determined using the income approach.  If the carrying amount of a reporting unit exceeds the reporting unit's fair value, the second step of the goodwill impairment test is performed to determine the amount of any impairment loss.  The second step of the goodwill impairment test involves comparing the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill.  No amortization is recorded for goodwill with indefinite useful life.  No impairment of Goodwill was recognized during the nine months ended September 30, 2011 and 2010, respectively.

Intangible Assets

In accordance with Goodwill and Other Intangible Assets, intangible assets that are determined not to have an indefinite useful life are subject to amortization.  The Company amortizes intangible assets using the straight-line method over their estimated useful lives.

Impairment of Long-Lived and Intangible Assets

In accordance with Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.  The Company assesses the recoverability of the long-lived and intangible assets by comparing the carrying amount to the estimated future undiscounted cash flow associated with the related assets.  No impairment of long-lived assets was recognized during the nine months ended September 30, 2011 and 2010, respectively.

Year Ended December 31, 2010 compared to Year Ended December 31, 2009

During the year ended December 31, 2010, we completed two acquisitions.
 
 
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WeedMaps, LLC

On November 19, 2010, we entered into an Agreement and Plan of Reorganization and Merger (the “WeedMaps Purchase Agreement”) pursuant to which we acquired 100% of the membership interests of WeedMaps, LLC, a Nevada limited liability company (“WeedMaps”), pursuant to the terms of which WeedMaps, LLC was merged with and into WeedMaps Media, Inc., our wholly-owned subsidiary.  Prior to the Merger, General Cannabis was deemed to be a non-operating public shell corporation with nominal net assets and WeedMaps was a private operating company with significant operations.  For accounting purposes the transaction is considered to be a reverse merger treated as a recapitalization of General Cannabis where General Cannabis is the surviving legal entity and the accounting acquiree, and WeedMaps is considered to be the accounting acquirer and the legal acquiree.  The assets and liabilities of WeedMaps are recorded at their historical cost with the equity structure of General Cannabis.  No goodwill was recorded in the transaction.  General Cannabis was deemed a continuation of the business of WeedMaps and the historical financial statements of WeedMaps became the historical financial statements of General Cannabis.

See Note 3 Recapitalization in the financials statements filed herewith for a discussion regarding the elimination of the historical results of operation and the accumulated deficit of General Cannabis including its wholly owned subsidiary, LV Luxuries Incorporated, as a result of the Merger and the associated reverse merger accounting and recapitalization of General Cannabis.

The total purchase price was $54,962,269, which pursuant to the WeedMaps Purchase Agreement consisted of i) the issuance of 16,400,000 shares of common stock to two individuals, Justin Hartfield and Keith Hoerling (“Hartfield” and “Hoerling” together as “Sellers”), which shares were issued on January 20, 2011; ii) the issuance of Secured Promissory Notes with the aggregate principal amount of $3,600,000, in the form of four $900,000 principal amount 0.35% Secured Promissory Notes, two issued to each of the Sellers, half of which principal matures on June 30, 2012, and half of which principal matures on January 10, 2013; and iii) up to an aggregate of 16,000,000 additional shares of common stock pursuant to certain Earn-out Provisions in the WeedMaps Purchase Agreement.

WeedMaps, LLC is now operated as WeedMaps Media, Inc., our wholly owned subsidiary.

Synergistic Resources, LLC

On December 3, 2010, we entered into a Reorganization and Asset Acquisition Agreement pursuant to which we acquired substantially all the assets of Synergistic Resources, LLC, a California limited liability company.  The assets consisted primarily of the intellectual property and established marketing associated with the name Marijuana Medicine Evaluation Centers, including its website (www.marijuanamedicine.com), and the assignment of a Management Services Agreement pursuant to which we initially managed twelve (12) medicinal cannabis clinics (we now manage 10).  As consideration for the purchase, we issued an aggregate of Two Million (2,000,000) shares of our common stock, and paid Fifty Thousand Dollars ($50,000) cash, to Synergistic Resources.

We relied upon, and the acquisition of Synergistic Resources was accounted for in accordance with, the authoritative literature described in FASB ASC 805-10 Business Combinations.  Pursuant to FASB ASC 805-10 Business Combinations, only the acquisition method may be applied to account for a business combination and also requires for an acquirer to be identified for each business combination.  The acquisition will be accounted for as a purchase, with the assets acquired and liabilities assumed recorded at fair value, and the results of Synergistic Resources operations included in General Health Solutions’ financial statements from the date of acquisition, December 3, 2010.

 
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Synergistic Resources, LLC is now operated as General Health Solutions, Inc., our wholly owned subsidiary.

Results of Operations

Revenue and Operating Expenses

Our sales, total revenue, total operating expenses and operating income (loss) for the year ended December 31, 2010, compared to the year ended December 31, 2009, were as follows:

   
Year ended
December 31,
2010
   
Year ended
December 31,
2009
   
Percentage
Change
 
                   
Sales
  $ 3,576,484     $ 94,823       3672 %
Total revenue
    3,576,484       94,823       3672 %
Total operating expenses
    3,162,103       72,944       4235 %
                         
Operating income
  $ 414,381     $ 21,879       1794 %

Revenues
 
Sales – For the years ended December 31, 2010 and December 31, 2009, revenues were $3.6 million and $95,000, respectively.  We generate revenue through the operation of our website WeedMaps.com and several associated websites together composing a large scale, medical-cannabis industry focused internet media portal that targets dispensaries, advertisers and consumers for which we charge fees to our customers for listing their related company on our website, and we also generate revenues through the management of medical cannabis clinics throughout California pursuant to a contractual arrangement with a professional medical corporation for which we charge fees for providing the professional medical corporation administrative, marketing and human resources services.  

Listing Fee Revenue – For the years ending December 31, 2010 and December 31, 2009, WeedMaps Media, Inc., had revenues of $3,356,000 and $95,000, respectively.  The increase in revenues is attributable to a significant increase in the number of customers and an increase in the number of ‘listing packages’ offered to customers which introduced listings with higher price points for certain listings.

Management Fee Revenue – For the year ending December 31, 2010 (for the period from the date of the Synergistic Resources acquisition December 3, 2010 to December 31, 2010), General Health Solutions, Inc. had revenues of $221,000.  The revenues generated are attributable to the medicinal cannabis clinics for which we provide, through a contractual arrangement with a medical corporation, administrative, marketing and human resources services.
 
