What changed in this filing

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Item 1. Financial Statements

2020-07-07 compared with 2019-11-08 · 344 added, 442 removed, 274 unchanged (74% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30,

December 31, 2018

Current Assets

1 unchanged sentence

Accounts receivable, net

Prepaid expenses and other current assets

Notes receivable, net current portion

Prepaid expenses and other current assets

Assets held for sale

Assets of discontinued operations

Total current assets

Note receivable, net

Operating lease right-of-use asset

Property and equipment, net

Intangible assets, net

LIABILITIES AND STOCKHOLDERS EQUITY

Assets held for sale

Assets of discontinued operations

LIABILITIES & STOCKHOLDERS EQUITY

Current Liabilities

1 unchanged sentence

Interest payable

Deferred revenue and customer deposits

Customer deposits

Accrued stock payable

Notes payable (net of discount)

Operating lease liability current portion

Related party note payable (net of discount)

Warrant derivative liability

Liabilities held for sale

Liabilities of discontinued operations

Total current liabilities

Operating lease liability

Total liabilities

Commitments and Contingencies (Note 8)

Stockholders (Deficit) Equity

Stockholders Equity (Deficit)

Preferred stock, no par value;

5,000,000 shares authorized;

no shares issued and outstanding at September 30, 2019 and December 31, 2018

no shares issued and outstanding at March 31, 2020 and December 31, 2019

Common Stock, $0.001 par value;

100,000,000 shares authorized;

39,497,480 and 36,222,752 shares issued and outstanding as of September 30, 2019 and December 31, 2018

40,281,881 shares and 39,497,480 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively.

Additional paid-in capital

Accumulated deficit

Total Stockholders (Deficit) Equity

Total Liabilities and Stockholders Equity

Total Stockholders Deficit

Total Liabilities & Stockholders Equity (Deficit)

See Notes to condensed consolidated financial statements.

2 unchanged sentences

Three months ended

September 30,

Nine months ended

September 30,

Rent and interest

11 unchanged sentences

OTHER (INCOME) EXPENSE

Amortization of debt discount and equity issuance costs

Amortization of debt discount

Loss on extinguishment of debt

1 unchanged sentence

Gain on warrant derivative liability

Loss from Desert Created investment

Impairment of Desert Created investment

Total other expense , net

Deemed dividend

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

Gain on sale of building

Total other (income) expense , net

NET LOSS FROM CONTINUING OPERATIONS

Loss from discontinued operations

PER SHARE DATA Basic and diluted

Net loss attributable to common stockholders per share

Net loss from continuing operations per share

Net loss from discontinued operations per share

Net loss per common share

Weighted average number of common shares outstanding

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended

September 30,

Three months ended

OPERATING ACTIVITIES

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

Amortization of debt discount and equity issuance costs

Loss on extinguishment of debt

Amortization of debt discount

Depreciation and amortization expense

1 unchanged sentence

Bad debt expense

Impairment of Desert Created investment

Loss from Desert Created investment

Share-based payments

Gain on warrant derivative liability

Share-based expense

Loss on extinguishment of debt

Gain on discontinued operations

Gain on sale of building

Changes in operating assets and liabilities:

1 unchanged sentence

Prepaid expenses and other assets

Accounts payable and other current liabilities

Accounts payable and accrued liabilities

Net cash used in operating activities:

1 unchanged sentence

Purchase of property and equipment

Proceeds on sale of building

Lending on notes receivable

Proceeds on note receivable

Investment in Desert Created

Net cash used in investing activities

Net cash provided by (used in) investing activities

FINANCING ACTIVITIES

Net proceeds from the sale of common stock and warrants

Proceeds from exercise of warrants

Proceeds from exercise of stock options

Proceeds from the exercise of warrants

Proceeds from notes payable

Payments on notes payable

Payments on Infinity Note related party

Net cash (used in) provided by financing activities

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

Net cash provided by financing activities

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

2 unchanged sentences

Cash paid for interest

NON-CASH TRANSACTIONS

Deemed dividend from 8.5% Warrants repricing

Cash paid for taxes

NON-CASH INVESTING AND FINANCING ACTIVITIES

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

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

8.5% Note principal used to exercise 8.5% Warrants

8.5% Warrants recorded as debt discount and additional paid-in capital

Issuance of common stock for accrued stock payable

Issuance of common stock and warrants for investment in Desert Created

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

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

Debt converted to equity

Beneficial conversion feature

Issuance of common stock to an employee

See Notes to condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS (DEFICIT) EQUITY

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

IN STOCKHOLDERS EQUITY (DEFICIT)

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

Paid-in Capital

June 30, 2019

January 1, 2020

Warrants issued with the 15% Notes

Common stock issued upon exercise of stock options

Stock options granted to employees and consultants

September 30, 2019

Paid-in Capital

June 30, 2018

Issuance of common stock

Common stock issued upon exercise of warrants

Common stock issued upon exercise of stock options

Stock options and warrants granted to employees and consultants

September 30, 2018

See Notes to condensed consolidated financial statements.

GENERAL CANNABIS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS (DEFICIT) EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

Paid-in Capital

December 31, 2018

Sale of common stock, net of issuance costs

Warrants issued with the 12% Notes

Common stock issued for property and equipment

Common stock issued upon exercise of stock options

Common stock issued to an employee for services

Common stock issued upon conversion of debt

Expense in relation to beneficial conversion feature

Stock options granted to employees and Consultants

September 30, 2019

March 31, 2020

Paid-in Capital

December 31, 2017

Issuance of common stock

Common stock issued for MHPS acquisition

Common stock and warrants issued for Desert Created acquisition

Warrants issued with the 8.5% Notes

Common stock issued upon exercise of warrants

Common stock issued upon exercise of stock options

Stock options and warrants granted to employees and consultants

September 30, 2018

January 1, 2019

Stock options granted to employees and Consultants

March 31, 2019

See Notes to condensed consolidated financial statements.

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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 June 6, 2018 we began trading on the OTCQX® Best Market after upgrading from the OTCQB® Venture Market.

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, cannabis processing facilities and retail shops, under the business name Iron Protection Group (IPG) in California and Colorado, and security services to non-cannabis customers in Colorado, such as hotels, apartment buildings and retail, under the business name Mile High Protection Services (MHPS), which we acquired in August 2017.

We currently trade on the OTCQB® Venture Market.

As of March 31, 2020, our operations are segregated into the following two segments:

Operations Consulting and Products (Operations Segment)

Through Next Big Crop (NBC), we deliver comprehensive consulting services to the cannabis industry that include obtaining licenses, compliance, cultivation, retail operations, logistical support, facility design and construction, and expansion of existing operations.

During the 3 and 9 months ended September 30, 2019, 82% of NBCs revenue was with three customers and 61% of NBCs revenue was with two customers, respectively.

During the three months ended March 31, 2020 and 2019, 73% and 76% of NBCs revenue was with three customers and one customer, respectively.

NBC oversees our wholesale equipment and supply business, operated under the name GC Supply, which provides turnkey sourcing and stocking services to cultivation, retail and infused products manufacturing facilities.

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however, there are a limited number of manufacturers of certain high-tech cultivation equipment.

Consumer Goods and Marketing Consulting (Consumer Goods Segment)

Our apparel business, Chiefton, has two primary revenue streams.

Chiefton Supply strives to create innovative, unique t-shirts, hats, hoodies and accessories.

Our apparel is sold through our on-line shop, cannabis retailers, non-cannabis retailers, and specialty t-shirt and gift shops.

