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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
June 30, 2015.


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 August 21, 2015, there were 14,529,277 issued and outstanding shares of the Companys common stock.








GENERAL CANNABIS CORPORATION

FORM 10-Q


TABLE OF CONTENTS


 

 

Page

PART I. FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

Condensed consolidated balance sheets

3

 

Condensed consolidated statements of operations

4

 

Condensed consolidated statements of cash flows

5

 

Notes to condensed consolidated financial statements

6

 

 

 

Item 2.

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

24

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

29

 

 

 

Item 4.

Controls and Procedures

29

 

 

 

PART II. OTHER INFORMATION

31

 

 

 

Item 1.

Legal Proceedings

31

 

 

 

Item 1A.

Risk Factors

31

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

 

 

Item 3.

Defaults Upon Senior Securities

32

 

 

 

Item 4.

Mine Safety Disclosures

32

 

 

 

Item 5.

Other Information

32

 

 

 

Item 6.

Exhibits

32

 

 

 

 

Signatures

33





GENERAL CANNABIS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS


 

 

June 30,
2015

 

December 31,

2014

 

 

(Unaudited)

 

 

ASSETS

 

 

 

 

Current Assets

 

 

 

 

Cash and cash equivalents

$

16,371

$

165,536

Accounts receivable

 

73,190

 

18,319

Prepaid expenses and other current assets

 

104,622

 

22,402

Inventory, net

 

54,807

 

70,341

Total current assets

 

248,990

 

276,598

 

 

 

 

 

Property and equipment, net

 

1,731,957

 

1,707,410

Intangible assets, net

 

1,342,937

 

Goodwill

 

487,000

 

Deferred financing costs, net

 

63,889

 

83,056

Total Assets

$

3,873,973

$

2,067,064

 

 

 

 

 

LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIENCY)

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

Accrued stock payable, current portion

$

1,714,947

$

385,917

Related party line of credit

 

289,000

 

Notes payable (net of discount), less current portion

 

195,001

 

6,337

Interest payable

 

68,572

 

16,470

Accounts payable and accrued expenses

 

140,781

 

83,185

Deferred rental revenue

 

36,884

 

Warrant derivative liability

 

 

3,893,904

Total current liabilities

 

2,445,185

 

4,385,813

 

 

 

 

 

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

 

1,111,143

 

1,055,797

Accrued stock payable, less current portion

 

300,848

 

138,125

Tenant deposits

 

9,204

 

8,854

Total liabilities

 

3,866,380

 

5,588,589

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

Stockholders’ Equity (Deficiency)

 

 

 

 

Preferred stock, no par value; 5,000,000 share authorized; no shares issued and outstanding at June 30, 2015 and December 31, 2014

 

 

Common Stock, $0.001 par value; 100,000,000 shares authorized; 14,393,409 shares and 12,499,933 shares issued and outstanding on June 30, 2015 and December 31, 2014, respectively

 

14,393

 

12,500

Additional paid-in capital

 

12,812,016

 

4,107,076

Accumulated deficit

 

(12,818,816)

 

(7,641,101)

 

 

 

 

 

Total Stockholders’ Equity (Deficiency)

 

(7,593)

 

(3,521,525)

Total Liabilities & Stockholders’ Equity (Deficiency)

$

3,873,973

$

2,067,064


See Notes to condensed consolidated financial statements.


3




GENERAL CANNABIS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


 

 

Three Months Ended June 30, 2015

 

Three Months Ended June 30, 2014

 

Six Months Ended June 30, 2015

 

Six Months Ended June 30, 2014

REVENUES

 

 

 

 

 

 

 

 

Service revenues

$

376,722

$

33,600

$

394,104

$

53,600

Tenant revenues

 

37,911

 

28,765

 

64,588

 

57,530

Wholesale revenues

 

12,569

 

17,758

 

25,367

 

17,758

Total revenues

 

427,202

 

80,123

 

484,059

 

128,888

 

 

 

 

 

 

 

 

 

COSTS AND EXPENSES

 

 

 

 

 

 

 

 

Cost of service revenues

 

242,951

 

14,850

 

257,088

 

29,700

Cost of goods sold

 

5,764

 

17,323

 

12,142

 

17,323

Selling, general and administrative

 

435,279

 

181,103

 

620,683

 

333,553

Share-based compensation

 

3,855,465

 

 

4,104,090

 

Professional fees

 

162,768

 

118,538

 

250,497

 

201,054

Depreciation and amortization

 

66,871

 

3,116

 

75,878

 

6,232

Total costs and expenses

 

4,769,098

 

334,930

 

5,320,378

 

587,862

 

 

 

 

 

 

 

 

 

OPERATING LOSS

 

(4,341,896)

 

(254,807)

 

(4,836,319)

 

(458,974)

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

Amortization of debt discount and deferred financing costs

 

(134,195)

 

(113,040)

 

(376,825)

 

(417,881)

Interest expense

 

(78,498)

 

(78,836)

 

(147,705)

 

(128,110)

Net gain (loss) on derivative liability

 

232,867

 

223,876

 

210,634

 

(423,764)

Other expense

 

(27,500)

 

 

(27,500)

 

Total other income (expense), net

 

(7,326)

 

32,000

 

(341,396)

 

(969,755

 

 

 

 

 

 

 

 

 

NET LOSS

$

(4,349,222)

$

(222,807)

$

(5,177,715)

$

(1,428,729)

 

 

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

 

 

 

Net loss per share – basic and diluted

$

(0.31)

$

(0.02)

$

(0.38)

$

(0.11)

Weighted average number of common shares outstanding - basic and diluted

 

14,054,673

 

13,439,159

 

13,577,719

 

13,548,968


See Notes to condensed consolidated financial statements.



4




GENERAL CANNABIS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


 

 

Six Months

Ended

June 30,

2015

 

Six Months Ended

June 30,

2014

CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

 

 

 

Net loss

$

(5,177,715)

$

(1,428,729)

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

operating activities:

 

 

 

 

Amortization of debt discount

 

357,658

 

417,881

Amortization of deferred financing costs

 

19,167

 

15,972

Gain (loss) on derivative liability, net

 

(210,634)

 

423,764

Bad debt expense

 

4,320

 

26,400

Depreciation and amortization expense

 

75,878

 

6,232

Issue/ grant of equity instruments for services

 

3,551,850

 

Equity instruments to be issued/ granted for services

 

552,240

 

Changes in operating assets and liabilities

 

 

 

 

Increase in accounts receivable

 

(59,191)

 

(135,869)

(Increase) in prepaid expenses and other assets

 

(82,220)

 

(4,005)

Decrease/ (increase) in inventory

 

15,534

 

(26,427)

Increase in interest payable

 

53,165

 

3,669

Increase in other liabilities

 

94,830

 

11,492

Net cash used in operating activities:

 

(805,118)

 

(689,620)

 

 

 

 

 

CASH FLOWS USED IN INVESTING ACTIVITIES

 

 

 

 

Purchase of property and equipment

 

(42,562)

 

(11,449)

Increase in other capitalized assets

 

 

(20,000)

Net cash used in investing activities

 

(42,562)

 

(31,449)

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

 

 

 

Proceeds from issuance of notes payable, net of cash expenses

 

325,000

 

1,412,400

Increase in short-term financing from related party

 

289,000

 

Proceeds from sale of warrants, net

 

 

400,000

Principal repayment on convertible notes payable

 

(3,101)

 

(3,178)

Proceeds from exercise of warrants for shares of common stock, net

 

87,616

 

Deferred financing costs

 

 

(15,000)

Net cash provided by financing activities

 

698,515

 

1,794,222

 

 

 

 

 

NET (DECREASE) INCREASE IN CASH

 

(149,165)

 

1,073,153

CASH, BEGINNING OF PERIOD

 

165,536

 

427,436

CASH, END OF PERIOD

$

16,371

$

1,500,589

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION

 

 

 

 

Cash paid for interest

$

95,540

$

123,448

 

 

 

 

 

Supplemental disclosure on non-cash financing activities

 

 

 

 

Acquisition of IPG, net of cash received

$

1,887,000

$

Non-cash financing costs

$

$

100,000

Convertible notes payable settled in stock

$

290,000

$

255,000

Interest on convertible notes payable settled in stock

$

1,063

$

3,669

Warrants issued in connection with debt recorded as debt discount

$

145,547

$

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

$

3,683,270

$

Issuance of common stock from accrued stock payable

$

114,487

$


See Notes to condensed consolidated financial statements.


5




GENERAL CANNABIS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

(Unaudited)


1.   NATURE OF OPERATIONS, HISTORY AND PRESENTATION


Nature of Operations


General Cannabis Corporation (the “Company,” “GCC,” or “GC Corp.”) (formerly, Advanced Cannabis Solutions, Inc.), was incorporated on June 3, 2013 (Inception) and provides products and services to the regulated cannabis industry.  The Company’s primary operations include real estate leasing, shared office space, networking and event services, security and cash management services, industry finance, wholesale supply, and consulting and advisory.


The Company’s 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.  As of the date of this report, the Company owns one cultivation property that is located in a suburb of Pueblo, Colorado.  The property consists of approximately three acres of land, which 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 (the “Pueblo West Property”).


The Company leases cultivation equipment and facilities to customers in the cannabis industry. This includes sale lease-back transactions of grow lights, tenant improvements and other grow equipment. The Company’s finance strategy will include providing customized finance, direct term loans and revolving lines of credit to businesses involved in the cultivation and sale of cannabis and related products.


In October 2014, the Company 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 a leading 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.


In March 2015, the Company’s wholly owned subsidiary, GC Security, LLC (“GCS”), acquired substantially all of the assets of Iron Protection Group, LLC, a Colorado limited liability company (See Note 4).  GCS, which will continue to do business as “Iron Protection Group,” provides advanced security, including on-site professionals and video surveillance, to licensed cannabis cultivators and retail shops.


The Company delivers comprehensive consulting services that includes design and construction to approved and licensed cannabis operators, as well as assistance with licensure and related applications for potential cannabis operators. The Company’s business plan is based on the future growth of the regulated cannabis market in the United States. The Company provides general advisory services for business development, facilities design and construction, cultivation and retail operations, marketing and the improvement and expansion of existing operations.


The Company’s wholesale supply business, GC Supply, is a reseller of supplies to the cannabis market. GC Supply works with industry leaders and innovators to deliver high-quality products that are compliant with applicable regulations and with a focus on products that are manufactured in the United States. GC Supply operates out of a leased, 1,800 square-foot warehouse located in Colorado Springs, Colorado.


While GC Corp. does not grow, harvest, distribute or sell cannabis or any substances that violate United States law or the Controlled Substances Act, the Company may be irreparably harmed by a change in enforcement by the federal or state governments.


Principles of Consolidation


The condensed consolidated financial statements include the results of GCC, and its five wholly-owned subsidiary companies, ACS Colorado Corp., a Colorado corporation formed in 2013; Advanced Cannabis Solutions Corporation, a Colorado corporation formed in 2013, 6565 E. Evans Avenue LLC (“6565 Evans”), a Colorado limited liability company formed in 2014, General Cannabis Capital Corporation (“GCCC”), a Colorado corporation formed in 2015 and GCS, a Colorado limited liability company formed in 2015.  


Advanced Cannabis Solutions Corporation has one wholly-owned subsidiary company, ACS Corp., which was formed in the State of Colorado on June 6, 2013.


Basis of Presentation


The accompanying (a) condensed consolidated balance sheet at December 31, 2014 has been derived from audited statements and (b) the condensed consolidated unaudited financial statements as of June 30, 2015 and 2014, 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on April 15, 2015.  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 and six months ended June 30, 2015 are not necessarily indicative of the results of operations expected for the year ending December 31, 2015.


6



2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


This summary of significant accounting policies is presented to assist the reader in understanding and evaluating the Company’s financial statements. The consolidated financial statements and notes are the representation of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied to the preparation of the financial statements.


Use of Estimates


The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the related notes at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  The Company’s balances requiring management to make estimates and assumptions about future events include equity and debt transactions and the Company’s derivative liability. Actual results could differ from those estimates.


Reclassifications


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.


Concentration of Cash Balances


We maintain our cash balances in financial institutions that from time to time exceed amounts insured by the Federal Deposit Insurance Corporation (up to $250,000, per financial institution as of June 30, 2015). At June 30, 2015 and December 31, 2014, our deposits did not exceed insured amounts. We have not experienced any losses in such accounts.


Business Combinations


Amounts paid for acquisitions are allocated to the tangible assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The Company then allocates the purchase price in excess of net tangible assets acquired to identifiable intangible assets. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions provided by management. The Company allocates any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.


Intangible Assets and Goodwill


Intangible assets are stated at cost and consist primarily of customer relationships, non-compete agreements with key employees, and marketing-related intangibles. The Company’s intangible assets are being amortized on a straight-line basis over a period of two to ten years. The life assigned to customer relationships acquired is based on management’s estimate of our expected customer attrition rate. The attrition rate is estimated based on historical contract longevity and management’s operating experience.


Management evaluates the remaining useful life of intangible assets on a periodic basis to determine whether events and circumstances warrant a revision to the remaining useful life. If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying value of the intangible asset is amortized prospectively over the revised remaining useful life Any potential impairment is evaluated based on anticipated undiscounted future cash flows and actual customer attrition in accordance with Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) 360, Property, Plant and Equipment.


Management monitors the recoverability of goodwill recorded in connection with acquisitions, by reporting unit, annually, or more often if events or changes in circumstances indicate that the carrying amount may not be recoverable.


