10-Q 1 a12944.htm FORM 10-Q 10-Q



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549


FORM 10-Q


(Mark One)

þ

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for quarterly period ended March 31, 2016.

 

 

o

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


for the transition period from __________ to __________.


Commission file number:   000-54457


GENERAL CANNABIS CORPORATION

(Exact name of registrant as specified in its charter)


Colorado

 

90-1072649

(State of incorporation)

 

(IRS Employer Identification No.)

 

6565 East Evans Avenue

Denver, CO 80224

(Address of principal executive offices) (Zip Code)


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


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


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


Large accelerated filer  o

 

Accelerated filer     o

Non-accelerated filer    o

 

Smaller reporting company     þ


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


As of May 9, 2016, there were 15,495,421 issued and outstanding shares of the Companys common stock.







GENERAL CANNABIS CORPORATION

FORM 10-Q


TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

3

Item 2.

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

17

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

22

Item 4.

Controls and Procedures

23

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

25

Item 1A.

Risk Factors

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

Item 3.

Defaults Upon Senior Securities

25

Item 4.

Mine Safety Disclosures

25

Item 5.

Other Information

25

Item 6.

Exhibits

25

 

 

 

 

Signatures

26




2




PART I.  FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS


GENERAL CANNABIS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS


 

 

March 31, 2016

(Unaudited)

 

December 31, 2015

ASSETS

 

 

 

 

Current Assets

 

 

 

 

Cash and cash equivalents

$

14,626

$

58,711

Accounts receivable

 

149,377

 

124,553

Prepaid expenses and other current assets

 

16,593

 

46,734

Inventory, net

 

9,356

 

15,518

Total current assets

 

189,952

 

245,516

 

 

 

 

 

Property and equipment, net

 

1,715,725

 

1,725,268

Intangible assets, net

 

1,439,820

 

1,524,927

Goodwill

 

187,000

 

187,000

Total Assets

$

3,532,497

$

3,682,711

 

 

 

 

 

LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

Accounts payable and accrued expenses

$

371,499

$

293,532

Interest payable

 

104,115

 

84,720

Line of credit – related party

 

1,007,500

 

800,000

Notes payable (net of discount), current portion

 

1,122,460

 

986,475

Deferred rental revenue

 

32,016

 

33,146

Accrued stock payable

 

1,597,623

 

1,532,420

Total current liabilities

 

4,235,213

 

3,730,293

 

 

 

 

 

Notes payable (net of debt discount), less current portion

 

149,579

 

151,397

Tenant deposits

 

8,854

 

9,204

Total Liabilities

 

4,393,646

 

3,890,894

 

 

 

 

 

Commitments and Contingencies

 

--

 

--

 

 

 

 

 

Stockholders’ Equity (Deficit)

 

 

 

 

Preferred stock, no par value; 5,000,000 share authorized; no shares issued and outstanding at March 31, 2016 and December 31, 2015

 

--

 

--

Common Stock, $0.001 par value; 100,000,000 shares authorized; 14,965,421 shares and 14,915,421 shares issued and outstanding on March 31, 2016 and December 31, 2015, respectively

 

14,965

 

14,915

Additional paid-in capital

 

16,739,496

 

16,204,280

Accumulated deficit

 

(17,615,610)

 

(16,427,378)

Total Stockholders’ Deficit

 

(861,149)

 

(208,183)

 

 

 

 

 

Total Liabilities & Stockholders’ Deficit

$

3,532,497

$

3,682,711


See Notes to condensed consolidated financial statements.



3




GENERAL CANNABIS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


 

 

Three months ended

March 31,

 

 

2016

 

2015

REVENUES

 

 

 

 

Service

$

636,219

$

17,382

Tenant

 

36,369

 

26,677

Product Sales

 

19,524

 

12,798

Total revenues

 

692,112

 

56,857

 

 

 

 

 

COSTS AND EXPENSES

 

 

 

 

Cost of service revenues

 

452,584

 

13,037

Cost of goods sold

 

28,267

 

1,100

Selling, general and administrative

 

416,362

 

185,404

Share-based expense

 

600,469

 

248,625

Professional fees

 

105,729

 

94,107

Depreciation and amortization

 

97,266

 

9,007

Total costs and expenses

 

1,700,677

 

551,280

 

 

 

 

 

OPERATING LOSS

 

(1,008,565)

 

(494,423)

 

 

 

 

 

OTHER (INCOME) EXPENSE

 

 

 

 

Amortization of debt discount and deferred financing costs

 

135,837

 

242,630

Interest expense

 

43,830

 

69,207

Net (gain) loss on derivative liability

 

--

 

22,233

Total other (income) expense, net

 

179,667

 

334,070

 

 

 

 

 

NET LOSS

$

(1,188,232)

$

(828,493)

 

 

 

 

 

PER SHARE DATA – Basic and diluted

 

 

 

 

Net loss per share

$

(0.08)

$

(0.06)

Weighted average number of common shares outstanding

 

14,930,256

 

13,095,465


See Notes to condensed consolidated financial statements.



4




GENERAL CANNABIS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


 

 

Three months ended

March 31,

 

 

2016

 

2015

CASH FLOWS USED IN OPERATING ACTIVITIES

 

 

 

 

Net loss

$

(1,188,232)

$

(828,493)

Adjustments to reconcile net loss to net cash provided by (used in)

operating activities:

 

 

 

 

Amortization of debt discount

 

135,837

 

233,046

Amortization of deferred financing costs

 

--

 

9,584

(Gain) loss on derivative liability, net

 

--

 

22,233

Depreciation and amortization expense

 

97,266

 

9,007

Equity-based payments

 

600,469

 

248,625

Changes in operating assets and liabilities

 

 

 

 

Accounts receivable

 

(24,824)

 

938

Prepaid expenses and other assets

 

30,141

 

(26,804)

Inventory

 

6,162

 

(11,236)

Accounts payable and accrued liabilities

 

95,882

 

53,039

Net cash used in operating activities:

 

(247,299)

 

(290,061)

 

 

 

 

 

CASH FLOWS USED IN INVESTING ACTIVITIES

 

 

 

 

Purchase of property and equipment

 

(2,616)

 

(13,253)

Net cash used in investing activities

 

(2,616)

 

(13,253)

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

 

 

 

Increase in line of credit -- related party

 

207,500

 

239,000

Payments on notes payable

 

(1,670)

 

(1,534)

Net cash provided by financing activities

 

205,830

 

237,466

 

 

 

 

 

NET DECREASE IN CASH

 

(44,085)

 

(65,848)

CASH, BEGINNING OF PERIOD

 

58,711

 

165,536

CASH, END OF PERIOD

$

14,626

$

99,688

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION

 

 

 

 

Cash paid for interest

$

24,435

$

46,938

 

 

 

 

 

NON-CASH TRANSACTIONS

 

 

 

 

Issuance of common stock and warrants from accrued stock payable

$

25,000

$

109,667

Acquisition of IPG with common stock payable and warrants

 

--

 

1,887,000

Common stock and warrants capitalized as construction in progress

 

--

 

4,820

Convertible notes payable settled in common stock

 

--

 

290,000

Interest on convertible notes payable settled in common stock

 

--

 

1,063

Issuance of common stock upon cashless conversion of warrants by Full Circle

 

--

 

3,314,520


See Notes to condensed consolidated financial statements.