Chiefton Design provides design, branding and marketing strategy consulting services to the cannabis industry, which frequently includes sourcing and selling customer-specific apparel and accessories.

Capital Investments (Investments Segment)

As a publicly traded company, we have access to capital that may not be available to businesses operating in the cannabis industry.

Accordingly, we may provide debt or equity capital through (a) loans or revolving lines of credit and (b) investing in businesses using cash or shares of our common stock.

Discontinued Operations - Security and Cash Transportation Services (Security Segment)

We provided advanced security, including on-site professionals and cash transport, to licensed cannabis cultivators, cannabis processing facilities and retail shops, under the business name Iron Protection Group (IPG) in California and Colorado, and security services to non-cannabis customers in Colorado, such as hotels, apartment buildings and retail.

On December 26, 2019, the board of directors and management made the strategic decision to investigate a possible buyer for the security segment and if no buyer could be found, cease operations of the security segment.

We transferred all our Colorado security contracts and employees to a company on January 16, 2020, in exchange for which we will receive $1.00 per man hour worked on existing contracts for a period of one year.

On February 6, 2020 we cancelled all our security contracts in California.

Discontinued Operations - Consumer Goods and Marketing Consulting (Consumer Goods Segment)

Our apparel business, Chiefton, had two primary revenue streams.

Chiefton Supply strived to create innovative, unique t-shirts, hats, hoodies and accessories.

Our apparel was sold through our on-line shop, cannabis retailers, non-cannabis retailers, and specialty t-shirt and gift shops.

Chiefton Design provided design, branding and marketing strategy consulting services to the cannabis industry, which frequently included sourcing and selling customer-specific apparel and accessories.

On December 26, 2019, the board of directors and management made the strategic move to cease operations of Chiefton.

All operations of Chiefton were abandoned on December 31, 2019.

Our CBD retail business, STOA Wellness, opened in July of 2019.

STOA Wellness offers a curated collection of high quality CBD products for athletes and general wellness.

Capital Investments and Real Estate (Investments Segment)

As a publicly traded company, we believe that we have access to capital that may not be available to businesses operating in the cannabis industry.

Accordingly, we may provide debt or equity capital through (a) loans or revolving lines of credit, (b) leasing real estate we own, or (c) investing in businesses using cash or shares of our common stock.

STOA Wellness offered a curated collection of high quality CBD products for athletes and general wellness.

On December 26, 2019, the board of directors committed to a plan to cease operations of STOA Wellness.

We transferred all assets of STOA Wellness to an individual on January 10, 2020, in exchange for the release on the outstanding lease of the STOA retail front.

Basis of Presentation

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As permitted under those rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States of America (U.S.

GAAP) can be condensed or omitted.

can be condensed or omitted.

The condensed consolidated balance sheet for the year ended December 31, 2019 was derived from audited financial statements, but does not include all disclosures required by U.S.

The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto of the Company for the year ended December 31, 2018 which were included in the annual report on Form 10-K filed by the Company on March 8, 2019.

The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto of the Company for the year ended December 31, 2019 which were included in the Annual Report on Form 10-K filed by the Company with the SEC on May 14, 2020.

In the opinion of management, these condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and notes thereto of the Company and include all adjustments, consisting only of normal recurring adjustments, considered necessary for the fair presentation of the Companys financial position and operating results.

The results for the three and nine months ended September 30, 2019 are not necessarily indicative of the operating results for the year ending December 31, 2019, or any other interim or future periods.

The results for the three months ended March 31, 2020 are not necessarily indicative of the operating results for the year ending December 31, 2020, or any other interim or future periods.

Use of Estimates

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Furthermore, when testing assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment charges may result.

In particular, the COVID-19 pandemic has adversely impacted and is likely to further adversely impact the Companys business and markets.

The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company's business, results of operations and financial condition, including revenues, expenses, reserves and allowances, fair value measurements and asset impairment charges, will depend on future developments that are highly uncertain and difficult to predict.

These developments include, but are not limited to, the duration and spread of the pandemic, its severity in our markets and elsewhere, governmental actions to contain the spread of the pandemic and respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.

Going Concern

The condensed consolidated financial statements have been prepared on a going concern basis, which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for at least the twelve months from the date these condensed consolidated financial statements are issued.

Our cash of approximately $600,000 is not sufficient to absorb our operating losses and repay our debt of $2.4 million.

The warrants associated with this debt, if exercised, would provide sufficient funds to retire the debt;

however, there is no guarantee that these warrants will be exercised.

As of March 31, 2020 our cash of approximately $600,000 is not sufficient to absorb our operating losses and repay our debt of $2.7 million.

The warrants associated with this debt, if exercised in cash, would provide sufficient funds to retire the debt;

however, there is no guarantee that these warrants will be exercised in cash or at all.

Our ability to continue as a going concern is dependent upon our generating profitable operations in the future and / or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due.

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We consider the following individuals / companies to be related parties:

Michael Feinsod Chairman of our Board of Directors (Board).

Michael Feinsod Executive 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.

Summary of Significant Accounting Policies

Since the date of the Annual Report, there have been no material changes to the Companys significant accounting policies, except as disclosed below.

Notes Receivable

We classify our notes receivable as held for investment, because we have the intent and ability to hold our notes receivable to maturity or settlement.

Direct loan origination costs we incur are netted with loan origination fees we receive and the net amount, loan origination fees or costs, is included in notes receivable on the condensed consolidated balance sheets.

The loan origination fees or costs are amortized over the term of the underlying note receivable and included in interest income in the condensed consolidated statements of operations.

We record an allowance for credit losses, as needed, using the current expected credit losses impairment model (CECL Model).

The CECL Model requires us to consider relevant information about past events, current conditions, and reasonable and supportable forecasts of factors that affect the expected collectability of notes receivable.

There is no probability of loss threshold that must be met prior to recording an allowance for credit losses under the CECL Model.

We may assess notes receivable for impairment either on an aggregated basis, if they have sufficiently similar characteristics, or on an individual basis.

Increases or decreases to the allowance for credit losses, if any, are included in net loss in the condensed consolidated statements of operations.

Right-of-use Asset / Lease Liability

We adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02 Leases (Topic 842) on January 1, 2019.

We first evaluated our leases to determine whether they are classified as a finance lease or as an operating lease.

A lease is a finance lease if any of the following criteria are met:

(a) ownership transfers, (b) the lease includes an option to purchase the underlying asset, (c) the lease term is for the major part of the remaining economic life of the underlying asset, (d) the present value of the lease payments equals or exceeds the fair value of the underlying asset, or (e) the underlying asset is of a specialized nature that is expected to have no alternative use to the lessor at the end of the lease term.

All of our leases are classified as operating leases.

We then determined whether the short-term exemption applies;

that is, is the lease term 12 months or less and does not include a purchase option whose exercise is reasonably certain.

If the short-term exemption applies then lease payments are recognized as expense and no asset or liability is recorded.

If the short-term exemption does not apply, then we recorded an operating lease right-of-use asset and a corresponding operating lease liability equal to the present value of the lease payments.

All of our leases entered into prior to 2019 met the short-term exemption, so modification to prior period financial position was is not required.

The two year commercial real estate lease we entered into in February 2019 did not meet the short-term exemption and, accordingly, we recorded the present value of the lease payments as a right-of-use asset and a lease liability in the condensed consolidated balance sheet.

We recognize rent expense on a straight-line basis over the life of the lease.

Fair Value of Financial Instruments

GAAP requires disclosing the fair value of financial instruments to the extent practicable for financial instruments which are recognized or unrecognized in the consolidated balance sheet.