If it is determined that sufficient indicators of potential impairment exists to require an interim goodwill impairment analysis for a reporting unit, the Company compares the reporting unit’s carrying value to its estimated fair value and, accordingly, performs a second phase of the goodwill impairment test (“Step 2”). Under Step 2, the fair value of the reporting unit’s assets and liabilities are estimated, including tangible assets and intangible assets for the purpose of deriving an estimate of the implied fair value of goodwill. The implied fair value of the goodwill is then compared to the carrying value of the goodwill to determine the amount of the impairment, if any.  There were no impairments to goodwill recorded during the six months ended June 30, 2015.


Long-Lived Assets


The Company accounts for long-lived assets in accordance with ASC 360-10, Property, Plant and Equipment.  The Company tests for impairment losses on long-lived assets used in operations, including property, plant and equipment, and identifiable intangible assets, excluding goodwill, whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be


7



generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the asset exceeds its fair value. Impairment evaluations involve management’s estimates on asset useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on the Company’s operating results and financial positions. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Through the date of this report, the Company had not experienced impairment losses on its long-lived assets. However, there can be no assurances that the demand for the Company’s products and services will continue, which could result in an impairment of long-lived assets in the future.


Conventional Convertible Debt


The Company records conventional convertible debt in accordance with ASC 470-20, Debt with Conversion and Other Options (“ASC 470-20”). Conventional convertible debt is a financial instrument in which the holder may only realize the value of the conversion option by exercising the option and receiving the entire proceeds in a fixed number of shares or the equivalent amount of cash. Conventional convertible debt with a non-detachable conversion feature that does not contain a cash settlement option, and is not accounted for as a derivative, is recorded as a debt instrument in its entirety. The Company has accounted for the December 2013 debt issuance and an 8 ½% Convertible Note Payable as conventional convertible debt (see Note 10).


Fair Value Measurements


ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), provides a comprehensive framework for measuring fair value and expands disclosures regarding fair value measurements.  Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs.  ASC 820 defines the hierarchy as follows:


Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange.


Level 2 - Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reporting date.  The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts, or priced with models using highly observable inputs.


Level 3 - Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value of financial transmission rights.


Our financial instruments consist of cash, accounts receivable, other receivables, prepaid expenses, deferred financing costs, accounts payable and accrued expenses, notes payable and tenant deposits. The carrying values of these financial instruments approximate their fair value due to their short maturities. The Company’s derivative liability is a Level 3 estimated fair market value instrument (see Note 13).


Revenue Recognition


Revenue is recognized on an accrual basis as earned under contract terms. Specifically, revenue from tenant rentals is recognized on a straight-line basis over the reasonably assured lease term, and when collectability is reasonably assured. Consulting revenue is recognized based upon the payment terms within the contracts, and collectability is reasonably assured. Revenue relating to our wholesale business is recognized at the time goods are sold.  Security services revenue is recognized as earned and billed to customers on terms agreed upon with the individual customer, usually weekly or bi-monthly.


Inventory


Inventory consisting of wholesale finished goods is stated at the lower-of-cost (first-in, first-out (“FIFO”)) or market value. Amounts paid to suppliers for inventory not yet received is classified as prepaid inventory. Once received, the cost of inventory is reclassified into inventory. The Company periodically assesses inventory for both potential obsolescence and potential loss of value based primarily on management’s estimated forecast of product demand.  During the three-months ended June 30, 2015, the Company concluded that it incurred a loss in value of inventory of approximately $27,500.  The loss in value of inventory is due to certain nutrients in our Wholesale Supply segment’s inventory that have underperformed in the marketplace.


Income Tax


The Company accounts for income taxes pursuant to ASC 740, Income Taxes (“ASC 740”).  The provision for income taxes, income taxes payable and deferred income taxes are determined using the asset and liability method. Deferred tax assets and liabilities are determined based on temporary differences between the financial carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. On a periodic basis, the Company assesses the probability that its net deferred tax assets, if any, will be recovered. If after evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a valuation allowance is provided by a charge to tax expense to reserve the portion of the deferred tax assets which are not expected to be realized.


8




When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position the Company takes has to have at least a “more likely than not” chance of being sustained (based on the position’s technical merits) upon challenge by the respective authorities. The term “more likely than not” means a likelihood of more than 50 percent. Otherwise, the Company may not recognize any of the potential tax benefit associated with the position. The Company recognizes a benefit for a tax position that meets the “more likely than not” criterion at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon its effective resolution. Unrecognized tax benefits involve management’s judgment regarding the likelihood of the benefit being sustained. The final resolution of uncertain tax positions could result in adjustments to recorded amounts and may affect the Company’s results of operations, financial position and cash flows.


The Company reviews its filing positions for all open tax years in all U.S. federal and state jurisdictions where the Company is required to file. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense.  The tax years subject to examination by major tax jurisdictions include the 2013 Fiscal Period and forward by the U.S. Internal Revenue Service, and the various states.


Net Income (Loss) Per Share


The Company computes net income (loss) per share by dividing the net income (loss) by the weighted average number of common shares outstanding in accordance with ASC 260, Earnings Per Share. Diluted earnings or loss per share is computed using the weighted average common shares and diluted potential common shares outstanding. Warrants, stock options and common stock issuable upon the conversion of the Company’s convertible notes payable have not been included in the computation as the effect would be anti-dilutive and would decrease the loss per share as the Company has incurred losses in all periods reported.  As of June 30, 2015 and 2014, the Company had the following potentially dilutive shares outstanding:


 

 

June 30, 2015

 

June 30, 2014

Common stock issuable upon conversion of convertible debt (see Note 10).

 

272,000

 

376,000

Stock options (see Note 12).

 

625,000

 

Warrants (see Note 12).

 

2,468,200

 

2,015,700

Total

 

3,365,200

 

2,391,700


Business Segments


At June 30, 2015, the Company reported four operating segments in accordance with ASC 280, Segment Reporting (“ASC 280”). As of the date of this filing, the Company’s operations are conducted primarily within the state of Colorado and the Company’s operations are divided into four operating segments: (i) Finance and Real Estate; (ii) Wholesale Supply; (iii) Security; and (iv) Consulting. Our Chief Executive Officer has been identified as the chief decision maker.


The Company’s Finance and Real Estate operating segment provides participants in the cannabis industry with industry finance and leasing services, shared space, as well as networking and event services, as discussed above.  Acquired in March 2015, the Company’s Security operating segment provides protection and security services to licensed and approved operators in the cannabis industry. The Company’s Consulting segment, GC Consulting, provides advice and consulting services to existing and new cannabis-related cultivation, operational and retail ventures. The Company’s Wholesale Supply operating segment, GC Supply, provides customers with nutrients and other supplies for growing and customizable specialty products.


Recently Issued Accounting Standards


Consolidation Reporting


In February 2015, the FASB issued ASU 2015-02, “Consolidation: Amendments to the Consolidation Analysis” (“ASU 2015-02”). This standard update is intended to improve targeted areas of consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. This ASU simplifies consolidation accounting by reducing the number of consolidation models and improves current U.S. GAAP by (1) placing more emphasis on risk of loss when determining a controlling financial interest; (2) reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity; and (3) changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or variable interest entities. The amendments in ASU 2015-02 are effective for reporting periods beginning after December 15, 2015, with early adoption permitted. Entities can transition to the standard either retrospectively or as a cumulative effect adjustment as of the date of adoption. The adoption of ASU 2015-02 is not expected to have an impact on the Company’s consolidated financial statements.


Debt Issuance Costs


In April 2015, the FASB issued ASU 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”. This standard update requires an entity to present debt issuance costs on the balance sheet as a direct deduction from the related debt liability as opposed to an asset. Amortization of the costs will continue to be reported as interest expense. The update is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued, and the new guidance would be applied retrospectively to all prior periods presented. The adoption of this standard update is not expected to have a material impact on the Company’s consolidated financial statements.


9




3.    GOING CONCERN


The financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future.  The ability to continue as a going concern is dependent upon the Company 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 the opportunity for the Company to continue as a going concern.  While the Company believes in the viability of its strategy to generate additional revenues and its ability to raise additional funds, there can be no assurances to that effect.  The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate additional revenues.


The Company had an accumulated deficit of approximately $12,819,000 and $7,641,000 as of June 30, 2015 and December 31, 2014, respectively, and further losses are anticipated in the development of its business. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.


On April 10, 2014, quotation of the Company’s common stock resumed on the OTC Market’s OTCBB after having been suspended by the SEC on March 27, 2014.  On April 28, 2015, the Company’s stock was uplisted to the OTC Market’s OTCQB.


4.   BUSINESS ACQUISITION


On March 26, 2015, GCS, a wholly-owned subsidiary of the Company, entered into an Asset Purchase Agreement (the “IPG APA”) by and among the Company, GCS and Iron Protection Group, LLC, a Colorado limited liability company (“IPG” or 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, the Company will deliver to Seller 500,000 restricted shares of the Company’s common stock, which will vest over a one-year period (100,000 shares vest on October 1, 2015; 200,000 shares vest on January 1, 2016; and 200,000 shares vest on April 1, 2016).


In addition, the Company delivered to Seller three-year warrants (the “IPG Warrants”) to purchase an aggregate of 500,000 shares of the Company’s common stock at an exercise price of: (i) $4.50 for warrants to purchase 250,000 shares of the Company’s common stock, and (i) $5.00 for warrants to purchase another 250,000 shares of the Company’s common stock. 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 the Company has initially calculated the purchase price of the IPG Acquisition to be approximately $1,887,000. At the acquisition date and pursuant to the IPG APA, the Company did not assume any of the Seller’s liabilities and there were no tangible assets of significance.


Calculation of Purchase Price


The total purchase price for IPG was approximately $1,887,000 and was comprised of stock and warrants (see Note 12 for the Company’s calculation of fair values below):


Stock consideration

$

1,054,000

Warrants issued with $4.50 exercise price

 

421,000

Warrants issued with $5.00 exercise price

 

412,000

Total purchase price

$

1,887,000


The $1,054,000 value of stock consideration has been included in accrued stock payable as of June 30, 2015.  


Preliminary Allocation of Purchase Price


The purchase price allocation continues to be preliminary as of June 30, 2015 due to its accounting significance. Management anticipates completing the Company’s purchase price allocation as soon as reasonably possible, not to exceed one year from the acquisition date. The preliminary purchase price allocation as of the date of the acquisition is set forth in the table below and reflects various fair value estimates and analysis. These estimates were determined through established and generally accepted valuation techniques, including work performed by third-party valuation specialists.  


Intangible assets:

 

 

Customer relationship intangible

$

1,000,000

Marketing-related intangibles

 

200,000

Non-compete agreements

 

200,000

Goodwill

 

487,000

Total intangible assets

$

1,887,000


In connection with the Company’s acquisition of IPG, the Company will issue to the sole shareholder of the Seller 100,000 fully vested warrants to purchase shares of the Company’s stock if sales of the Security business segment exceed $3,000,000 for the year ended December 31, 2015.  If the warrants are issued, they will have an exercise price of $2.48, which was the Company’s closing share price on March 26, 2015.  Should the sole shareholder of the Seller cease employment with the Company, the right to receive these warrants will be forfeited.  At March 26, 2015, the fair value of the warrants was calculated to be approximately $188,000.  This has not been included in the purchase price or accrued as contingent compensation at June 30, 2015.


10




5.   INTANGIBLE ASSETS AND GOODWILL


Intangible Assets, Net


Intangible assets, net as of June 30, 2015 consisted of the following:


 

 

Gross

 

Accumulated Amortization

 

Net

Customer relationship intangible

$

1,000,000

$

(26,301)

$

973,699

Marketing-related intangibles

 

200,000

 

(5,261)

 

194,739

Non-compete agreements

 

200,000

 

(26,301)

 

173,699

Intangible assets, net

$

1,400,000

$

(57,863)

$

1,342,137


The useful lives of amortizable intangible assets are as follows:


Asset

 

Life

Customer relationship intangible

 

10 years

Marketing-related intangibles

 

10 years

Non-compete agreements

 

2 years


The following table represents the estimated future amortization expense of intangible assets as of June 30, 2015:


Fiscal Year

 

Amount

Remainder of 2015

$

110,904

2016

 

220,602

2017

 

143,014

2018

 

120,000

2019

 

120,000

2020

 

120,329

Thereafter

 

507,288

Total intangible assets

$

1,342,137


The Company began amortizing the above intangible assets on April 1, 2015 and recorded amortization expense on intangible assets of $57,863 and $57,863 for the three-month and six-month periods ended June 30, 2015, respectively.


Goodwill


In connection with the Company’s purchase of IPG, the Company had recorded goodwill of $487,000. The Company had not recognized any impairment as of June 30, 2015.


6.   PROPERTY AND EQUIPMENT


The following table summarizes property and equipment and related accumulated depreciation:


 

 

June 30,

2015

 

December 31,

2014

Land

$

812,340

$

812,340

Buildings

 

724,284

 

724,284

Leasehold improvements

 

49,784

 

45,000

Furniture, fixtures and equipment

 

18,905

 

15,792

Construction in progress

 

172,721

 

138,056

Property and equipment, gross

 

1,778,034

 

1,735,472

Less: Accumulated depreciation

 

(46,077)

 

(28,062)

Property and equipment, net

$

1,731,957

$

1,707,410


Depreciation expense was $9,008 and $3,116 for the three months ended June 30, 2015 and 2014, respectively, and $18,015 and $6,232 for the six months ended June 30, 2015 and 2014, respectively.


