GENERAL CANNABIS CORP - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - GENERAL CANNABIS CORP	exh32_1.htm
EX-31.2 - EXHIBIT 31.2 - GENERAL CANNABIS CORP	exh31_2.htm
EX-31.1 - EXHIBIT 31.1 - GENERAL CANNABIS CORP	exh31_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for quarterly period ended March 31, 2018.

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 CORP

(Exact name of registrant as specified in its charter)


Colorado		90-1072649
(State of incorporation)		(IRS Employer Identification No.)

6565 East Evans Avenue
Denver, CO 80224
(Address of principal executive offices) (Zip Code)

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in rule 12b-2 of the Exchange Act.


Large accelerated filer	o	Smaller reporting company	þ
Non-accelerated filer	o	Emerging growth company	o
Accelerated filer	o

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

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

As of May 8, 2018, there were 35,460,990 issued and outstanding shares of the Company’s common stock.

GENERAL CANNABIS CORP

FORM 10-Q

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21
Item 4.	Controls and Procedures	21

PART II. OTHER INFORMATION		24

Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	24

	Signatures	25

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED BALANCE SHEETS


		March 31, 2018 (Unaudited)		December 31, 2017
ASSETS
Current Assets
Cash and cash equivalents	$	4,640,799	$	5,036,787
Accounts receivable, net		368,352		446,219
Prepaid expenses and other current assets		214,585		672,636
Inventory		120,204		34,769
Total current assets		5,343,940		6,190,411

Property and equipment, net		1,418,988		1,293,761
Intangible assets, net		100,642		119,754
Investment in Desert Created		125,671		–
Total Assets	$	6,989,241	$	7,603,926

LIABILITIES & STOCKHOLDERS’ EQUITY

Current Liabilities
Accounts payable and accrued expenses	$	816,434	$	997,794
Interest payable		–		123,446
Customer deposits		71,445		107,370
Accrued stock payable		–		321,860
Notes payable (net of discount)		–		1,177,333
Infinity Note – related party		–		1,370,126
Total current liabilities		887,879		4,097,929

Total Liabilities		887,879		4,097,929

Commitments and Contingencies		–		–

Stockholders’ Equity
Preferred stock, no par value; 5,000,000 share authorized; no shares issued and outstanding at March 31, 2018 and December 31, 2017		–		–
Common Stock, $0.001 par value; 100,000,000 shares authorized; 35,433,990 shares and 27,692,910 shares issued and outstanding on March 31, 2018 and December 31, 2017, respectively		35,434		27,693
Additional paid-in capital		45,346,504		38,292,493
Accumulated deficit		(39,280,576)		(34,814,189)
Total Stockholders’ Equity		6,101,362		3,505,997

Total Liabilities & Stockholders’ Equity	$	6,989,241	$	7,603,926

See Notes to condensed consolidated financial statements.

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


		Three months ended March 31,
		2018		2017
				As Adjusted (Note 11)
REVENUES
Service	$	893,379	$	663,334
Rent and interest		–		32,484
Product sales		49,103		23,287
Total revenues		942,482		719,105

COSTS AND EXPENSES
Cost of service revenues		752,474		457,696
Cost of goods sold		77,690		18,611
Selling, general and administrative		942,178		723,907
Share-based expense		1,758,571		1,434,835
Professional fees		545,110		246,606
Depreciation and amortization		32,941		24,572
Total costs and expenses		4,108,964		2,906,227

OPERATING LOSS		(3,166,482)		(2,187,122)

OTHER EXPENSE
Amortization of debt discount		443,917		364,933
Interest expense, net		2,659		78,031
Loss from Desert Created investment		47,829		–
Impairment of Desert Created investment		805,500		–
Total other expense, net		1,299,905		442,964

NET LOSS	$	(4,466,387)	$	(2,630,086)

PER SHARE DATA – Basic and diluted
Net loss per share	$	(0.14)	$	(0.14)
Weighted average number of common shares outstanding		32,034,298		18,895,657

See Notes to condensed consolidated financial statements.

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


		Three months ended March 31,
		2018		2017
				As Adjusted (Note 11)
OPERATING ACTIVITIES
Net loss	$	(4,466,387)	$	(2,630,086)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount		443,917		364,933
Depreciation and amortization expense		32,941		24,572
Impairment of Desert Created investment		805,500		–
Loss from Desert Created investment		47,829		–
Equity-based payments		1,758,571		1,434,835
Changes in operating assets and liabilities:
Accounts receivable		77,867		(57,207)
Prepaid expenses and other assets		458,051		(36,986)
Inventory		(85,435)		(1,744)
Accounts payable and accrued liabilities		(340,731)		(57,023)
Net cash used in operating activities:		(1,267,877)		(958,706)

INVESTING ACTIVITIES
Purchase of property and equipment		(139,056)		(12,383)
Lending on Note receivable – related party		–		(26,500)
Net cash used in investing activities		(139,056)		(38,883)

FINANCING ACTIVITIES
Proceeds from exercise of warrants		3,559,000		553,125
Proceeds from exercise of stock options		443,321		78,305
Payments on notes payable		(1,621,250)		–
Payments on Infinity Note – related party		(1,370,126)		–
Net cash provided by financing activities		1,010,945		631,430

NET DECREASE IN CASH		(395,988)		(366,159)
CASH, BEGINNING OF PERIOD		5,036,787		773,795
CASH, END OF PERIOD	$	4,640,799	$	407,636

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest	$	202,749	$	69,496

NON-CASH TRANSACTIONS
Issuance of common stock and warrants for investment in Desert Created	$	979,000	$	–
Issuance of common stock for accrued stock payable		321,860		–
12% Note principal used to exercise 12% Warrants		–		668,750

See Notes to condensed consolidated financial statements.