5




GENERAL CANNABIS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)


NOTE 1.   NATURE OF OPERATIONS, HISTORY AND PRESENTATION


Nature of Operations


General Cannabis Corporation (the “Company,” “we,” “us,” “our,” or “GCC”) (formerly, Advanced Cannabis Solutions, Inc.), was incorporated on June 3, 2013, and provides products and services to the regulated cannabis industry.  On April 28, 2015, our common stock was uplisted and resumed quotation on the OTC Market’s OTCQB on May 6, 2015.  Our operations are segregated into the following four reportable segments:


Security and Cash Management Services

 

In March 2015, we acquired substantially all of the assets of Iron Protection Group, LLC, a Colorado limited liability company, which continues to do business as “Iron Protection Group.” Iron Protection Group (“IPG”) provides advanced security, including on-site professionals, video surveillance and cash transport, to licensed cannabis cultivators and retail shops. As of March 31, 2016, Iron Protection Group had approximately 52 guards who serve 15 clients throughout Colorado.


Marketing and Products


In September 2015, we acquired substantially all of the assets of Chiefton Supply Co., and established a dba of Chiefton Supply Co., incorporated in Colorado (“Chiefton”).  Chiefton is an apparel and design company.  We design, distribute and sell apparel featuring graphic designs.  Our apparel is purchased and screen printed by third parties, for which there are numerous suppliers.  Chiefton also provides high-level design and branding services to various clients, from grow stores and dispensaries to wholesale cannabis companies.


In April 2016, we relaunched GC Supply, dedicated to providing wholesale equipment and supplies to participants in the regulated cannabis industry.  We will provide turnkey sourcing and stocking services to cultivation, retail and infused products manufacturing facilities.  Offerings will include infrastructure, equipment, consumables, various delivery technologies (vaporizers and capsules) and compliance packaging.  GC Supply operates out of a leased, 1,800 square-foot warehouse located in Colorado Springs, Colorado.

  

Consulting and Advisory

 

Through Next Big Crop we deliver comprehensive consulting services to the cannabis industry that include obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and building services, and expansion of existing operations.  Our business plan is based on the future growth of the regulated cannabis market in the United States.


In April 2016, we launched our public market research services division, called General Cannabis Equity Research, or GCER.  Our approach to investment research will place an emphasis on intrinsic value and management quality.  We will evaluate cannabis investments in the same manner as a merger and acquisitions specialist might.  Our analyses of the individual cannabis companies will be driven by economic realities of the industry and its constantly changing dynamics.  We expect our first report will be available in July 2016.


Finance and Real Estate


Real Estate Leasing


Our real estate leasing business primarily includes the acquisition and leasing of cultivation space and related facilities to licensed marijuana growers and dispensary owners for their operations. Management anticipates that these facilities will range in size from 5,000 to 50,000 square feet. These facilities will only be leased to tenants that possess the requisite state licenses to operate cultivation facilities. The leases with the tenants will provide certain requirements that permit us to continually evaluate our tenants’ compliance with applicable laws and regulations.


As of the date of this report, we owned one cultivation property that is located in a suburb of Pueblo, Colorado (the “Pueblo West Property”). The property consists of approximately three acres of land, which currently includes a 5,000 square foot steel building, and parking lot. The property is zoned for cultivating cannabis and is leased to a medical cannabis grower until December 31, 2022.  We are evaluating strategic options for this property.




6



Shared Office Space, Networking and Event Services   

 

In October 2014, we purchased a former retail bank located at 6565 East Evans Avenue, Denver, Colorado 80224, which has been branded as The Greenhouse (“The Greenhouse”).  The building is a 16,056 square-foot facility, which will be converted to serve as the largest shared workspace for entrepreneurs, professionals and others serving the cannabis industry.  Clients will be able to lease space to use as offices, meeting rooms, lecture, educational and networking facilities, and individual workstations.


The Greenhouse has approximately 10,000 square feet of existing office space and 5,000 square feet on its ground floor that is dedicated to a consumer banking design.  The banking space includes a vault with safety deposit boxes, three drive through teller windows and five secure teller windows inside.


We plan to continue to acquire commercial real estate and lease office space to participants in the cannabis industry. These participants include media, internet, packaging, lighting, cultivation supplies, and financial services. In exchange for certain services that may be provided to these tenants, we expect to receive rental income in the form of cash. In certain cases, we may acquire equity interests or provide debt capital to these businesses.


Industry Finance and Equipment Leasing Services


We lease cultivation equipment and facilities to customers in the cannabis industry. We expect we will enter into sale lease-back transactions of grow lights, tenant improvements and other grow equipment. Since Colorado State law does not allow entities operating under a cannabis license to pledge the assets or the license of the cannabis operation for any type of general borrowing activity, we intend to provide loans to individuals and businesses in the cannabis industry on an unsecured basis.  Equipment will only be leased to tenants that possess the requisite state licenses to operate such facilities. The leases with the tenants will provide certain requirements that permit us to continually evaluate its tenants’ compliance with applicable laws and regulations.


We are exploring lending opportunities in Oregon, Washington, Colorado, and Arizona. Our finance strategy will include making direct term loans and providing revolving lines of credit to businesses involved in the cultivation and sale of cannabis and related products.  These loans will generally be secured to the maximum extent permitted by law.  We believe there is a significant demand for this financing.  We are pursuing other finance services including customized finance, capital formation, and banking, for participants in the cannabis industry.


On November 4, 2015, we entered into an agreement (the “DB Option Agreement”) with Infinity Capital, a related party, which was amended on March 29, 2016 (the “Amended DB Option Agreement”).  Pursuant to the Amended DB Option Agreement, we have the right to purchase all of Infinity Capital’s interest in DB Products Arizona, LLC (“DB”) at Infinity Capital’s actual cost, plus $1.00, or $750,001. The interests for which the option has been granted are Infinity Capital’s 50% equity interest in the membership interests of DB, and any outstanding unpaid principal and interest owed on promissory note(s) issued by DB in favor of Infinity Capital for up to $750,000.  DB is involved in the production and distribution of Dixie Brands, Inc’s full line of medical cannabis Dixie Elixirs and Edible products in Arizona.  DB expects to begin sales in 2016.  We have no obligation to exercise the option, which expires September 24, 2016.


Basis of Presentation


The accompanying (a) condensed consolidated balance sheet at December 31, 2015, has been derived from audited statements and (b) the condensed consolidated unaudited financial statements as of March 31, 2016 and 2015, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, and should be read in conjunction with the audited consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on March 25, 2016.  It is management’s opinion, however, that all material adjustments (consisting of normal recurring adjustments), have been made which are necessary for a fair financial statements presentation. The financial statements include all material adjustments (consisting of normal recurring accruals) necessary to make the financial statements not misleading as required by Regulation S-X, Rule 10-01. Operating results for the three ended March 31, 2016, are not necessarily indicative of the results of operations expected for the year ending December 31, 2016.


The condensed consolidated financial statements include the results of GCC and its five wholly-owned subsidiary companies: (a) ACS Colorado Corp., a Colorado corporation formed in 2013; (b) Advanced Cannabis Solutions Corporation, a Colorado corporation formed in 2013; (c) 6565 E. Evans Avenue LLC, a Colorado limited liability company formed in 2014; (d) General Cannabis Capital Corporation, a Colorado corporation formed in 2015; and (e) GC Security LLC, a Colorado limited liability company formed in 2015.  Advanced Cannabis Solutions Corporation has one wholly-owned subsidiary company, ACS Corp., which was formed in Colorado on June 6, 2013.  Intercompany accounts and transactions have been eliminated.




7



Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. The reclassifications had no effect on net loss, total assets, or total stockholders’ equity (deficit).


Going Concern


The financial statements have been prepared on a going concern basis, which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future.  The ability to continue as a going concern is dependent upon our generating profitable operations in the future and / or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management believes that actions presently being taken to further implement its business plan and generate additional revenues provide opportunity for the Company to continue as a going concern.  While we believe in the viability of our strategy to generate additional revenues and our ability to raise additional funds, there can be no assurances to that effect.


