0001558370-20-013716.txt : 20201112 0001558370-20-013716.hdr.sgml : 20201112 20201112162943 ACCESSION NUMBER: 0001558370-20-013716 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 76 CONFORMED PERIOD OF REPORT: 20200930 FILED AS OF DATE: 20201112 DATE AS OF CHANGE: 20201112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL CANNABIS CORP CENTRAL INDEX KEY: 0001477009 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-DETECTIVE, GUARD & ARMORED CAR SERVICES [7381] IRS NUMBER: 208096131 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-54457 FILM NUMBER: 201307182 BUSINESS ADDRESS: STREET 1: 6565 EAST EVANS AVENUE CITY: DENVER STATE: CO ZIP: 80224 BUSINESS PHONE: 303-759-1300 MAIL ADDRESS: STREET 1: 6565 EAST EVANS AVENUE CITY: DENVER STATE: CO ZIP: 80224 FORMER COMPANY: FORMER CONFORMED NAME: Advanced Cannabis Solutions, Inc. DATE OF NAME CHANGE: 20131023 FORMER COMPANY: FORMER CONFORMED NAME: Promap Corp DATE OF NAME CHANGE: 20091117 10-Q 1 cann-20200930x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

for the quarterly period ended September 30, 2020.

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

for the transition period from ____________ to ____________.

Commission file number:  000-54457

GENERAL CANNABIS CORP

(Exact name of registrant as specified in its charter)

Colorado

    

90-1072649

(State of incorporation)

(IRS Employer Identification No.)

6565 East Evans Avenue
Denver, CO 80224

(Address of principal executive offices) (Zip Code)

(303) 759-1300

(Registrant’s Telephone Number, Including Area Code)

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

Title of each class

Name of each exchange on which registered

Ticker symbol

N/A

N/A

N/A

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act.

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

As of November 10, 2020, there were 59,838,929 issued and outstanding shares of the Company's  common stock.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2020

(Unaudited)

December 31, 2019

ASSETS

 

  

 

  

Current assets

 

  

 

  

Cash and cash equivalents

$

734,305

$

122,390

Accounts receivable, net of allowance of $137,000 and $111,000 as of September 30, 2020 and December 31, 2019, respectively

 

300,200

 

85,204

Current portion of notes receivable, net of allowance of $125,000 and $0 as of September 30, 2020 and December 31, 2019, respectively

 

350,000

 

375,000

Inventories, net

285,405

Prepaid expenses and other current assets

 

590,320

 

546,970

Assets of discontinued operations

 

84,455

 

422,671

Total current assets

 

2,344,685

 

1,552,235

Note receivable, net

 

 

93,333

Right-of-use operating lease asset

2,678,151

Property and equipment, net

 

372,376

 

1,507,327

Investment

 

250,000

 

250,000

Intangible assets, net

20,875

Goodwill

2,561,744

Assets of discontinued operations

 

 

99,109

Total assets

$

8,227,831

$

3,502,004

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

  

 

  

Current liabilities

 

  

 

  

Accounts payable and accrued expenses

$

1,340,885

$

1,221,194

Interest payable

 

89,355

 

93,375

Income tax payable

108,731

Customer deposits

 

302,941

 

562,803

Operating lease liability, current

364,050

Accrued stock payable

 

60,900

 

80,657

Current portion of notes payable (net of discount)

 

1,638,527

 

2,269,977

Related party note payable (net of discount)

 

 

60,374

Warrant derivative liability

 

1,269,472

 

4,620,594

Stock put liability

958,114

Liabilities of discontinued operations

87,627

357,242

Total current liabilities

 

6,220,602

 

9,266,216

Operating lease liability, non-current

2,330,084

Long-term notes payable

500,000

Related party long-term note payable

100,000

Total liabilities

9,150,686

9,266,216

Commitments and contingencies (Note 10)

Stockholders’ deficit

 

  

 

  