Construction in progress (“CIP”) includes land development costs, pre-construction costs, construction costs, interest incurred on financing, property taxes, insurance and overhead costs related to development. Included in pre-construction costs are architectural fees and site, soil, and engineering costs. Included in land development costs are on-site construction costs and other direct and indirect expenditures.  Interest and property taxes are capitalized to CIP when development activities commence, and end when the qualifying assets are ready for their intended use. Sales and marketing costs are expensed as incurred.  No interest or property taxes have been capitalized to CIP. Capitalized project costs are allocated to specific venues within the property using specific identification where feasible. Costs that are not specifically attributable to a particular venue will be allocated using methodologies deemed appropriate to the cost and areas benefited at the completion of the project.


11




CIP of approximately $173,000 at June 30, 2015 was capitalized in conjunction with the Company’s renovation of The Greenhouse.  CIP includes approximately $114,000 relating to the value of common stock and warrants issued to Spector Group II, LLP, a New York limited liability partnership (“Spector Group”), to act as the design architect for The Greenhouse.  Management of the Company anticipates that additional cash expenditures to complete The Greenhouse will approximate $150,000.


7.   DEFERRED FINANCING COSTS, NET


On January 10, 2014 the Company paid $15,000 to Full Circle Capital Corporation (“Full Circle”) as a deposit for deal-related expenses related to the long-term financing commitment. On January 21, 2014 as part of the $500,000 proceeds from the warrant being issued to Full Circle, $100,000 was retained by Full Circle out of the total consideration of $500,000 to cover legal and deal-related expenses in connection with the long-term financing commitment from Full Circle (see Note 11).


The deferred financing costs of $115,000 are being amortized over the estimated term of the long-term financing agreement of three years (see Note 10). Amortization expense was approximately $9,600 and $9,600 for the three months ended June 30, 2015 and 2014, respectively, and approximately $19,200 and $16,000 for the six months ended June 30, 2015 and 2014, respectively. The unamortized deferred financing balance was approximately $64,000 and $83,000 at June 30, 2015 and December 31, 2014, respectively.


8.   RECEIVABLES


The Company’s Finance and Real Estate and Security segments have revenue and accounts receivable which are concentrated among certain customers, all of which operate in the cannabis industry.


The Company’s Finance and Real Estate segment owns, operates, and leases warehouse and office space to tenants (See Note 9).   The Security segment provides on-site and transportation security services for clients operating in the cannabis industry. At June 30, 2015 and December 31, 2014, tenant rental receipts exceeded revenue recognized by $36,884 and $0, respectively, which was recorded as deferred rental revenue at period end.  At June 30, 2015, the Company had $73,190 in accounts receivable due from clients.


Accounts receivable due from significant customers representing 10% or more of accounts receivable consist of:


 

 

June 30,

2015

 

December 31,

2014

Customer 1

Finance and Real Estate

(1)

 

100%

Customer 2

Security

36.5%

 

(2)

Customer 3

Security

21.7%

 

(2)


(1)   As of June 30, 2015, the Company has recorded a deferred rental revenue, as described above.

(2)   The Company acquired its Security segment in March 2015.


Revenues from significant customers representing 10% or more of revenues consist of:


 

 

Three months ended

 

Six months ended

 

 

June 30, 2015

 

June 30, 2014

 

June 30, 2015

 

June 30, 2014

Customer A

Security

36.54%

 

(1)

 

32.25%

 

(1)

Customer B

Finance and Real Estate

(2)

 

43.24%

 

13.34%

 

41.59%

Customer C

Consulting

(2)

 

30.06%

 

(2)

 

41.64%


(1)   The Company acquired its Security segment in March 2015.

(2)   Customer revenue as a percentage of total revenue was less than 10% for the periods above.


The following discloses scheduled tenant receipts for the remainder of 2015, the next five fiscal years, and thereafter:


2015

$

54,187

2016

 

110,536

2017

 

112,753

2018

 

115,008

2019

 

117,308

2020

 

119,655

Thereafter

 

126,548

Total scheduled rental receipts

$

755,995


12




9.   BUSINESS SEGMENTS


At June 30, 2015, the Company reported four business segments in accordance with ASC 280: (i) Finance and Real Estate; (ii) Wholesale Supply; (iii) Security; and (iv) Consulting.


For the three months ended June 30, 2015 and 2014, respectively:


2015

 

Finance and Real Estate

 

Wholesale

Supply

 

Security

 

Consulting

 

Corporate and Other

 

Total

Revenues

$

37,911

$

12,569

$

376,722

$

$

$

427,202

Costs and expenses

 

9,008

 

29,019

 

300,814

 

125,029

 

4,305,228

 

4,769,098

Other income (expense)

 

(77,498)

 

(27,500)

 

 

 

97,672

 

(7,326)

Net profit (loss)

 

(48,595)

 

(43,950)

 

75,908

 

(125,029)

 

(4,207,556)

 

(4,349,222)

Depreciation and amortization expense

 

9,008

 

 

57,863

 

 

 

66,871


2014

 

Finance and Real Estate

 

Wholesale

Supply

 

Security

 

Consulting

 

Corporate and Other

 

Total

Revenues

$

28,765

$

17,758

$

$

33,600

$

$

80,123

Costs and expenses

 

3,116

 

42,520

 

 

14,850

 

274,444

 

334,930

Other income (expense)

 

(3,582)

 

 

 

 

35,582

 

32,000

Net profit (loss)

 

22,067

 

(24,762)

 

 

18,750

 

(238,862)

 

(222,807)

Depreciation and amortization expense

 

3,116

 

 

 

 

 

3,116


For the six months ended June 30, 2015 and 2014, respectively:


2015

 

Finance and Real Estate

 

Wholesale

Supply

 

Security

 

Consulting

 

Corporate and Other

 

Total

Revenues

$

64,588

$

25,367

$

394,104

$

$

$

484,059

Costs and expenses

 

18,015

 

52,422

 

314,951

 

125,029

 

4,809,961

 

5,320,378

Other income (expense)

 

(155,029)

 

(27,500)

 

 

 

(158,867)

 

(341,396)

Net profit (loss)

 

(108,456)

 

(54,555)

 

79,153

 

(125,029)

 

(4,968,828)

 

(5,177,715)

Receivables (at June 30, 2015)

 

 

 

73,190

 

 

 

73,190

Depreciation and amortization expense

 

18,015

 

 

57,863

 

 

 

75,878


2014

 

Finance and Real Estate

 

Wholesale

Supply

 

Security

 

Consulting

 

Corporate and Other

 

Total

Revenues

$

57,530

$

17,758

$

$

53,600

$

$

128,888

Costs and expenses

 

6,232

 

42,520

 

 

29,700

 

509,410

 

587,862

Other income (expense)

 

(5,987)

 

 

 

 

(963,768)

 

(969,755)

Net profit (loss)

 

45,311

 

(24,762)

 

 

23,900

 

(1,473,178)

 

(1,428,729)

Receivables (at December 31, 2014)

 

18,319

 

 

 

 

 

18,319

Depreciation and amortization expense

 

6,232

 

 

 

 

 

6,232


10.   LONG TERM DEBT


Long-term debt consists of the following:


 

 

June 30,

2015

 

December 31,

2014

12.0% convertible notes, due October 31, 2018, issued December 2013

$

380,000

$

530,000

8.5% convertible note payable, due December 31, 2018 (Pueblo West Property)

 

161,543

 

164,644

12.0% convertible notes, due October 31, 2018, issued January 2014

 

980,000

 

1,120,000

14.0% mortgage payable, due October 21, 2016 (The Greenhouse)

 

600,000

 

600,000

10.0% private placement notes, due May 1, 2016

 

325,000

 

Long-term debt

 

2,446,543

 

2,414,644

Unamortized discount

 

(1,140,399)

 

(1,352,510)

Long-term debt, net of unamortized discount

 

1,306,144

 

1,062,134

Debt maturing within one year (1)

 

(195,001)

 

(6,337)

Debt maturing after one year

$

1,111,143

$

1,055,797


(1)

Includes principal due within the next twelve months on the 8.5% convertible note payable (Pueblo West Property) and the 10.0% private placement notes, due May 1, 2016.


13



12% Convertible Notes


December 2013 Issuance


In December 2013, the Company entered into various convertible promissory notes with various third parties totaling $530,000 (the “December 2013 Issuance”), of which $380,000 and $530,000 was outstanding at June 30, 2015 and December 31, 2014, respectively. The principal amounts of these notes range between $10,000 and $150,000. Under the terms of these notes, they mature on October 31, 2018, accrue interest at 12.0% per annum, and are convertible into shares of the Company’s common stock at a conversion rate of $5.00 per share, with standard dilution clauses (i.e. dividends, stock splits, etc.). These notes are secured by a first lien on all of the Company’s assets, which the Company acquires with the proceeds from the sale of these notes.


The Company paid $66,000 to a placement agent for finder’s fees which the Company recorded as a debt discount as of  June 30, 2015 and December 31, 2014. In addition, the Company granted the placement agent warrants to purchase 10,600 shares at a price of $5.00 per share, (with standard dilution clause for dividends, stock splits, etc.) which vest immediately, and expire October 31, 2018. The value of the warrants was approximately $20,000 based on the Black-Scholes pricing model. The Company recorded the value of warrants as additional debt discount at issuance. The debt discount is being amortized over the life of the notes. The Company recorded debt discount amortization expense of $4,000 and $3,000 for the three months ended June 30, 2015 and 2014, respectively, and $21,000 and $6,000 for the six months ended June 30, 2015 and 2014, respectively.  The unamortized debt discount balance for these notes was approximately $46,000 and $67,000 at June 30, 2015 and December 31, 2014, respectively.


To properly account for the December 2013 Issuance, the Company performed a detailed analysis to obtain a thorough understanding of the transaction. The Company reviewed ASC 815, to identify whether any equity-linked features in the December 2013 Issuance are freestanding or embedded. The Company determined that there were no free standing features. The December 2013 Issuance was then analyzed in accordance with ASC 815 to determine if the embedded conversion feature should be bifurcated and accounted for at fair value and remeasured at fair value in income. The Company determined that the embedded conversion feature did not meet the requirements for bifurcation pursuant to ASC 815 and therefore accounted for the December 2013 Issuance as conventional debt. The Company then reviewed ASC 470-20, and determined that the December 2013 Issuance met the criteria of a conventional convertible note and that none of the December 2013 Issuance had a beneficial conversion feature. As a result, pursuant to ASC 470-20, the Company recorded the conventional convertible note as a debt instrument in its entirety.


January 2014 Issuance


In January 2014, the Company entered into various convertible promissory notes with various third parties totaling $1,605,000 (the “January 2014 Issuance”), of which $980,000 and $1,120,000 was outstanding at June 30, 2015 and December 31, 2014, respectively. The principal amounts of these notes range between $10,000 and $200,000. Under the terms of these notes, they mature on October 31, 2018, accrue interest at 12.0% per annum, and are convertible into shares of the Company’s common stock at a conversion rate of $5.00 per share, with standard dilution clauses (i.e. dividends, stock splits, etc.). These notes are convertible at the election of the noteholder at any time on or before maturity date. These notes are secured by a first lien on all of the Company’s assets, which the Company acquires with the proceeds from the sale of these notes.


The Company paid  approximately $160,500 in debt issuance costs and $32,100 to a placement agent for finder’s fees which the Company recorded as a debt discount as of December 31, 2014. In addition, the Company granted the placement agent warrants to purchase 32,100 shares at a price of $5.00 per share, (with standard dilution clause for dividends, stock splits, etc.) which vest immediately, and expire October 31, 2018. The value of the warrants was approximately $84,000 based on the Black-Scholes pricing model.


To properly account for the January 2014 Issuance, the Company evaluated the debt instruments pursuant to ASC 815, to identify whether any equity-linked features in the convertible debt are freestanding or embedded. The January 2014 Issuance was issued availing the option for note holders to convert debt to common stock at fixed conversion price of $5.00 per share. The Company determined that the conversion feature was embedded in the January 2014 Issuance, but did not meet the definition of a derivative pursuant to ASC 815 and therefore should not be bifurcated. The Company concluded that the January 2014 Issuance was conventional debt and assessed under ASC 470-20 whether the January 2014 Issuance had a beneficial conversion feature. Since the initial conversion price of the security 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 Company calculated the value of the beneficial conversion feature by estimating the intrinsic value using the lattice method.


The calculated 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. The Company recorded debt discount amortization expense of approximately $52,000 and $110,000 for the three months ended June 30, 2015 and 2014, respectively, and approximately $216,000 and $412,000 for the six months ended June 30, 2015 and 2014, respectively.   The unamortized discount balance was approximately $687,000 and $903,000 at June 30, 2015 and December 31, 2014, respectively.


Conversion of 12% Convertible Notes


Through June 30, 2015, one of the December 2013 Issuance note holders converted notes with principal balances totaling $150,000 into 30,000 shares of the Company’s common stock at a conversion price of $5.00 per share.  Through June 30, 2015, ten of the January 2014 Issuance note holders converted notes with principal balances totaling an aggregate of $625,000, and accrued interest of approximately $4,700 into 125,946 shares of the Company’s common stock at a conversion price of $5.00 per share.


14




Upon conversion, any remaining unamortized portions of debt discount relating to converted notes is immediately expensed to amortization expense. Amortization expense immediately expensed relating to converted notes was approximately $0 and $148,000 for the three months ended June 30, 2015 and 2014, respectively, and $123,000 and $148,000 for the six months ended June 30, 2015 and 2014, respectively.


After December 1, 2015, the remaining convertible notes in the December 2013 Issuance and the January 2014 Issuance (collectively, the “Convertible Notes”) will automatically convert to shares of the Company’s stock if the trading stock price has exceeded $10 for twenty consecutive trading days and the daily volume for those twenty consecutive trading days exceeds 25,000 shares.  As of April 24, 2014, these parameters have been met and the Company expects that the Convertible Notes will automatically convert to shares of the Company’s stock on December 1, 2015.  The Company’s Convertible Notes gross balance of $1,360,000 at June 30, 2015 is convertible to 272,000 shares of the Company’s stock.  