We had an accumulated deficit of $17,615,610 and $16,427,378, respectively, at March 31, 2016 and December 31, 2015, and further losses are anticipated in the development of our business. Accordingly, there is substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.


Recently Issued Accounting Standards


Financial Accounting Standards Board, or FASB, Accounting Standards Update, or FASB ASU 2016-09 “Compensation – Stock Compensation (Topic 718)” – In March 2016, the FASB issued ASU 2016-09, which includes multiple provisions intended to simplify various aspects of accounting for share-based payments.  While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, earnings per share, and the statement of cash flows.  Implementation and administration may present challenges for companies with significant share-based payment activities.  This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.


FASB ASU 2016-10 “Revenue from Contracts with Customers (Topic 606)” – In April 2016, the FASB issued ASU 2016-10, clarify identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas.  This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.


NOTE 2.   BUSINESS ACQUISITIONS


IPG Acquisition


On March 26, 2015, GCS, our wholly-owned subsidiary, entered into an Asset Purchase Agreement (the “IPG APA”) by and among us, GCS and Iron Protection Group, LLC, a Colorado limited liability company (the “Seller”), whereby GCS agreed to acquire substantially all of the assets of Seller (the “IPG Acquisition”). Pursuant to the terms of the IPG APA, we delivered to Seller 500,000 restricted shares of our common stock, which vested over a one-year period (100,000 shares on October 1, 2015; 200,000 shares on January 1, 2016; and 200,000 shares on April 1, 2016).


In addition, we delivered to Seller three-year warrants (the “IPG Warrants”) to purchase an aggregate of 500,000 shares of our common stock at an exercise price of: (i) $4.50 for warrants to purchase 250,000 shares, and (ii) $5.00 for warrants to purchase another 250,000 shares. The IPG APA contains certain provisions that require Seller to forfeit a portion of the stock consideration in the event that Seller violates its obligations under the IPG APA relating to non-competition and non-disclosure. The closing date of the IPG Acquisition was March 26, 2015 and we calculated the purchase price of the IPG Acquisition to be approximately $1,887,000. At the acquisition date and pursuant to the IPG APA, we did not assume any of the Seller’s liabilities and there were no tangible assets of significance.


The aggregate consideration was as follows:


Common stock payable

$

1,054,000

Warrants issued with $4.50 exercise price

 

421,000

Warrants issued with $5.00 exercise price

 

412,000

 

$

1,887,000




8



The 500,000 shares of common stock were valued based on the closing price per share on March 26, 2015, or $2.48, reduced by a discount of 15% due to restrictions in the ability to trade our common stock.  The $1,054,000 value of stock consideration was recorded as accrued stock payable on the consolidated balance sheet, which is reduced as we issue common stock according to the vesting schedule.


The purchase price allocation is as follows:


Intangible assets:

 

 

Customer relationship intangible

$

1,000,000

Marketing-related intangibles

 

200,000

Non-compete agreements

 

500,000

Goodwill

 

187,000

 

$

1,887,000


We finalized the purchase price allocation in the fourth quarter of the year ended December 31, 2015. 


In connection with our acquisition of IPG, we agreed to issue to the sole shareholder of the Seller 100,000 fully vested warrants to purchase shares of our common stock if revenues of the Security segment exceeded $3,000,000 for the year ended December 31, 2015, with an exercise price of $2.48.  This condition was not met during the year ended December 31, 2015, so no value was recorded for these warrants.


The accompanying condensed consolidated financial statements include the results of IPG from the date of acquisition, March 26, 2015.  The pro forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2015, are as follows:


 

 

Three months ended

 

 

March 31, 2015

(Unaudited)

Total net revenues

$

1,061,858

Net loss

 

(1,079,871)

Net loss per common share:

 

 

  Basic and diluted

$

(0.07)


Chiefton Acquisition


On September 25, 2015, we closed an asset purchase agreement for the purchase of substantially all the assets of Chiefton Supply Co., a Colorado corporation, and established a dba within GCC of Chiefton.  This acquisition expands our service offerings in the cannabis industry and provides a new revenue stream.


We acquired the Chiefton assets for consideration of 80,000 restricted shares of our common stock. The shares shall remain in escrow for six months for the exclusive purpose of being available to indemnify us for any claims that may be made by any person or governmental entity related to or arising from Chiefton’s intellectual property during the six month period after closing. After such period, the shares will be released if no claims have been made, provided that if any claims have been made the shares will remain in escrow until the claim is resolved, at which time the shares will be released less the value of any and all settlement amounts, penalties, damages or other liabilities arising from the claim.


The aggregate consideration was as follows:


Cash

$

12,249

Common stock

 

69,400

  Aggregate consideration

$

81,649


The value of the common stock consideration was estimated based on our closing common stock price on September 25, 2015, or $1.02 per share, reduced by a discount of 15% due to restrictions in the ability to trade our shares.  The $69,400 value of stock consideration is included in accrued stock payable on the consolidated balance sheet as of December 31, 2015.


The purchase price allocation is as follows:


Inventory

$

12,249

Intangible assets – intellectual property

 

69,400

 

$

81,649




9



We finalized the purchase price allocation in the fourth quarter of the year ended December 31, 2015. 


NOTE 3.   LONG-LIVED ASSETS


Property and Equipment


Depreciation expense was $12,159 and $9,007, respectively for the three months ended March 31, 2016 and 2015.  We have not recognized any impairment as of March 31, 2016.


Intangible Assets


Intangible assets consisted of the following as of March 31, 2016:


 

 

Gross

 

Accumulated Amortization

 

Net

 

Estimated Life

(in years)

Customer relationship intangible

$

1,000,000

$

101,643

$

898,357

 

10

Marketing-related intangibles

 

200,000

 

40,658

 

159,342

 

5

Non-compete agreements

 

500,000

 

169,406

 

330,594

 

3

Chiefton brand and graphic designs

 

69,400

 

17,873

 

51,527

 

2

  Intangible assets, net

$

1,769,400

$

329,580

$

1,439,820

 

 


Amortization expense was $85,107 and $0, respectively, for the three months ended March 31, 2016 and 2015.  We have not recognized any impairment as of March 31, 2016.


Goodwill


In connection with our purchase of IPG, we recorded goodwill of $187,000. We have not recognized any impairment as of March 31, 2016.


NOTE 4.    DEBT


Line of Credit – Related Party


In February 2015, we issued a senior secured note to Infinity Capital, LLC (“Infinity Capital”), as amended in April 2015, bearing 5% interest payable monthly in arrears commencing June 30, 2015, until the maturity date of August 31, 2015 (the “Infinity Note”).   Infinity Capital, an investment management company, was founded and is controlled by our chairman of the board, Michael Feinsod, a related party.  On July 1, 2015, the outstanding principal and interest of $309,000 was settled by our issuing a 10% private placement note.  Subsequent to the settlement on July 1, 2015, we continued to borrow under the Infinity Note.  Interest expense for the Infinity Note for the three months ended March 31, 2016, was approximately $11,700, and approximately $23,400 was accrued as of March 31, 2016.


Notes Payable


 

 

March 31,

2016

 

December 31,

2015

10.0% private placement notes

$

659,000

$

659,000

14.0% mortgage note payable (The Greenhouse)

 

600,000

 

600,000

8.5% convertible note payable (Pueblo West Property)

 

156,637

 

158,307

 

 

1,415,637

 

1,417,307

Unamortized debt discount

 

(143,598)

 

(279,435)

 

 

1,272,039

 

1,137,872

Less: Current portion

 

(1,122,460)

 

(986,475)

Long-term portion

$

149,579

$

151,397


10% Private Placement Notes


In 2015, we completed a private placement pursuant to a Promissory Note and Warrant Purchase Agreement (the “10% Agreement”) with certain accredited investors, bearing interest at 10% payable quarterly, with a maturity date of May 1, 2016.  Under the 10% Agreement, we can issue up to $2,000,000 of notes to investors, bearing interest at 10%, with a minimum denomination of $25,000



10



(each such note, a “10% Note,” and collectively, the “10% Notes”).  Subject to the terms and conditions of the 10% Agreement, each investor is granted fully-vested warrants equal to their note principal divided by two (the “10% Warrants”) (with standard dilution clauses).  The 10% Warrants are exercisable for a period of eighteen months after grant date and have an exercise price of $1.08 per share.  The debt is treated as conventional debt.  The 10% Notes are collateralized by a security interest in substantially all of our assets.