Preferred stock, no par value; 5,000,000 shares authorized; no shares issued and outstanding at September 30, 2020 and 2019

Common Stock, $0.001 par value; 100,000,000 shares authorized; 58,720,574 shares and 39,497,480 shares issued and outstanding on September 30, 2020 and December 31, 2019, respectively

58,721

39,498

Additional paid-in capital

 

70,819,714

 

61,468,034

Accumulated deficit

 

(71,801,290)

 

(67,271,744)

Total stockholders’ deficit

 

(922,855)

 

(5,764,212)

Total liabilities and stockholders’ deficit

$

8,227,831

$

3,502,004

See Notes to condensed consolidated financial statements.

3

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

    

Three months ended

Nine months ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

REVENUES

 

Service

$

132,873

$

614,041

$

495,623

$

1,228,344

Cultivation sales

798,352

1,307,527

Product sales

632,623

220,293

3,099,113

1,178,733

Interest

21,716

28,597

83,814

71,193

Total revenues

1,585,564

862,931

4,986,077

2,478,270

COSTS AND EXPENSES

Cost of sales

989,916

452,220

3,725,600

1,669,314

Selling, general and administrative

956,576

1,181,270

3,123,196

3,240,742

Stock-based compensation expense

420,990

768,079

1,427,931

3,013,042

Professional fees

672,987

282,688

1,784,684

1,254,183

Depreciation and amortization

50,910

31,837

107,780

80,380

Total costs and expenses

3,091,379

2,716,094

10,169,191

9,257,661

OPERATING LOSS

(1,505,815)

(1,853,163)

(5,183,114)

(6,779,391)

OTHER EXPENSE/(INCOME)

Amortization of debt discount and equity issuance costs

61,002

83,094

199,839

1,976,869

Interest expense

84,716

75,996

359,436

274,083

Debt extinguishment

298,500

1,186,336

298,500

Gain on derivative liability

(1,076,264)

(420,840)

(2,447,343)

(822,702)

Gain on sale of building

(139,187)

Total other (income) expense, net

(930,546)

36,750

(840,919)

1,726,750

NET LOSS FROM CONTINUING OPERATIONS

$

(575,269)

$

(1,889,913)

$

(4,342,195)

$

(8,506,141)

Gain/(loss) from discontinued operations

69,005

(364,409)

(78,620)

(1,156,678)

LOSS BEFORE INCOME TAXES

$

(506,264)

$

(2,254,322)

$

(4,420,815)

$

(9,662,819)

Provision for income taxes

68,196

108,731

NET LOSS

$

(574,460)

$

(2,254,322)

$

(4,529,546)

$

(9,662,819)

Deemed dividend

(98,000)

(1,192,000)

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

$

(574,460)

$

(2,254,322)

$

(4,627,546)

$

(10,854,819)

PER SHARE DATA — Basic and diluted

Net loss from continuing operations per share

$

(0.01)

$

(0.05)

$

(0.09)

$

(0.22)

Net loss from discontinued operations per share

$

0.00

$

(0.01)

$

(0.00)

$

(0.03)

Net loss attributable to common stockholders per share

$

(0.01)

$

(0.06)

$

(0.10)

$

(0.28)

Weighted average number of common shares outstanding

58,097,819

39,402,594

47,951,618

38,106,781

See Notes to condensed consolidated financial statements.

4

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine months ended

September 30,

    

2020

2019

OPERATING ACTIVITIES

 

  

 

  

Net loss

$

(4,529,546)

$

(9,662,819)

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

 

  

 

  

Amortization of debt discount and equity issuance costs

 

199,839

 

1,976,869

Depreciation and amortization

 

109,954

 

146,819

Amortization of loan origination fees

 

(6,667)

 

(10,820)

Noncash lease expense

150,984

Bad debt expense

128,491

116,761

Gain on warrant derivative liability

(2,447,343)

(822,702)