 
39

 

Operating Expenses

Operating Expenses – During the years ended December 31, 2010 and December 31, 2009, operating expenses were $3,162,000 and $73,000, respectively.  The increase in operating expenses is attributable to significant increases in salaries and employee benefits, advertising, professional fees and general and administrative expenses which was as a result of the growth experienced by us during the year ended December 31, 2010.  

Salaries And Employee Benefits – During the years ended December 31, 2010 and December 31, 2009, salaries and employee benefits were $1,139,000 and zero, respectively.  The significant increase in salaries and employee benefits during the year ended December 31, 2010 as compared to the year ended December 31, 2009, is primarily attributed to our substantially increasing our operations and hiring various employees which resulted in increases in associated salaries and employee benefits as well as increases in general and administrative costs.  

Professional Fees – During the years ended December 31, 2010 and December 31, 2009, professional fees were $1,012,000 and $30,000, respectively.  The significant increase in professional fees includes fees for legal and accounting work as well as our year end audit for the years ending December 31, 2010 and December 31, 2009, for Securities and Exchange filing related matters and for fees paid to consultants related to business development, investor relations, sales contract work and to support our efforts to expand our operations during the year ended December 31, 2010.

General And Administrative Expenses – During the years ended December 31, 2010 and December 31, 2009, general and administrative expenses were $530,000 and $17,000, respectively.  The increase in general and administrative expenses is primarily attributable to significant increases in advertising and marketing expense during the year ended December 31, 2010 as compared to the year ended December 31, 2009.  Advertising expense during the years ended December 31, 2010 and December 31, 2009, were $277,000 and $300, respectively.
 
Net Income

For the years ended December 31, 2010 and 2009, we had net income of approximately $350,000 and $22,000, respectively, and is primarily attributed to our efforts to expand our operations during the year ended December 31, 2010 and the associated growth that we experienced which resulted in significant increases in our operating expenses.
 
 
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Mendoza Berger & Company, LLP

On approximately June 1, 2010, Mendoza Berger & Company, LLP, our independent accountants previously engaged as the principal accountants to audit our financial statements, were dismissed as our independent accountants.  The decision to change independent accountants was approved by our Board of Directors and did not arise out of any dispute or disagreement with Mendoza Berger & Company, LLP.

Mendoza Berger & Company, LLP audited our financial statements, including our balance sheet as of December 31, 2008 and 2007 and our related statements of operations, changes in stockholders’ equity, and statements of cash flows for the two years then ended, which were filed with our Annual Report on Form 10K with the Commission on April 1, 2009.  The audit report of Mendoza Berger & Company, LLP on our financial statements for the period stated above (the “Mendoza Audit Period”) did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles, but it did indicate conditions which raised substantial doubt about our ability to continue as a going concern.  During the Mendoza Audit Period, and through their termination, there were no disagreements with Mendoza Berger & Company, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of the former accountants, would have caused it to make reference to the subject matter of the disagreements in connection with its report, and there were no reportable events as described in Item 304(a)(1)(v) of Regulation S-K.

We have provided a copy of this disclosure to Mendoza Berger & Company, LLP and requested that the former accountants furnish us with a letter addressed to the Securities and Exchange Commission stating whether they agree with the statements made by us, and, if not, stating the respects in which they do not agree.  A copy of the letter from Mendoza Berger & Company, LLP to the Securities and Exchange Commission stating that they agree with the statements made by us is attached hereto as Exhibit 16.1.

Dale Matheson Carr-Hilton Labonte, LLP

On June 1, 2010, we engaged Dale Matheson Carr-Hilton Labonte, LLP, Chartered Accountants, as our independent public accountant for all our audit work going forward, starting with the fiscal year ended December 31, 2009.

During the two most recent fiscal years, or any subsequent interim period, prior to engaging Dale Matheson Carr-Hilton Labonte, LLP neither we nor anyone acting on our behalf consulted with Dale Matheson Carr-Hilton Labonte, LLP regarding (i) the application of accounting principles to a specific completed or contemplated transaction, or (ii) the type of audit opinion that might be rendered on our financial statements where either written or oral advice was provided that was an important factor considered by us in reaching a decision as to the accounting, auditing, or financial reporting issue, or (iii) any matter that was the subject of a disagreement with our former accountant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of the former accountant, would have caused it to make reference to the subject matter of the disagreements in connection with its audit report.
 
 
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Dale Matheson Carr-Hilton Labonte, LLP audited our financial statements, including our balance sheet as of December 31, 2009 and our related statements of operations, changes in stockholders’ equity, and statements of cash flows for the year then ended.  The audit report of Dale Matheson Carr-Hilton Labonte, LLP on our financial statements for the period stated above (the “DMCL Audit Period”) did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles, but it did indicate conditions which raised substantial doubt about our ability to continue as a going concern.  During the DMCL Audit Period, and through their termination, there were no disagreements with Dale Matheson Carr-Hilton Labonte, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of the former accountants, would have caused it to make reference to the subject matter of the disagreements in connection with its report, and there were no reportable events as described in Item 304(a)(1)(v) of Regulation S-K.

We have provided a copy of this disclosure to Dale Matheson Carr-Hilton Labonte, LLP and requested that the former accountants furnish us with a letter addressed to the Securities and Exchange Commission stating whether they agree with the statements made by us, and, if not, stating the respects in which they do not agree.  A copy of the letter from Dale Matheson Carr-Hilton Labonte, LLP to the Securities and Exchange Commission stating that they agree with the statements made by us is attached hereto as Exhibit 16.2.

Tarvaran, Askelson & Company LLP

On approximately October 1, 2010, Dale Matheson Carr-Hilton Labonte, LLP, was dismissed as our independent accountants. The decision to change independent accountants was approved by our Board of Directors and did not arise out of any dispute or disagreement with Dale Matheson Carr-Hilton Labonte, LLP.

On October 1, 2010, we engaged Tarvaran, Askelson & Company LLP, Certified Public Accountants, as our independent certified public accountant for all our audit work going forward, starting with the fiscal years ended December 31, 2010 and 2009.

During the two most recent fiscal years, or any subsequent interim period prior to engaging Tarvaran, Askelson & Company LLP neither we nor anyone acting on our behalf consulted with Tarvaran, Askelson & Company LLP regarding (i) the application of accounting principles to a specific completed or contemplated transaction, or (ii) the type of audit opinion that might be rendered on our financial statements where either written or oral advice was provided that was an important factor considered by us in reaching a decision as to the accounting, auditing, or financial reporting issue, or (iii) any matter that was the subject of a disagreement with our former accountant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of the former accountant, would have caused it to make reference to the subject matter of the disagreements in connection with its audit report.
 