$309,000 of the 10% Notes are due to a related party, Infinity Capital, at March 31, 2016 and December 31, 2015.  During the three months ended March 31, 2015, approximately $3,600 of interest expense and $10,900 of accrued interest under the 10% Notes relates to Infinity Capital.


14% Mortgage Note Payable (The Greenhouse)


In October 2014, we executed a mortgage on The Greenhouse in the amount of $600,000, bearing 14.0% interest payable monthly, with a maturity date of October 21, 2016 (the “Greenhouse Mortgage”).  The debt is treated as conventional debt.


In addition, we granted warrants to Evans Street Lendco LLC (“Evans Lendco”), the note holder of the Greenhouse Mortgage, which expire on October 21, 2016.  The warrants vested immediately and allowed for Evans Lendco to purchase 600,000 shares of our common stock at a price of $4.40 per share, (with standard dilution clauses).  Due to the drop in our stock price, on July 29, 2015, we agreed with Evans Lendco to replace the warrants previously issued to Evans Lendco with warrants to purchase 225,000 shares of our stock at $1.20 per share with a term of two years.  The estimated fair value of the replacement warrants is less than the fair value of the original warrants on their date of grant.  Accordingly, we will continue to amortize the remaining fair value of the original warrants over the remaining life of the underlying debt.


8 ½% Convertible Note Payable (Pueblo West Property)


In December 2013, we executed a mortgage on our Pueblo West Property in the amount of $170,000, bearing 8 ½% interest with monthly principal and interest payments totaling $1,674, with the balance due on December 31, 2018 (the “Pueblo Mortgage”). This note is convertible at any time at $5.00 per share.


Derivative treatment is not required, as the conversion feature meets the scope exception. The conversion feature is not beneficial, because the conversion price was higher than the stock price on the commitment date.  Accordingly, we treated the Pueblo Mortgage as conventional debt.


12% Convertible Notes


Conversion of 12% Convertible Notes


During the year ended December 31, 2015, lenders converted $321,123 of 12% Convertible Notes for 64,225 shares of our common stock.  The December 2013 Issuance and the January 2014 Issuance (collectively, the “12% Convertible Notes”) included a provision that if the trading stock price exceeded $10 for twenty consecutive trading days and the daily volume for those twenty consecutive trading days exceeds 25,000 shares, then the 12% Convertible Notes convert into shares of our common stock on or after December 1, 2015.  As of April 24, 2014, these parameters were met.  On December 1, 2015, the remaining $1,330,000 of convertible notes was automatically converted to 266,000 shares of our common stock.


December 2013 Issuance


In December 2013, we entered into convertible promissory notes with various third parties totaling $530,000 (the “December 2013 Issuance”). The principal amounts of these notes ranged between $10,000 and $150,000. The notes required quarterly interest payments at 12%, and were convertible into shares of our common stock at a conversion rate of $5.00 per share (with standard dilution clauses).


Derivative treatment was not required, as the conversion feature met the scope exception. The conversion feature was not beneficial, because the conversion price was higher than the stock price on the commitment date.  Accordingly, we treated the December 2013 Issuance as conventional debt.


January 2014 Issuance


In January 2014, we entered into convertible promissory notes with various third parties totaling $1,605,000 (the “January 2014 Issuance”). The principal amounts of these notes ranged between $10,000 and $200,000. The notes required quarterly interest payments at 12%, and were convertible into shares of our common stock at a conversion rate of $5.00 per share (with standard dilution clauses).



11



Derivative treatment was not required, as the conversion feature met the scope exception.  Since the initial conversion price was less than the market value of the common stock at the time of issuance, it was determined that a beneficial conversion feature existed. The intrinsic value of the beneficial conversion feature and the combined value of the debt discount resulted in a value greater than the value of the debt and, as such, the total discount was limited to the value of the debt balance of $1,605,000.


Annual maturities of long-term debt (excluding unamortized discount) for the next four years, consist of:


Year ending December 31,

 

 

2016

$

1,264,240

2017

 

7,507

2018

 

143,890

 

$

1,415,637


NOTE 5.  ACCRUED STOCK PAYABLE


The following tables summarize the changes in accrued common stock payable during the three months ended March 31, 2016:


 

 

Amount

 

Number of Shares

December 31, 2015

$

1,532,420

 

730,000

Feinsod Agreement -- accrual

 

82,648

 

--

Consulting services -- accrual

 

6,988

 

--

Consulting services -- issued

 

(25,000)

 

(50,000)

Employment agreements -- accrual

 

567

 

--

March 31, 2016

$

1,597,623

 

680,000


Feinsod Agreement


On August 4, 2014, we entered into an agreement with Michael Feinsod in consideration for serving as Executive Chairman of the Board and as a member of the Board and pursuant to the terms of the Executive Board and Director Agreement (the “Feinsod Agreement”).  The Board approved the issuance to Infinity Capital of (a) 200,000 shares of our common stock on August 4, 2014; (b) 1,000,000 shares of our common stock upon the uplisting of our common stock to the OTC Market’s OTCQB; (c) 150,000 shares of our common stock on August 4, 2015; and (d) 150,000 shares of our common stock on August 4, 2016.  Mr. Feinsod must remain a member of the Board in order for the common stock to be issued.  In addition, the Feinsod Agreement requires the issuance of a number of shares of our common stock to Infinity Capital equal to 10% of any new issuances not to exceed 600,000 shares of our common stock in the aggregate during the time that Mr. Feinsod remains a member of the Board (the “New Issuance Allowance”).  Under the terms of the Feinsod Agreement, the New Issuance Allowance will not be triggered upon issuances relating to convertible securities existing as of the date of the Feinsod Agreement.  For illustrative purposes, if we issue 7,000,000 new shares of common stock, then the New Issuance Allowance issued to Infinity Capital would be capped at 600,000 shares of our common stock.  No shares have been issued under the New Issuance Allowance.


The 1,000,000 shares of our common stock were valued at $2.97 per share, based on the closing price of our common stock of $3.49 on April 27, 2015, and then reduced by 15% due to restrictions on the ability to trade our shares.  The other shares under the Feinsod Agreement were valued at $4.42 per share, based on the closing price of our common stock of $5.20 on August 4, 2014, and then reduced by 15% due to restriction on the ability to trade our common stock.  We are recognizing expense for the unissued shares ratably over the vesting period.


Employment Agreements


On May 13, 2015, we hired two individuals from Next Big Crop (“NBC”), an unaffiliated entity serving the cannabis industry, to service our new and existing clients. We did not purchase any existing client base from NBC and upon execution of employment agreements, granted these persons a total of 100,000 shares of our common stock with a vesting date of January 1, 2016. On the date of grant, the 100,000 shares had an initial fair value of $311,000, based on a closing price per share of our common stock of $3.11 on May 13, 2015. Due to restrictions in the ability to trade our shares, a discount of fifteen percent (15%) was applied to the fair value of the shares. After taking into consideration the illiquidity of the shares, the fair value was determined to be $264,350.  One individual forfeited his shares, so expense was only recognized for 50,000 shares.