GENERAL CANNABIS CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(As Adjusted – Note 11)

(Unaudited)

NOTE 1. NATURE OF OPERATIONS, HISTORY AND PRESENTATION

Nature of Operations

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

Security and Cash Transportation Services (“Security Segment”)

We provide advanced security, including on-site professionals and cash transport, to licensed cannabis cultivators and retail shops, under the business name Iron Protection Group (“IPG”), and security services to non-cannabis customers in the hospitality business, such as hotels, under the business name Mile High Protection Services (“MHPS”). The drop in wholesale cannabis prices in Colorado has negatively impacted security services in Colorado, as grow facilities and retailers seek cheaper alternatives or curtail services. We strategically acquired MHPS in order to expand our Colorado security business into the non-cannabis space, as we believe that market provides an opportunity for growth. We have opened an IPG office in California, which recently legalized recreational cannabis in addition to previously legal medical marijuana.

In states that have recently legalized cannabis, whether medical, recreational or both, license applications require a security plan and, if approved, implementation of that security plan. Accordingly, we are assessing the opportunity to expand our security consulting business to assist companies with their application process and the subsequent implementation of compliant security services.

Marketing Consulting and Apparel (“Marketing Segment”)

Chiefton’s apparel business, Chiefton Supply, strives to create innovative, unique t-shirts, hats, hoodies and accessories. Our apparel is sold through our on-line shop, cannabis retailers, and specialty t-shirt and gift shops. We are pursuing relationships with national apparel retailers and distributors, as well as expanding our offerings nationwide within the cannabis industry.

Chiefton Design provides design, branding and marketing strategy consulting services to the cannabis industry. We assist clients in developing a comprehensive marketing strategy, as well as designing and sourcing client-specific apparel and products. We now have the capacity of a full service marketing agency. Chiefton Design also supports our other segments with marketing designs and apparel.

Operations Consulting and Products (“Operations Segment”)

Through Next Big Crop (“NBC”), we deliver comprehensive consulting services to the cannabis industry that include obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and construction, and expansion of existing operations. Our business plan for NBC correlates to future growth of the regulated cannabis market in the United States.

NBC oversees our wholesale equipment and supply business, operated under the name “GC Supply,” which provides turnkey sourcing and stocking services to cultivation, retail and infused products manufacturing facilities. Our products include infrastructure, equipment, consumables and compliance packaging.

Finance and Real Estate (“Finance Segment”)

Real Estate Leasing

Until December 29, 2017, we owned a cultivation property in a suburb of Pueblo, Colorado, consisting of approximately three acres of land, which currently includes a 5,000 square foot steel building and a parking lot. The property is zoned for cultivating cannabis and is leased to a medical cannabis grower until December 31, 2022. On December 19, 2017, we entered into an agreement to sell this property for $625,000 in cash, which closed on December 29, 2017.

Our real estate leasing business plan includes the potential future acquisition and leasing of cultivation space and related facilities to licensed marijuana growers and dispensary owners for their operations. These facilities would only be leased to tenants that possess the requisite state licenses to operate cultivation facilities. The leases with the tenants would include certain requirements that permit us to continually evaluate our tenants’ compliance with applicable laws and regulations.

Shared Office Space, Networking and Event Services

In October 2014, we purchased a former retail bank located at 6565 East Evans Avenue, Denver, Colorado 80224, which has been branded as “The Greenhouse.” The building is a 16,056 square foot facility, which we use as our corporate headquarters.

The Greenhouse has approximately 10,000 square feet of existing office space and 5,000 square feet on its ground floor that is dedicated to a consumer banking design. We continue to assess the opportunity to lease shared workspace for entrepreneurs, professionals and others serving the cannabis industry. Clients would be able to lease office, meeting, lecture, educational and networking space, and individual workstations. We expect to continue the renovation of The Greenhouse in 2018.

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

Industry Finance

Our industry finance strategy includes evaluating opportunities to make direct term loans or to provide revolving lines of credit to businesses involved in the cultivation and sale of cannabis and related products. These loans would generally be secured to the maximum extent permitted by law. We believe there is a significant demand for this type of financing. We are assessing other finance services including customized finance, capital formation and banking, for participants in the cannabis industry.

Basis of Presentation

The accompanying (a) condensed consolidated balance sheet at December 31, 2017, has been derived from audited financial statements and (b) condensed consolidated unaudited financial statements as of March 31, 2018 and 2017, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, and should be read in conjunction with the audited consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on March 12, 2018. 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 condensed consolidated financial statements include all material adjustments (consisting of normal recurring accruals) necessary to make the condensed consolidated financial statements not misleading as required by Regulation S-X, Rule 10-01. Operating results for the three months ended March 31, 2018, are not necessarily indicative of the results of operations expected for the year ending December 31, 2018.

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

During the year ended December 31, 2017, we adopted Financial Accounting Standards Board, or FASB, Accounting Standards Update, or FASB ASU 2017-11, which impacts accounting for financial instruments with down round features. This change in accounting principle was applied retrospectively and, accordingly, impacted all 2017 periods presented. See Note 11.

Related Parties

Related parties are any entities or individuals that, through employment, ownership or other means, possess the ability to direct or cause the direction of the management and policies of the Company. We disclose related party transactions that are outside of normal compensatory agreements, such as salaries or board of director fees. We had related party transactions with the following individuals / companies:

Michael Feinsod – Chairman of our Board of Directors (“Board”).

Infinity Capital West, LLC (“Infinity Capital”) – An investment management company that was founded and is controlled by Michael Feinsod.

DB Arizona – A company that borrowed $825,000 from GC Finance Arizona. Prior to our purchase in June 2017, we did not possess the ability to influence DB Arizona and DB Arizona did not have the ability to influence us. We include DB Arizona as a related party due to our relationship with Michael Feinsod and Infinity Capital, and their relationship with DB Arizona.