The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.

In assessing the fair value of financial instruments, the Company uses a variety of methods and assumptions, which are based on estimates of market conditions and risks existing at the time.

For certain instruments, including accounts receivable and accounts payable, the Company estimated that the carrying amount approximated fair value because of the short maturities of these instruments.

All debt is based on current rates at which the Company could borrow funds with similar remaining maturities and approximates fair value.

GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use on unobservable inputs by requiring that the most observable inputs be used when available.

Observable inputs consist of items that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company.

Unobservable inputs are inputs that reflect the Companys assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The hierarchy is described below:

Quoted prices in active markets for identical assets or liabilities.

There are no fair valued assets or liabilities classified under Level 1 as of September 30, 2019 and December 31, 2018.

Observable prices that are based on inputs not quoted on active markets but corroborated by market data.

There are no fair valued assets or liabilities classified under Level 2 as of September 30, 2019 and December 31, 2018.

Unobservable inputs are used when little or no market data is available.

The fair value hierarchy gives the lowest priority to Level 3 inputs (see Note 9).

Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the liabilities.

For fair value measurements categorized within Level 3 of the fair value hierarchy, the Companys accounting and finance department, which reports to the Chief Financial Officer, determines its valuation policies and procedures.

The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Companys accounting and finance department and are approved by the Chief Financial Officer.

Level 3 Valuation Techniques:

Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation.

Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

The Company deems financial instruments which do not have fixed settlement provisions to be derivative instruments.

In accordance with U.S.

GAAP the fair value of these warrants is classified as a liability on the Companys consolidated balance sheets because, according to the terms of the warrants, a fundamental transaction could give rise to an obligation of the Company to pay cash to its

warrant holders.

Such instruments do not have fixed settlement provisions and have also been recorded as derivative liabilities.

Corresponding changes in the fair value of the derivative liabilities are recognized in earnings on the Companys consolidated statements of operations in each subsequent period.

The Companys derivative liabilities are carried at fair value and were classified as Level 3 in the fair value hierarchy due to the use of significant unobservable inputs.

Modification of Notes Payable

When we change the terms of existing notes payable subsequent to the maturity date, we evaluate the amendments under ASC 470-50, Debt Modification and Extinguishment to determine whether the change should be treated as a debt extinguishment or as a debt modification.

This evaluation includes analyzing whether there are significant and consequential changes to the economic substance of the note.

If the change is deemed insignificant then the change is considered a debt modification, whereas if the change is substantial the change is reflected as a debt extinguishment.

If determined to be a debt extinguishment, the difference between the fair value of the new instrument compared to the original instrument is reflected as a gain or loss on extinguishment of debt.

Equity Instruments

Warrants with derivative features When we raise capital by issuing warrants that do not have complex terms, they are recorded as additional paid in capital in our condensed consolidated balance sheet.

When we issue warrants that have complex terms, such as a clause in which the warrant agreements contain a cash settlement provision whereby the holders could settle the warrants for cash upon a fundamental transaction that is considered outside of the control of management, such as a change of control, the warrants are considered to be a derivative that are recorded as a liability at fair value.

The warrant derivative liability is adjusted to its fair value at the end of each reporting period, with the change being recorded as expense or gain.

Equity issuance costs associated with a capital raise transaction are allocated between expense and additional paid-in capital based on the relative fair value of the instruments being issued.

The expense is included in amortization of debt discount and equity issuance costs on the condensed consolidated statements of operations, and the equity allocation as a reduction of additional paid-in capital in our condensed consolidated balance sheet.

Peter Boockvar Audit committee chairman.

Seth Oster Board member

Significant Accounting Policy Updates

See our Annual Report on Form 10-K for the year ended December 31, 2019 for discussion of the Companys significant accounting policies.

Since the date of the Annual Report, there have been no material changes to the Companys significant accounting policies.

Recently Issued Accounting Standards

FASB ASU 2019-12 Income Taxes (Topic 740) In December 2019, the Financial Accounting Standards Board (FASB) issued guidance which simplifies certain aspects of accounting for income taxes.

The guidance is effective for interim and annual reporting periods beginning after December 15, 2020, and early adoption is permitted.

We do not expect adoption of this ASU to have a material effect on our consolidated financial statements.

FASB ASU 2018-13 Fair Value Measurement (Topic 820)- In August 2018, the FASB issued new disclosure guidance on fair value measurement.

This new guidance modifies the disclosure requirements on fair value measurements, including removal and modifications of various current disclosures as well as some additional disclosure requirements for Level 3 fair value measurements.

Some of these disclosure changes must be applied prospectively while others retrospectively depending on requirement.

We adopted ASU 2018-13 as of January 1, 2020.

There was no material impact to our financial statements or disclosures.

DISCONTINUED OPERATIONS

Security Segment

On December 26, 2019, our board of directors and management made the strategic decision to investigate a possible buyer for the Security Segment and if no buyer could be found, cease operations of the security segment.

On February 6, 2020 we cancelled all our security contracts in California.

The assets and liabilities classified as held for sale for the security segment are presented separately in the balance sheet as of March 31, 2020 and December 31, 2019 and as discontinued operations as of March 31, 2020 and the operating results for the three months ended March 31, 2020 and 2019, respectively, are presented as discontinued operations.

Assets and liabilities of discontinued operations for the security segment included the following:

Cash and cash equivalents

Accounts receivable, net

Prepaid expenses and other current assets

Current assets discontinued operations

Property and equipment, net

Noncurrent assets discontinued operations

Accounts payable and accrued expenses

Customer deposits

Current liabilities discontinued operations

A breakdown of the discontinued operations is presented as follows:

Three months ended

Service revenues

Cost of service revenues

Selling, general and administrative

Depreciation and amortization

Total costs and expenses

OPERATING LOSS

Interest expense, net

NET LOSS FROM DISCONTINUED OPERATIONS

The cash flows related to discontinued operations have not been segregated, and are included in the consolidated statements of cash flows.

The following table provides selected information on cash flows related to discontinued operations for the three months ended March 31, 2020 and 2019, respectively.

Three months ended

Prepaids and other

Depreciation and amortization

Capital expenditures

Accounts payable and accrued expenses

Customer deposits

Consumer Goods Segment

On December 26, 2019, our board of directors and management made the strategic move to cease operations of Chiefton.

On December 26, 2019, our board of directors committed to a plan to cease operations of STOA Wellness.

We transferred all assets of STOA Wellness to an individual on January 10, 2020, in exchange for the release on the outstanding lease of the STOA retail front.

The assets and liabilities classified as discontinued operations for the consumer goods segment are presented separately in the balance sheet as of March 31, 2020 and December 31, 2019 and the operating results for the three months ended March 31, 2020 and 2019, respectively, are presented as discontinued operations.

Assets and liabilities of discontinued operations included the following:

Cash and cash equivalents

Accounts receivable, net

Prepaid expenses and other current assets

Current assets discontinued operations

Right to use asset

Noncurrent assets discontinued operations

Accounts payable and accrued expenses

Operating lease liability current portion

Current liabilities discontinued operations

A breakdown of the discontinued operations is presented as follows:

Three months ended

Product Revenues

Cost of service revenues

Cost of goods sold

Selling, general and administrative

Professional fees

Depreciation and amortization

Total costs and expenses

OPERATING LOSS

NET LOSS FROM DISCONTINUED OPERATIONS

The cash flows related to discontinued operations have not been segregated, and are included in the consolidated statements of cash flows.