12



Consulting Agreement


On July 15, 2015, we entered into an agreement with an individual to provide consulting services to customers in exchange for 50,000 shares of our common stock to be delivered on March 15, 2016.  The fair value of the common stock is determined at the end of each reporting period and the pro rata amount earned is recognized as accrued stock payable over the term of the agreement.  These shares were issued in March 2016.


NOTE 6.   COMMITMENTS AND CONTINGENCIES


Legal


To the best of the Company’s knowledge and belief, no legal proceedings of merit are currently pending or threatened against the Company.


NOTE 8.   STOCKHOLDERS’ EQUITY


Employee Stock Options


On October 29, 2014, the Board authorized the adoption of and on June 26, 2015, our stockholders ratified our 2014 Equity Incentive Plan (the “Incentive Plan”).  The Incentive Plan provides for the issuance of up to 10 million shares of our common stock, and is designed to provide an additional incentive to executives, employees, directors and key consultants, aligning our long term interests with participants.


Share-based compensation costs for award grants to employees and directors (“Employee Awards”) are recognized on a straight-line basis over the service period for the entire award, with the amount of compensation cost recognized at any date equaling at least the portion of the award that is vested. We recognized expense for continued vesting of previously issued Employee Awards of $452,621 during the three months ended March 31, 2016.  No Employee Awards were granted during the three months ended March 31, 2016 and 2015.


The following summarizes Employee Awards activity:


 

 

Number of Shares

 

Weighted-average Exercise Price per Share

 

Weighted-average Remaining Contractual Term

(in years)

 

Aggregate Intrinsic Value

Outstanding at December 31, 2015

 

2,509,000

$

 1.49

 

 

 

 

Forfeited

 

(134,000)

$

0.73

 

 

 

 

Outstanding at March 31, 2016

 

2,375,000

$

1.53

 

2.9

$

5,270

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2016

 

347,500

$

2.57

 

3.3

 

--


As of March 31, 2016, there was approximately $877,000 of total unrecognized compensation expense related to unvested Employee Awards, which is expected to be recognized over a weighted-average period of six months.


Warrants for Consulting Services


As needed, we may issue warrants to third parties in exchange for consulting services.  Stock-based compensation costs for award grants to third parties for consulting services (“Consulting Awards”) are recognized on a straight-line basis over the service period for the entire award, with the amount of compensation cost recognized at any date equaling at least the portion of the award that is vested.  Service Awards are revalued at each reporting date until fully vested, which may generate an expense or benefit.  We recognized expense for continued vesting of previously issued Consulting Awards of $10,100 for the three months ended March 31, 2016.  No Consulting Awards were granted during the three months ended March 31, 2016 and 2015.




13



The following summarizes Consulting Awards:


 

 

Number of Shares

 

Weighted-average Exercise Price per Share

 

Weighted-average Remaining Contractual Term

(in years)

 

Aggregate Intrinsic Value

Outstanding at December 31, 2015

 

252,500

$

3.62

 

 

 

 

Outstanding at March 31, 2016

 

252,500

$

3.62

 

1.2

$

75

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2016

 

180,000

$

 3.99

 

1.0

$

75


As of March 31, 2016, there was approximately $4,825 of total unrecognized expense related to unvested Consulting Awards, which is expected to be recognized over a weighted-average period of two months.


IPG Acquisition Warrants


In connection with the IPG APA, we issued to IPG 500,000 fully-vested warrants to purchase a) 250,000 shares of our common stock at $4.50 per share, (the “IPG $4.50 Warrants”), and b) 250,000 shares of our common stock at $5.00 per share (the “IPG $5.00 Warrants”) (collectively, the “IPG Warrants”). The IPG Warrants are subject to customary adjustments in the event of our reclassification, consolidation, merger, subdivision of shares of our common stock, combination of shares of our common stock or payment of dividends in the form of the our common stock. The IPG Warrants expire three years after their initial issuance date.


As of March 31, 2016, all of the IPG Warrants are outstanding and exercisable.


Warrants with Debt


The following summarizes warrants issued with debt:


 

 

Number of Shares

 

Weighted-average Exercise Price per Share

 

Weighted-average Remaining Contractual Term

(in years)

 

Aggregate Intrinsic Value

Outstanding at December 31, 2015

 

597,200

$

1.41

 

 

 

 

Outstanding at March 31, 2016

 

597,200

$

1.41

 

0.8

$

--

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2016

 

597,200

$

1.41

 

0.8

$

--


DB Option Agreement warrants


In order to extend the DB Option Agreement with Infinity Capital, we granted Infinity Capital warrants to purchase 100,000 shares of our common stock at an exercise price of $0.67 per share with a five year life.  The fair value of $55,100 is included in equity-based expense.  The following summarizes the Black-Scholes assumptions used to estimate the fair value of the DB Option Agreement warrants:


Volatility

 

150 %

Risk-free interest rate

 

1.2 %

Expected life (years)

 

5.0

Dividend yield

 

--


Series A Warrants


Between July 11, 2013 and August 8, 2013, we issued 707,000 shares of our common stock and 707,000 fully-vested Series A Warrants for cash consideration of $1.00 per share. Each Series A Warrant entitles the holder to purchase one share of our common stock at a price of $10.00 per share. The Series A Warrants expire on the earlier of August 1, 2016, or twenty days following written notification from that our common stock had a closing bid price at or above $12.00 for any ten consecutive trading days. This condition was met as of April 30, 2014; however, we have not forced conversion of the warrants at this time.




14



Between August 14, 2013 and September 19, 2013, we issued 266,000 shares and 266,000 fully-vested Series A Warrants of our common stock for cash consideration of $1.00 per share. The Series A Warrants expire on the earlier of August 1, 2016, or twenty days following written notification from that our common stock had a closing bid price at or above $12.00 for any ten consecutive trading days. This condition was met as of April 30, 2014; however, we have not forced conversion of the warrants at this time.


As of March 31, 2016, all 973,000 warrants are outstanding and exercisable.


NOTE 9.  NET LOSS PER SHARE


Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the reporting period.  Diluted net loss per share is computed similarly to basic loss per share, except that it includes the potential dilution that could occur if dilutive securities are exercised.


The following table presents a reconciliation of the denominators used in the computation of net loss per share – basic and diluted:


 

 

Three months ended March 31,

 

 

2016

 

2015

Net loss

$

(1,188,232)

$

(828,493)

Weighted average outstanding shares of common stock

 

14,930,256

 

13,095,465

Dilutive effect of stock options and warrants

 

--

 

--

Common stock and equivalents

 

14,930,256

 

13,095,465

 

 

 

 

 

Net loss per share – Basic and diluted

$

(0.08)

$

(0.06)


Outstanding stock options and common stock warrants are considered anti-dilutive because we are in a net loss position.

 

NOTE 10.   SUBSEQUENT EVENTS


Settlement of Accrued Stock Payable


In April 2016, we issued shares of our common stock related to accrued stock payable, as follows:


 

 

Number of Shares

IPG Acquisition

 

400,000

Chiefton Acquisition

 

80,000

Consulting services

 

50,000

March 31, 2016

 

530,000


Employee Awards


In April 2016, we issued options to employees to purchase 216,650 shares of our common stock at an exercise price of $0.61 per share, with a one year vesting period.


Registration Statement on Form S-8


In April 2016, we filed a Registration Statement on Form S-8 (the “Registration Statement”), which automatically became effective in May 2016.  The Registration Statement relates to 10,000,000 shares of our common stock, which are issuable pursuant to, or upon exercise of, options that have been granted or may be granted under our Incentive Plan.


NOTE 11.   SEGMENT INFORMATION


Our operations are organized into four segments: Security and Cash Management Services; Marketing and Products; Consulting and Advisory; and Finance and Real Estate.  All revenue originates and all assets are located in the United States.  We have revised our disclosure to correspond to the information provided to the chief operating decision maker.