Significant Accounting Policy Updates

Revenue Recognition

During the three months ended March 31, 2018, we adopted the following accounting principles related to revenue recognition: (a) FASB ASU 2016-12 “Revenue from Contracts with Customers (Topic 606);” (b) FASB ASU 2016-11 “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815);” and (c) FASB ASU 2016-10 “Revenue from Contracts with Customers (Topic 606).” Due to the nature of our contracts with customers, adopting the new accounting principles did not have a significant impact on our prior period results of operations, cash flows or financial position.

Our service and product revenues arise from contracts with customers. Service revenue includes (a) Security segment revenue, (b) Operations segment consulting revenues, and (c) Marketing segment revenues from design consulting, including customer-branded apparel designed and fulfilled by Chiefton. Product revenue includes (a) Operations segment product sales and (b) Marketing segment Chiefton-branded apparel. The majority of our revenue is derived from distinct performance obligations, such as time spent delivering a service or the delivery of a specific product.

We may also enter into contracts with customers that identify a single, or few, distinct performance obligations, but that also have non-distinct, underlying performance obligations. These contracts are typically fulfilled within one to three months. Only an insignificant portion of our revenue would be assessed for allocation between distinct (contractual) performance obligations and non-distinct deliverables between reporting periods and, accordingly, we do not record a contract asset for completed, non-distinct performance obligations prior to invoicing the customer.

We recognize revenue when the following criteria are met:

The parties to the contract have approved the contract and are committed to perform their respective obligations – our customary practice is to obtain written evidence, typically in the form of a contract or purchase order.

Each party’s rights regarding the goods or services have been identified – we have rights to payment when services are completed in accordance with the underlying contract, or for the sale of goods when custody is transferred to our customers either upon shipment to or receipt at our customers’ locations, with no right of return or further obligations.

The payment terms for the goods or services have been identified – prices are typically fixed and no price protections or variables are offered.

The contract has commercial substance – our practice is to only enter into contracts that will positively affect our future cash flows.

Collectability is probable – we typically require a retainer for all or a portion of the goods or services to be delivered, as well as continually monitoring and evaluating customers’ ability to pay. Payment terms are typically zero to fifteen days within delivery of the good or service.

Customer deposits are contract liabilities with customers that represent our obligation to either transfer goods or services in the future, or refund the amount received. Where possible, we obtain retainers to lessen our risk of non-payment by our customers. Customer deposits are recognized as revenue as we perform under the contract. During the three months ended March 31, 2018, we received $54,895 in deposits and recognized $90,820 into revenue.

We record bad debt expense when we conclude the credit risk of a customer indicates the amount due under the contract is not collectible. We recorded bad debt expense of $67,514 and $2,470, respectively, during the three months ended March 31, 2018 and 2017.

Equity-method Investments

We use the equity method for investments when we are able to exercise significant influence over, but do not control, the investee, and are not the primary beneficiary of the investee’s activities. We include our portion of an equity-method investee’s net income or loss within other expense on the condensed consolidated statements of operations. In the event that the cost basis in an investment exceeds the fair value of the underlying business, we record an impairment charge to reduce our carrying value to the estimated fair value.

Recently Issued Accounting Standards

FASB ASU 2017-04 “Simplifying the Test for Goodwill Impairment (Topic 350)” – In January 2017, the FASB issued 2017-04. The guidance removes “Step Two” of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The ASU is effective for annual reporting periods beginning after December 15, 2019, and for interim periods within those years, with early adoption permitted. We do not currently expect this ASU to have a significant impact on our consolidated financial statements and related disclosures.

NOTE 2. EQUITY-METHOD INVESTMENT AND BUSINESS ACQUISITIONS

Desert Created Company LLC / DB Products Arizona, LLC

In January 2018, we entered into a limited liability company operating agreement with DNFC LLC (“DNFC”), pursuant to the formation of Desert Created Company LLC (“Desert Created”). Each party owns a 50% interest in Desert Created, which took over the assets and operations of DB Products Arizona, LLC (“DB Arizona”). Desert Created produces and distributes cannabis-infused edible products in Arizona. In connection with the formation of Desert Created, we contributed 75,000 shares of our common stock and warrants to purchase 75,000 shares of our common stock, at an exercise price of $2.00 per share, to members of DNFC. This pricing was agreed to in November 2017, however, the transaction did not close until January 2018. In the interim, our stock price increased substantially.

The 75,000 shares of our common stock were valued at $461,000, based on the closing price per share of our common stock on January 24, 2018, or $7.23 per share, reduced by a discount of 15% due to the restrictions on the Seller’s ability to immediately sell such shares. The warrants to purchase 75,000 shares of our common stock were valued at $518,000, using the Black-Scholes model, assuming a life of 5.0 years, a risk-free interest rate of 1.2% and a volatility of 150%. The fair value of Desert Created was estimated based on the relative fair value of the underlying assets and liabilities, consisting primarily of cash, accounts receivable, equipment and accounts payable.

The purchase price allocation was as follows:


Common Stock	$	461,000
Warrants		518,000
Initial investment in Desert Created	$	979,000

Fair value of Desert Created	$	347,097
Percentage ownership		50%
Fair value of 50% of Desert Created		173,500
Initial investment in Desert Created		979,000
Impairment	$	805,500

The income and losses related to Desert Created are recognized using the equity method of accounting. The value of the investment as of March 31, 2018 consists of the following:


Initial investment in Desert Created	$	979,000
Impairment		(805,500)
Net loss		(47,829)
March 31, 2018	$	125,671

DB Arizona produced and distributed cannabis-infused elixirs and edible products in Arizona. We loaned $26,500 and $75,000, respectively, to DB Arizona during the years ended December 31, 2017 and 2016. In June 2017, we purchased 100% of the ownership interests in GC Finance Arizona LLC (“GC Finance Arizona”) from Infinity Capital for $106,000 in cash. GC Finance Arizona holds a 50% ownership interest in DB Arizona, an $825,000 loan to DB Arizona, and no liabilities. We expected future positive cash flows, if any, would first go towards paying the holders of DB Arizona’s notes payable. Accordingly, we allocated the entire consideration of $106,000 to the note receivable from DB Arizona. During the quarter ended December 31, 2017, DB Arizona ceased operations and we impaired the full amount of our notes receivable from DB Arizona.