The following table provides selected information on cash flows related to discontinued operations for the three months ended March 31, 2020 and 2019.

Three months ended

Prepaids and other

Depreciation and amortization

Capital expenditures

Accounts payable and accrued expenses

Customer deposits

ACCOUNTS RECEIVABLE AND CUSTOMER DEPOSITS

Our accounts receivable consisted of the following:

September 30,

Accounts receivable

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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 (recovery) of $13,499 and $(28,000), respectively, during the three months ended September 30, 2019 and 2018 and $116,761 and $82,615, respectively, during the nine months ended September 30, 2019 and 2018.

As of September 30, 2019 and December 31, 2018, prepaid expenses and other current assets includes $0 and $18,164 of unbilled revenue, respectively, representing amounts for services completed but not billed.

Our deferred revenue and customer deposit liability had the following activity:

We recorded bad debt recovery of $508 during the three months ended March 31, 2020 and bad debt expense of $20,000 during the three months ended March 31, 2019.

Our customer deposit liability had the following activity:

December 31, 2019

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Deposits recognized as revenue

September 30, 2019

March 31, 2020

NOTES RECEIVABLE

As of September 30, 2019, our notes receivable consisted of the following:

Our notes receivable consisted of the following:

Total Principal

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Long-term portion

In March 2019, we agreed to loan $375,000 to Consolidated C.R., LLC (CCR) pursuant to the terms of a convertible promissory note (CCR Note), bearing interest at 12% per annum, collateralized by virtually all of the assets of CCR and a maturity date of November 2020.

Interest is due on the first of every month starting in November 2019.

CCR is a vertically integrated medical cannabis company located in San Juan, Puerto Rico.

As of September 30, 2019, we had loaned $375,000, of which $155,000 was loaned in the first quarter, to CCR under the CCR Note.

As of March 31, 2020, we had loaned an aggregate of $375,000 to CCR pursuant to the CCR Note.

The CCR Note included a loan origination fee of $15,000, which is being recognized as interest income over the term of the agreement.

On January 3, 2019, we loaned $100,000 to Beacher Brewing, LLC (BB) pursuant to the terms of a promissory note (BB Note), bearing interest at 11% per annum and a maturity date of January 3, 2020.

On December 13, 2018, we loaned $50,000 to BRB Realty, LLC (BRB) pursuant to the terms of a promissory note (BRB Note), bearing interest at 13% per annum and a maturity date of June 12, 2019.

On January 19, 2019 the BRB Note was amended with an additional loan amount of $250,000 bearing an interest rate of 13% and a new maturity date of July 15, 2019.

On July 15, 2019, BRB Realty extended the maturity date, in accordance with the terms of the BRB Note, an additional six months with an increased interest rate to 15%.

The BRB Note included a loan origination fee of $5,000, which is being recognized as interest income over the term of the agreement.

OPERATING LEASE RIGHT-OF-USE ASSET / OPERATING LEASE LIABILITY

On February 1, 2019, we entered into a commercial real estate lease for 3,200 square feet of retail space in Greenvale, NY, with an initial term of two years and, at our option, two additional terms of five years each.

Rent is $7,000 per month, as well as our portion of real estate taxes and common area maintenance.

We determined the present value of the future lease payments using a discount rate of 8.5%, our incremental borrowing rate based on outstanding debt, resulting in an initial right-of-use asset and lease liability of $154,200, which are being applied ratably over the term of the lease.

As of September 30, 2019, the balance of the right-of-use asset and lease liability was $102,800.

Future remaining minimum lease payments were as follows:

Year ending December 31,

Present value adjustment

Operating lease liability

Interest is due in advance at the beginning of each quarter.

On December 13, 2019, we agreed to extend the maturity date of the BB Note to January 3, 2021.

ACCRUED STOCK PAYABLE

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

Number of Shares

December 31, 2019

Employee stock award accrual

September 30, 2019

On January 31, 2019, we granted an employee $100,000 worth of our common stock, with half vesting over six months and half vesting over eighteen months.

Employee stock issuance

Consultant stock award accrual

March 31, 2020

On January 29, 2019, we granted an employee $100,000 worth of our common stock, with 50% vesting on July 29, 2019 and the remaining amount vesting over eighteen months.

Based on a stock price of $2.34 on the date of grant, the employee would receive 42,736 shares of our common stock upon vesting.

We are recognizing the value of the grant ratably over the vesting periods.

In February 2020, the vesting was accelerated, and we issued all of the common stock associated with this transaction.

On February 18, 2020 we granted a consultant 100,000 fully vested shares for consulting services.

Based on a stock price of $0.61 on the date of grant, the consultant will receive $60,900 worth of our common stock.

As of March 31, 2020, none of the stock had been issued.

NOTES PAYABLE

Our notes payable consisted of the following:

September 30,

2019 12% Notes

Related party note payable

Unamortized debt discount

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Long-term portion

2019 12% Notes

In September 2019, we completed a private placement with certain accredited investors pursuant to (a) a senior unsecured promissory note, bearing interest at 12% payable quarterly, with principal due October 31, 2020, with an option for the holder to extend the due date to October 31, 2021 (2019 12% Notes) and (b) warrants with an exercise price of $1.30 per share and a life of 1.1 years;

however, if we prepay at any time the life extends to October 31, 2022 (2019 12% Warrants) (combined the 2019 12% Agreements).

We may prepay the 2019 12% Notes at any time, but in any event must pay at least one year of interest.

We issued an aggregate of $1,506,000 under the 2019 12% Notes and warrants to purchase an aggregate of 1,506,000 shares of common stock.

$400,000 was received in cash and $1,106,000 from modifying the outstanding principal under the 8.5% Notes;

see 8.5% Notes below.

The change in terms of the 8.5% Notes is treated as a debt extinguishment and the fair value of the warrants of $298,500 is included in our condensed consolidated statement of operations and as additional paid-in capital.

The relative fair value of the 2019 12% Warrants was recorded as a debt discount and additional paid-in capital of $93,500.

For the three and nine months ended September 30, 2019, amortization of debt discount includes $2,297.

In July 2019, we completed a $855,000 private placement pursuant to a promissory note (SBI Note) with SBI Investments LLC, 2014-1 (SBI), bearing interest at 10% with principal due on October 18, 2019.

On October 18, 2019, SBI agreed to an extension of the maturity date of the SBI Note to November 1, 2019.

On November 1, 2019, SBI agreed to another extension of the maturity date to November 15, 2019.

On November 15, 2019, SBI agreed to another extension of the maturity date to November 29, 2019 with an increase in principal amount of the note from $855,000 to $905,000.

On November 27, 2019, SBI agreed to an extension of the maturity date to December 13, 2019.

On December 13, 2019, SBI agreed to extend the maturity date to December 20, 2019.

On December 30, 2019 SBI agreed to extend the maturity date of the note to January 31, 2020, upon the payment of $195,911, of which $40,911 was for accrued interest and $155,000 towards the outstanding principal of the SBI Note.

On February 18, 2020, we entered into a promissory note exchange agreement with SBI pursuant to which the original SBI Note was exchanged for a new convertible promissory note (the Convertible Note).

The Convertible Note has a principal amount of $934,000, an interest rate of 10% per annum and a maturity date of February 18, 2021.

The Convertible Note may be converted at the option of SBI into shares of common stock at a conversion price equal to 80% of the Market Price;

provided that the conversion price shall in no event be less than $0.45 per share.

The exchange of the SBI Note for the Convertible Note is treated as a debt extinguishment.

The additional $184,000 of principal was treated as a debt extinguishment and included in our condensed consolidated statement of operations.