15



Three months ended March 31


2016

 

Security and Cash Management

 

Marketing and Products

 

Consulting and Advisory

 

Finance and Real Estate

 

Total

Revenues, net

$

507,531

$

50,098

$

98,114

$

36,369

$

692,112

Costs and expenses

 

(541,396)

 

(81,575)

 

(83,769)

 

(11,786)

 

(718,526)

Other expense

 

--

 

--

 

--

 

(3,352)

 

(3,352)

 

$

(33,865)

$

(31,477)

$

14,345

$

21,231

 

(29,766)

Corporate expenses

 

 

 

 

 

 

 

 

 

(1,158,466)

 

 

 

 

 

 

 

 

Net loss

$

(1,188,232)


2015

 

Security and Cash Management

 

Marketing and Products

 

Consulting and Advisory

 

Finance and Real Estate

 

Total

Revenues, net

$

17,382

$

12,798

$

--

$

26,677

$

56,857

Costs and expenses

 

(27,470)

 

(24,653)

 

--

 

(9,007)

 

(61,130)

Other expense

 

--

 

--

 

--

 

(2,322)

 

(2,322)

 

$

(10,088)

$

(11,855)

$

--

$

15,348

 

(6,595)

Corporate expenses

 

 

 

 

 

 

 

 

 

(821,898)

 

 

 

 

 

 

 

 

Net loss

$

(828,493)


Total assets

 

March 31, 2016

 

December 31,

2015

Security and Cash Management

$

110,214

 

132,314

Marketing and Products

 

30,045

 

127,345

Consulting and Advisory

 

22,220

 

22,268

Finance and Real Estate

 

453,312

 

431,639

Corporate

 

2,916,706

 

2,969,145

 

$

3,532,497

 

3,682,711


All assets are located in the United States.




16



ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


This Management’s Discussion and Analysis (“MD&A”) is intended to provide an understanding of our financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year.  This discussion should be read in conjunction with the Condensed Consolidated Unaudited Financial Statements contained in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and related notes and MD&A of Financial Condition and Results of operations appearing in our Annual Report on Form 10-K as of and for the years ended December 31, 2015 and 2014. The results of operations for an interim period may not give a true indication of results for future interim periods or for the year.


Cautionary Statement Regarding Forward Looking Statements


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


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


Our Products, Services and Customers


We operate in a rapidly evolving and highly regulated industry that, as has been estimated by some, will exceed $30 billion by the year 2020.  We have been and will continue to be aggressive in executing acquisitions and other opportunities that it believes will benefit us in the long-term.


Through our reporting segments we provide services and products to the regulated cannabis industry, which include the following:


Security and Cash Management Services

 

In March 2015, we acquired substantially all of the assets of Iron Protection Group, LLC, a Colorado limited liability company, which continues to do business as “Iron Protection Group.” Iron Protection Group (“IPG”) provides advanced security, including on-site professionals, video surveillance and cash transport, to licensed cannabis cultivators and retail shops. As of March 31, 2016, Iron Protection Group had approximately 52 guards who serve 15 clients throughout Colorado.


Marketing and Products


In September 2015, we acquired substantially all of the assets of Chiefton Supply Co., and established a dba of Chiefton Supply Co., incorporated in Colorado (“Chiefton”).  Chiefton is an apparel and design company.  We design, distribute and sell apparel featuring graphic designs.  Our apparel is purchased and screen printed by third parties, for which there are numerous suppliers.  Chiefton also provides high-level design and branding services to various clients, from grow stores and dispensaries to wholesale cannabis companies.


In April 2016, we relaunched GC Supply, dedicated to providing wholesale equipment and supplies to participants in the regulated cannabis industry.  We will provide turnkey sourcing and stocking services to cultivation, retail and infused products manufacturing facilities.  Offerings will include infrastructure, equipment, consumables, various delivery technologies (vaporizers and capsules) and compliance packaging.  GC Supply operates out of a leased, 1,800 square-foot warehouse located in Colorado Springs, Colorado.

  

Consulting and Advisory

 

Through Next Big Crop we deliver comprehensive consulting services to the cannabis industry that include obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and building services, and expansion of existing operations.  Our business plan is based on the future growth of the regulated cannabis market in the United States.




17



In April 2016, we launched our public market research services division, called General Cannabis Equity Research, or GCER.  Our approach to investment research will place an emphasis on intrinsic value and management quality.  We will evaluate cannabis investments in the same manner as a merger and acquisitions specialist might.  Our analyses of the individual cannabis companies will be driven by economic realities of the industry and its constantly changing dynamics.  We expect our first report will be available in July 2016.


Finance and Real Estate


Real Estate Leasing


Our real estate leasing business primarily includes the acquisition and leasing of cultivation space and related facilities to licensed marijuana growers and dispensary owners for their operations. Management anticipates that these facilities will range in size from 5,000 to 50,000 square feet. These facilities will only be leased to tenants that possess the requisite state licenses to operate cultivation facilities. The leases with the tenants will provide certain requirements that permit us to continually evaluate our tenants’ compliance with applicable laws and regulations.


As of the date of this report, we owned one cultivation property that is located in a suburb of Pueblo, Colorado (the “Pueblo West Property”). The property consists of approximately three acres of land, which currently includes a 5,000 square foot steel building, and parking lot. The property is zoned for cultivating cannabis and is leased to a medical cannabis grower until December 31, 2022.  We are evaluating strategic options for this property.


Shared Office Space, Networking and Event Services   

 

In October 2014, we purchased a former retail bank located at 6565 East Evans Owner, Denver, Colorado 80224, which has been branded as The Greenhouse (“The Greenhouse”).  The building is a 16,056 square-foot facility, which will be converted to serve as the largest shared workspace for entrepreneurs, professionals and others serving the cannabis industry.  Clients will be able to lease space to use as offices, meeting rooms, lecture, educational and networking facilities, and individual workstations.


The Greenhouse has approximately 10,000 square feet of existing office space and 5,000 square feet on its ground floor that is dedicated to a consumer banking design.  The banking space includes a vault with safety deposit boxes, three drive through teller windows and five secure teller windows inside.


We plan to continue to acquire commercial real estate and lease office space to participants in the cannabis industry. These participants include media, internet, packaging, lighting, cultivation supplies, and financial services. In exchange for certain services that may be provided to these tenants, we expect to receive rental income in the form of cash. In certain cases, we may acquire equity interests or provide debt capital to these businesses.


Industry Finance and Equipment Leasing Services


We lease cultivation equipment and facilities to customers in the cannabis industry. We expect we will enter into sale lease-back transactions of grow lights, tenant improvements and other grow equipment. Since Colorado State law does not allow entities operating under a cannabis license to pledge the assets or the license of the cannabis operation for any type of general borrowing activity, we intend to provide loans to individuals and businesses in the cannabis industry on an unsecured basis.  Equipment will only be leased to tenants that possess the requisite state licenses to operate such facilities. The leases with the tenants will provide certain requirements that permit us to continually evaluate its tenants’ compliance with applicable laws and regulations.


We are exploring lending opportunities in Oregon, Washington, Colorado, and Arizona. Our finance strategy will include making direct term loans and providing revolving lines of credit to businesses involved in the cultivation and sale of cannabis and related products.  These loans will generally be secured to the maximum extent permitted by law.  We believe there is a significant demand for this financing.  We are pursuing other finance services including customized finance, capital formation, and banking, for participants in the cannabis industry.