8 ½% Convertible Note Payable (Pueblo West Property)


In December 2013, the Company executed a mortgage on its Pueblo West Property in the amount of $170,000 at 8 ½% interest with a term of five years and an amortization period of 15 years (the “Pueblo Mortgage”). This note is convertible at any time at $5.00 per share.


To properly account for the Pueblo Mortgage, the Company performed a detailed analysis to obtain a thorough understanding of the transaction. The Company reviewed ASC 815, to identify whether any equity-linked features in the Pueblo Mortgage are freestanding or embedded. The Company determined that there were no free standing features. The Pueblo Mortgage was then analyzed in accordance with ASC 815 to determine if the embedded conversion feature should be bifurcated and accounted for at fair value and remeasured at fair value in income. The Company determined that the embedded conversion feature did not meet the requirements for bifurcation pursuant to ASC 815 and therefore accounted for the Pueblo Mortgage as conventional debt. The Company then reviewed ASC 470-20, and determined that the Pueblo Mortgage met the criteria of a conventional convertible note and that none of the Pueblo Mortgage had a beneficial conversion feature As a result, pursuant to ASC 470-20, the Company recorded the conventional convertible note as a debt instrument in its entirety.


14% Mortgage Note Payable (The Greenhouse)


In October 2014, the Company executed a mortgage on The Greenhouse in the amount of $600,000 at 14.0% interest with a maturity date of October 21, 2016 (the “Greenhouse Mortgage”).  


To properly account for the Greenhouse Mortgage, the Company performed a detailed analysis to obtain a thorough understanding of the transaction. The Company reviewed ASC 815, to identify whether any equity-linked features in the Greenhouse Mortgage are freestanding or embedded. The Company determined that there were no free standing features. The Greenhouse Mortgage was then analyzed in accordance with ASC 815 to determine if the embedded conversion feature should be bifurcated and accounted for at fair value and remeasured at fair value in income. The Company determined that the embedded conversion feature did not meet the requirements for bifurcation pursuant to ASC 815 and therefore accounted for the Greenhouse Mortgage as conventional debt. The Company then reviewed ASC 470-20, and determined that the Greenhouse Mortgage met the criteria of a conventional convertible note and that none of the Greenhouse Mortgage had a beneficial conversion feature. As a result, pursuant to ASC 470-20, the Company recorded the conventional convertible note as a debt instrument in its entirety.


In addition, the Company granted 600,000 warrants to Evans Lendco, the note holder of the Greenhouse Mortgage, which expire on October 21, 2016.  The warrants vest immediately and allow for Evans Lendco to purchase 600,000 shares of the Company’s common stock at a price of $4.40 per share, (with standard dilution clause for dividends, stock splits, etc.). The relative fair value of the warrants was approximately $418,000 based on the Black-Scholes pricing model. The Company recorded the relative fair value of warrants as debt discount at issuance. The debt discount is being amortized to interest expense over the life of the notes. The amount amortized to interest expense was approximately $58,000 and 111,000 for the three and six month periods ended June 30, 2015. The unamortized debt discount balance at June 30, 2015 and December 31, 2014 was approximately $272,000 and $383,000, respectively.  On July 29, 2015, the Company exchanged 600,000 warrants previously issued to Evans Street Lendco, LLC (“Evans Lendco”) with 225,000 warrants to purchase shares of the Company’s stock at $1.20 per share with a term of 2 years (See Note 16).


10% Private Placement Notes


In May, 2015, the Company initiated a private placement pursuant to a Promissory Note and Warrant Purchase Agreement (the “10% Agreement”) between the Company and certain accredited investors for a term of one year for the note and 18 months for the warrants. Under the 10% Agreement, the Company can sell up to $2,000,000 of notes to investors, each note with a denomination of a minimum of $25,000 (each such note, a “10% Note,” and collectively, the “10% Notes”).  At June 30, 2015, the balance of 10% Notes was $325,000.  The Company performed an analysis to obtain a thorough understanding of the transaction. Pursuant to ASC 815 and ASC 470-20, the Company concluded that the 10% Notes should be accounted for as conventional debt and recorded the 10% Notes as debt instruments in their entirety.


Subject to the terms and conditions of the 10% Agreement, each investor is granted fully-vested warrants equal to their Note principal divided by 2 (the “10% Warrants”) (with standard dilution clause for dividends, stock splits, etc.).  The 10% Warrants shall be exercisable for a period of eighteen (18) months after grant date and have an exercise price of $1.08 per share. As of June 30, 2015, the Company had 162,500 10% Warrants outstanding to various investors.  The relative fair value of the warrants was approximately $146,000 based on the Black-Scholes pricing model. The Company recorded the relative fair value of warrants as debt discount at issuance. The debt discount is being amortized over the life of the notes. The amount amortized to interest expense was approximately $11,000 for the six months ended June 30, 2015. The unamortized debt discount balance at June 30, 2015 was approximately $135,000.


15



The tables below summarize the Company’s convertible notes activity during the six months ended June 30, 2015:


 

 

Principal Balance

 

Debt Discount

 

Accrued Interest

 

Total

Balance at December 31, 2014

$

2,414,644

$

(1,352,510)

$

16,470

$

1,078,604

Issued during the period

 

325,000

 

(147,547)

 

 

179,453

Converted into shares of common stock

 

(290,000)

 

 

(1,063)

 

(291,063)

Amortization of debt discount

 

 

357,658

 

 

357,658

Payment of loan principal

 

(3,101)

 

 

 

(3,101)

Interest accrued during period

 

 

 

147,705

 

147,705

Interest paid during period

 

 

 

(94,540)

 

(94,540)

Balance at June 30, 2015

 

2,446,543

 

(1,140,399)

 

68,572

 

1,374,716

Less: Current portion  (1)

 

(330,133)

 

135,132

 

 

(195,001)

Long-term debt

$

2,116,410

$

(1,005,267)

$

68,572

$

1,179,715


(1)

Includes principal due within the next twelve months on the 8.5% convertible note payable (Pueblo West Property) and the 10.0% private placement notes, due May 1, 2016.


Annual maturities of long-term debt (excluding unamortized discount) for the next five years ending December 31, and thereafter, consist of:


Remainder of 2015

$

3,238

2016

 

931,897

2017

 

7,507

2018

 

1,503,901

2019

 

2020

 

Thereafter

 

 

$

2,446,543


11.   COMMITMENTS AND CONTINGENCIES


Long-Term Financing Commitment


On January 21, 2014, the Company signed a Securities Purchase Agreement (the “SPA”) with Full Circle.  The SPA provides that Full Circle will initially provide $7.5 million to the Company in the form of Senior Secured Convertible Notes, subject to certain named conditions.  The Company can borrow an additional $22.5 million with the mutual agreement of Full Circle and the Company.


At least 95% of any loan proceeds will be used to acquire properties, which the Company will lease to licensed cannabis cultivators.


Full Circle will provide the Company with the initial $7.5 million when:


·

Full Circle agrees on the location of property to be purchased;

·

The specified property’s appraised value is satisfactory to Full Circle;

·

A Phase I environmental inspection is completed to the satisfaction of Full Circle; and

·

The Company is able to provide a first priority lien on the property in favor of Full Circle.


The six-year loan(s) will be secured by real estate acquired with the loan proceeds and will require interest-only payments at a rate of 12% a year, payable monthly. The funding of the loan(s) is subject to the execution of additional documents between the parties. The initial loan can, at any time, be converted into shares of the Company’s common stock at a conversion price of $5.00 per common share. It is contemplated that further advances will be convertible at 110% of the market price of the Company’s stock on the day of any advance, or the ten-day volume-weighted average price prior to the day of advance, whichever is lower. As of June 30, 2015, no amounts have been funded to the Company pursuant to the SPA. In connection with the SPA, Full Circle purchased warrants from the Company for $500,000 (see Note 12).


Operating Leases


The Company rents office space for its corporate needs. The Company entered into a month-to-month lease agreement in July 2013 to lease 2,000 square feet for an annual rate of $12,000, paid monthly. This lease was terminated effective April 1, 2014. On April 2, 2014, the Company entered into a three-year lease agreement to lease 3,000 square feet for its corporate offices. The Company’s lease for office space at 4445 Northpark Avenue, Colorado Springs, Colorado, 80907 was canceled without penalty, effective November 1, 2014.  The Company entered into a three-year agreement effective April 21, 2014 for a warehouse supply and distribution facility. The facility leased is 1,800 square feet and expires April 30, 2017.


Lease expense was approximately $3,200 and $10,197 for the three months ended June 30, 2015 and 2014, respectively, and $6,400 and $13,197 for the six months ended June 30, 2015 and 2014. The future obligations under this lease amount to approximately $6,500 for the remainder of 2015, $13,200 for 2016, and $4,500 for 2017.


16




Legal


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


12.   STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION


Common Stock


From January 1, 2015 to June 30, 2015, three of the January 2014 Issuance note holders and one of the December 2013 Issuance note holders converted loan notes with principal balances totaling $290,000 and accrued interest of $1,063 into an aggregate of 58,213 shares of the Company’s common stock at a conversion price of $5.00 per share.


On January 21, 2015, Full Circle executed its option to cashlessly exercise 1,215,000 warrants in exchange for 660,263 common shares of the Company’s stock (See “Series C Warrants” below).


In January 2015, the Company issued 50,000 shares to Spector Group in satisfaction of architectural services performed for The Greenhouse. The shares were valued at approximately $114,000 and had been included in accrued stock payable at December 31, 2014.


Pursuant to the terms of the IPG APA, the Company will deliver to Seller 500,000 restricted shares of the Company’s common stock, which will vest over a one-year period.  On the date of the agreement, March 26, 2015, the 500,000 shares had an initial fair value of $1,240,000, based on a closing price per share of the Company of $2.48 on March 26, 2015.   Due to restrictions in the ability to trade the Company’s shares, a discount of fifteen percent (15%) was applied to the fair value of the shares the Company anticipates issuing to the Seller.  After taking into consideration the illiquidity of the shares, approximately $1,054,000 was recorded to accrued stock payable as a component of the purchase price of the IPG Acquisition (See Note 4).  


On August 4, 2014, pursuant to an agreement with Michael Feinsod, the Company’s Board of Directors (the “Board”) appointed Michael Feinsod as Chairman of the Board and approved a compensatory arrangement with Infinity Capital LLC (“Infinity Capital”), an investment management company Mr. Feinsod founded in 1999 (the “Feinsod Agreement”).  Mr. Feinsod, who is a director of the Company, is deemed to be the beneficial owner of Infinity Capital.  On April 28, 2015, pursuant to the Feinsod Agreement, the Company issued 1,000,000 shares of its stock to Infinity Capital LLC as a result of the uplisting of the Company’s stock to the OTC Market’s OTCQB on April 28, 2015. On the date of issue, the 1,000,000 shares had an initial fair value of $3,490,000, based on a closing price per share of the Company of $3.49 on April 27, 2015. Due to restrictions in the ability to trade the Company’s 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 issued, $2,966,500 and was recorded to share-based compensation, $1,000 was recorded to common stock (par value) and $2,695,500 was recored to additional paid-in capital.


In connection with the Feinsod Agreement, the Company agreed to issue 150,000 shares of the Company’s common stock to Infinity Capital on each of the first and second anniversary of the agreement, contingent upon Mr. Feinsod remaining as a member of the Board at each of those dates. As it is the Company’s anticipation that Mr. Feinsod will remain a member of the Board through August 2016, during the three-months ended June 30, 2015, the Company recorded approximately $249,000 to share-based compensation, of which approximately $166,000 and $83,000 was recorded to accrued stock payable (current) and accrued stock payable (noncurrent), respectively. During the six months ended June 30, 2015, the Company recorded approximately $498,000 to share-based compensation, of which approximately $332,000 and $166,000 was recorded to accrued stock payable (current) and accrued stock payable (noncurrent), respectively.


On May 1, 2015, the Company and Full Circle entered into Amendment No. 2 to the Series C Warrants, pursuant to which Full Circle cashlessly exercised 160,000 warrants and received 100,000 shares of the Company’s common stock.  On May 4, 2015, Full Circle exercised its remaining warrants under the Series C Warrants to purchase 25,000 shares of the Company’s common stock for $4.00 per share (See “Series C Warrants” below and Note 13).


On May 13, 2015, the Company hired two individuals from the Next Big Crop (“NBC”), an unaffiliated entity serving the cannabis industry (“the NBC Consultants”). In connection with the hirings, the individuals will service the Company’s new and existing clients. The Company 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 the Company’s 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 the Company of $3.11 on May 13, 2015. Due to restrictions in the ability to trade the Company’s 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. During the three months ended June 30, 2015, the Company recorded $54,226 to share-based compensation and to accrued stock payable (current).


17




The following tables summarize the changes in shares of the Company’s common stock issued and outstanding for the six months ended June 30, 2015 and 2014, respectively:


 

 

2015

 

2014

Beginning balance

 

12,499,933

 

15,137,200

Re-acquired from stockholders

 

0

 

(1,750,000)

Issued to Spector Group for services

 

50,000

 

0

Issued to Infinity Capital upon uplisting of the Company’s stock

 

1,000,000

 

0

Issued to Full Circle via cashless exercises (1)

 

760,263

 

0

Issued to Full Circle for cash consideration (1)

 

25,000

 

0

Issued in settlement of converted 12% Convertible Notes and accrued interest

 

58,213

 

51,733

Ending balance

 

14,393,409

 

13,438,933


(1)   See  “Series C Warrants” below and Note 13.