We determined that the Convertible Note should be accounted for in accordance with FASB ASC 470-20 which addresses Accounting for Convertible Securities with Beneficial Conversion Features.

The beneficial conversion feature is calculated at its intrinsic value (that is, the difference between the conversion price of $0.49 at the date of the note issuance and the fair value of the common stock into which the debt is convertible at the commitment date, per share being $0.61, multiplied by the number of shares into which the debt is convertible).

The valuation of the beneficial conversion feature recorded

cannot be greater than the face value of the note issued.

We recorded $233,500 as additional paid in capital and as a debt extinguishment and included in our condensed consolidated statement of operations.

During the quarter ended March 31, 2020, SBI converted $250,000 aggregate principal amount of the Convertible Note into 541,666 shares of our common stock.

In December 2019, we completed a private placement of with certain accredited investors pursuant to an unsecured promissory note (the 15% Notes) with an aggregate principal amount of $300,000.

In February and March 2020, we completed private placements with certain accredited investors, including holders of $1,506,000 aggregate principal amount of our 2019 12% Notes (as defined below), of 15% Notes with an aggregate principal amount of $2,031,000 in exchange for $525,000 of new funding and the cancellation of $1,506,000 aggregate principal amount of the 2019 12% Notes.

The 15% Notes have an annual interest rate of 15% and mature on January 31, 2021.

The 15% Notes provide that they shall be repaid in full out of the proceeds of any new debt or equity capital raise with net proceeds of more than $5,000,000.

In connection with the issuance of the 15% Notes, each holder of 15%Notes received three warrants (i.e., a 2020 A Warrant, a 2020 B Warrant and a 2020 C Warrant) to acquire shares of common stock at an exercise price equal to $0.45 per share, with the number of shares subject to each warrant equal to one share for each $1.00 of principal amount of 15% Notes issued to the noteholder.

The 2020 A Warrants have an expiration date of December 31, 2020, the 2020 B Warrants have an expiration date of December 31, 2021, and the 2020 C Warrants have an expiration date of December 31, 2022 (collectively, the 15% Warrants).

By way of example, if an investor was issued a 15% Note with a principal amount of $250,000, such noteholder would receive a 2020 A Warrant to purchase 250,000 shares of common stock, a 2020 B Warrant to purchase 250,000 shares of common stock and a 2020 C Warrant to purchase 250,000 shares of common stock.

Accordingly, as of March 31, 2020, the Company has issued 15% Warrants to purchase a total of 6,993,000 shares of common stock to the holders of 15% Notes.

We received $300,000 of cash in December 2019 and an additional $525,000 of cash January 2020 through March 2020 for issuing the 15% Notes.

The relative fair value of the new funding on the 15% Warrants was recorded as a debt discount and additional paid-in capital of $333,056.

The relative fair value of the cancellation of the outstanding indebtedness was recorded as an extinguishment of debt and additional paid-in capital of $668,335.

For the three months ended March 31, 2020 and 2019, amortization of debt discount expense was $69,159 and $0, respectively, from the 15% Notes.

The 15% Notes are otherwise treated as conventional debt.

For purposes of determining the loss on extinguishment of debt and the debt discount, the underlying assumptions used in the Black-Scholes model to determine the fair value of the 2019 12% Warrants were:

For purposes of determining the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the 15% Warrants as of March 2020, were:

Current stock price

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Expected volatility

In April 2018, we completed a $7,500,000 private placement pursuant to a promissory note (8.5% Notes) and warrant purchase agreement (the 8.5% Agreement) with certain accredited investors, bearing interest at 8.5%, with principal due May 1, 2019, and interest payable quarterly.

During the second quarter this note was extended to be due June 1, 2019.

On June 6, 2019, we made payments of approximately $5.7 million, leaving approximately $1.1 million outstanding.

In the event of default, the interest rate increases to 18%.

The 8.5% Notes are collateralized by a security interest in substantially all of our assets.

We may prepay the 8.5% Notes at any time, but in any event must pay at least one year of interest.

In September 2019, we modified the debt agreement into the 2019 12% Notes.

Subject to the terms and conditions of the 8.5% Agreement, each investor was granted fully-vested warrants equal to their note principal times 80%, or six million warrants, with an exercise price of $2.35 per share and a life of two years (the 8.5% Warrants).

Should we issue any equity-based instruments at a price lower than the exercise price(s) of the 8.5% Warrants, other than under our Incentive Plan (as defined below), the exercise price(s) of the 8.5% Warrants will be adjusted to the lower price.

If the shares underlying the 8.5% Warrants were not registered for resale on a registration statement within six months, we would have issued an additional warrant to each purchaser at the same exercise price for one-half of the shares covered by the initial 8.5% Warrants.

A registration statement related to the 8.5% Warrants was declared effective on June 5, 2018.

We may call the 8.5% Warrants at $0.01 per share if our stock trades above $8.00 per share for 15 consecutive days.

The 8.5% Warrants may be exercised at the option of the holder by paying cash or by applying the amount due under the 8.5% Notes as consideration.

We received $7,500,000 of cash for issuing the 8.5% Notes.

The relative fair value of the 8.5% Warrants was recorded as a debt discount and additional paid-in capital of $5,366,000.

For the three months ended September 30, 2019 and 2018, respectively, amortization of debt discount includes $0 and $1,013,261.

For the Nine months ended September 30, 2019 and 2018, amortization of debt discount expense was $1,575,094 and $1,457,178, respectively, from the 8.5% Notes.

The 8.5% Notes are otherwise treated as conventional debt.

For purposes of determining the debt discount, the underlying assumptions used in the binomial lattice model to determine the fair value of the 8.5% Warrants as of April 2018, were:

Current stock price

Exercise price

Risk-free interest rate

Expected dividend yield

Expected term (in years)

Expected volatility

Number of iterations

In July 2019, we completed a $855,000 private placement pursuant to a promissory note (SBI Note) with a certain accredited investor, bearing interest at 10%, with principal due October 17, 2019, and interest due at maturity.

On October 18, 2019, the maturity date was extended to November 15, 2019, in exchange for 50,000 options to purchase shares of our common stock, with an exercise price of $1.00 per share and an exercise period of two years from date of grant.

We received $755,000 of cash for issuing the SBI Note and the difference between the cash received and the principal amount was recorded as a debt discount of $100,000.

For the three and nine months ended September 30, 2019 amortization of debt discount includes $80,797.

2019 12% Notes

In September 2019, we completed a private placement with certain accredited investors, including holders of $1,106,000 aggregate principal amount of our 8.5% Notes, pursuant to (a) a senior unsecured promissory note, bearing interest at 12% payable quarterly, with principal due October 31, 2020, with an option for us to extend the due date to October 31, 2021 (2019 12% Notes) and (b) warrants with an exercise price of $1.30 per share and a life of 1.1 years;

however, if we prepay the 2019 12% Notes at any time the life extends to October 31, 2022 (2019 12% Warrants) (combined the 2019 12% Agreements).

Pursuant to the 2019 12% Agreements, we could prepay the 2019 12% Notes at any time, but in any event were required to pay at least one year of interest.

In February 2020, we issued $1,506,000 aggregate principal amount of 15% Notes to the holders of the outstanding 12% Notes in exchange for the cancellation of the outstanding 12% Notes.

Loan on Building

On January 8, 2020 we entered a $975,000 deed of trust (the Mortgage Loan) secured by a first mortgage lien on the property located in Denver, Colorado.