Mile High Protection Services

On August 18, 2017, we entered into an Asset Purchase Agreement (the “Mile High APA”) with Mile High Protection Services LLC, a Colorado limited liability company, and its sole member (together “Seller”) whereby we acquired the tradename, workforce, customer contracts, and other intangible assets of the business. Pursuant to the Mile High APA, we agreed to deliver to Seller 224,359 restricted shares of our common stock. The shares vested over a six month period. The Mile High APA contained certain provisions that require Seller to forfeit a portion of such shares in the event that Seller does not meet the obligations under the Mile High APA. In accordance with the terms of the Mile High APA, the number of shares to be delivered was reduced by 120,000, to 104,359 shares of our common stock. Seller also agreed to a three year non-compete agreement.

The 104,359 shares of restricted common stock were valued based on the closing price per share of our common stock on August 18, 2017, or $1.75 per share, reduced by a discount of 15% due to the vesting period and the restrictions on the Seller’s ability to immediately sell such shares. The $155,000 value of stock consideration was recorded as accrued stock payable on the December 31, 2017, consolidated balance sheet, which was reduced when the vesting requirements for the shares was met and we issued the common stock in February 2018.

The purchase price allocation was as follows:

Intangible assets:


Customer relationships	$	100,000
Tradename		55,000
	$	155,000

We finalized the purchase price allocation in the quarter ended December 31, 2017.

The accompanying consolidated financial statements include the results of MHPS from the date of acquisition, August 18, 2017. The pro forma effects of the acquisition on the results of operations as if the transaction had been completed on January 1, 2017, are as follows:


		Three months ended March 31, 2017
Total revenues	$	912,885
Net loss		(2,601,751)
Net loss per common share:
Basic and diluted	$	(0.14)

NOTE 3. LONG-LIVED ASSETS

Property and Equipment

Depreciation expense was $13,829 and $16,016, respectively, for the three months ended March 31, 2018 and 2017. We have not recognized any impairment as of March 31, 2018.

Intangible Assets

Intangible assets of $100,642 as of March 31, 2018, consisted of MHPS customer relationships of $100,000, net of accumulated amortization of $35,069 and MHPS tradename of $55,000, net of accumulated amortization of $19,289, both based on an estimated useful life of two years. The intangible asset for Chiefton brand and graphic designs, with a gross value of $69,400, was fully amortized as of September 30, 2017.

Amortization expense was $19,112 and $8,556, respectively, for the three months ended March 31, 2018 and 2017.

NOTE 4. DEBT

Infinity Note – Related Party

This note was paid in full in February 2018. In February 2015, we issued a senior secured note to Infinity Capital, as amended in April 2015, bearing interest at 5% payable monthly in arrears commencing June 30, 2015, until the maturity date of August 31, 2015 (the “Infinity Note”). On December 31, 2016, the Infinity Note was amended to aggregate principal and interest, and extend the due date of principal and interest to September 21, 2018. No additional advances may be made after December 31, 2016. The Infinity Note is collateralized by a security interest in substantially all of our assets. Interest expense for the Infinity Note for the three months ended March 31, 2018 and 2017, was $9,272 and $16,892, respectively, and $0 was accrued as of March 31, 2018.

Notes Payable


		March 31, 2018		December 31, 2017
12% Notes	$	–	$	1,621,250
Unamortized debt discount		–		(443,917)
		–		1,177,333
Less: Current portion		–		(1,177,333)
Long-term portion	$	–	$	–

12% Notes

These notes were paid off in January 2018.

In September 2016, we completed a $3,000,000 private placement pursuant to a promissory note and warrant purchase agreement (the “12% Agreement”) with certain accredited investors, bearing interest at 12%, with principal due September 21, 2018, and interest payable quarterly (each such note, a “12% Note,” and collectively, the “12% Notes”). In the event of default, the interest rate increases to 18%. The 12% Notes are collateralized by a security interest in substantially all of our assets. We may prepay the 12% Notes at any time, but in any event must pay at least one year of interest.

Subject to the terms and conditions of the 12% Agreement, each investor was granted fully-vested warrants equal to their note principal times three (the “12% Warrants”), or nine million warrants, with a life of three years. 4.5 million warrants have an exercise price of $0.35 per share and the other 4.5 million warrants have an exercise price of $0.70 per share. Should we issue any equity-based instruments at a price lower than the exercise price(s) of the 12% Warrants, other than under our Incentive Plan, the exercise price(s) of the 12% Warrants will be adjusted to the lower price. The 12% Warrants may be exercised at the option of the holder (a) by paying cash, (b) by applying the amount due under the 12% Notes as consideration, or (c) if there is no effective registration statement for the 12% Warrants within six months of being granted, the holder may exercise on a cashless basis. The registration statement related to the 12% Warrants was declared effective on December 23, 2016. If our common stock closes above $5.00 for ten consecutive days, we may call the warrants, giving the warrant holders 30 days to exercise. We called the warrants during the three months ended March 31, 2018, and all holders elected to exercise.