Options


On October 29, 2014, the Board authorized the adoption of the Company’s 2014 Equity Incentive Plan (the “Incentive Plan”), which is designed to provide an additional incentive to executives, employees, directors and key consultants, aligning the long term interests of participants in the Incentive Plan with those of the Company and the Company’s stockholders. The Incentive Plan provides that up to 10 million shares of the Company’s common stock may be issued under the Plan.  On June 26, 2015, the Company’s stockholders ratified the Incentive Plan.


Options granted consists of the following at June 30, 2015:


Options Granted

 

Exercise

Price

 

Number of Options Granted

 

Weighted
Average
Life (in
months)

 

Aggregated Intrinsic Value(1)

October 2014 Grant

$

3.70

 

125,000

 

36

$

Frichtel

 

3.75

 

300,000

 

34

 

NBC Consultants

 

3.11

 

200,000

 

34

 

 

$

3.54

 

625,000

 

34.40

 

 


(1)

Amount represents the difference between the exercise price and the closing share price of the Company’s stock on the last trading day of the corresponding period, multiplied by the number of in-the-money options.


On May 1, 2015, the Company and Robert Frichtel entered into an Executive Employment Agreement (the “Frichtel Agreement”) and  an Option Agreement (the “Frichtel Option Agreement”) in order to secure Mr. Frichtel’s continued employment as the Company’s Chief Executive Officer. Pursuant to the Frichtel Option Agreement, Mr. Frichtel received options to purchase 300,000 shares of the Company’s common stock at a price of $3.75 per share (which price was based on the closing price of the Company’s common stock on May 1, 2015), 100,000 of which vested upon execution of the Frichtel Agreement, and provided that Mr. Frichtel remains an employee of the Company on each date, 100,000 of which will vest on May 1, 2016, and the remaining 100,000 will vest on May 1, 2017.  On the date of grant, these options had a fair value of approximately $848,500.  For the three months ended June 30, 2015, the Company recorded $353,571 to share-based compensation expense and to additional paid-in capital.  The remaining $494,922 in unrecognized compensation cost at June 30, 2015 will be recognized over the remaining vesting periods.


In connection with the Company’s hiring of the NBC Consultants as full-time emplpyees, the Company granted the individuals 200,000 options to purchase a total of 200,000 shares of the Company’s common stock.  Provided that both individuals remain employees of the Company through each date, 100,000 will vest on May 13, 2016, and 100,000 will vest on May 13, 2017.  On the date of grant, these options had a fair value of approximately $466,900.  For the three months ended June 30, 2015, the Company recorded  $46,053 to share-based compensation expense and to additional paid-in capital.  The remaining unrecognized compensation of $420,876  at June 30, 2015 will be recorded on a straight-line basis over the remaining vesting period.


As noted above, on October 29, 2014, the Company granted certain employees options to purchase the Company’s common stock (the “October 2014 Grant”).  At that time, the Incentive Plan had not been approved by the Company’s shareholders. These options, which vested immediately on the grant date, were valued at approximately $169,700 on June 26, 2015, the day the Company’s shareholders approved the Incentive Plan, which the Company recorded as share-based compensation expense and additional paid-in capital.


The following tables summarize the changes in options outstanding and exercisable for the three months ended June 30, 2015:


 

 

Outstanding

 

Exercisable

Beginning balance

 

 

Granted/ Vested

 

625,000

 

100,000

Exercised

 

 

Canceled or forfeited

 

 

Ending balance

 

625,000

 

100,000


18




Fair Value of Options Granted


Fair value is generally based on independent sources such as quoted market prices or dealer price quotations. To the extent certain financial instruments trade infrequently or are non-marketable securities, they may not have readily determinable fair values.  The Company estimated the fair value of the Company’s options using a Black-Scholes option pricing model and available information that management deems most relevant.  The following assumptions were used to derive the value of the options granted during the six months ended June 30, 2015:


 

 

Frichtel

 

NBC Consultants

 

October 2014 Grant

 

Grant date

 

5/1/2015

 

5/13/2015

 

6/26/2015

 

Stock price on Grant date (1)

$

3.75

$

3.11

$

2.10

 

Exercise price (2)

$

3.75

$

3.11

$

3.70

 

Risk-free interest rate (3)

 

0.97

%

0.97

%

1.09

%

Expected dividend yield (4)

 

0.00

%

0.00

%

0.00

%

Expected term (in years) (5)

 

3

 

3

 

3

 

Expected volatility (6)

 

133

%

132

%

126

%


(1)

Closing price of the Company’s stock on the valuation date;

(2)

Price at which the security can be purchased by exercising prior to expiration;

(3)

Risk-free interest rate is based on the U.S. Government Securities Treasury Bill constant maturity rate on the date of issuance;

(4)

The Company has not historically declared dividends;

(5)

Expected term of the security based on the respective expiration dates; and

(6)

Statistical measure (standard deviation) of the Company’s stock price to change over time.


Warrants


Warrants consists of the following at June 30, 2015:


Warrant Name

 

Exercise

Price

 

Warrants

Outstanding

 

Weighted

Average

Life of

Outstanding

Warrants in

Months

 

Date of

Expiration

Series A

$

10.00

 

973,000

 

13

 

7/31/2016

Series B

 

5.00

 

42,700

 

40

 

10/31/2018

Evans

 

4.40

 

600,000

 

16

 

10/21/2016

Spector

 

4.40

 

150,000

 

16

 

12/12/2016

IPG ($4.50)

 

4.50

 

250,000

 

33

 

3/26/2018

IPG ($5.00)

 

5.00

 

250,000

 

33

 

3/26/2018

Castro

 

3.75

 

20,000

 

22

 

4/24/2017

PLR

 

3.49

 

20,000

 

22

 

4/27/2017

10% Notes

 

1.08

 

162,500

 

18

 

12/1/2016

 

$

6.46

 

2,468,200

 

18.91

 

 


Series C Warrants


On January 21, 2014, the Company issued to Full Circle, for $500,000, fully-vested warrants which allow Full Circle to purchase up to 1,000,000 shares of the Company’s common stock at any time on or prior to January 21, 2017 at a price of $5.50 per share. As part of the $500,000 proceeds from the warrant being issued to Full Circle, $100,000 was retained by Full Circle to cover legal and deal related expenses of future financing transactions, which was recorded as deferred financing costs (See Note 7).  On September 24, 2014, the Company and Full Circle entered into Amendment No. 1 to the SPA, which changed the exercise price of the warrants issuable to $4.00 per share of the Company’s common stock, and increased the amount of warrants issuable to 1,400,000 warrants to purchase shares of the Company’s common stock.


On January 21, 2015, Full Circle executed its option to cashlessly exercise 1,215,000 warrants in exchange for 660,263 common shares of the Company’s stock (see Note 13).  On May 1, 2015, the Company and Full Circle entered into Amendment No. 2 to the Series C Warrants, pursuant to which Full Circle cashlessly exercised 160,000 warrants and received 100,000 shares of the Company’s common stock.  On May 4, 2015, Full Circle exercised its remaining 25,000 warrants under the Series C Warrants to purchase 25,000 shares of the Company’s common stock for $4.00 per share.  The Company issued a total of 760,263 shares of the Company’s common stock to Full Circle in exchange for Full Circle’s cashless exercise of 1,375,000 warrants, and issued 25,000 shares of the Company’s common stock to Full Circle in exchange for Full Circle’s exercise of 25,000 warrants for cash consideration of $100,000. There are no more warrants under the Series C Warrants outstanding (See Note 13).


19




IPG Warrants


In connection with the IPG APA, the Company issued to IPG fully-vested warrants to purchase 250,000 shares of the Company’s common stock at a conversion price of $4.50 per share, (the “IPG $4.50 Warrants”), and warrants 250,000 shares of the Company’s common stock at a conversion price of $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 reclassification of the Company, consolidation of the Company, merger, subdivision of shares of the Company’s common stock, combination of shares of the Company’s common stock or payment of dividends in the form of the Company’s common stock. The IPG Warrants expire three years after their initial issuance date.  On the date of grant, the IPG $4.50 Warrants and the IPG $5.00 Warrants had fair values of approximately $421,000 and $412,000, respectively, based on the Black-Scholes pricing model, which was included in the purchase price of IPG (See Note 4).


Castro & PLR Warrants


On April 24, 2015, the Company and Rafael Castro entered into a one-year contract whereby Mr. Castro would provide the Company with services to raise capital.  In connection with the Company’s agreement with Mr. Castro, the Company granted  Mr. Castro warrants to purchase 20,000 shares of the Company’s common stock at an exercise price of $3.75 per share with a term of 2 years.  These warrants will vest over the service term and had a fair value of approximately $49,400 on the date of grant.


On April 27, 2015, the Company and Porter, LeVay & Rose, Inc. (“PLR”) entered into a one-year contract whereby PLR would provide the Company with investor relations services.  In connection with the Company’s agreement with PLR, the Company granted  PLR warrants to purchase 20,000 shares of the Company’s common stock at an exercise price of $3.49 per share with a term of 2 years. These warrants will vest over the service term and had a fair value of approximately $46,000 on the date of grant.


In connection with the Castro and PLR Warrants, for the three months ended June 30, 2015, the Company recorded $17,454 to share-based compensation expense and additional paid-in capital. The Company will revalue the warrants at each reporting period and recognize the remaining unrecognized compensation cost on a straight-line basis over the remaining contract periods.


10% Warrants


On May 7, 2015, the Company initiated a private placement pursuant to the 10% Agreement between the Company and certain accredited investors.  Each investor  was granted 10% Warrants (See Note 10).  The 10% Warrants are exercisable for a period of eighteen (18) months after grant date and have an exercise price of $1.08 per share. As of June 30, 2015, the Company had 162,500 10% Warrants outstanding to various investors (See Note 10).


The following tables summarize the changes in warrants issued and outstanding for the six months ended June 30, 2015 and 2014, respectively:


 

 

2015

 

2014

Beginning balance

 

3,165,700

 

983,600

Issued to Full Circle (Series C)

 

 

1,400,000

Issued to placement agent (Series B)

 

 

32,100

Issued to IPG

 

500,000

 

Issued for services (Castro and PLR)

 

40,000

 

Issued in connection with private placement debt (10% Warrants)

 

162,500

 

Converted by Full Circle via cashless conversion option

 

(1,375,000)

 

Converted by Full Circle for cash consideration

 

(25,000)

 

Ending balance

 

2,468,200

 

2,415,700


Fair Value of Warrants


Fair value is generally based on independent sources such as quoted market prices or dealer price quotations. To the extent certain financial instruments trade infrequently or are non-marketable securities, they may not have readily determinable fair values.  The Company estimated the fair value of the Company’s warrants using a Black-Scholes option pricing model and available information that management deems most relevant.  The following assumptions were used to derive the value of the warrants issued during the six months ended June 30, 2015:


 

 

Castro

 

PLR

 

10% Notes (Weighted Average)

 

Grant date

 

4/24/2015

 

4/27/2015

 

6/1/2015

 

Stock price on Grant date (1)

$

3.75

$

3.49

$

2.87

 

Exercise price (2)

$

3.75

$

3.49

$

1.08

 

Risk-free interest rate (3)

 

0.54

%

0.54

%

0.45

%

Expected dividend yield (4)

 

0.00

%

0.00

%

0.00

%

Expected term (in years) (5)

 

2

 

2

 

1.5

 

Expected volatility (6)

 

134

%

134

%

130

%


(1)

Closing price of the Company’s stock on the valuation date;

(2)

Price at which the security can be purchased by exercising prior to expiration;


20



(3)

Risk-free interest rate is based on the U.S. Government Securities Treasury Bill constant maturity rate on the date of issuance;

(4)

The Company has not historically declared dividends;

(5)

Expected term of the security based on the respective expiration dates; and

(6)

Statistical measure (standard deviation) of the Company’s stock price to change over time.


13.   DERIVATIVE WARRANT LIABILITY


The Series C Warrants issued in connection with the agreements, as amended, with the Full Circle private placement offering initially provided Full Circle with the opportunity to purchase 1,000,000 shares of the Company’s common stock at the exercise price of $5.50 per share. In September 2014, through amendment, the shares of common stock were increased to 1,400,000 and the exercise price reduced to $4.00 per share. The Series C Warrants have non-standard anti-dilution protection provisions and, under certain conditions, grant the right to the holder to require the Company to adjust the warrant’s exercise price to a lower price. Accordingly, through December 31, 2014, these warrants were accounted for as derivative liabilities.


On January 21, 2014, the value of the initial warrant derivative liability was calculated to be $1,368,908. The Company received $500,000 in cash of which $100,000 was identified as deferred financing costs, resulting in an initial loss on the fair value of the derivative liability of $868,908 on the grant date. The price of $5.00 per share of the Series A and Series B Warrants granted in conjunction with the December 2013 Issuance and the January 2014 Issuance resulted in the revaluation of the Series C Warrants granted to Full Circle and an increase to the derivative liability of $153,994.


The Company used the binomial pricing model and assumptions that consider, among other factors, the fair value of the underlying stock, risk-free interest rate, volatility, expected life and dividend rates in estimating fair value for the warrants considered to be derivative instruments. The Company’s common stock has been thinly traded since being delisted in the first quarter of 2014, and all conversions of debt from the January 2014 Issuance during 2014 were converted using a stock price of $5.00 per share. Using the binomial pricing model and a stock price of $5.00 per share, management utilized initial scenario stock prices of $3.00, $4.00, $6.00, and $7.00.  Initially assuming a three-year expected term, management assessed the probabilities of the stock prices for each year, with probabilities more heavily weighted toward lower stock prices, in light of the Company’s delisted status, changes in leadership, and the Company’s current inability to execute its initial financing with Full Circle.