The Mortgage Loan matures on December 31, 2020 and accrues interest at a rate of equal to the greater of 5.25% in excess of the Prime Rate or 10% per annum, payable on a monthly basis.

This loan was paid in full on March 20, 2020 with the sale of our building.

WARRANT DERIVATIVE LIABILITY

On May 31, 2019 we received gross proceeds of $3 million by issuing three million shares of our common stock and three million warrants (2019 Warrants) to purchase shares of our common stock (together 2019 Units) in a registered direct offering for $1.00 per 2019 Unit (combined the 2019 Capital Raise).

The 2019 Warrants, issued with the 2019 Capital Raise, are accounted for as a derivative liability.

The 2019 Warrant agreements contain a cash settlement provision whereby the holders could settle the warrants for cash based on the Black-Scholes value, upon certain fundamental transactions, as defined in the 2019 Warrant agreement, that are considered outside of the control of management, such as a change of control.

The original exercise price of the 2019 Warrants was $1.30 per share.

The 2019 Warrants contain certain anti-dilution adjustment provisions with respect to subsequent issuances of securities by the Company at a price below the exercise price of such warrants.

As a result of such subsequent issuances of securities by the Company during 2019, the exercise price of the 2019 Warrants had decreased to $0.45 per share and the number of shares subject to the 2019 Warrants had increased to 8,666,666 shares of common stock as of December 31, 2019.

In February 2020, one of the warrant holders exercised 200,000 warrants.

We received $90,000 in cash for the exercise and booked an adjustment to the derivative liability of $82,241 as a result of the transaction.

As of March 31, 2020 there were 8,466,666 of these warrants outstanding.

The following are the key assumptions that were used to determine the fair value of the 2019 Warrants:

September 30,

March 31, 2020

Number of shares underlying the warrants

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Three months ended

September 30,

Nine months ended

September 30,

Beginning balance

Recognition of warrant derivative liability on

Beginning balance as of December 31

Warrant exercise

Change in fair value of warrants derivative liability

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COMMITMENTS AND CONTINGENCIES

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

From time to time, the Company is a party to various litigation matters incidental to the conduct of its business.

The Company is not presently a party to any legal proceedings that would have a material adverse effect on its business, operating results, financial condition or cash flows.

STOCKHOLDERS EQUITY

2019 Capital Raise

The 2019 Warrants have an exercise price of $1.30 per share and are exercisable for five years from the date of issuance.

We received cash of $2,604,355 which is net of $395,645 of issuance costs, of which $318,681 is included as amortization of debt discount and equity issuance costs and $76,964 is included as a reduction of additional paid in capital.

We used a portion of the net proceeds from the issuance of the 2019 Units to pay down the 8.5% Notes by $5,743,000, leaving $1,106,000 outstanding.

On May 31, 2019 we received gross proceeds of $3 million by issuing three million shares of our common stock and three million warrants to purchase shares of our common stock in a registered direct offering for $1.00 per 2019 Unit.

The 2019 Warrants had an exercise price of $1.30 per share at issuance and are exercisable for five years from the date of issuance.

The number of shares issuable pursuant to the warrants granted under the 2019 Warrants, as well as the exercise price of those warrants, is subject to adjustment as a result of certain future equity issuances of securities by the Company at a price below the then-effective exercise price of the 2019 Warrants.

As a result of such subsequent issuances of securities by the Company during the fourth quarter of 2019, the exercise price of the 2019 Warrants had decreased to $0.45 per share and the number of shares subject to the 2019 Warrants had increased to 8,666,666 shares of common stock as of December 31, 2019.

As of March 31, 2020, there were 8,466,666 of these warrants outstanding.

We received cash of $2,604,355 which is net of $395,645 of issuance costs.

Of the gross proceeds, we recorded $2,416,422 as a warrant derivative liability, as discussed in Note 7.

Share-based compensation

We use the fair value method to account for stock-based compensation.

We recorded $768,079 and $1,289,408 in compensation expense, for the three months ended September 30, 2019 and 2018, respectively and $3,013,042 and $4,252,900, for the nine months ended September 30, 2019 and 2018, respectively.

We recorded $572,574 and $1,492,496 in compensation expense, for the three months ended March 31, 2020 and 2019, respectively.

This includes expense related to options issued in prior years for which the requisite service period for those options includes the current period as well as options issued in the current period.

The fair value of these instruments was calculated using the Black-Scholes option pricing method.

As of September 30, 2019, there was approximately $1,630,009 of total unrecognized compensation expense related to unvested Employee Awards, which is expected to be recognized over a weighted-average period of nine months.

As of March 31, 2020, there was approximately $605,729 of total unrecognized compensation expense related to unvested Employee Awards, which is expected to be recognized over a weighted-average period of eleven months.

Feinsod Employment Agreement

On August 6, 2019, we entered into an agreement (the Feinsod Agreement) with Michael Feinsod for his permanent service as our Chief Executive Officer.

On August 6, 2019, we entered into an agreement (the Feinsod Agreement) with Michael Feinsod for his service as Chief Executive Officer.

Pursuant to the agreement, Mr.

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The options were valued using the Monte Carlo method.

For the three months ended March 31, 2020, we recognized approximately $57,000 of share-based compensation expense related to these options.

The underlying assumptions used in the Monte Carlo simulations to determine the fair value of options were:

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Expected volatility

On May 31, 2019, we issued the 2019 Units at $1.00, which triggered the down round feature specified in the 8.5% Warrants.

We calculated the difference between the 8.5% Warrants fair value on the date the down round feature was triggered using the original exercise price and the new exercise price.

The difference in fair value of the effect of the down round feature is reflected in our condensed consolidated financial statements as a deemed dividend and as a reduction to income available to common stockholders in the basic earnings per share calculation.

The underlying assumptions used in the binomial lattice model to determine the fair value of the 8.5% Warrants were:

Current stock price

Exercise price

Risk-free interest rate

Expected dividend yield

Expected term (in years)

Expected volatility

Number of iterations

SUBSEQUENT EVENTS

As disclosed in Note 6, Notes Payable, we and SBI agreed to extend the maturity date of the SBI Note to November 15, 2019.

SEGMENT INFORMATION

Our operations are organized into four segments:

Security and Cash Transportation Services;

Our operations are organized into two segments:

Operations Consulting and Products;

Consumer Goods and Marketing Consulting;

and Capital Investments and Real Estate.

and Capital Investments.

All revenue originates, and all assets are located in the United States.

Three months ended September 30

Rent and interest

Total Revenues

Costs and expenses

Rent and interest

Total revenue

Costs and expenses

Investment in Desert Created

Nine months ended September 30

Segment information is presented in accordance with ASC 280, "

Segments Reporting."

This standard is based on a management approach that requires segmentation based upon the Companys internal organization and disclosure of revenue and certain expenses based upon internal accounting methods.

The Companys financial reporting systems present various data for management to run the business, including internal profit and loss statements prepared on a basis not consistent with GAAP.

The following information is presented net of discontinued operations.

For more information see Note 3.

Three months ended March 31

Rent and interest

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Costs and expenses

Investment in Desert Created

September 30,

Consumer Goods

SUBSEQUENT EVENTS

On April 7, 2020, we entered into an Asset Purchase Agreement (the Agreement) with The Organic Seed, LLC, doing business under the name Cannasseur (the Seller), pursuant to which we agreed to acquire the assets of the Seller which includes a recreational retail dispensary, a 12,000 square foot light deprivation greenhouse, and a manufacturing facility based in Pueblo West, Colorado.

The Agreement provides the purchase price to acquire Cannasseur is $2,350,000 (the Purchase Price).