 
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DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
 
The following table sets forth the names, ages, and biographical information of each of our current directors and executive officers, and the positions with us held by each person, and the date such person became a director or executive officer.  Our executive officers are elected annually by the Board of Directors.  The directors serve one-year terms until their successors are elected.  The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors.  Family relationships among any of the directors and officers are described below.

Name
 
Age
 
Position
         
James Pakulis
 
48
 
Chairman of the Board of Directors and Chief Executive Officer
         
Douglas Francis
 
33
 
President, Chief Strategy Officer, Director
         
Munjit Johal
 
56
 
Chief Financial Officer, Secretary, Treasurer, and Director
         
Bonni Goldstein
 
47
 
Director
         
Justin Hartfield
 
27
 
Chief Web Officer
         
Keith Hoerling
 
30
 
Chief Technology Officer

James Pakulis, age 48, has been one of our directors since August 2010, our Chief Executive Officer since November 2010, and our Chairman of the Board since January 2011.  He served as our Chairman of the Board, President and COO from August 2010 to November 2010.  Mr. Pakulis was an advisor to Synergistic Resources, LLC from January 2010 until the time of our acquisition of its assets in December 2010.  Mr. Pakulis was made a director at the time of his acquisition of control of the company in August 2010.  At Synergistic Resources, Mr. Pakulis was instrumental in enhancing the operations of the company. He provided keen leadership in upgrading the accounting department as well as streamlining the operations, including but not limited, to better call retention, and higher patient conversion rate.  Mr. Pakulis organized and oversaw, with legal counsel, the upgrade of legal documentation being used by the company, and assisted in the review and implementation of contracts and agreements.  Mr. Pakulis was also responsible for the due diligence and analysis in order to determine the viability of expanding the company’s operations outside the state of California.

Since 1995, Mr. Pakulis has also been an owner and/or consultant in start-up companies in various industries including internet, finance, real estate and insurance.  From 2003 through 2009 Mr. Pakulis was President of Pacific West Funding Corporation.  Mr. Pakulis oversaw the operations at both locations of Pacific West Funding Corporation (California and Utah) including the financing, accounting, hiring and legal compliance issues. Mr. Pakulis also structured non-residential real estate transactions as well as sourced and allocated funds for various real estate projects.  Mr. Pakulis obtained his insurance license in 2009.
 
 
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From 1995 to 2003 Mr. Pakulis acted as a financial consultant to several privately held entities located in California, as well as performed mortgage brokerage services for several firms including BrooksAmerica, a mortgage and wholesale lender located in Santa Ana, California.  From 1990 to 1995, Mr. Pakulis oversaw all mergers and acquisitions in the western United States for CliniCorp, Inc., a publicly traded entity that had specialized in healthcare clinic management and operations.  Mr. Pakulis’ role entailed sourcing, negotiation and acquiring, on behalf of CliniCorp, the assets of healthcare facilities located in California, New Mexico, Colorado and Arizona.  Mr. Pakulis also acted as the conduit between senior management at CliniCorp and the acquiring entities.  In this role Mr. Pakulis assisted management with forming stock option plans, projecting clinic revenues and negotiating key person contracts.  From 1987 to 1990, Mr. Pakulis was involved in the healthcare industry overseeing day-to-day operations for several privately held multi-disciplinary clinics in the Los Angeles area.  Mr. Pakulis primary responsibilities at these facilities included managing, staffing and training office personnel, as well establish additional locations for future medical offices. Mr. Pakulis received his BA in English from The Ohio State University in 1987.

Douglas Francis, age 33, has been one of our directors and our Chief Strategy Officer since August 2010, our President since November 2010, and was our CEO from August 2010 to November 2010 and our Chairman of the Board from November 2010 to January 2011.  From 2008 until the time of our acquisition of its assets in December 2010, Mr. Francis was the CEO of Synergistic Resources, LLC, an entity specializing in the management of physician owned healthcare facilities throughout California.  Mr. Francis was instrumental in the creation and design of Synergistic Resources custom design marketing campaigns which was primarily based on the development of software and the implementation of technology. Specifically, the technology methodology included leveraging search engine optimization, social media outlets and corporate branding via the web.  Mr. Francis’s responsibilities also included the integration and monitoring of web based communication and telephone systems, as well as redundant systems, which prevented minimal communication interruptions in a high call volume environment.  Separately, Mr. Francis spearheaded the original expansion of the management of health care facilities at Synergistic Resources from one to ten facilities over the course of two years.

Mr. Francis’ expertise in the medicinal cannabis industry made him attractive as one of our directors.  In November 2009 Mr. Francis also became COO of WeedMaps, LLC, which owns the domain weedmaps.com, which is an online community where medical marijuana patients connect with other patients in their geographical area and discuss matters related to medicinal cannabis.  Mr. Francis, having significant sales experience, was instrumental in combining state-of-the-art internet technology with conventional sales methodologies.  As a result, Weedmaps.com has become the largest internet finder site in the country for medical dispensaries.

Mr. Francis was an independent mortgage broker for all of 2007.  From October 2005 through the end of 2006, Mr. Francis served as the CEO of Embark Lending Corporation, a mortgage firm.  Mr. Francis hired and trained mortgage brokers, oversaw operations and administrations, and assisted in organizing and monitoring various lines of credits originating from financing institutions.  From November 2003 to August 2005, Mr. Francis served as the CEO of Home Advantage Funding, under NovaStar Home Mortgage, also a mortgage firm.  During that time Mr. Francis provided a similar leadership role that he performed at Embark Lending Corporation.  Mr. Francis received his BA in Finance from Chapman University in 2001.
 
 
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Munjit Johal, age 56, has been a director and our Chief Financial Officer since October 20, 2006.  Additionally, Mr. Johal serves as the Controller of High Tower Capital, Inc., where he has served since January 2007.  Prior to that, Mr. Johal was the Chief Financial Officer of Secured Diversified Investment, Ltd from 2002 to January 2009 and Davi Skin, Inc. from March 2007 to May 2010.  Since 1990, Mr. Johal has served as a financial officer of various companies including Pacific Heritage Bank as Executive Vice President.  Mr. Johal has over 28 years of broad experience in banking, accounting, finance, and management in the private and public sector.  Mr. Johal worked primarily with troubled companies in turnaround situations.  Mr. Johal earned his MBA from the University of San Francisco in 1980.  He received his BS degree in History from the University of California, Los Angeles, in 1978.