On November 4, 2015, we entered into an agreement (the “DB Option Agreement”) with Infinity Capital, a related party, which was amended on March 29, 2016 (the “Amended DB Option Agreement”).  Pursuant to the Amended DB Option Agreement, we have the right to purchase all of Infinity Capital’s interest in DB Products Arizona, LLC (“DB”) at Infinity Capital’s actual cost, plus $1.00, or $750,001. The interests for which the option has been granted are Infinity Capital’s 50% equity interest in the membership interests of DB, and any outstanding unpaid principal and interest owed on promissory note(s) issued by DB in favor of Infinity Capital for up to $750,000.  DB is involved in the production and distribution of Dixie Brands, Inc’s full line of medical cannabis Dixie Elixirs and Edible products in Arizona.  DB expects to begin sales in 2016.  We have no obligation to exercise the option, which expires September 24, 2016.




18



Subsidiary Structure


General Cannabis Corporation has five wholly-owned subsidiary companies: (a) ACS Colorado Corp., a Colorado corporation formed in 2013; (b) Advanced Cannabis Solutions Corporation, a Colorado corporation formed in 2013; (c) 6565 E. Evans Avenue LLC, a Colorado limited liability company formed in 2014; (d) General Cannabis Capital Corporation, a Colorado corporation formed in 2015; and (e) GC Security LLC, a Colorado limited liability company formed in 2015.  Advanced Cannabis Solutions Corporation has one wholly-owned subsidiary company, ACS Corp., which was formed in Colorado on June 6, 2013.  Intercompany accounts and transactions have been eliminated.


Results of Operations


The following table sets forth, for the periods indicated, condensed statements of income data.  The table and the discussion below should be read in conjunction with the accompanying condensed financial statements and the notes thereto appearing elsewhere in this report.


Consolidated Results


 

 

Three months ended March 31,

 

Percent

 

 

2016

 

2015

 

Change

 

Change

Revenues

$

692,112

$

56,857

$

635,255

 

1,117%

Costs and expenses

 

(1,700,677)

 

(551,280)

 

(1,149,397)

 

208%

Other expense

 

(179,667)

 

(334,070)

 

154,403

 

(46)%

Net loss

$

(1,188,232)

$

(828,493)

$

(359,739)

 

43%


Revenues


Revenue increased primarily due to (a) the acquisition of Iron Protection Group (“IPG”), which occurred in late March 2015, which generated revenue of $507,531 and $17,382, respectively, for the three months ended March 31, 2016 and 2015; and (b) the acquisition of Chiefton, which occurred in September 2015, which generated revenue of $49,147 and $0, respectively, for the three months ended March 31, 2016 and 2015.


Costs and expenses


 

 

Three months ended March 31,

 

Percent

 

 

2016

 

2015

 

Change

 

Change

Cost of service revenues

$

452,584

$

13,037

$

439,547

 

3,372%

Cost of goods sold

 

28,267

 

1,100

 

27,167

 

2,470%

Selling, general and administrative

 

416,362

 

185,404

 

230,958

 

125%

Share-based expense

 

600,469

 

248,625

 

351,844

 

142%

Professional fees

 

105,729

 

94,107

 

11,622

 

12%

Depreciation and amortization

 

97,266

 

9,007

 

88,259

 

980%

 

$

1,700,677

$

551,280

$

1,149,397

 

208%


The cost of service revenue increase in 2016 compared to 2015, relates primarily to the IPG acquisition, which had costs of $420,558 and $13,037, respectively for the three months ended March 31, 2016 and 2015.  Cost of goods sold increased in 2016 compared to 2015, due primarily to the Chiefton acquisition.


Selling, general and administrative expense increased in 2016 compared to 2015, due to an increase in management salaries in connection with the IPG and Chiefton acquisitions, and our hiring of individuals from Next Big Crop for our consulting segment, as well as overhead incurred on The Greenhouse.


Share-based expense included the following:


 

 

Three months ended

March 31,

 

 

2016

 

2015

Feinsod agreement

$

82,648

$

248,625

Consulting Awards

 

10,100

 

--

Employee Awards

 

452,621

 

--

DB Option Agreement warrants

 

55,100

 

--

 

$

600,469

$

248,625




19



On August 4, 2014, pursuant to an agreement with Michael Feinsod (“Feinsod”), our Board of Directors (the “Board”) appointed Feinsod Chairman of the Board and approved a compensatory agreement with Infinity Capital, LLC (“Infinity Capital”), an investment management company founded and controlled by him.  Under the agreement, we issued 200,000 shares of our common stock in 2014 and committed to issuing an additional 150,000 shares in 2015 and 150,000 shares in 2016.  The 200,000 shares were expensed immediately, while the additional shares are being expensed ratably through their issue date.  Additionally, when our common stock was uplisted to the OTC Market’s OTCQB, we issued 1,000,000 shares of our common stock to Infinity Capital.  Employee awards are issued under our 2014 Equity Incentive Plan, which was approved by shareholders on June 26, 2015.  In March 2016, we extended the DB Option Agreement and issued 100,000 warrants for our common stock.


Professional fees consist primarily of accounting and legal expenses.  Legal fees are typically incurred for acquisitions and other corporate matters.  Accounting fees are incurred for annual audits and quarterly reviews.  Professional fees generally fluctuate depending on the timing of the delivery of service.


Depreciation and amortization expense increased due to the amortization of the intangibles from the IPG and Chiefton acquisitions.


Other Expense


 

 

Three months ended

March 31,

 

 

2016

 

2015

Amortization of debt discount and deferred financing costs

$

135,837

$

242,630

Interest expense

 

43,830

 

69,207

Net (gain) loss on derivative liability

 

--

 

22,233

 

$

179,667

$

334,070


Amortization of debt discount and deferred financing costs are lower in 2016 compared to 2015, due to (a) the settlement of the 12% Notes in December 2015; (b) the write-off of the deferred financing costs for the Full Circle financing in 2015; and (c) additional borrowings in 2015 under the 10% convertible notes payable.  Interest expense is lower in 2016 compared to 2015 due to the settlement of the 12% Notes in December 2015.  The Full Circle warrants that generated the derivative liability were fully exercised in May 2015, thus there was no gain or loss in 2016.


Security and Cash Management


We launched this segment with the IPG acquisition on March 26, 2015.


 

 

Three months ended March 31,

 

Percent

 

 

2016

 

2015

 

Change

 

Change

Revenues

$

507,531

$

17,382

$

490,149

 

2,820%

Costs and expenses

 

(541,396)

 

(27,470)

 

(513,926)

 

1,871%

 

$

(33,865)

$

(10,088)

$

(23,777)

 

236%


Revenues are derived primarily from guard services and cash transport.  Costs and expenses are comprised primarily of payroll for guards and management.


Marketing and Products


 

 

Three months ended March 31,

 

Percent

 

 

2016

 

2015

 

Change

 

Change

Revenues

$

50,098

$

12,798

$

37,300

 

291%

Costs and expenses

 

(81,575)

 

(24,653)

 

(56,922)

 

231%

 

$

(31,477)

$

(11,855)

$

(19,622)

 

166%


Chiefton, acquired in late September 2015, contributed revenue of $49,147 in 2016.  Revenues from our wholesale supply business decreased from $12,798 in 2015 to $951 in 2016, as we transitioned to a relaunch of GC Supply in April 2016 with a new mix of products.  Costs and expenses increased in 2016 primarily due to Chiefton.




20



Consulting and Advisory


 

 

Three months ended

March 31,

 

 

2016

 

2015

Revenues

$

98,114

$

--

Costs and expenses

 

(83,769)

 

--

 

$

14,345

$

--


We relaunched our consulting business under the tradename Next Big Crop in May 2015, by hiring two individuals with expertise in the cannabis consulting industry, including obtaining licenses, compliance, cultivation, logistical support, facility design and building services.   We have contracts with clients pursuing medical cannabis licenses in numerous states.  Costs and expenses consist primarily of payroll and external consulting fees.