We received $2,450,000 of cash for issuing the 12% Notes. $300,000 of 10% Notes and $250,000 of the 14% Greenhouse Mortgage were converted into 12% Notes. We concluded that these conversions met the criteria for a debt extinguishment and, accordingly, recorded a loss on extinguishment of $1,728,280 during the year ended December 31, 2016. The loss on extinguishment represents the fair value of the 12% Warrants issued to the previous 10% Note holders and the 14% Greenhouse Mortgage lender. The initial fair value of the 12% Warrants not associated with the conversions was recorded as a debt discount of $2,450,000 and interest expense of $5,189,000. The 12% Notes are otherwise treated as conventional debt.

NOTE 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Our accounts payable and accrued expenses consist of the following:


		March 31, 2018		December 31, 2017
Accounts payable	$	595,867	$	192,204
Accrued payroll, taxes and vacation		213,963		243,659
Payroll tax liability for stock option exercises		–		519,278
Property taxes and other		6,604		42,653
	$	816,434	$	997,794

NOTE 6 ACCRUED STOCK PAYABLE

The following tables summarize the changes in accrued common stock payable:


		Amount	Number of Shares
December 31, 2016	$	–	–
Acquisition of MHPS – accrual		155,000	104,359
Warrant exercises – accrual		166,860	154,500
December 31, 2017		321,860	258,859
Acquisition of MHPS – issued		(155,000)	(104,359)
Warrant exercises – issued		(166,860)	(154,500)
March 31, 2017	$	–	–

NOTE 7. COMMITMENTS AND CONTINGENCIES

Legal

To the best of our knowledge and belief, no material legal proceedings of merit are currently pending or threatened.

NOTE 8. STOCKHOLDERS’ EQUITY

Fall 2017 Capital Raise

During the year ended December 31, 2017, in a private placement we raised $4 million of equity by issuing four million shares of our common stock and four million warrants (“Fall 2017 Warrants”) to purchase shares of our common stock (together “Units”) for $1.00 per Unit. The Fall 2017 Warrants have an exercise price of $0.50 per share and are exercisable for two years. If our common stock closes above $5.00 for ten consecutive days, we may call the warrants, giving the warrant holders 10 days to exercise. During the quarter ended March 31, 2018, we called the warrants and all were exercised. All four million Fall 2017 Warrants were outstanding as of December 31, 2017. In consideration for the sale of the Units, we received $3,750,000 in cash and extinguished $250,000 of 12% Notes.

Share-based compensation

Share-based expense consisted of the following:


		Three months ended March 31,
		2018		2017
Employee Awards	$	723,085	$	1,409,395
Consulting Awards		–		25,440
Feinsod Agreement		1,035,486		–
	$	1,758,571	$	1,434,835

Employee Stock Options

On October 29, 2014, the Board authorized the adoption of, and on June 26, 2015, our stockholders ratified, our 2014 Equity Incentive Plan (the “Incentive Plan”). The Incentive Plan provides for the issuance of up to 10 million shares of our common stock, and is designed to provide an additional incentive to executives, employees, directors and key consultants, aligning our long term interests with participants. In April 2016, we filed a Registration Statement on Form S-8 (the “Registration Statement”), which automatically became effective in May 2016. The Registration Statement relates to 10,000,000 shares of our common stock, which are issuable pursuant to, or upon exercise of, options that have been granted or may be granted under our Incentive Plan. As of March 31, 2018, there were 8,327,257 shares available to issue under the Incentive Plan. In April 2018, stockholders approved an increase of 5,000,000 shares of common stock that may be granted under our Incentive Plan.

Share-based compensation costs for award grants to employees and directors (“Employee Awards”) are recognized on a straight-line basis over the service period for the entire award, with the amount of compensation cost recognized at any date equaling at least the portion of the award that is vested. The following summarizes the Black-Scholes assumptions used for Employee Awards granted during the three months ended March 31, 2018:


Exercise price	$ 2.21 – 7.17
Stock price on date of grant	$ 2.21 – 7.17
Volatility	140 %
Risk-free interest rate	2.17 – 2.36 %
Expected life (years)	2.5
Dividend yield	–

The following summarizes Employee Awards activity:


	Number of Shares		Weighted-average Exercise Price per Share	Weighted-average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at December 31, 2017	8,705,278	$	1.28
Granted	707,050		3.14
Exercised	(507,221)		0.87
Forfeited	(16,350)		2.45
Outstanding at March 31, 2018	8,888,757		1.45	2.1	$	8,909,000

Exercisable at March 31, 2018	7,113,307	$	1.13	1.8	$	8,541,000

Based on our estimated forfeiture rates, we expect 1,763,315 Employee Awards will vest. As of March 31, 2018, there was approximately $2,691,657 of total unrecognized compensation expense related to unvested Employee Awards, which is expected to be recognized over a weighted-average period of nine months.

Warrants for Consulting Services

As needed, we may issue warrants to third parties in exchange for consulting services. Stock-based compensation costs for award grants to third parties for consulting services (“Consulting Awards”) are recognized on a straight-line basis over the service period for the entire award, with the amount of compensation cost recognized at any date equaling at least the portion of the award that is vested. Consulting Awards are revalued at each reporting date until fully vested, which may generate an expense or benefit.


	Number of Shares		Weighted-average Exercise Price per Share	Weighted-average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at December 31, 2017	127,500	$	2.40
Exercised	(75,000)	$	1.31
Outstanding and exercisable at March 31, 2018	52,500	$	1.54	0.9	$	35,375

Feinsod Employment Agreement

On December 8, 2017, we entered into an employment agreement with Michael Feinsod for his continued service as our Executive Chairman of our Board of Directors. Pursuant to the agreement, Mr. Feinsod received (a) 600,000 stock options that vest on the anniversary date of the agreement for the next three years, or 200,000 per year (“Time-based Options”); and (b) three tranches of 100,000 stock options that vest when our stock price has an average trading price for 20 days of $3.50, $5.00 and $6.50 (“Market-based Options”). The options have an exercise price of $3.45 per share and a ten year life. These options were not issued under the Incentive Plan and, accordingly, the underlying shares are not registered. During the quarter ended March 31, 2018, the $3.50 and $5.00 Market-based Options vested and, accordingly, the expense associated with those options was recognized immediately.