Bonni Goldstein, age 47, has been one of our directors since August 2010.  Dr. Goldstein’s medical experience in the medicinal cannabis industry made her attractive as a director.  She developed an interest in the emerging specialty of cannabis medicine after a close friend found beneficial results with cannabis to combat the side effects of chemotherapy.  She began the practice of medical cannabis in 2008 and continues to see patients to this day.  Dr. Goldstein has helped many patients understand the science of medical cannabis and find an improved quality of life with its use.  As Medical Director of CannaCenters, she has educated physicians from all specialties to understand cannabis medicine.  She has given lectures on medical cannabis to cancer support groups and continues to promote the science behind the use of cannabis as medicine to those seeking accurate scientific information.

She has been the Medical Director at Synergistic Resources, LLC since 2008.  Prior to joining Synergistic Resources, from 2006 to 2008, Ms. Goldstein was the owner and founder of Brainiacs Science Discover Center in Redondo Beach, California.  From 2002 to 2006, Ms. Goldstein was a Pediatric Emergency Medicine Physician at the Little Company of Mary Hospital in Torrance, California.  Ms. Goldstein attended Rutgers College where she majored in Biology and graduated in 1986, and then attended University of Medicine and Dentistry of New Jersey (Robert Wood Johnson Medical School) where she received her M.D. in 1990.  After an internship and residency at Children’s Hospital Los Angeles, she was chosen to be the Chief Resident of the program.  She worked in the Community Health Center evaluating low-income pediatric patients while also acting as Clinical Instructor for USC School of Medicine.  She became an Attending Physician in the LAC-USC Pediatric Emergency Department, handling complex emergencies and instructing medical students and residents in the art of assessing pediatric illness. Dr. Goldstein is also a published medical author, creating questions for ExamMaster, a Board Preparation Program.  Ms. Goldstein is a Member of the International Association of Cannabis as Medicine and a Member of the International Cannabinoid Research Society.

Justin Hartfield, age 27, has been our Chief Web Officer since November 2010, when we acquired his company, WeedMaps, LLC.  Mr. Hartfield was the founder and Chief Executive Officer of WeedMaps, LLC beginning in July 2008.  Mr. Hartfield’s expertise in the medicinal cannabis industry made him attractive as one of our directors.  Mr. Hartfield also serves as an Executive Vice President for The Prometheus Institute, a think tank in Orange County focused on technology and Internet issues, where he has been since December 2003.  From October 2004 through October 2007, Mr. Hartfield was a Content Manager at Innovative Media Solutions, where he was responsible for licensing, receiving, maintaining, billing, and supplying metadata for all content used in the PEA (Portable Entertainment Appliance) in-flight entertainment system, including music, games, movies, TV shows, music videos, and newspapers.  Mr. Hartfield has a Masters in Business Administration and a Bachelor of Science in Information and Computer Science from the University of California, Irvine.
 
 
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Keith Hoerling, age 30, has served as our Chief Technology Officer since November 2010.  From October 1, 2009 through November 1, 2009, Mr. Hoerling was the Chief Technology Officer and co-founder of WeedMaps, LLC.  Mr. Hoerling’s expertise in the medicinal cannabis  industry made him attractive as one of our directors.  From March 1, 2008 through October 1, 2009, Mr. Hoerling worked at Internet Brands in El Segundo, CA.  Mr. Hoerling was a Senior Software Engineer who worked across all verticals, responsible for managing a team of developers that improved public-facing web properties and for building internal workflow efficiency tools to gain competitive advantage against competitors in similar spaces.  From January 1, 2008 through March 1, 2008, Mr. Hoerling worked at Opposing Views, Los Angeles CA as part of a small team of three (3) Ruby on Rails engineers responsible for launching a modern website startup that helps people make educated life decisions.  From 2006 through 2007, he worked at Dynamic Concepts, Aliso Viejo CA, where he worked with a team of engineers to architect modern Apple XNU/Unix solutions for transitioning clients from legacy SCO/Unix.  Keith was also responsible for maintaining technical customer relationships and writing both high-level web-based software interfaces for DynamicXport, a secure software transport layer, and low-level business logic in C.  Mr. Hoerling received his BS in Information Technology from Chapman University in 2003.

Family Relationships

There are no family relationships among any of our officers, directors, or greater-than-10% shareholders.

EXECUTIVE COMPENSATION

Executive Compensation

           We currently have written employment agreements with James Pakulis and Douglas Francis.  All of our executives are at-will employees or consultants whose compensation is set forth in the Summary Compensation Table below.

We previously entered into a three-year Consulting Agreement for mergers and acquisition services with Douglas Francis, our President.  The Consulting Agreement provided him with a cash consulting fee of One Million Eight Hundred Thousand Dollars ($1,800,000) payable to Francis, one-half on June 30, 2012 (per an Amendment to the agreement) and the other half on January 10, 2013.  The merger and acquisition services provided by Mr. Francis pursuant to the consulting agreement were for formulating corporate strategy, financing and the targeting of candidate companies that we could acquire or merge with in order to grow and significantly expand our business operations during the term of the agreement. The purpose of entering into this agreement, at the time, was to properly incentivize and retain Mr. Francis on a long-term basis.

On August 1, 2011, we entered into a Termination of Consulting Agreement with Mr. Francis, which terminated, effective as of April 1, 2011, his Consulting Agreement with us dated as of November 19, 2010, with no further amounts due under the Consulting Agreement.

On August 1, 2011, we entered into an at-will Employment Agreement with Mr. Francis.  Mr. Francis’ employment is effective as of April 1, 2011.  Under the terms of the agreement, his compensation is thirty thousand dollars ($30,000) per month.  In the event of termination of the agreement for a reason other than for cause, Mr. Francis will be entitled to severance equal to eighteen (18) months of compensation.
 
 
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On August 1, 2011, we entered into an at-will Employment Agreement with James Pakulis, our Chief Executive Officer and Chairman of our Board of Directors.  Mr. Pakulis’ employment is effective as of August 1, 2011.  Under the terms of the agreement, his compensation is thirty thousand dollars ($30,000) per month.  In the event of termination of the agreement for a reason other than for cause, Mr. Pakulis will be entitled to severance equal to eighteen (18) months of compensation.