The purchase price will be paid by issuing to the Seller shares of common stock of the Company equal to the purchase price divided by the volume weighted average per share price of the Companys shares for 30 consecutive trading days ending on the second trading day prior to the closing (the VWAP);

provided that if the VWAP exceeds $0.55 per share, then the VWAP will equal $0.55 per share for purposes of the foregoing calculation;

and if the VWAP is less than $0.45 per share, then the VWAP will be adjusted to equal $0.45 for the purposes of the foregoing calculation.

The closing is subject to approval of the transaction by the Colorado Marijuana Enforcement Division, as well as other customary closing conditions.

On May 25, 2020, following receipt of approval of the transaction by the Colorado Marijuana Enforcement Division, we closed the acquisition of Dalton Adventures, LLC, pursuant to which the we had acquired the assets of Dalton Adventures, LLC that constitute the business of SevenFive Farm, a cultivation facility in Boulder, Colorado.

The purchase price paid by us to the Dalton Adventures, LLC was 8,859,117 shares of common stock.

Dalton Adventures, LLC may require us to repurchase in cash 25% of the shares issued to Dalton Adventures, LLC at the closing at a repurchase price equal to the same VWAP used to determine the number of shares issued to Dalton Adventures, LLC at closing.

On May 29, 2020, we entered into a subscription agreement with Hershey Strategic Capital, LP and Shore Ventures III, LP (collectively, the Investor) with respect to the sale of shares of common stock and warrants to purchase common stock (collectively, the securities).

The sales of the securities to the Investor consists of a minimum of $2,185,000 of securities and a maximum of $3,000,000 of securities, as described further below.

The purchase price of the securities at each closing is as follows:

(i) the purchase price of each share of common stock is $0.3983 per share, and (ii) for each one dollar invested by the Investor, the Investor receives a warrant to purchase a number of shares of common stock equal to 75% of the number of shares of common stock purchased by the Investor at an exercise price per share equal to $0.5565.

The warrants have a term of five years.

The subscription agreement provides for the sale of securities in three closings.

At the first closing, which occurred on May 29, 2020, we sold $800,000 of securities to the Investor, representing 2,008,536 shares of common stock and warrants to purchase 1,506,402 shares of common stock.

At the second closing, which occurred on June 3, 2020, we sold to the Investor $1,385,000 of the securities at the same price sold in the first closing.

A third closing will be held with respect to the sale of $815,000 of the securities if Adam Hershey, the managing member of the Investor, is Approved for Suitability within one year of the date of the subscription agreement by State of Colorados Marijuana Enforcement Division (MED).

Accordingly, a total of 7,532,010 shares of common stock and warrants to purchase 5,649,007 shares of common stock may be sold pursuant to the subscription agreement with the Investor.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Managements 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 Condensed 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, 2018 and 2017.

This Managements Discussion and Analysis of Financial Condition and Results of Operations (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 Condensed Consolidated Financial Statements and related notes and MD&A appearing in our Annual Report on Form 10-K for the year ended December 31, 2019.

The results of operations for an interim period may not give a true indication of results for future interim periods or for the year.

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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 of this Quarterly Report on Form 10-Q.

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.).

The recent outbreak of the novel coronavirus disease (COVID-19), was labeled a global pandemic by the World Health Organization in March 2020 and has led to material and adverse impacts on the U.S.

and global economies and created widespread uncertainty, including locations where we do business.

As of the date of this Quarterly Report on Form 10-Q, we have not experienced significant disruption in our operations as a result of the COVID-19 pandemic and are conducting business with modifications to employee travel and employee work locations, among other modifications.

We will continue to actively monitor the development of the COVID-19 pandemic and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, clients, partners, and stockholders.

The full extent of the pandemic, related business and travel restrictions, governmental regulations and changes to consumer behavior intended to reduce its spread are uncertain as of the date of this Quarterly Report on Form 10-Q, and the timing of the peak of the pandemic and its ultimate impact on the U.S.

and global economies remains uncertain.

Therefore, the full extent to which the COVID-19 pandemic may impact our results of operations, liquidity or financial position is uncertain.

In addition, the COVID-19 pandemic has had and is likely to continue to have adverse effects on our clients, suppliers and third-party business partners.

Management continues to monitor the impact that the COVID-19 pandemic is having on the Company and the economies in which we operate.

We anticipate that our liquidity may be materially impacted by the COVID-19 pandemic and we expect that the effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods.

Our Products, Services and Customers

Through our reporting segments (Security, Operations, Consumer Goods, and Investments), we provide products, services and capital to the regulated cannabis industry and non-cannabis customers, which include the following:

Security and Cash Transportation Services (Security Segment)

Through our two reporting segments Operations Consulting and Products;

and Capital Investments, we provide products, services and capital to the regulated cannabis industry and non-cannabis customers, which include the following:

Operations Consulting and Products (Operations Segment)

During the three and nine months ended September 30, 2019, 82% of NBCs revenue was with three customers and 61% of NBCs revenue was with two customers.

During the three months ended March 31, 2020 and 2019, 73% and 76% of NBCs revenue was with three customers and one customer, respectively.

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however, there are a limited number of manufacturers of certain high tech cultivation equipment.

Consumer Goods and Marketing Consulting (Consumer Goods Segment)

Our apparel business, Chiefton, has two primary revenue streams.

Chiefton Supply strives to create innovative, unique t-shirts, hats, hoodies and accessories.

Our apparel is sold through our on-line shop, cannabis retailers, non-cannabis retailers, and specialty t-shirt and gift shops.

Our CBD retail business, STOA Wellness, opened in July of 2019.

STOA Wellness offers a curated collection of high quality CBD products for athletes and general wellness.

Capital Investments and Real Estate (Investments Segment)

NBC provides a competitive advantage as we plan to evaluate and operate licensed cultivation facilities.

Capital Investments (Investments Segment)

As a publicly traded company, we have access to capital that may not be available to businesses operating in the cannabis industry.

Developments in 2019

Security Our security business, IPG, continues to find success expanding into the California market, with a recent shift in focus to the greater Los Angeles area.

We also left the northern California market, as the revenue opportunities did not warrant the cost to operate in that area.

IPG continues to face significant challenges in Colorado, however, such as pricing pressure from unfavorable economic conditions and the availability and cost of guards.

These challenges have resulted in a reduction of revenue and an increase in the cost of revenue.

Operations Our operations consulting business, NBC, has found significant success in 2019:

(a) equipment and product sales continue to rise;

(b) increased revenue from licensing application consulting;

and (d) an expansion of our grow facility design and construction business.

Consumer Goods We made significant changes to our apparel and marketing business, Chiefton, during the quarter ended September 30, 2019.

We reduced recurring annualized overhead by approximately $400,000.

With a revised cost structure, we are pursuing new, lower cost methods to acquire customers, as well as identify sustainable, profitable revenue streams.

STOA, our CBD retail store in Long Island, NY, offering a curated collection of high quality CBD products, opened to customers in July 2019.

STOA revenues have shown steady, moderate growth since opening.

Corporate We continue to invest in our infrastructure in order to better serve our current customers and position ourselves for expansion through organic growth and acquisition.

Additionally, through expense management strategies, we reduced annualized overhead by approximately $600,000, and have identified $200,000 - $400,000 of additional potential cost savings.

These reductions are partially offset by adding key positions to prepare us for significant growth as we execute our PubCo strategy.

PubCo We are focused on taking advantage of the ability for public companies to own cultivation, processing and retail cannabis licenses.