Loss on extinguishment of debt

1,186,336

298,500

Gain on sale of building

(139,187)

Loss on disposal of assets

 

8,593

 

Stock-based compensation

 

1,427,931

 

3,013,042

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

(28,941)

 

(74,650)

Prepaid expenses and other assets

 

(11,176)

 

(242,571)

Inventory

 

(100,144)

 

(18,005)

Income taxes

108,731

Operating lease liabilities

(135,001)

Accounts payable and other current liabilities

 

(307,226)

 

750,264

Net cash used in operating activities:

 

(4,384,372)

 

(4,529,312)

INVESTING ACTIVITIES

 

  

 

  

Purchase of property and equipment

 

(156,344)

 

(296,091)

Proceeds on sale of building

1,421,134

Lending on notes receivable

(705,000)

Net cash provided by (used in) investing activities

 

1,264,790

 

(1,001,091)

FINANCING ACTIVITIES

 

  

 

  

Proceeds from sale of common stock and warrants

 

3,000,000

 

2,604,355

Proceeds from the exercise of warrants

90,000

Proceeds from exercise of stock options

 

 

188,770

Proceeds from notes payable

 

1,500,000

 

1,155,000

Payments on notes payable

 

(975,000)

 

(5,743,000)

Net cash provided by (used in) financing activities

 

3,615,000

 

(1,794,875)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

495,418

 

(7,325,278)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

224,994

 

7,957,169

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

720,412

$

631,891

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION

 

  

 

  

Cash paid for interest

$

364,440

$

209,777

NON-CASH INVESTING & FINANCING ACTIVITIES

 

  

 

  

Deemed dividend from 8.5% Warrants repricing

$

98,000

$

1,192,000

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

 

2,721,069

 

154,200

12% Warrants recorded as a debt discount and loss on extinguishment of debt

 

 

392,000

15% Warrants recorded as a debt discount and additional paid-in capital

 

167,163

 

15% Warrants recorded as a loss on extinguishment of debt and additional paid-in capital

668,336

Debt converted to equity

957,056

Beneficial conversion feature

233,500

Cashless exercise

903,779

Issuance of common stock to an employee

100,000

Stock issued in connection with SevenFive Farm acquisition

2,861,495

See Notes to condensed consolidated financial statements.

5

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ (DEFICIT) EQUITY

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

Common Stock

Additional

Accumulated

Shares

Amount

Paid-in Capital

Deficit

Total

June 30, 2020

    

51,188,564

    

$

51,189

    

$

67,406,256

    

$

(71,226,830)

    

$

(3,769,385)

Sale of common stock, net of issuance costs

7,532,010

 

7,532

 

2,992,468

 

 

3,000,000

Stock option granted to employees and consultants

 

 

 

420,990

 

 

420,990

Net loss

 

 

 

 

(574,460)

 

(574,460)

September 30, 2020

 

58,720,574

$

58,721

$

70,819,714

$

(71,801,290)

$

(922,855)

Common Stock

Additional

Accumulated

Shares

Amount

Paid-in Capital

Deficit

Total

June 30, 2019

39,302,752

    

$

39,303

    

$

59,061,513

    

$

(59,196,444)

    

$

(95,628)

Warrants issued with the 12% Notes

 

 

392,000

 

 

392,000

Common stock issued upon exercise of stock options

194,728

 

195

 

131,950

 

 

132,145

Stock options granted to employees and consultants

 

 

734,549

 

 

734,549

Net loss

 

 

 

(2,254,322)

 

(2,254,322)

September 30, 2019

39,497,480

$

39,498

$

60,320,012

$

(61,450,766)

$

(1,091,256)

See Notes to condensed consolidated financial statements.