Summary Compensation Table

The following table sets forth information with respect to compensation earned by our Chief Executive Officer, President, and Chief Financial Officer for the fiscal year ended December 31, 2010 and 2009.


Name and 
Principal Position
 
Year
 
Salary
($)
   
Bonus
($)
   
Stock
Awards
($)
   
Option
Awards
($)
   
Non-Equity
Incentive Plan
Compensation
($)
   
Nonqualified
Deferred
Compensation
($)
   
All Other
Compensation
($)
   
Total
($)
 
                                                     
James Pakulis (1)
 
2010
    30,000       -0-       -0-       -0-       -0-       -0-       -0-       30,000  
CEO
 
2009
    -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-  
                                                                     
Douglas Francis (2)
 
2010
    30,000       -0-       -0-       -0-       -0-       -0-       1,850,000       1,880,000  
President
 
2009
    -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-  
                                                                     
Munjit Johal (3)
 
2010
    4,000       -0-       -0-       -0-       -0-       -0-       -0-       4,000  
CFO
 
2009
    -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-  

(1)
Mr. Pakulis' annual salary, beginning in December 2010, is $360,000.

(2)
Mr. Francis' annual consulting compensation, beginning in December 2010, was $360,000.  Effective August 1, 2011, he entered into an employment agreement and his consulting agreement was terminated.

(3)
Mr. Johal's receives $4,000 per month, beginning in December 2010, for his services as Chief Financial Officer.  At December 31, 2010 the $4,000 represents accrued amounts due to Mr. Johal.

Director Compensation
 
For the year ended December 31, 2010, none of the members of our Board of Directors received compensation for his or her service as a director.  We do not currently have an established policy to provide compensation to members of our Board of Directors for their services in that capacity.  We intend to develop such a policy in the near future.

Outstanding Equity Awards at Fiscal Year-End

We do not currently have a stock option or grant plan.
 
 
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of the date of this Prospectus, certain information with respect to our equity securities owned of record or beneficially by (i) each Officer and Director; (ii) each person who owns beneficially more than 10% of each class of our outstanding equity securities; and (iii) all Directors and Executive Officers as a group.

Title of Class
 
Name and Address
of Beneficial Owner (1)
 
Amount and Nature of
Beneficial Ownership
   
Percent of
Class Before
Offering (2)
   
Percent of
Class After
Offering (3)
 
                       
Common Stock
 
James Pakulis (4)(5)
    28,327,290       34.1 %     32.1 %
                             
Common Stock
 
Douglas Francis (4)(5)
    28,827,289       34.7 %     32.7 %
                             
Common Stock
 
Munjit Johal (4)
    -0-       -0-       -0-  
                             
Common Stock
 
Bonni Goldstein (4)
    -0-       -0-       -0-  
                             
Common Stock
 
Justin Hartfield
    8,200,000 (6)     9.9 %(6)     9.0 %(6)
                             
Common Stock
 
Keith Hoerling
    8,200,000 (6)     9.9 %(6)     9.0 %(6)
                             
Common Stock
 
All Directors and Officers
As a Group (4 persons)
    57,154,579       69.5 %     65.6 %

 
(1)
Unless indicated otherwise, the address of the shareholder is c/o General Cannabis, Inc., 1300 Dove Street, Suite 100, Newport Beach, California 92660.
 
(2)
Unless otherwise indicated, based on 83,140,256 shares of common stock issued and outstanding.  Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for the purposes of computing the percentage of any other person.
 
(3)
Based on 88,140,256 shares of common stock outstanding if all 5,000,000 shares offered by us are sold.
 
(4)
Indicates one of our officers or directors.
 
(5)
The shares held by Mr. Pakulis and Mr. Francis are held of record by R.H. Daignault Law Corporation, In Trust, pursuant to an escrow agreement between them and the parties who assigned certain debts to Pakulis prior to its conversion into the shares.  Mr. Pakulis and Mr. Francis maintain investment control, including the power of disposition and voting, over the shares.
 
(6)
Each of Mr. Hartfield and Mr. Hoerling own 8,200,000 shares.  The shares held by each of Mr. Hartfield and Mr. Hoerling does not include an additional 8,000,000 shares each that may be earned pursuant to earn-out provisions set forth in the agreement whereby they sold WeedMaps, LLC to us.  If the additional 8,000,000 shares was included in the ownership of each of Mr. Hartfield and Mr. Hoerling, their percentage ownership before the offering would be 16.3% each, and their percentage ownership after the offering would be 15.3% each.

The issuer is not aware of any person who owns of record, or is known to own beneficially, ten percent or more of the outstanding securities of any class of the issuer, other than as set forth above.  The issuer is not aware of any person who controls the issuer as specified in Section 2(a)(1) of the 1940 Act.  There are no classes of stock other than common stock issued or outstanding.  We do not have an investment advisor.

There are no current arrangements which will result in a change in control.
 
 
48

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On October 17, 2011, we entered into a Lock-Up Agreement with James Pakulis and Douglas Francis that prevents them from selling any of their securities until the earlier to occur of (i) three months after effectiveness of the registration statement of which this prospectus is a part, (b) we are no longer selling our securities in a primary sale pursuant to the registration statement, or (c) the closing sale price for our common stock is over $3.00 for twenty (20) consecutive trading days.

We currently have written employment agreements with James Pakulis and Douglas Francis.  All of our executives are at-will employees or consultants whose compensation is set forth in the Summary Compensation Table below.

We previously entered into a three-year Consulting Agreement for mergers and acquisition services with Douglas Francis, our President.  The Consulting Agreement provided him with a cash consulting fee of One Million Eight Hundred Thousand Dollars ($1,800,000) payable to Francis, one-half on June 30, 2012 (per an Amendment to the agreement) and the other half on January 10, 2013.  The merger and acquisition services provided by Mr. Francis pursuant to the consulting agreement were for formulating corporate strategy, financing and the targeting of candidate companies that we could acquire or merge with in order to grow and significantly expand our business operations during the term of the agreement. The purpose of entering into this agreement, at the time, was to properly incentivize and retain Mr. Francis on a long-term basis.

On August 1, 2011, we entered into a Termination of Consulting Agreement with Mr. Francis, which terminated, effective as of April 1, 2011, his Consulting Agreement with us dated as of November 19, 2010, with no further amounts due under the Consulting Agreement.