Warrants with Debt

The following summarizes warrants issued with debt:


	Number of Shares		Weighted-average Exercise Price per Share	Weighted-average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at December 31, 2017	3,351,700	$	0.65
Exercised	(2,825,000)	$	0.52
Outstanding and exercisable at March 31, 2018	526,700	$	1.36	3.4	$	566,260

NOTE 9. SUBSEQUENT EVENTS

In April 2018, we entered into promissory note and warrant purchase agreements (the “2018 Notes” and “2018 Note Warrants”) with certain accredited investors, pursuant to which we issued and sold $7.5 million of senior secured promissory notes and warrants to purchase an aggregate of 6.0 million shares of our common stock. The 2018 Notes bear interest at 8.5%, are payable May 1, 2019 and are secured by our assets pursuant to the terms of a security agreement. The 2018 Note Warrants have an exercise price of $2.35 per share and a life of two years. If the shares underlying the 2018 Note Warrants are not registered for resale on a registration statement within six months, we will issue an additional warrant to each purchaser at the same exercise price for one-half of the shares covered by the initial 2018 Note Warrants. We may call the warrants at $0.01 per share, if our stock trades above $8.00 per share for 15 consecutive days.

NOTE 10. SEGMENT INFORMATION

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

Three months ended March 31


2018		Security		Marketing		Operations		Finance		Total
Revenues, net	$	551,977	$	84,491	$	306,014	$	–	$	942,482
Costs and expenses		(758,489)		(198,874)		(420,475)		–		(1,377,838)
Investment in Desert Created		–		–		–		(853,329)		(853,329)
	$	(206,512)	$	(114,383)	$	(114,461)	$	(853,329)		(1,288,685)
Corporate										(3,177,702)
								Net loss	$	(4,466,387)


2017		Security		Marketing		Operations		Finance		Total
Revenues, net	$	425,138	$	44,287	$	217,196	$	32,484	$	719,105
Costs and expenses		(483,881)		(140,567)		(210,264)		(13,047)		(847,759)
	$	(58,743)	$	(96,280)	$	6,932	$	19,437		(128,654)
Corporate										(2,501,432)
								Net loss	$	(2,630,086)


Total assets		March 31, 2018		December 31, 2017
Security	$	511,606	$	488,299
Marketing		165,382		57,833
Operations		167,008		231,670
Finance		125,671		–
Corporate		6,019,574		6,826,124
	$	6,989,241	$	7,603,926

All assets are located in the United States.

NOTE 11. CHANGE IN ACCOUNTING PRINCIPLE

During the quarter ended December 31, 2017, we early adopted ASU 2017-11, which eliminates the requirement to consider “down round” features when determining whether certain equity-linked instruments or embedded features are indexed to an entity’s own stock. Our 12% Warrants were treated as derivative instruments, because they include a “down round” feature, whereby if we issue equity-based instruments at a price below the exercise price of the 12% Warrants, the exercise price of the 12% Warrants would be adjusted. Upon adoption of the new accounting principle, the 12% Warrants qualify for the exception from derivative treatment. We have retrospectively adjusted our consolidated financial statements for each prior reporting period to reflect this change in accounting principle.

The changes to our consolidated statement of operations for the period ended March 31, 2017, are as follows:


		Previously Reported		Currently Reported		Effect of Change
Amortization of debt discount	$	695,032	$	364,933	$	(330,099)
Gain on derivative warrant liability		(5,132,000)		–		5,132,000
Total other (income) expense, net		(4,358,937)		442,964		4,801,901
Net income (loss)		2,171,815		(2,630,086)		(4,801,901)
Net income (loss) per share	$	0.11	$	(0.14)	$	(0.25)

The changes to our consolidated statement of cash flows for the period ended March 31, 2017, are as follows:


		Previously Reported		Currently Reported		Effect of Change
Net income (loss)	$	2,171,815	$	(2,630,086)	$	(4,801,901)
Amortization of debt discount		695,032		364,933		(330,099)
Gain on derivative warrant liability		(5,132,000)		–		5,132,000
Net cash used in operating activities		(958,706)		(958,706)		–

Non-Cash Transactions
Portion of Warrant derivative liability recorded as Additional paid-in capital upon exercise of warrants		(5,828,000)		–		5,828,000

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

This Management’s Discussion and Analysis (“MD&A”) is intended to provide an understanding of our financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. This discussion should be read in conjunction with the Condensed Consolidated Unaudited Financial Statements contained in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and related notes and MD&A of Financial Condition and Results of operations appearing in our Annual Report on Form 10-K as of and for the years ended December 31, 2017 and 2016. The results of operations for an interim period may not give a true indication of results for future interim periods or for the year.

Cautionary Statement Regarding Forward Looking Statements

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

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

Our Products, Services and Customers

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

Through our reporting segments (Security, Marketing, Operations and Finance), we provide products and services to the regulated cannabis industry, which include the following:

Security and Cash Transportation Services (“Security Segment”)

We provide advanced security, including on-site professionals and cash transport, to licensed cannabis cultivators and retail shops, under the business name IPG, and security services to non-cannabis customers in the hospitality business, such as hotels, under the business name Mile High Protection Services (“MHPS”). The drop in wholesale prices in Colorado has negatively impacted security services in Colorado, as grow facilities and retailers seek cheaper alternatives or curtail services. We strategically acquired MHPS in order to expand our Colorado security business into the non-cannabis space, as we believe that market provides an opportunity for growth. We have opened an IPG office in California, which recently legalized recreational cannabis in addition to previously legal medical marijuana.