6

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ (DEFICIT) EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

    

Common Stock

Additional

Accumulated

    

Shares

    

Amount

    

Paid-in Capital

    

Deficit

    

Total

January 1, 2020

39,497,480

$

39,498

$

61,468,034

$

(67,271,744)

$

(5,764,212)

Sale of common stock, net of issuance costs

7,574,745

 

7,575

 

3,092,425

 

 

3,100,000

Common stock issued upon conversion of debt

2,215,892

 

2,215

 

954,841

 

 

957,056

Common stock issued for acquisition of SevenFive Farm

8,859,117

 

8,859

 

1,894,522

 

 

1,903,381

Stock options granted to employees and consultants

1,347,688

1,347,688

Beneficial conversion feature

233,500

233,500

Warrants exercised

200,000

200

172,041

172,241

Warrants issued with the 15% Notes

835,499

835,499

Cashless exercise of warrants

373,340

 

374

 

821,164

 

 

821,538

Net loss

 

 

 

(4,529,546)

 

(4,529,546)

September 30, 2020

58,720,574

$

58,721

$

70,819,714

$

(71,801,290)

$

(922,855)

Common Stock

Additional

Accumulated

Shares

    

Amount

    

Paid-in Capital

    

Deficit

    

Total

January 1, 2019

36,222,752

$

36,223

$

56,303,061

$

(51,787,947)

$

4,551,337

Sale of common stock, net of issuance costs

3,000,000

 

3,000

 

503,615

 

 

506,615

Warrants issued with the 12% Notes

392,000

392,000

Common stock issued for property and equipment

5,000

 

5

 

7,995

 

 

8,000

Common stock issued upon exercise of stock options

269,728

 

270

 

188,500

 

 

188,770

Stock options granted to employees and consultants

 

 

2,924,841

 

 

2,924,841

Net loss

 

 

 

(9,662,819)

 

(9,662,819)

September 30, 2019

39,497,480

$

39,498

$

60,320,012

$

(61,450,766)

$

(1,091,256)

See Notes to condensed consolidated financial statements.

7

GENERAL CANNABIS CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1.  NATURE OF OPERATIONS, HISTORY AND PRESENTATION

Nature of Operations

General Cannabis Corp, a Colorado Corporation (the “Company,” “we,” “us,” “our,” or “GCC”) (formerly, Advanced Cannabis Solutions, Inc.), was incorporated on June 3, 2013, and provides services and products to the regulated cannabis industry. We currently trade on the OTCQB® Venture Market. As of September 30, 2020, our operations are segregated into the following three segments:

Operations Consulting and Products (“Operations Segment”)

Through Next Big Crop (“NBC”), we deliver comprehensive consulting services to the cannabis industry that include obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and construction, and expansion of existing operations. During the three and nine months ended September 30, 2020, 60% and 76% of NBC’s revenue was with one and four customers, respectively.

NBC oversees our wholesale equipment and supply business, operated under the name “GC Supply,” which provides turnkey sourcing and stocking services to cultivation, retail and infused products manufacturing facilities. Our products include building materials, equipment, consumables and compliance packaging. There are generally multiple suppliers for the products we sell; however, there are a limited number of manufacturers of certain high-tech cultivation equipment. NBC also provides operational support for our internal cultivation.

Cultivation (“Cultivation Segment”)

Through our acquisition of SevenFive Farm ("SevenFive") in May 2020, we operate a licensed light deprivation greenhouse cultivation facility.

During the three and nine months ended September 30, 2020, 15% and 27% of SevenFive’s revenue was with one and two customers, respectively.

Capital Investments (“Investments Segment”)

As a publicly traded company, we believe that we have access to capital that may not be available to businesses operating in the cannabis industry. Accordingly, we may provide debt or equity capital through investing in businesses using cash or shares of our common stock.

Basis of Presentation

The accompanying condensed consolidated financial statements include all accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States of America ("U.S. GAAP") can be condensed or omitted. The condensed consolidated balance sheet for the year ended December 31, 2019 was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto of the Company for the year ended December 31, 2019 which were included in the annual report on Form 10-K/A filed by the Company on July 7, 2020.