On August 1, 2011, we entered into an at-will Employment Agreement with Mr. Francis.  Mr. Francis’ employment is effective as of April 1, 2011.  Under the terms of the agreement, his compensation is thirty thousand dollars ($30,000) per month.  In the event of termination of the agreement for a reason other than for cause, Mr. Francis will be entitled to severance equal to eighteen (18) months of compensation.

On August 1, 2011, we entered into an at-will Employment Agreement with James Pakulis, our Chief Executive Officer and Chairman of our Board of Directors.  Mr. Pakulis’ employment is effective as of August 1, 2011.  Under the terms of the agreement, his compensation is thirty thousand dollars ($30,000) per month.  In the event of termination of the agreement for a reason other than for cause, Mr. Pakulis will be entitled to severance equal to eighteen (18) months of compensation.

On November 23, 2010, we sold an aggregate of 825,000 shares of our common stock, restricted in accordance with Rule 144 and containing an appropriate restrictive legend, to four shareholders at a purchase price of $2.00 per share, for aggregate cash consideration of $1,650,000.  One of the four shareholders was James Pakulis, our Chief Executive Officer and a member of our Board of Directors, who purchased 150,000 shares for aggregate cash consideration of $300,000.
 
 
49

 

            On November 19, 2010, we entered into an Agreement and Plan of Reorganization and Merger pursuant to which we acquired 100% of the membership interests of WeedMaps, LLC, Nevada limited liability company.  As consideration for the purchase, we issued an aggregate of Sixteen Million Four Hundred Thousand (16,400,000) shares of our common stock to two individuals, Justin Hartfield and Keith Hoerling.  As further consideration for the purchase, we issued four (4) Secured Promissory Notes, two (2) to each of Hartfield and Hoerling.  The total principal amount of the notes is Three Million Six Hundred Thousand Dollars ($3,600,000), one half of which is due on June 30, 2012 (per an Amendment to the Notes), and the other half of which is due on January 10, 2013.  The notes pay interest at the rate of 0.35% per annum.  Pursuant to a three-year Consulting Agreement for mergers and acquisition services with Douglas Francis, one of our officers and directors, a cash consulting fee of One Million Eight Hundred Thousand Dollars ($1,800,000) is payable to Francis, one-half on June 30, 2012 (per an Amendment to the agreement) and the other half on January 10, 2013.  Hartfield and Hoerling can collectively earn up to an aggregate of Sixteen Million (16,000,000) additional shares of our common stock pursuant to certain earn-out provisions in the Purchase Agreement.  All of the shares of common stock issued or to be issued to Hartfield and Hoerling are subject to the terms of a Lock-Up Agreement whereby none of the shares may be sold prior to June 30, 2011, up to twenty five percent (25%) of the shares may be sold beginning on June 30, 2011, and the remaining shares may be sold beginning on November 30, 2011.

On August 18, 2010, a total of $1,609,704 in our convertible debt was assigned by various parties to James Pakulis.  On that same date, Mr. Pakulis converted the debt into an aggregate of 53,656,814 shares of our common stock, representing (as of October 29, 2010) 84.5% of our issued and outstanding common stock, which were issued on August 24, 2010.  Mr. Pakulis subsequently sold one-half (1/2) of the shares to Douglas Francis, another of our officers and directors.  Also on August 18, 2010, James Pakulis purchased 5,000,000 shares of our common stock from a former affiliate shareholder, representing (as of October 29, 2010) 7.8% of our issued and outstanding common stock.  The shares held by Mr. Pakulis and Mr. Francis are held of record by R.H. Daignault Law Corporation, In Trust, pursuant to an escrow agreement between them and the parties who assigned the debts to Pakulis prior to its conversion into the shares.

DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES

Article V of our Articles of Incorporation provides that, the personal liability of the directors of the corporation is hereby eliminated to the fullest extent permitted by paragraph 1 of Section 78.037 of the General Corporation Law of the State of Nevada, as the same may be amended and supplemented.

Article VI of our Articles of Incorporation provides that, the corporation shall, to the fullest extent permitted by Section 78.751 of the General Corporation Law of the State of Nevada, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all expenses, liabilities, or other matters referred to in or covered by said section.

Our bylaws do not further address indemnification, and there are no resolutions of our shareholders or directors which address indemnification.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Act”) may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
 
 
50

 
 
AVAILABLE INFORMATION

We are not subject to the reporting requirements of the Securities Exchange Act of 1934.  We have filed with the Securities and Exchange Commission a registration statement on Form S-1, together with all amendments and exhibits thereto, under the Securities Act of 1933 with respect to the common stock offered hereby.  This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto.  Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference.

Copies of all or any part of the registration statement may be inspected without charge or obtained from the Public Reference Section of the Commission at 100 F Street, NE, Washington, DC 20549.  The registration statement is also available through the Commission’s web site at the following address:  http://www.sec.gov.

EXPERTS

The audited financial statements of General Cannabis, Inc. as of December 31, 2010 and 2009 and for the years then ended appearing in this prospectus which is part of a registration statement have been so included in reliance on the report of Tarvaran, Askelson & Company, LLC, given on the authority of such firm as experts in accounting and auditing.

INDEX TO FINANCIAL STATEMENTS

Consolidated Balance Sheet as of September 30, 2011 (unaudited) and December 31, 2010 (audited)
 
F-1
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010
 
F-2
Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2011 and 2010
 
F-3
Notes to Financial Statements
 
F-4 to F-15
     
Report of Independent Registered Public Accounting Firm
 
F-16
Restated Consolidated Balance Sheet as of December 31, 2010 and 2009
 
F-17
Restated Consolidated Statements of Operations for the Years Ended December 31, 2010 and 2009
 
F-18
Restated Consolidated Statements of Cash Flows for the Years Ended December 31, 2010 and 2009
 
F-19
Restated Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2010 and 2009
 
F-20
Notes to Financial Statements
 
F-21 to F-38

Exhibit 99.1 to the registration statement of which this Prospectus is a part contains unaudited pro-forma financial statements and financial information of the company and its subsidiaries.
 
 
51

 
 
GENERAL CANNABIS, INC.
Consolidated Balance Sheets
September 30, 2011 and December 31, 2010
 
GENERAL CANNABIS, INC.
 