Marketing Consulting and Apparel (“Marketing Segment”)

Operations Consulting and Products (“Operations Segment”)

Finance and Real Estate (“Finance Segment”)

Real Estate Leasing

Shared Office Space, Networking and Event Services

Industry Finance

Desert Created Company LLC / DB Products Arizona, LLC

We loaned $26,500 and $75,000, respectively, to DB Arizona during the years ended December 31, 2017 and 2016. In June 2017, we purchased 100% of the ownership interests in GC Finance Arizona LLC (“GC Finance Arizona”) from Infinity Capital for $106,000 in cash. GC Finance Arizona holds a 50% ownership interest in DB Arizona, an $825,000 loan to DB Arizona, and no liabilities. We expected future positive cash flows, if any, would first go towards paying the holders of DB Arizona’s notes payable. Accordingly, we allocated the entire consideration of $106,000 to the note receivable from DB Arizona. During the quarter ended December 31, 2017, DB Arizona ceased operations and we impaired the full amount of our notes receivable from DB Arizona.

Results of Operations

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

Consolidated Results


		Three months ended March 31,					Percent
		2018		2017		Change	Change
Revenues	$	942,482	$	719,105	$	223,377	31%
Costs and expenses		(4,108,964)		(2,906,227)		(1,202,737)	41%
Other expense		(1,299,905)		(442,964)		(856,941)	193%
Net loss	$	(4,466,387)	$	(2,630,086)	$	(1,836,301)	70%

Revenues

Revenue for the quarter ended March 31, 2018 compared to 2017, increased for each of our Security Segment, Operations Segment and Marketing Segment, offset by a decrease in revenue for our Finance Segment, due to the sale of our rental property in Pueblo, Colorado.

Costs and expenses


		Three months ended March 31,					Percent
		2018		2017		Change	Change
Cost of service revenues	$	752,474	$	457,696	$	287,278	64%
Cost of goods sold		77,690		18,611		59,079	317%
Selling, general and administrative		942,178		723,907		225,771	30%
Share-based expense		1,758,571		1,434,835		323,736	23%
Professional fees		545,110		246,606		298,504	121%
Depreciation and amortization		32,941		24,572		8,369	34%
	$	4,108,964	$	2,906,227	$	1,202,737	41%

Cost of service revenues increased due to overall higher salaries, increase in travel costs and an increase in overtime in our Security Segment, as they had a shortage of guards for a short time in the first quarter. Cost of goods sold increased due to an increase in product sales, including an increase in products sold by our Operations Segment, which have smaller margins than apparel sold by our Marketing Segment.

Selling, general and administrative expense increased in 2018 primarily due to increases for (a) marketing and promotion; (b) premiums for liability, and directors and officers insurance; (c) legal fees associated with our stock registration and general corporate purposes, and (d) additional personnel added to our corporate and segment teams.

Share-based expense included the following:


		Three months ended March 31,
		2018		2017
Employee Awards	$	723,085	$	1,409,395
Consulting Awards		–		25,440
Feinsod Agreement		1,035,486		–
	$	1,758,571	$	1,434,835

Employee awards are issued under our 2014 Equity Incentive Plan, which was approved by shareholders on June 26, 2015, and expense varies primarily due to the number of stock options granted and the share price on the date of grant. Consulting awards are granted to third parties in lieu of cash for services provided. The Feinsod Agreement expense represents equity-based compensation pursuant to agreements with Michael Feinsod for serving as the Executive Chairman of our Board.

Professional fees consist primarily of accounting and legal expenses, and increased in 2018 due to filing of registration statements, an increase in corporate work and a change to a larger law firm as outside counsel. The increase is also due to Sarbanes-Oxley (“SOX”) implementation that started in the first quarter and recruiting fees for additional accounting personnel.

Depreciation and amortization expense increased due to the amortization of MHPS intangibles and depreciation expense has started for several building improvements performed in the first quarter of 2018.

Other Expense


		Three months ended March 31,
		2018		2017
Amortization of debt discount	$	443,917	$	364,933
Interest expense		2,659		78,031
Loss from Desert Created investment		47,829		–
Impairment of Desert Created investment		805,500		–
	$	1,299,905	$	442,964

Amortization of debt discount is higher in 2018 compared to 2017, because outstanding debt as of December 31, 2017, was paid off and the remaining debt discount was expensed. Interest expense decreased in 2018 due to the payoff of the 12% Notes in January 2018, and the payoff of the Infinity Note in February 2018. The impairment of Desert Created occurred primarily because the agreement was priced in November 2017, however, the transaction did not close until January 2018. In the interim, our stock price increased substantially, thus the consideration we paid, in equity instruments, was higher than the fair value of the investment received. The loss on investment in Desert Created is our 50% share of the net loss of Desert Created during the quarter ended March 31, 2018.

Security and Cash Transportation Services


		Three months ended March 31,					Percent
		2018		2017		Change	Change
Revenues	$	551,977	$	425,138	$	126,839	30%
Costs and expenses		(758,489)		(483,881)		(274,608)	57%
	$	(206,512)	$	(58,743)	$	(147,769)	252%

Revenues increased in 2018 primarily from a general increase in guard rates in the fourth quarter of 2017 and the acquisition of MHPS in August 2017. Costs and expenses typically vary with changes in revenue, however, the increase in 2018 compared to 2017 is due to higher salaries, bad debt expense, liability insurance prices, and our expansion into California. In addition to the above there was an increase in legal fees due to litigation, which was resolved in our favor in March 2018.

Marketing Consulting and Apparel


		Three months ended March 31,					Percent
		2018		2017		Change	Change
Revenues	$	84,491	$	44,287	$	40,204	91%
Costs and expenses		(198,874)		(140,567)		(58,307)	41%
	$	(114,383)	$	(96,280)	$	(18,103)	19%

The increase in revenues in 2018 is due to an increase in clients for both Chiefton Supply and Chiefton Design due to more effective marketing efforts. The increase in costs and expenses corresponds to the increased revenues from apparel sales, along with an increase in payroll, due to additional personnel being hired to support growth.