8

In the opinion of management, these condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and notes thereto of the Company and include all adjustments, consisting only of normal recurring adjustments, considered necessary for the fair presentation of the Company's financial position and operating results. The results for the three and nine months ended September 30, 2020 are not necessarily indicative of the operating results for the year ending December 31, 2020, or any other interim or future periods. Since the date of the Annual Report, there have been no material changes to the Company’s significant accounting policies except for inventories and goodwill and long-lived assets as disclosed below.

Reclassifications

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

Use of Estimates

The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Furthermore, when testing assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment charges may result. In particular, the COVID-19 pandemic has adversely impacted and is likely to further adversely impact the Company's business and markets. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company's business, results of operations and financial condition, including revenues, expenses, reserves and allowances, fair value measurements and asset impairment charges, will depend on future developments that are highly uncertain and difficult to predict. These developments include, but are not limited to, the duration and spread of the pandemic, its severity in our markets and elsewhere, governmental actions to contain the spread of the pandemic and respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.

Going Concern

The condensed consolidated financial statements have been prepared on a going concern basis, which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for at least the twelve months from the date these condensed consolidated financial statements are issued. As of September 30, 2020, our cash balance of approximately $0.7 million is not sufficient to absorb our operating losses and repay our notes payable of $2.3 million, of which $1.7 million is short-term. The warrants associated with this debt, if exercised in cash, would provide sufficient funds to retire the debt; however, there is no guarantee that these warrants will be exercised in cash or at all. Our ability to continue as a going concern is dependent upon our generating profitable operations in the future and / or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. Management believes that (a) we will be successful obtaining additional capital and (b) actions presently being taken to further implement our business plan and generate additional revenues provide opportunity for the Company to continue as a going concern. While we believe in the viability of our strategy to generate additional revenues and our ability to raise additional funds, there can be no assurances that we will be successful in such efforts. Accordingly, there is substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

Summary of Significant Accounting Policies

See our Annual Report on Form 10-K for the year ended December 31, 2019, as amended, for discussion of the Company's significant accounting policies.

9

Inventories

Inventories consist of raw materials, supplies, growing and harvested plants (work-in-process), and finished goods, and are stated at the lower of cost or net realizable value. All direct and indirect costs of growing plants are accumulated until the time of harvest and allocated to the plants during the growing process. All direct and indirect costs of finished goods are accumulated and allocated to the products between the harvest and completion stages. The Company uses an average costing method to allocate costs.

Net realizable value is determined as the estimated selling price in the ordinary course of business less the estimated costs of completion and estimated costs necessary to make the sale. The Company periodically reviews physical inventory for excess, obsolete, and potentially impaired items, noting none for the period ended September 30, 2020.

Goodwill and Long-Lived Assets

Goodwill represents the excess of purchase price over the fair value of identifiable net assets acquired in a business combination. Goodwill and long-lived intangible assets are tested for impairment at least annually in accordance with the provisions of ASC No. 350, “Intangibles-Goodwill and Other” (“ASC No. 350”). ASC No. 350 requires that goodwill be tested for impairment at the reporting unit level (operating segment or on level below an operating segment) on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carry value. Application of the goodwill impairment test requires judgement, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. We test goodwill and long-lived assets annually in April, unless an event occurs that would cause the us to believe the value is impaired at an interim date.

Intangible assets with finite useful lives are amortized over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

Recently Issued Accounting Standards

FASB ASU 2020-06 – “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”- In June 2020, the Financial Accounting Standards Board (“FASB”) issued guidance which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Accounting Standards Updates (“ASU”) also removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and simplifies the diluted earnings per share calculation in certain areas. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2021, although early adoption is permitted. We are in the process of evaluating the impact of this new guidance on our consolidated financial statements.