On January 21, 2015, Full Circle executed its option to cashlessly exercise 1,215,000 warrants in exchange for 660,263 common shares of the Company’s stock.  At the time of the cashlessly exercise, the fair value of the common shares was determined to be $3,314,520 based on the Company’s closing share price of $5.02 on January 21, 2015. Accordingly, the Company decreased the derivative liability by $3,314,520 and increased common stock by $660 and additional paid-in capital by $3,313,860.


On May 1, 2015, the Company and Full Circle entered into Amendment No. 2 to the Series C Warrants, pursuant to which Full Circle cashlessly exercised 160,000 warrants and received 100,000 shares of the Company’s common stock. On May 4, 2015, Full Circle exercised its remaining warrants under the Series C Warrants to purchase 25,000 shares of the Company’s common stock for $4.00 per share. Immediately preceding Full Circle’s exercises the fair values of the Series C Warrants were determined to be $593,394. The fair value of the 125,000 common shares issued to Full Circle were determined to be approximately $468,750, based on closing prices per share of $3.75 on May 1, 2015. Accordingly, the Company decreased the derivative liability by $601,617 and increased common stock by $125 and additional paid-in capital by $454,796, and $86,171 in cash received from Full Circle, net of $13,829 of settlement expenses paid. The Company recorded a net gain in the settlement of the warrant liability of $232,867 and $210,634 for the three and six-month periods ended June 30, 2015. There are no more warrants under the Series C Warrants outstanding.


In determining the value of Full Circle’s remaining warrants prior to exercise, the Company used the binomial pricing model and a stock price of $5.00 per share and utilized initial scenario stock prices of $3.00, $4.00, $6.00, and $7.00.  The Company utilized an expected term of 1.81 years which is the remaining term of Full Circle’s warrants and an early exercise factor of 1.33 to factor in an anticipation of early exercise of in-the-money warrants. The underlying assumptions used in our value of the derivative warrant liability at June 30, 2015 were:


 

May 1, 2015

 

May 4, 2015

 

Current stock price

$3.75

 

$3.50

 

Exercise price of warrant

4.00

 

4.00

 

Risk-free interest rate

0.60

%

0.60

%

Expected dividend yield

0.00

%

0.00

%

Expected term (in years)

1.81 years

 

1.81 years

 

Expected volatility

133

%

133

%

Early exercise factor

1.33

 

1.33

 


Changes in fair value of the derivative financial instruments are recognized in the Company’s consolidated statements of operations as a derivative gain or loss and are included in other income (expense). The warrant derivative gains (losses) are non-cash income (expenses); and loss on derivative liability, net, was included in other income (expense) in the Company’s consolidated statements of operations. The primary underlying risk exposure pertaining to the warrants was the change in fair value of the underlying common stock for each reporting period.


21




Changes in the derivative warrant liability for the three and six-month periods ended June 30, 2015 and 2014 are as follows:


 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

2015

 

2014

 

2015

 

2014

Balance at beginning of period

$

601,617

$

1,147,640

$

3,893,904

$

Fair value of warrants issued

 

 

 

 

1,368,908

Increase in derivative liability resulting from anti-dilution provision in agreement, with Full Circle

 

 

 

 

153,994

Increase (decrease) in the fair value of warrant liability

 

(8,223)

 

(223,876)

 

14,010

 

(599,138)

Reclassification to APIC for shares issued for Full Circle as a result of warrant exercises, net of cash received

 

(368,750)

 

 

(3,683,270)

 

(Gain) loss on settlement of derivative

 

(224,644)

 

 

(224,644)

 

Balance at end of period

$

$

923,764

$

$

923,764


Changes in the aggregate loss of the derivative warrant liability for the three and six-month periods ended June 30, 2015 and 2014 are as follows:


 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

2015

 

2014

 

2015

 

2014

Beginning balance at beginning of period

$

101,617

$

647,640

$

3,393,904

$

Initial loss on recognition of derivative liability

 

 

 

 

868,908

Increase (decrease) in the fair value of warrant liability

 

(8,223)

 

(223,876)

 

14,010

 

(445,144)

Reclassification from (to) APIC for shares issued for Full Circle as a result of warrant exercises, net of initial consideration

 

131,250

 

 

(3,183,270)

 

(Gain) loss on settlement of derivative

 

(224,644)

 

 

(224,644)

 

Balance at end of period

$

$

423,764

$

$

423,764


14.   INCOME TAXES


The Company accounts for income taxes in accordance with ASC 740. Deferred income taxes reflect the net effect of (i) temporary difference between carrying amounts of assets and liabilities for financial purposes and the amounts used for income tax reporting purposes, and (ii) net operating loss carry-forwards. No net provision for refundable federal income tax has been made in the accompanying statement of loss because no recoverable taxes were paid previously.  No provision was made for income taxes for the three and six months periods ended June 30, 2015 and 2014. The Company, from the date of Inception, has incurred net operating losses for tax purposes of approximately $12,819,000. The net operating loss carry-forward may be used to reduce taxable income through the year 2033.


The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties at June 30, 2015 and December 31, 2014, and has not recognized interest and/or penalties during the three and six-month periods ended June 30, 2015 and 2014, since there are no material unrecognized tax benefits. Management believes no material change to the amount of unrecognized tax benefits will occur within in the next 12 months.  The tax years subject to examination by major tax jurisdictions include the years 2013 and forward by the U.S. Internal Revenue Service and for various states.


There was no significant difference between reportable income tax and statutory income tax, as the Company does not have significant temporary or permanent differences. For those years in which the Company has filed taxes, the Company’s sales have occurred within the State of Colorado, book depreciation expense approximates tax depreciation expense, and the Company did not incur any tax consequences for issuing warrants. Based on losses incurred since inception and an estimated federal tax rate of 35%, the Company calculated that it had a federal deferred tax asset of approximately $4,487,000 and $2,674,000 at June 30, 2015 and December 31, 2014, respectively. Based on an estimated Colorado state tax of 4.63% (flat tax rate applied to net income of corporation), the Company calculated that it had a state deferred tax asset of approximately $594,000 and $354,000 at June 30, 2015 and December 31, 2014, respectively. A 100% valuation allowance has been established against these deferred tax asset, as the utilization of the loss carry-forwards cannot be reasonably assured.


15.   RELATED PARTY TRANSACTIONS


In February 2015, the Company completed the closing of a private placement financing transaction with Infinity Capital, which purchased a senior secured note (the “Infinity Note”) from the Company in the principal amount of up to $300,000, as amended in April 2015. Infinity Capital agreed to make advances to the Company from time to time in amounts not to exceed the maximum principal amount. The balance of the Infinity Note was approximately $289,000 on June 30, 2015.  For the three and six-month periods ended June 30, 2015, interest expense was approximately $400 and $3,000, respectively, all of which was interest payable at June 30, 2015.  On July 1, 2015, the outstanding balance of $309,000 was converted to a 10% Note. The Company has since been advanced additional amounts under the terms of the Infinity Note (see Note 16).


22




Interest on the Infinity Note accrues at 5.0% on the then-outstanding principal amount is payable monthly in arrears commencing June 30, 2015, until the note’s maturity date on August 31, 2015.  The Infinity Note may be prepaid at any time upon 5 business days’ notice to Infinity Capital.  As collateral for payment of the Infinity Note, the Company granted Infinity Capital a lien and security interest in substantially all of the Company’s business assets and property.  The Company believes that the arrangement was on terms that were at least as favorable as it could have obtained from third parties.


16.   SUBSEQUENT EVENTS


On July 1, 2015, the Company and Elliot Singer entered into a one-year contract whereby Mr. Singer would provide the Company with investor relations services.  In connection with the Company’s agreement with Mr. Singer, the Company granted Mr. Singer an option to purchase 20,000 shares of the Company’s common stock at an exercise price of $1.88 per share with a term of 3 years.


On July 1, 2015, Infinity Capital loaned the Company $20,000 under the terms of the Infinity Note. Immediately following this draw on the Infinity Note, the Company and Infinity Capital mutually agreed to transition the balance of the Infinity Note of $309,000 to a 10% Note. At the time of the conversion, Infinity Capital was issued 10% Warrants to purchase 154,000 shares of the Company’s common stock at an exercise price of $1.08 per share with a term of 18 months. After the transition of the outstanding balance of $309,000 to a 10% Note, and from July 2, 2015 through the date of this filing, Infinity Capital has advanced the Company $195,000 under the terms of the Infinity Note.


On July 15, 2015, the Company and Trevor McGarvey entered into a consulting agreement whereby Mr. McGarvey would provide the Company with industry advisory expertise and consulting services.   In connection with the Company’s agreement with Mr. McGarvey, which continues through February 28, 2016, the Company granted Mr. McGarvey 50,000 shares of the Company’s common stock at a price of $1.17 per share. These shares will vest on January 1, 2016.


On July 14, 2015, the Company and Peter Boockvar entered into an Employee Nonstatutory Stock Option Agreement (the “Boockvar Agreement”), pursuant to which Mr. Boockvar will receive options to purchase 150,000 shares of the Company’s common stock at a price of $2.15 per share and a term of 10 years, 50,000 of which vested upon execution of the Boockvar Agreement, and provided that Mr. Boockvar remains a director of the Company on each date, 50,000 of which will vest on June 26, 2016, and the remaining 50,000 will vest on June 26, 2017.


On July 29, 2015, the Company entered into a Securities Exchange Agreement (the “Evans Exchange Agreement”) with Evans Street Lendco, LLC (“Evans Lendco”) to exchange the 600,000 Evans Warrants. Pursuant to the Evans Exchange Agreement, the Company issued 225,000 new warrants to Evans Lendco to purchase shares of the Company’s stock at $1.20 per share with a term of 2 years (the “Evans-A Warrants”). With the exception of the new exercise term of 2 years and the new exercise price, the terms of the Evans-A Warrants and the Evans Warrants are identical, in all material respects.


On August 4, 2015, pursuant to the Feinsod Agreement, the Company issued 150,000 shares of common stock to Infinity Capital. Upon executing the Feinsod Agreement on August 4, 2014, the Company expected that Mr. Feinsod would remain a member of the Board through August 4, 2016, and had calculated the fair value of the shares of common stock that the Company expected to issue to Infinity Capital on August 4, 2015 and August 4, 2016.


Subsequent to June 30, 2015 through the date of this filing, one of the January 2014 Issuance note holders converted loan notes with a principal balance of $30,000 into 6,000 shares of the Company’s common stock at a conversion price of $5.00 per share.


23




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 GC Corp.’s 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 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 December 31, 2014 and 2013 and for the year ended December 31, 2014 and for the period from June 5, 2013 (Inception) to December 31, 2013 (the “2013 Fiscal Period”). The results of operations for an interim period may not give a true indication of results for future interim periods or 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,” “GCC,” “GC Corp.,” and the “Company,” they refer to General Cannabis Corporation (formerly, “Advanced Cannabis Solutions, Inc.”).


Our Products, Services and Customers


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


Through its operating segments (Finance and Real Estate, Wholesale Supply, Security, and Consulting) the Company provides products and services to the regulated cannabis industry, which include the following:


Real Estate Leasing


The Company’s real estate 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 the Company to continually evaluate its tenants’ compliance with applicable laws and regulations.


The Company has a credit facility to finance the acquisition of real estate.


As of the date of this report, the Company owned one cultivation property that is located in a suburb of Pueblo, Colorado.  The property consists of approximately three acres of land, which 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 (the “Pueblo West Property”).


The Company has identified other properties that are currently under review for purchase and leaseback to licensed cannabis cultivators in Colorado. These projects include the purchase and leaseback of existing, currently operating facilities, as well as proposed new construction projects. These opportunities are in Denver and Pueblo counties in Colorado and can be purchased and/or constructed for amounts ranging from $750,000 to $5 million for each project. There can be no assurance that the Company will be able to complete any of these transactions.


Shared Office Space, Networking and Event Services


In October 2014, the Company 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 5,000 square feet on its ground floor that is dedicated to a consumer banking design.


The Company plans to continue to acquire commercial real estate and lease office space to non-regulated 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, the Company expects to receive rental income in the form of cash. In certain cases, the Company may acquire equity interests or provide debt capital to these non-regulated businesses.


24




Security and Cash Management Services


In March 2015, GC Security, LLC, a Colorado limited liability company incorporated in 2015 and wholly-owned subsidiary of the Company (“GCS”), acquired substantially all of the assets of Iron Protection Group, LLC (“IPG”), a Colorado limited liability company (the “IPG APA”).  GCS, which will continue to do business as “Iron Protection Group,” provides advanced security, including on-site professionals and video surveillance, to licensed cannabis cultivators and retail shops. Iron Protection Group has approximately fifty static guards who service twenty clients throughout Colorado.  The acquisition is anticipated to add annualized revenue of approximately $1.2 million in 2015.


Industry Finance and Equipment Leasing Services


The Company leases cultivation equipment and facilities to customers in the cannabis industry. The Company expects it 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, the Company intends 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 the Company to continually evaluate its tenants’ compliance with applicable laws and regulations.


The Company is exploring lending opportunities in Oregon, Washington, Colorado, and Arizona. The Company’s 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.  The Company believes there is a significant demand for this financing.  The Company is pursuing other finance services including customized finance, capital formation, and banking, for participants in the cannabis industry.


Wholesale Supply


The Company’s wholesale supply business, GC Supply, is a reseller of supplies to the cannabis market. GC Supply works with industry leaders and innovators to deliver high-quality products that are compliant with applicable regulations and with a focus on products that are manufactured in the United States.   GC Supply operates out of a leased, 1,800 square-foot warehouse located in Colorado Springs, Colorado.