Consolidated Balance Sheets

  
   
September 30,
   
December 31,
 
   
2011
   
2010
 
ASSETS
 
(Unaudited)
   
(Audited)
 
CURRENT ASSETS
           
Cash and cash equivalents
  $ 1,387,113     $ 1,388,574  
Accounts receivable
    197,140        
Other current assets
    24,961       1,104,337  
TOTAL CURRENT ASSETS
    1,609,214       2,492,911  
                 
Property and equipment, net
    468,414       47,168  
Intangible assets:
               
Management Contract, net
    1,341,420       1,424,297  
Domain Names
    123,734       23,076  
Software, net
    539,825        
Goodwill
    3,204,941       2,718,538  
Other Assets
    655,322       933,872  
                 
TOTAL ASSETS
  $ 7,942,870     $ 7,639,862  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
               
                 
CURRENT LIABILITIES
               
                 
Accounts payable
  $ 122,674     $ 124,353  
Accrued liabilities
    1,136,130       1,037,670  
Note payable
    125,000       125,000  
                 
TOTAL CURRENT LIABILITIES
  $ 1,383,804     $ 1,287,023  
                 
LONG TERM LIABILITIES
               
                 
Other accrued liabilities
          900,000  
Note payable - related party
    3,205,000       3,600,000  
Earn-out provisions, WeedMaps
    18,362,269       18,362,269  
                 
TOTAL LONG TERM LIABILITIES
    21,567,269       22,862,269  
                 
TOTAL LIABILITIES
  $ 22,951,073     $ 24,149,292  
                 
STOCKHOLDERS' EQUITY (DEFICIT)
               
                 
Preferred stock, $0.001 par value: 20,000,000 shares authorized;
               
zero shares issued and outstanding at September 30, 2011;
               
zero shares issued and outstanding at December 31, 2010;
           
Common stock, $0.001 par value: 200,000,000 shares authorized;
               
83,140,256 shares issued and outstanding at September 30, 2011;
               
82,640,256 shares issued and outstanding at December 31, 2010;
    83,140       82,640  
Paid-in capital
    (16,752,294 )     (16,964,444 )
Retained Earnings
    1,660,951       372,374  
                 
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)
    (15,008,203 )     (16,509,430 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
  $ 7,942,870     $ 7,639,862  


See accompanying notes to consolidated financial statements.
 
 
F-1

 
 
GENERAL CANNABIS, INC.
Consolidated Statements of Income
(Unaudited)
 
GENERAL CANNABIS, INC.
 
Consolidated Statements of Operations (Unaudited)


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
REVENUE
                       
Sales
  $ 4,126,195     $ 944,121     $ 10,382,120     $ 2,011,187  
                                 
Total revenue
    4,126,195       944,121       10,382,120       2,011,187  
                                 
OPERATING EXPENSES
                               
Cost of sales
    40,239       37,759       176,020       74,556  
Selling, general and administrative expenses
    3,327,756       492,057       8,069,583       1,439,570  
                                 
Total operating expenses
    3,367,995       529,816       8,245,603       1,514,126  
                                 
Operating Income
    758,200       414,305       2,136,517       497,061  
                                 
Other Income
                               
Interest income
    35       4       214       64  
                                 
Total other income
    35       4       214       64  
                                 
                                 
INCOME BEFORE INCOME TAXES
    758,235       414,309       2,136,731       497,125  
                                 
Provision for Income Taxes
    324,000             853,000        
                                 
NET INCOME
  $ 434,235     $ 414,309     $ 1,283,731     $ 497,125  
                                 
BASIC AND DILUTED NET INCOME PER COMMON SHARE
  $ 0.01     $ 0.01     $ 0.02     $ 0.03  
                                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
    83,140,256       31,312,813       83,116,446       17,005,611  


See accompanying notes to consolidated financial statements.
 
 
F-2

 
 
GENERAL CANNABIS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
 
GENERAL CANNABIS, INC.
 
Consolidated Statements of Cash Flows (Unaudited)


   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net income from continuing operations
  $ 1,283,731     $ 497,125  
Adjustments to reconcile net income to net cash used in operating activities:
               
Depreciation
    50,703       111,820  
Amortization
    110,755        
Changes in operating assets and liabilities:
               
Accounts receivable
    (197,140 )     (22,076 )
Prepaid expenses and deposits
    539,210       (44,668 )
Accounts payable and accrued liabilities
    96,781       50,760  
                 
Net cash used in operating activities
    1,884,040       592,961  
                 
Cash flows from investing activities:
               
Purchases of property and equipment
    (441,983 )     (112,559 )
Purchases of intangible assets
    (148,518 )     (8,170 )
                 
Net cash used in investing activities
    (590,501 )     (120,729 )
                 
Cash flows from financing activities:
               
Convertible note related party
          (18,250 )
Payments on note payable - related party
    (1,295,000 )      
                 
Net cash provided by financing activities
    (1,295,000 )     (18,250 )
                 
Net increase (decrease) in cash and cash equivalents
    (1,461 )     453,982  
                 
Cash and cash equivalents at beginning of period
    1,388,574       16,513  
                 
Cash and cash equivalents at end of period
  $ 1,387,113     $ 470,495  
                 
Non-cash investing and financing activity:
               
                 
Shares issued pursuant to Revyv acquisition
    500,000     $  


See accompanying notes to consolidated financial statements.
 
 
F-3

 

GENERAL CANNABIS, INC.
Notes to Consolidated Financial Statements
September 30, 2011
Unaudited

NOTE 1 GENERAL

Nature of Business:

General Cannabis, Inc., together with its wholly owned subsidiaries (hereinafter collectively referred to as the “Company”) is engaged in providing a variety of services to the medicinal cannabis industry. The Company provides services in four different sectors: media, technology, medical clinic management, and marketing.  The Company is not engaged in the growing, harvesting, cultivation, possession, or distribution of cannabis. Instead, the Company assists the physicians, dispensaries, and end-users within the medicinal cannabis industry in finding each other and in managing their businesses.  General Cannabis, Inc. was formed on July 14, 2003 in the State of Nevada as Tora Technologies, Inc. On November 21, 2006, it changed its name to Makeup.com Limited, and on January 29, 2010, changed its name again to LC Luxuries Limited. Finally, on November 5, 2010, the company changed its name to General Cannabis, Inc.