FASB ASU 2019-12 – “Income Taxes (Topic 740)” – In December 2019, the FASB issued guidance which simplifies certain aspects of accounting for income taxes. The guidance is effective for interim and annual reporting periods beginning after December 15, 2020, and early adoption is permitted. We do not expect adoption of this ASU to have a material effect on our consolidated financial statements.

FASB ASU 2018-13 – “Fair Value Measurement (Topic 820)”- In August 2018, the FASB issued new disclosure guidance on fair value measurement. This new guidance modifies the disclosure requirements on fair value measurements, including removal and modifications of various current disclosures as well as some additional disclosure requirements for Level 3 fair value measurements. Some of these disclosure changes must be applied prospectively while others retrospectively depending on requirement. We adopted ASU 2018-13 as of January 1, 2020. There was no material impact to our consolidated financial statements or disclosures.

10

NOTE 2. BUSINESS ACQUISITION

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

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

The preliminary purchase price allocation is as follows:

Inventories

$

185,261

Fixed assets

    

89,490

Cultivation license

 

20,000

Tradename

 

5,000

Goodwill

 

2,561,744

$

2,861,495

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

    

Three months ended

    

Nine months ended

September 30, 

September 30, 

2020

2019

2020

2019

Total revenues

$

1,585,564

$

1,680,887

$

4,986,077

$

4,443,902

Net loss attributable to common stockholders

$

(643,465)

$

(1,616,340)

$

(4,548,926)

$

(10,243,814)

Net loss per common share:

$

(0.01)

$

(0.03)

$

(0.09)

$

(0.22)

Weighted average number of basic and diluted common shares outstanding

58,097,819

48,261,711

52,704,502

46,965,898

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

11

NOTE 3. DISCONTINUED OPERATIONS

Security Segment

On December 26, 2019, our board of directors and management made the strategic decision to investigate a possible buyer for the Security Segment and if no buyer could be found, cease operations of the Security Segment. We transferred all our Colorado security contracts and employees to a company on January 16, 2020, in exchange for which we will receive $1.00 per man hour worked on existing contracts for a period of one year. On February 6, 2020 we cancelled all our security contracts in California. The assets and liabilities for the Security Segment are presented in the balance sheet as of September 30, 2020 and December 31, 2019 as discontinued operations and the operating results for the three and nine months ended September 30, 2020 and 2019 are presented as gain (loss) from discontinued operations.

Assets and liabilities of discontinued operations for the Security Segment included the following:

September 30, 

December 31, 

    

2020

    

2019

Cash and cash equivalents

$

81,015

$

77,380

Accounts receivable, net

 

3,440

 

280,058

Prepaid expenses and other current assets

 

651

 

17,780

Current assets discontinued operations

85,106

375,218

Property and equipment, net

15,584

Noncurrent assets discontinued operations

15,584

Accounts payable and accrued expenses

88,309

Customer deposits

60,940

Current liabilities discontinued operations

149,249

A summary of the discontinued operations for the Security Segment is presented as follows:

Three months ended

Nine months ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

Service revenues

$

$

524,525

$

119,891

$

1,596,673

Cost of sales

427,613

 

88,599

 

1,257,450

Selling, general and administrative

(65,053)

210,999

 

81,054

 

607,670

Professional fees

2,415

 

 

4,219

Depreciation and amortization

5,924

2,174

49,500

Total (income) expenses

(65,053)

646,951

 

171,827

 

1,918,839

OPERATING INCOME (LOSS)

65,053

(122,426)

 

(51,936)

 

(322,166)

Interest expense, net

984

 

984

 

2,438

NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS

$

65,053

$

(123,410)

$

(52,920)

$

(324,604)

12

The cash flows related to discontinued operations have not been segregated and are included in the consolidated statements of cash flows. The following table provides selected information on cash flows related to discontinued operations for the Security Segment for the nine months ended September 30, 2020 and 2019.

Nine months ended

September 30, 

    

2020

    

2019

Receivables

$

276,618

$

128,867

Prepaids and other

17,780

(8,752)

Depreciation and amortization

2,174