Finance and Real Estate


 

 

Three months ended March 31,

 

Percent

 

 

2016

 

2015

 

Change

 

Change

Revenues

$

36,369

$

26,677

$

9,692

 

36%

Costs and expenses

 

(11,786)

 

(9,007)

 

(2,779)

 

31%

Interest expense

 

(3,352)

 

(2,322)

 

(1,030)

 

44%

 

$

21,231

$

15,348

$

5,883

 

38%


Revenue from leasing our Pueblo facility remained steady between 2016 and 2015.  Revenue increased in 2016 compared to 2015, due to lease revenue for The Greenhouse.  We continue to renovate The Greenhouse and are pursuing new tenants in anticipation of being able to generate additional revenue from currently available space.  Costs and expenses increased in 2016 compared to 2015, associated with The Greenhouse.  Interest expense represents the interest for the mortgage on our Pueblo facility.


Liquidity and Capital Resources


We had cash of $14,626 and $58,711, respectively, as of March 31, 2016 and December 31, 2015.  Our cash flows from operating, investing and financing activities were as follows:


 

 

Three months ended

March 31,

 

 

2016

 

2015

Net cash used in operating activities

$

(247,299)

$

(290,061)

Net cash used in investing activities

 

(2,616)

 

(13,253)

Net cash provided by financing activities

$

205,830

$

237,466


Net cash used in operating activities decreased in 2016 by $42,762 compared to 2015, primarily due to our management of working capital.  Our operations expanded significantly in 2015, with the launch of our Security and Cash Management segment through the acquisition of IPG, as well as the relaunch of our Consulting segment, with the hiring of three employees with expertise in the cannabis industry.  We have also expanded our infrastructure ahead of anticipated revenue growth in all of our segments.  Where possible, we continue to use non-cash equity-based instruments to obtain consulting services and compensate employees.


Net cash used in investing activities relates primarily to renovating The Greenhouse for use as corporate offices and future revenue generating activities through leasing available space.


Net cash provided by financing activities was from our short-term financing with Infinity Capital, which carries an interest rate of 5%, offset by payments on our Pueblo mortgage.


Non-GAAP Financial Measures


For the non-GAAP Adjusted EBITDA (Earnings (loss) Before Interest, Taxes, Depreciation and Amortization) per share-basic and diluted measures presented above, we have provided (1) the most directly comparable GAAP measure; (2) a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure; (3) an explanation of why our management believes this non-GAAP measure provides useful information to investors; and (4) additional purposes for which we use this non-GAAP measure.




21



We believe that the disclosure of Adjusted EBITDA per share-basic and diluted provides investors with a better comparison of our period-to-period operating results. We exclude the effects of certain items from net loss per share-basic and diluted when we evaluate key measures of our performance internally, and in assessing the impact of known trends and uncertainties on our business. We also believe that excluding the effects of these items provides a more balanced view of the underlying dynamics of our business. Adjusted EBITDA per share-diluted excludes the impacts of interest expense, tax expense, depreciation and amortization, gain (loss) on its derivative liability, and share-based compensation. Weighted average number of common shares outstanding - basic and diluted (adjusted) excludes the impact of shares issued in connection with share-based compensation.


Tabular reconciliations of this supplemental non-GAAP financial information to our most comparable GAAP information are contained in this Quarterly Report on Form 10-Q. We present such non-GAAP supplemental financial information, as we believe such information provides additional meaningful methods of evaluating certain aspects of our operating performance from period-to-period on a basis that may not be otherwise apparent on a non-GAAP basis. This supplemental financial information should be considered in addition to, not in lieu of, our Condensed Consolidated Financial Statements.


 

 

Three months ended

March 31,

 

 

2016

 

2015

Net loss

$

(1,188,232)

$

(828,493)

Adjustments:

 

 

 

 

Share-based expense

 

600,469

 

248,625

Depreciation and amortization

 

97,267

 

9,007

Amortization of debt discount and debt financing costs

 

135,837

 

242,630

Interest expense

 

43,830

 

69,207

Net (gain) loss on derivative liability

 

--

 

22,233

Total adjustments

 

877,403

 

591,702

Adjusted EBITDA

$

(310,829)

$

(236,791)

 

 

 

 

 

Per share – basic and diluted:

 

 

 

 

Net loss

$

(0.08)

$

(0.06)

Adjusted EBITDA

 

(0.02)

 

(0.02)

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

Net loss

 

14,930,256

 

13,095,465

Adjusted EBITDA

 

14,915,421

 

13,050,465


Critical Accounting Policies


Our condensed financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates used to prepare the condensed financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended December 31, 2014 and Note 1 to the Condensed Consolidated Financial Statements in this Form 10-Q.


Off-Balance Sheet Arrangements


We did not have any off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


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




22



ITEM 4.  CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures


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


We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2016, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses discussed below.


Internal Control over Financial Reporting


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


·

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

·

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

·

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


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


Management identified the following material weaknesses:


·

We have not performed a risk assessment and mapped our processes to control objectives;

·

We have not implemented comprehensive entity-level internal controls;

·

We have not implemented adequate system and manual controls; and

·

We do not have sufficient segregation of duties.


Assessment of Internal Control over Financial Reporting


Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013). Based on management’s assessment, management concluded that the above material weaknesses have not been remediated and, accordingly, our internal control over financial reporting is not effective as of March 31, 2016.




23



Remediation of Material Weaknesses


We have designed and plan to implement, or in some cases have already implemented, the specific remediation initiatives described below:


·

We intend to allocate resources to perform a risk assessment and map processes to control objectives and, where necessary, implement and document internal controls in accordance with COSO.

·

Our entity-level controls are, generally, informal and we intend to evaluate current processes, supplement where necessary, and document requirements.

·

While we have implemented procedures to identify, evaluate and record significant transactions, we need to formally document these procedures and evidence the performance of the related controls.

·

We plan to evaluate system and manual controls, identify specific weaknesses, and implement a comprehensive system of internal controls.

·

We are assessing our current staffing and evaluating our personnel requirements to improve our segregation of duties.


Management understands that in order to remediate the material weaknesses, additional segregation of duties, changes in personnel, and technologies are necessary. We do not expect to have fully remediated these material weaknesses until management has tested those internal controls and found them to have been remediated.


Our Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to such attestation pursuant to rules of the SEC that permits us to provide only management’s report in our Annual Report on Form 10-K.


Changes in Internal Control over Financial Reporting


We have implemented an informal process of preparation and review of balance sheet reconciliations, as well as informal procedures to identify, evaluate and record significant transactions; however, these changes do not meet the strict requirements to overcome the material weaknesses identified above.




24




PART II.  OTHER INFORMATION


ITEM 1.    LEGAL PROCEEDINGS


None.


ITEM 1A.  RISK FACTORS


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


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


None.


ITEM 3.    DEFAULTS UPON SENIOR SECURITIES


None.


ITEM 4.    MINE SAFETY DISCLOSURES


Not applicable.


ITEM 5.   OTHER INFORMATION


None.


ITME 6.  Exhibits


Exhibits

 

Description

31.1

 

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

31.2

 

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

32.1

 

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

101

 

The following financial information from the Quarterly Report on Form 10-Q of General Cannabis Corporation for the quarter ended March 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows, and (iv) Notes to the Condensed Consolidated Financial Statements.




25




SIGNATURES


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


 

GENERAL CANNABIS CORPORATION

 

 

 

Date: May 9, 2016

By:

/s/Robert Frichtel

 

 

Robert Frichtel, Principal Executive Officer

 

 

 

 

By:

/s/ Shelly Whitson

 

 

Shelly Whitson, Principal Financial and Accounting Officer




26