Consulting and Advisory


GC Consulting delivers comprehensive consulting and advisory services that include new license competition, compliance advisory services, cultivation operation and logistical support, facility design and building services, and ongoing cultivation management services.  The Company’s business plan is based on the future growth of the regulated cannabis market in the United States.


Subsidiary Structure


General Cannabis Corporation has five wholly-owned subsidiaries, Advanced Cannabis Solutions Corporation, a Colorado corporation formed in 2013, ACS Colorado Corp., a Colorado corporation formed in 2013; 6565 E. Evans Avenue LLC (“6565 Evans”), a Colorado limited liability company formed in 2014, General Cannabis Capital Corporation (“GCCC”), a Colorado corporation formed in 2015 and GC Security LLC (“GCS”), a Colorado limited liability company formed in 2015.


Advanced Cannabis Solutions Corporation has one wholly-owned subsidiary company, GC Corp. (formerly, ACS Corp.), which was formed in the State of Colorado on June 6, 2013.


Results of Operations


The following discussion analyzes our financial condition and summarizes the results of operations for the three and six month periods ended June 30, 2015 and 2014. This discussion and analysis is partitioned by operating segment (i) Finance and Real Estate; (ii) Wholesale Supply; (iii) Security; and (iv) Consulting, and should be read in conjunction with our financial statements included as part of this report.


Consolidated Results


Revenues were $427,202 and $80,123 for the three months ended June 30, 2015 and 2014, respectively, and $484,059 and $128,888 for the six months ended June 30, 2015 and 2014, respectively.  The increases in revenue are primarily due to positive performance of the Company’s acquisition of Iron Protection Group, which occurred in March 2015.  


Costs and expenses were $4,769,098 and $334,930 for the three months ended June 30, 2015 and 2014, respectively, and $5,320,378 and $587,862 for the six months ended June 30, 2015 and 2014, respectively.  The increases in 2015 are due primarily to an increase in share-based compensation.  Share-based compensation, which is primarily allocated to “Corporate and Other,” was $3,855,465 and $4,104,090 for the three and six-month periods ended June 30, 2015.  On April 28, 2015, the Company’s stock was uplisted to the OTC Market’s OTCQB.  (On August 4, 2014, pursuant to an agreement with Michael Feinsod, the Company’s Board of Directors (the “Board”) appointed Michael Feinsod as Chairman of the Board and approved a compensatory arrangement with Infinity Capital LLC (“Infinity Capital”), an investment management company Mr. Feinsod founded in 1999 (the “Feinsod Agreement”)). On the date of issue, the 1,000,000 shares had an initial fair value of $3,490,000, based on a closing


25



price per share of the Company of $3.49 on April 27, 2015. Due to restrictions in the ability to trade the Company’s 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, approximately $2,966,500 and was recorded to share-based compensation and additional paid-in capital.  There was no share-based compensation expense for the corresponding periods in 2014. Also in connection with the Feinsod Agreement and the Company’s anticipation that Mr. Feinsod will remain a member of the Board through August 2016, the Company recorded share-based compensation of approximately $249,000 and $498,000 for the three and six-month periods ended June 30, 2015, respectively. During the three months ended June 30, 2015, the Company recorded share-based compensation for stock options granted of approximately $569,000 in connection with the Company’s 2014 Equity Incentive Plan which was established in October 2014 and ratified by the Company’s stockholders in July 2015.


Selling, general and administrative expenses and professional fees are allocated to “Corporate and Other”. Selling, general and administrative expenses were $435,279 and $181,103 for the three months ended June 30, 2015 and 2014, respectively, and $620,683 and $333,553 for the six months ended June 30, 2015 and 2014, respectively. The increases in 2015 are primarily due to an increase in administrative salaries in connection with the Company’s purchase of IPG and its hiring of individuals from Next Big Crop (“NBC”), as well as overhead expenses incurred on The Greenhouse. Professional fees were $162,768 and $118,538 for the three months ended June 30, 2015 and 2014, respectively, and $250,497 and $201,054 for the six months ended June 30, 2015 and 2014, respectively. The increases in professional fees in 2015 are, primarily, a result of the non-capitalizable expenditures relating to the Company’s purchase of IPG and an increase in fees in connection with regulatory filings.


Other income (expense) was $(7,326) and $32,000 for the three months ended June 30, 2015 and 2014, respectively, and $(341,396) and $(969,755) for the six months ended June 30, 2015 and 2014, respectively.   The primary reason for the variances between periods was a gain (loss) in the value of the derivative liability of $223,876 and $(423,764) for the three and six-month periods ended June 30, 2014, respectively.  The derivative liability was initially recorded during the first quarter of 2014 and decreased in value during the second quarter of 2014.   The gain in the value of the derivative liability was $232,867 and $210,634 for the three and six-month periods ended June 30, 2015, which resulted from the settlement of the Company’s derivative liability upon Full Circle’s exercising of its remaining 185,000 Series C Warrants in May 2015.


Amortization of debt discount and deferred financing costs was $(134,195) and $(113,040) for the three months ended June 30, 2015 and 2014, respectively, due to the Company’s private placement of its 10% Notes with attached 10% Warrants which were recorded as debt discount during the three months ended June 30, 2015 and amortization of the debt discount relating to The Greenhouse, which was purchased in October 2014. These increases were slightly offset by lower amortization expense of the Company’s 12% Convertible Notes due to conversions during the third quarter of 2014 and first quarter of 2015. Amortization of debt discount and deferred financing costs was $(376,825) and $(417,881) for the six months ended June 30, 2015 and 2014, respectively. The decrease from 2014 to 2015 is due to a larger expense of remaining debt discount balances on notes converted in 2014, somewhat offset by an increase in amortization expense relating to The Greenhouse. Interest expense was $(78,498) and $(78,836) for the three months ended June 30, 2015 and 2014, respectively, due to a higher average debt balance of approximately $2,260,000 for the three months ended June 30, 2015 compared to an average debt balance of approximately $2,150,000 for the three months ended June 30, 2014. This was offset by the issuance of lower-cost debt in 2015. Interest expense was $(147,705) and $(128,110) for the six months ended June 30, 2015 and 2014, respectively, primarily due to an increase in the average debt balance from approximately $1,980,000 for the six months ended June 30, 2014 to $2,250,000 for the six months ended June 30, 2015.


Net loss for the Company was $(4,461,222) and $(222,807) for the three months ended June 30, 2015 and 2014, respectively, and $(5,177,715) and $(1,428,729) for the six months ended June 30, 2015 and 2014, respectively.  Based on the weighted average shares outstanding for each period, Net loss per share for the Company was $(0.31) and $(0.02) for the three months ended June 30, 2015 and 2014, respectively, and $(0.38) and $(0.11) for the six months ended June 30, 2015 and 2014, respectively.


Finance and Real Estate


Revenues for the Finance and Real Estate segment were $37,911 and $28,765 for the three months ended June 30, 2015 and 2014, respectively, and $64,588 and $57,530 for the six months ended June 30, 2015 and 2014, respectively. The increases in revenue from 2014 to 2015 are due to tenant revenue at The Greenhouse in Denver, Colorado, which was acquired in October 2014 and is being renovated. Costs and expenses were $9,008 and $3,116 for the three months ended June 30, 2015 and 2014, respectively, and $18,015 and $6,232 for the six months ended June 30, 2015 and 2014, respectively. The amount is comprised of depreciation expense for the Pueblo Property, which the Company purchased in January 2014, and The Greenhouse. Other income (expense) was $(77,498) and $(3,582) for the three months ended June 30, 2015 and 2014, respectively, and $(155,029) and $(5,987) for the six months ended June 30, 2015 and 2014, respectively. The increases in 2015 are due to the interest expense on The Greenhouse and discount amortization expense associated with the Evans Warrants.


Wholesale Supply


Revenues for the Wholesale Supply segment were $12,659 and $17,758 for the three months ended June 30, 2015 and 2014, respectively. The decrease during three months ended June 30, 2015 was primarily due to increased competition and turnover in sales personnel. Revenues for the segment were $25,367 and $17,758 for the six months ended June 30, 2015 and 2014, respectively, due to the fact that our wholesale operations commenced during the second quarter of 2014. As such, the 2015 period had three months of additional operating activity. Costs and expenses reflect the segment’s cost of goods sold, warehouse lease expense, and personnel costs. Costs and expenses were $29,019 and $42,520 for the three months ended June 30, 2015 and 2014, respectively, and the variance is due primarily to a higher product cost in 2014. Costs and expenses were $52,422 and $42,520 for the six months ended June 30, 2015 and 2014, respectively, and the increase is due to six full months of operating activity in 2015, offset by a slightly lower cost of product. The Company recorded expense of $(27,500) in 2015 resulting from a loss in value of inventory due to certain nutrients in our Wholesale Supply segment's inventory that have underperformed in the marketplace.


26




Security


In March 2015, GCS, a wholly-owned subsidiary of the Company, purchased Iron Protection Group, LLC, a Colorado limited liability company (“IPG”). IPG comprises the Company’s Security segment. Revenues for the Security segment, which are derived primarily from guard service and cash transport, were $376,722 and $394,104 for the three and six-month periods ended June 30, 2015, respectively. Costs and expenses of $300,814 and $314,951 for the three and six-month periods ended June 30, 2015, respectively, were comprised primarily of payroll and transportation costs for guards of $242,951 and $257,088, respectively. Amortization of intangible assets relating to the Company’s purchase of IPG were $57,863 and $57,863 for the three and six-month periods ended June 30, 2015, respectively. At June 30, 2015, the segment’s receivables were $73,190.


Consulting


Revenues for the Consulting segment, were $33,600 and $53,600 for the three and six-month periods ended June 30, 2014, respectively, and were primarily a result of a contract with a Canadian client that was canceled during the third quarter of 2014.  There were no revenues in 2015.  However, as of June 30, 2015, the Consulting segment had collected approximately $3,000 in deposits from client contracts pursuing medical cannabis licenses in states other than Colorado.  These contracts are expected to result in revenue of at least $75,000 during the next two fiscal quarters of 2015.  Costs and expenses consist of compensation expenses and was $125,029 and $14,850 for the three months ended June 30, 2015 and 2014, respectively, and $125,029 and $29,700  for the six months ended June 30, 2015 and 2014, respectively.  Compensation expenses incurred during 2015 relate primarily to the hiring of two individuals from Next Big Crop (“NBC”), an unaffiliated entity serving the cannabis industry.


Liquidity and Capital Resources


The Company discusses its liquidity and capital resources below for the six months ended June 30, 2015 and 2014.  The table below shows significant cash and non-cash transactions that occurred during the periods:


 

 

2015

 

2014

Net cash used in operating activities

$

(805,118)

$

(689,620)

   Amortization of debt discount and debt financing costs (non-cash)

 

376,825

 

433,853

   Share-based compensation (non-cash)

 

4,104,090

 

4,104,090

   (Increase) decrease in fair value of derivative liability, net (non-cash)

 

(210,634)

 

423,764

 

 

 

 

 

Net cash provided by financing activities

 

698,515

 

1,794,222

   Proceeds from issuance of notes payable, net of cash expenses

 

325,000

 

1,412,400

   Increase in short-term financing from related party

 

289,000

 

   Proceeds from sale of warrants, net

 

 

400,000


Operating Activities


Cash flows provided by (used in) operating activities were $(805,118) and $(689,620) for the six months ended June 30, 2015 and 2014, respectively. The Company incurred net losses of $(5,177,715) and $(1,428,729) for the six months ended June 30, 2015 and 2014, respectively, of which non-cash items accounted for $4,346,159 and $863,849, respectively. Most significantly, for the six months ended June 30, 2015 and 2014, share-based compensation was $4,104,090 and $0, respectively; amortization of debt discounts and debt financing costs was $376,825 and $433,853, respectively; and net (gain) loss on derivative liability was $(210,634) and $423,764, respectively.


Awards granted through share-based compensation during the current period were primarily incurred by the Company as a result of the Company’s stock uplisting and in connection with our strategy to secure talented individuals with industry experience and leadership expertise.  On April 28, 2015, the Company’s stock was uplisted to the OTC Market’s OTCQB and pursuant to the Feinsod Agreement, the Company issued 1,000,000 shares of its common stock to Infinity Capital, resulting in  stock compensation expense of approximately $3 million.  During 2015, the Company granted options to our Chief Executive Officer, a new board member, individuals with industry consulting experience, and key employees.


Investing Activities


Cash flows used in investing activities were $(42,562) and $(31,449) for the six months ended June 30, 2015 and 2014, respectively, primarily resulting from construction in progress for The Greenhouse in 2015 and minor equipment purchases and capitalized costs later written off in 2014.


27




Financing Activities


Cash flows provided by financing activities were $698,515 and $1,794,222 for the six months ended June 30, 2015 and 2014, respectively, primarily resulting from debt financing and the sale and issuance of warrants to purchase the Company’s stock.  In 2014, the Company issued convertible debt, net of discount of $1,412,400.  The convertible debt carries an interest rate of 12% per annum, payable quarterly.  After December 1, 2015, this convertible debt will automatically convert to shares of the Company’s common stock.  As such, the Company’s final interest payments on this debt will be as of December 1, 2015.  In 2014, the Company also sold Series C warrants to Full Circle for net proceeds of $400,000.  As of May 4, 2015, the Company issued a total of 785,263 in settlement of Full Circle’s 1,400,000 Series C Warrants for net cash proceeds of $87,616. At June 30, 2015, there are no Series C Warrants remaining.  In addition, the Company’s derivative liability valued at $3,893,904 at December 31, 2014, which had resulted from the beneficial conversion features in the Full Circle Agreement, was settled during the three months ended June 30, 2015.  