The Medicinal Cannabis Industry

Sixteen states, plus the District of Columbia, have adopted laws that exempt patients from state criminal penalties who use medicinal cannabis under a physician’s supervision.  These are collectively generally referred to as the states that have de-criminalized medicinal cannabis, although there is a subtle difference between de-criminalization and legalization, and each state’s laws are different.  The states are as follows (in alphabetical order):

 
Alaska,
 
Arizona,
 
California,
 
Colorado,
 
Delaware
 
District of Columbia,
 
Hawaii,
 
Maine,
 
Michigan,
 
Montana,
 
Nevada,
 
New Jersey,
 
New Mexico,
 
Oregon,
 
Rhode Island,
 
Vermont, and
 
Washington.

Medical cannabis decriminalization is generally referred to as the removal of all criminal penalties for the private possession and use of cannabis by adults, including cultivation for personal use and casual, nonprofit transfers of small amounts.  Legalization is generally referred to as the development of a legally controlled market for cannabis, where consumers purchase from a safe, legal, and regulated source.

The United States federal government regulates drugs through the Controlled Substances Act (21 U.S.C. § 811), which places controlled substances, including cannabis, in a schedule.  Cannabis is classified as a Schedule I drug, which is viewed as highly addictive and having no medical value.  Under the First Amendment, doctors may recommend cannabis for medical use; however, under federal law, they may not prescribe cannabis for medical use.  In 2010, the United States Veterans Affairs Department clarified that veterans using medicinal cannabis will not be denied services or other medications that are denied to those using illegal drugs.
 
Principal Services

The Company’s principal services are offered through the following wholly owned subsidiaries.

 
F-4

 

GENERAL CANNABIS, INC.
Notes to Consolidated Financial Statements
September 30, 2011
Unaudited

WeedMaps Media, Inc.

WeedMaps Media, Inc. is our wholly-owned subsidiary, and its primary operation is the internet website, www.weedmaps.com.  Weedmaps.com is an online finder site service that allows patients to find local medical cannabis dispensaries, which are also referred to as collectives.  Dispensaries are locations where patients who have received letters of recommendation from a health care provider can purchase medicinal cannabis, as well as a variety of other non-cannabis related items including, but not limited to, apparel accessories, posters, bumper stickers, concert tickets, books and musical CD’s.

General Health Solutions, Inc.

General Health Solutions, Inc. (CannaCenters.com) is our wholly-owned subsidiary, and through a contractual arrangement with a professional medical corporation, manages medical cannabis clinics.  The medical clinics managed by General Health Solutions are all located throughout California.  Individuals that believe they may benefit from medical cannabis schedule a doctor’s appointment at one of the clinics throughout the state to be seen by a California licensed physician.  After the medical evaluation, if the physician believes the patient suffers from any of the symptoms or ailments as defined by law, the physician provides the patient a Letter Of Recommendation (“LOR”).  The “LOR” allows the patient to visit an independent dispensary, and after their “LOR” is verified, the patient is permitted to enter the dispensary and purchase any number of cannabis and non-cannabis related products.

General Marketing Solutions, Inc.

General Marketing Solutions, Inc. is our wholly-owned subsidiary, and its primary operation is the internet website, www.cannabiscenters.com.   Though primarily in the development stage, the website aids prospective patients in finding physicians across the country that support and recommend medicinal cannabis.  There is a patient verification system which verifies the authenticity of the patient’s Letter Of Recommendation.  This is an internal control system designed to validate the status of a patient to law enforcement, dispensaries and other interested parties, as well as a social media platform for users.

General Merchant Solutions, Inc.

Prior to August 1, 2011, General Merchant Solutions supplied dispensaries with credit card processing services, however, due to market conditions (specifically lack of reliable financing) we felt it to be in our best interests to discontinue providing merchant services to dispensaries.  The remaining credit card processing business proved to be only nominally profitable, and on October 31, 2011, General Merchant Solutions discontinued all retail credit card processing operations.  The entity is held as an entity in good standing with no operations.

General Management Solutions, Inc.

General Management Solutions, Inc., is our wholly-owned subsidiary that oversees and provides all of the human resource issues for employees including hiring, terminating, and employee benefits.

Other Subsidiaries

We have two additional wholly-owned subsidiaries whose operations are relatively inactive at this time, namely General Processing Corporation, CannaCenters Corporation (dba CannaCenters), and a third subsidiary, LV Luxuries Incorporated (which operated as makeup.com), whose operations have been discontinued.  As of right now we have no imminent or specific plans for either of the entities and they are held as corporations in good standing with no operations.

 
F-5

 

GENERAL CANNABIS, INC.
Notes to Consolidated Financial Statements
September 30, 2011
Unaudited

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
 
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information.  All intercompany transactions and balances have been eliminated in consolidation.  The interim financial information is unaudited, but reflects all normal recurring adjustments that are, in the opinion of management, necessary to fairly present the information set forth herein. The interim financial statements should be read in conjunction with the audited financial statements and related notes submitted on Form S-1 for the year ended December 31, 2010 filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2011. Interim results are not necessarily indicative of the results for a full year.

Reclassifications

Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the consolidated results of operations or financial position for any years presented.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
    
Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates are based on knowledge of current events and anticipated future events and accordingly, actual results may differ from those estimates.

Risks related to cash

The Company maintains cash in bank and deposit accounts, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.

Cash and Cash equivalents

The Company considers only highly liquid investments such as money market funds and commercial paper with maturities of 90 days or less at the date of their acquisition as cash and cash equivalents.

Fair Value of Financial Instruments

The accounting standards regarding disclosures about fair value of financial instruments defines financial instruments and required fair value disclosure of those instruments. This accounting standard defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. Receivables, investments, payables, short and long term debt and warrant liabilities qualified as financial instruments. Management believes the carrying amounts of receivables, payables and debt are a reasonable estimate of fair value because of the short period of time between the origination of such instruments, their expected realization, and if applicable, their stated interest rate is equivalent to interest rates currently available. The three levels are defined as follows:

 
Level 1
inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 
Level 2
inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
 
 
F-6

 

GENERAL CANNABIS, INC.
Notes to Consolidated Financial Statements
September 30, 2011
Unaudited
 
 
Level 3
inputs to the valuation methodology are unobservable and significant to the fair value.

The Company analyzes all financial instruments with features of both liabilities and equity under the accounting standards regarding accounting for certain financial instruments with characteristics of both liabilities and equity, accounting for derivative instruments and hedging activities, accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, and the accounting standard regarding determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. The accounting standard specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. This standard provides a two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for this accounting standard scope exception. All warrants issued by the Company are denominated in U.S. dollars.

Accounts Receivable