Operations Consulting and Products


		Three months ended March 31,					Percent
		2018		2017		Change	Change
Revenues	$	306,014	$	217,196	$	88,818	41%
Costs and expenses		(420,475)		(210,264)		(210,211)	100%
	$	(114,461)	$	6,932	$	(121,393)	(1,751)%

Increased revenues in 2018 primarily related to a contract to manage a large grow facility that began in August 2017, compared to two smaller management contracts that expired in July 2017. Costs and expenses increased in 2018 primarily due to hiring new consultants to meet current and future demand for services.

Finance and Real Estate


		Three months ended March 31,					Percent
		2018		2017		Change	Change
Revenues	$	–	$	32,484	$	(32,484)	(100)%
Costs and expenses		–		(13,047)		13,047	100%
Investment in Desert Created		(853,329)		–		(853,329)	100%
	$	(853,329)	$	19,437	$	(872,766)	(4,490)%

The decrease in revenues is due to the Pueblo rental property being sold in December 2017. The investment in Desert Created includes an $805,500 impairment charge and our share of their net loss.

Liquidity and Capital Resources

We had cash of $4,640,799 and $5,036,787, respectively, as of March 31, 2018 and December 31, 2017. Our cash flows from operating, investing and financing activities were as follows:


		Three months ended March 31,
		2018		2017
Net cash used in operating activities	$	(1,267,877)	$	(958,706)
Net cash used in investing activities		(139,056)		(38,883)
Net cash provided by financing activities	$	1,010,945	$	631,430

Net cash used in operating activities increased in 2018 by $309,171 compared to 2017, primarily due to a larger operating loss. We have added personnel to our Operations Segment and Marketing Segment in advance of growth opportunities. We also continue to add personnel to our corporate infrastructure and expanded our corporate marketing efforts. Where possible, we continue to use non-cash equity-based instruments to obtain consulting services and compensate employees.

Net cash used in investing activities relates primarily to purchasing fixed assets, including significant building improvements in 2018.

Net cash provided by financing activities in 2018 and 2017 was from the exercise of warrants and stock options. In 2018, we paid off the 12% Notes and the Infinity Note.

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

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


		Three months ended March 31,
		2018		2017
Net income (loss)	$	(4,466,387)	$	(2,630,086)
Adjustments:
Share-based expense		1,758,571		1,434,835
Depreciation and amortization		32,941		24,572
Amortization of debt discount		443,917		364,933
Interest expense		2,659		78,031
Loss from Desert Created investment		47,829		–
Impairment of Desert Created investment		805,500		–
Total adjustments		3,091,417		1,902,371
Adjusted EBITDA	$	(1,374,970)	$	(727,715)

Per share:
Net loss – Basic and Diluted	$	(0.14)	$	(0.14)
Adjusted EBITDA – Basic and Diluted		(0.04)		(0.04)

Weighted-average shares outstanding:
Adjusted EBITDA – Basic and Diluted		31,452,077		18,895,657

Critical Accounting Policies

Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates used to prepare the condensed financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended December 31, 2017, and Note 1 to the Condensed Consolidated Financial Statements in this Form 10-Q.

Off-Balance Sheet Arrangements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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 Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.

We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2018, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses discussed below.

Internal Control over Financial Reporting

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

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

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

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

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

Management identified the following material weaknesses:

We have not implemented comprehensive entity-level internal controls;

We have not implemented adequate system and manual controls; and

We do not have sufficient segregation of duties.

Assessment of Internal Control over Financial Reporting

Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013). Based on management’s assessment, management concluded that the above material weaknesses have not been remediated and, accordingly, our internal control over financial reporting was not effective as of March 31, 2018.

Remediation of Material Weaknesses

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

We have engaged with a consulting firm to assist us with complying with COSO, with the goal of eliminating our material weaknesses by the end of 2018.

We have performed a risk assessment and mapped our processes to control objectives.

We have preliminarily documented our controls and procedures in accordance with COSO, identified gaps, and are currently identifying additional controls.

We have evaluated our entity-level controls, identified gaps, and are updating our processes and documentation.

We have implemented controls and procedures to identify, evaluate and record significant transactions, along with the necessary documentation.

We are currently evaluating Enterprise Resource Planning (“ERP”) software, plan to evaluate system and manual controls, identify specific weaknesses, and implement a comprehensive system of internal controls.

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

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

Changes in Internal Control over Financial Reporting

We made the following changes to our internal control over financial reporting during the quarter ended March 31, 2018:

Hired a certified public accountant as our accounting manager.

Implemented an expanded review of our SEC filings and the related supporting schedules.

Added an additional level of review and segregation of duties for account reconciliations and journal entries.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may be involved in various claims and legal actions in the ordinary course of business. We are not currently involved in any material legal proceedings outside the ordinary course of our business.

ITEM 1A. RISK FACTORS

As of the date of this report, there have been no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.

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

On January 24, 2018, we issued 75,000 shares of our common stock and warrants to purchase 75,000 shares of our common stock, at an exercise price of $2.00 per share, for a 50% interest in Desert Created.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 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.
101	The following financial information from the Quarterly Report on Form 10-Q of General Cannabis Corp for the quarter ended March 31, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows, and (iv) Notes to the Condensed Consolidated Financial Statements.

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 CORP

Date: May 11, 2018		/s/ Robert Frichtel
		Robert Frichtel, Principal Executive Officer

		/s/ Brian Andrews
		Brian Andrews, Principal Financial and Accounting Officer

Attached files

Stock widget

Investing forum

GENERAL CANNABIS CORP Reports