For the six months ended June 30, 2015, the Company issued new debt of $614,000, of which $325,000 was raised through a private securities offering (see Form 8-K filed with the SEC on May 6, 2015).  The private placement debt (the “10% Notes”) carries an interest rate of 10% per annum and the Company issued warrants to investors of the 10% Notes.  The Company’s short-term financing from Infinity Capital, which carries an interest rate of 5%, was $289,000 at June 30, 2015.  The Company and Infinity Capital mutually agreed to transition the balance of the Infinity Note of $309,000 on July 1, 2015 to a 10% Note.  At the time of the conversion, Infinity Capital was issued 154,500 10% Warrants. After the transition of the outstanding balance of $309,000 to a 10% Note, and from July 2, 2015 through the date of this filing, Infinity Capital has advanced the Company $195,000 under the terms of the Infinity Note.


In April 2015, the Company’s common stock resumed quotation on the OTC Market’s OTCBB and was later uplisted to that Market’s OTCQB and in July 2015, the Company was selected by The Marijuana Index for inclusion in its MJIC US Reporting Index. The Marijuana Index is the leading equity-tracking index featuring public companies involved in the legalized marijuana and hemp sector. The Marijuana Index provides the most robust data set in the legal marijuana industry with a perpetually expanding assemblage of information available to brokers, analysts, investors and media.  The Company believes that these successes are a reflection of the Company’s strategic business and personnel acquisitions, improved operating cash flows, and effective branding and marketing.  We anticipate these successes, and the significant projected growth in the cannabis industry will continue to allow us to lower our cost of capital in future periods.


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.


We believe that the disclosure of Adjusted EBITDA per share-basic and diluted provides investors with a better comparison of our year-to-year 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

 

Six months ended

 

 

June 30, 2015

 

June 30, 2014

 

June 30, 2015

 

June 30, 2014

Net loss

$

(4,349,222)

$

(222,807)

$

(5,177,715)

$

(1,428,729)

Adjustments:

 

 

 

 

 

 

 

 

Share-based compensation

 

3,855,465

 

 

4,104,090

 

Depreciation and amortization

 

66,871

 

3,116

 

75,878

 

6,232

Amortization of debt discount and debt financing costs

 

134,195

 

113,040

 

376,825

 

417,881

Interest expense

 

78,498

 

78,836

 

147,705

 

128,110

Net (gain) loss on derivative liability

 

(232,867)

 

(223,876)

 

(210,634)

 

423,764

Inventory lower of cost or market valuation adjustment

 

27,500

 

 

27,500

 

Total adjustments:

 

3,929,662

 

(28,884)

 

4,521,364

 

975,987

Adjusted EBITDA

$

(419,560)

$

(251,691)

$

(656,351)

$

(452,742)

Adjusted EBITDA per share - basic and diluted (adjusted)

$

(0.03)

$

(0.02)

$

(0.05)

$

(0.03)

Net loss per share – basic and diluted (per Condensed consolidated unaudited statements of operations)

$

(0.31)

$

(0.02)

$

(0.38)

$

(0.11)

Weighted average number of common shares outstanding - basic and diluted (adjusted)

 

13,351,376

 

13,439,159

 

13,224,127

 

13,548,968

Weighted average number of common shares outstanding - basic and diluted

 

14,054,673

 

13,439,159

 

13,577,719

 

13,548,968


28



Contractual Obligations


The Company had the following contractual obligations, including interest, as of June 30, 2015:


 

 

Amounts Due in

Description

 

Total

 

2015

 

2016

 

2017

 

2018

 

2019

 

Thereafter

12% Convertible notes (3)

$

1,426,960

$

66,960

$

$

$

1,360,000

$

$

Mortgage on Pueblo Property

$

206,042

$

10,044

$

20,089

$

20,089

$

155,820

$

$

Mortgage on The Greenhouse, Denver (1)

$

772,685

$

45,730

$

726,955

$

$

$

$

Senior secured note to Infinity Capital (2)

$

289,000

$

289,000

$

$

$

$

$

10% Private placement notes

$

352,287

$

16,386

$

335,901

$

$

$

$

Warehouse rental,
Colorado Springs, CO

$

24,120

$

6,426

$

13,238

$

4,456

$

$

$

TOTAL

$

3,071,094

$

434,546

$

1,096,183

$

24,545

$

1,515,820

$

$


(1)

Pursuant to the terms of the Company’s Greenhouse Mortgage with Evans Lendco.

(2)

Pursuant to the terms of the Company’s Note with Infinity Capital.  On July 1, 2015 the Company’s Note with Infinity Capital was converted to a 10% Private Placement Note, with terms consistent with those of other investors.

(3)

As of December 1, 2015, we anticipate that all of the requirements for conversion of the 12% Convertible Notes will have been met and the Company intends to elect its option to convert the remaining 12% Convertible Notes on such date.  The amount due in 2015 represents the interest the Company would owe noteholders assuming that no noteholders convert their notes prior to the Company’s conversion on December 1, 2015.


Critical Accounting Policies


Preparation of our financial statements requires us to make estimates and assumptions which affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Consolidated Financial Statements 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  describe the significant accounting policies used in preparation of the Consolidated Financial Statements. On an ongoing basis, we evaluate the critical accounting policies used to prepare our consolidated financial statements, including, but not limited to, those related to:


·

revenue recognition;

·

conventional convertible debt;

·

derivative liabilities, beneficial conversion features and debt discounts;

·

fair value measurements;

·

business combinations;

·

share-based compensation;

·

use of estimates;

·

capital requirements; and

·

going concern.


There have been no significant changes in these aforementioned critical accounting policies.


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.


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.


29




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 June 30, 2015, 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.


Assessment of Internal Control over Financial Reporting


Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2015. 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 exist at June 30, 2015.


Remediation of Material Weaknesses


While management believes that the Company’s financial statements previously filed in the Company’s Securities and Exchange Commission (“SEC”) reports have been properly recorded and disclosed in accordance with US GAAP, based on the control deficiencies identified above, we have designed and plan to implement, or in some cases have already implemented, the specific remediation initiatives described below:


·

We are in the process of further enhancing our internal finance and accounting organizational structure, which includes engaging and hiring additional resources, and employing emerging technologies.

·

We are in the process of further enhancing the supervisory procedures to include additional levels of analysis and quality control reviews within the accounting and financial reporting functions.

·

We are in the process of strengthening our internal policies and enhancing our processes for ensuring consistent treatment and recording of reserve estimates and that validation of our conclusions regarding significant accounting policies and their application to our business transactions are carried out by personnel with an appropriate level of accounting knowledge, experience and training.


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.


Management has inspected the consolidated financial statements and underlying information included herein in detail and believes the procedures performed are adequate to fairly present our financial position, results of operations and cash flows for the periods presented in all material respects.


The Company’s Annual Report 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 the Company's Annual Report.


Changes in Internal Control over Financial Reporting


There have been no changes in our internal control over financial reporting identified in connection with our evaluation we conducted of the effectiveness of our internal control over financial reporting as of June 30, 2015, that occurred during our current fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


30





PART II

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


In March 2015, the Company acquired IPG.  Pursuant to the terms of the IPG APA by and among the Company, GCS and IPG, the Company will deliver to the sole shareholder of IPG 500,000 restricted shares of the Company’s common stock, which will vest over a one-year period. In addition, the Company delivered to IPG vested warrants to purchase an aggregate of 500,000 shares of the Company’s common stock for a term of three years.  The exercise prices are (i) $4.50 for warrants to purchase 250,000 shares of the Company’s common stock, and (ii) $5.00 for warrants to purchase another 250,000 shares of the Company’s common stock.


On April 24, 2015, the Company and Rafael Castro entered into a one-year contract whereby Mr. Castro would provide the Company with services to raise capital.  In connection with the Company’s agreement with Mr. Castro, the Company granted  Mr. Castro warrants to purchase 20,000 shares of the Company’s common stock at an exercise price of $3.75 per share with a term of 2 years.


On April 27, 2015, the Company and Porter, LeVay & Rose, Inc. (“PLR”) entered into a one-year contract whereby PLR would provide the Company with investor relations services. In connection with the Company’s agreement with PLR, the Company granted PLR warrants to purchase 20,000 shares of the Company’s common stock at an exercise price of $3.49 per share with a term of 2 years.


On April 28, 2015, pursuant to the Feinsod Agreement, the Company issued 1,000,000 shares of its common stock to Infinity Capital as a result of the uplisting of the Company’s stock to the OTC Market’s OTCQB on April 28, 2015. On the date of issue, the 1,000,000 shares had an initial fair value of $3,490,000, based on a closing price per share of the Company of $3.49 on April 27, 2015. Due to restrictions in the ability to trade the Company’s 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 common stock issued was had an estimated fair value of $2,966,500.


On May 1, 2015, the Company and Robert L. Frichtel entered into an Executive Employment Agreement (the “Frichtel Agreement”) and an Option Agreement (the “Frichtel Option Agreement”), pursuant to which Mr. Frichtel will receive options to purchase 300,000 shares of the Company’s common stock at a price of $3.75 per share with a term of 3 years, 100,000 of which vested upon execution of the Frichtel Agreement, and, provided that Mr. Frichtel remains an employee of the Company on each date, 100,000 of which will vest on May 1, 2016, and the remaining 100,000 will vest on May 1, 2017.


On May 1, 2015, the Company and Full Circle entered into Amendment No. 2 to the Series C Warrants, pursuant to which Full Circle cashlessly exercised 160,000 warrants and received 100,000 shares of the Company’s common stock.  On May 4, 2015, Full Circle exercised its remaining warrants under the Series C Warrants to purchase 25,000 shares of the Company’s common stock for $4.00 per share.  There are no more warrants under the Series C Warrants outstanding.


On May 7, 2015, the Company initiated a private placement pursuant to a Promissory Note and Warrant Purchase Agreement (the “10% Agreement”) between the Company and certain accredited investors.  Under the 10% Agreement, the Company can sell up to $2,000,000 of notes to investors, each note with a denomination of a minimum of $25,000 (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 warrants equal to their Note principal divided by 2 (the “10% Warrants”).  The 10% Warrants shall be exercisable for a period of eighteen (18) months after grant date and have an exercise price of $1.08 per share. As of the date of this filing, the Company had 304,500 10% Warrants outstanding to various investors.


On May 13, 2015, the Company hired two individuals from Next Big Crop Consulting, Inc. (“NBC”) whereby the persons from NBC became employees of the Company and will provide the Company’s new and existing clients with cannabis industry consulting services through our Consulting segment. In connection with this agreement, the Company granted these persons a total of 100,000 shares of the Company’s common stock and options to purchase 200,000 shares of the Company’s common stock. The shares vest January 1, 2016. and were issued with a share price of $3.11 per share. The options, which were issued with an exercise price of $3.11 per share, have vesting dates of May 12, 2016 (100,000) and May 12, 2017 (100,000).


On July 1, 2015, the Company and Elliot Singer entered into a one-year contract whereby Mr. Singer would provide the Company with investor relations services.  In connection with the Company’s agreement with Mr. Singer, the Company granted  Mr. Singer options to purchase 20,000 shares of the Company’s common stock at an exercise price of $1.88 per share with a term of 3 years.


On July 15, 2015, the Company and Trevor McGarvey entered into a consulting agreement whereby Mr. McGarvey will provide the Company with industry advisory expertise and consulting services.   In connection with the Company’s agreement with Mr. McGarvey, which continues through February 28, 2016, the Company granted Mr. McGarvey 50,000 shares of the Company’s common stock at price of $1.17 per share.


31



On July 14, 2015, the Company and Peter Boockvar entered into an Employee Nonstatutory Stock Option Agreement (the “Boockvar Agreement”), pursuant to which Mr. Boockvar will receive options to purchase 150,000 shares of the Company’s common stock at a price of $2.15 per share and a term of 10 years, 50,000 of which vested upon execution of the Boockvar Agreement, and, provided that Mr. Boockvar remains an director of the Company on each date, 50,000 of which will vest on July 14, 2016, and the remaining 50,000 will vest on July 14, 2017.


On July 29, 2015, the Company exchanged 600,000 warrants previously issued to Evans Street Lendco, LLC (“Evans Lendco”) with  warrants to purchase 225,000 shares of the Company’s stock at $1.20 per share with a term of 2 years.  The warrants previously issued to Evans Lendco were issued in connection with the Company’s purchase of The Greenhouse, in Denver, CO.


On August 4, 2015, pursuant to the Feinsod Agreement, the Company issued 150,000 shares of its common stock to Infinity Capital. Upon executing the Feinsod Agreement on August 4, 2014, the Company expected that Mr. Feinsod would remain a member of the Board through August 4, 2016, and had calculated the fair value of the shares of common stock that the Company expected to issue to Infinity Capital on August 4, 2015 and August 4, 2016.


ITEM 3.    DEFAULTS UPON SENIOR SECURITIES


None.


ITEM 4.    MINE SAFETY DISCLOSURES


Not applicable.


ITEM 5.   OTHER INFORMATION


None.


ITME 6.  Exhibits


Exhibits

 

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.

32.2

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

101.INS

XBRL Instance Document.

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Calculation Linkbase Document.

101.DEF

XBRL Taxonomy Definition Linkbase Document.

101.LAB

XBRL Taxonomy Label Linkbase Document.

101.PRE

XBRL Taxonomy Presentation Linkbase Document.


32




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: August 24, 2015

By:

/s/Robert Frichtel

 

 

Robert Frichtel, Principal Executive Officer

 

 

 

 

By:

/s/ Brian Kozel

 

 

Brian Kozel, Principal Financial and Accounting Officer


33