In Colorado, we have signed numerous letters of intent with potential targets and expect to begin closing acquisitions in early 2020.

Accordingly, we may provide debt or equity capital through (a) loans or revolving lines of credit, or (b) investing in businesses using cash or shares of our common stock.

Results of Operations

The following tables set forth, for the periods indicated, statements of operations data.

The tables and the discussion below should be read in conjunction with the accompanying condensed consolidated financial statements and the notes thereto appearing in elsewhere in this Report.

The tables and the discussion below should be read in conjunction with the accompanying condensed consolidated financial statements and the notes thereto appearing in Item 8 in this Report.

Consolidated Results

Three months ended

September 30,

Costs and expenses

Other expense

Nine months ended

September 30,

Three months ended March 31,

Costs and expenses

Other expense

Revenue increased for our Operations and Investments segments, offset by a decrease in revenues in our Security and Consumer Goods Segment.

Other income (expense)

Net loss from continuing operations

Loss from discontinued operations

Revenue increased for both our Operation Consulting and Investments segments.

See Segment discussions below for further details.

Costs and expenses

Three months ended

September 30,

Cost of service revenues

Cost of goods sold

Selling, general and administrative

Share-based compensation

Professional fees

Depreciation and amortization

Nine months ended

September 30,

Three months ended March 31,

Cost of service revenues

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Depreciation and amortization

Cost of service revenues typically fluctuates with the changes in revenue for our Operations and Security Segments, while these costs are relatively fixed for Chiefton Design within our Consumer Goods Segment.

Cost of goods sold varies with changes in product sales, including a significant increase in products sold by our Operations Segment, which have smaller margins than products sold by our Consumer Goods Segment.

Cost of service revenues typically fluctuates with the changes in revenue for our Operation Consulting Segment.

Cost of goods sold varies with changes in product sales, including an increase in products sold by our Operation Consulting Segment, which have smaller margin.

See Segment discussions below for further details.

Selling, general and administrative expense increased in 2019 primarily due to increases for (a) salaries;

(b) premiums for liability, and directors and officers insurance;

and (d) marketing costs.

Selling, general and administrative expense stayed relatively static for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

Share-based compensation included the following:

Three months ended

September 30,

Employee awards

Consulting awards

Feinsod Agreement

Nine months ended

September 30,

Three months ended March 31,

Employee awards

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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.

The decrease in expense for the three month ended March 31, 2020 as compared to March 31, 2019 is due to the restructuring we did at the end of 2019 and beginning of 2020.

We decreased our employee count by over 50% resulting in a sharp decrease in employee award expense.

Consulting awards are granted to third parties in lieu of cash for services provided.

The Feinsod Agreement expense represents share-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 have increased slightly from 2019 due primarily to the cost of raising capital.

Professional fees consist primarily of accounting and legal expenses and increased for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019 due to legal and accounting fees spent on acquisitions.

Other Expense

Three months ended

September 30,

Three months ended March 31,

Amortization of debt discount and equity issuance costs

Loss on extinguishment of debt

Interest expense

Loss from Desert Created investment

Impairment of Desert Created investment

Gain on warrant derivative liability

Nine months ended

September 30,

Amortization of debt discount and equity issuance costs

Gain on derivative liability

Loss on extinguishment of debt

Interest expense

Loss from Desert Created investment

Impairment of Desert Created investment

Gain on warrant derivative liability

Amortization of debt discount and equity issuance costs generally varies with our debt balance and, in 2019, includes $318,681 of equity issuance costs from the 2019 Warrants.

Loss on extinguishment of debt reflects the fair value of the warrants related to converting the remaining 8.5% Notes into 2019 12% Notes.

Interest expense varied between 2019 and 2018 due to the payoff of the 12% Notes in January 2018, the payoff of the Infinity Note in February 2018, and the issuance of the 8.5% Notes in April 2018.

We recognized equity issuance costs in conjunction with our registered direct offering in May 2019.

The loss on investment in Desert Created is our 50% share of the net loss of Desert Created during the three quarters September 30, 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.

In October 2018, we sold our 50% interest to DNFC for cash consideration of $23,045 and, accordingly, impaired the remaining balance.

The gain on warrant derivative liability reflects the change in fair value of the 2019 Warrants.

Security and Cash Transportation Services

Three months ended

September 30,

Costs and expenses

Nine months ended

September 30,

Costs and expenses

Revenues decreased in 2019 primarily from the loss of several clients in 2019.

Costs and expenses typically vary with changes in revenue.

During the three months ended September 30, 2019 compared to 2018, the change in expense did not correspond with the change in revenue, due primarily to increased overtime hours and an increase in overhead personnel and salaries.

Gain on sale of building

Amortization of debt discount was lower in 2020 compared to 2019, due to the April 2018 debt paid off in the second quarter of 2019.

This was offset slightly by new debt issued in the third and fourth quarters of 2019 and the first quarter of 2020.

Interest expense increased in 2019 due to the new debt entered in the third and fourth quarters of 2019 and the first quarter of 2020.

The gain on warrant derivative liability reflects the change in the fair value of the 2019 Warrants.

The loss on extinguishment of debt is due to the conversion and extension of the SBI debt and the exchange of the 12% Notes into the 15% Notes.

The gain on the sale of the building is the gain we recognized as a result of the sale of our building in March 2020.

Operations Consulting and Products

Three months ended

September 30,

Costs and expenses

Nine months ended

September 30,

Costs and expenses

The increase in revenues is mostly related to an increase in product sales for the first three quarters of 2019.

There were also several applications completed during the quarter ended September 30, 2019.

Ongoing management revenue remained consistent with prior year.

The higher margin mainly related to the three applications that were completed in the third quarter of 2019.

Costs and expenses increased in 2019 due to increased product sales.

Consumer Goods and Marketing Consulting

Three months ended

September 30,

Costs and expenses

Nine months ended

September 30,

Costs and expenses

The increase in revenues during the three months ended September 30, 2019 is related to STOA revenue, and a slight increase in Chiefton wholesale revenue during the three months ended September 30, 2019.

The decrease in revenues during the nine months ended September 30, 2019 is due to fewer custom design projects in 2019 and a decrease in product sales.

Costs and expenses vary with changes in product sales, product mix, and inventory adjustments.

Revenue derived from services has a higher margin than revenues derived from product sales.

In 2019, a larger percentage of revenues came from product sales, increasing the costs related to these sales.

Additionally, there was an increase in nonrecurring expense due to the opening of the STOA Wellness retail location in New York.

Three months ended

September 30,

Three months ended March 31,

Costs and expenses

Investment in Desert Created

Nine months ended

September 30,

Increased revenues in 2020 are primarily related to increased product sales and license application fees, offset by a decrease in recurring consulting fees.

Costs and expenses increased in 2020 due to increased product sales, offset by a reduction in employee costs.

Three months ended March 31,

Costs and expenses

Investment in Desert Created

The increase in revenues in 2019 is related to three new notes receivables that were executed during the nine months ended September 30, 2019.

The slight increase in revenues in 2020 is related to a full quarter of interest revenue in 2020 as compared to 2019.

All revenue is from interest and loan origination fees related to these new notes.

The investment in Desert Created includes an $805,500 impairment charge and our share of their net loss of $119,972.

The expense in 2019 was legal fees incurred for the new notes receivable agreements.

Sources of liquidity

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We anticipate our more significant uses of resources will include funding operations, developing infrastructure, as well as potential loans, investments, and business and real property acquisitions.

In May 2019, we raised approximately $3 million by issuing three million shares of our common stock and three million warrants (2019 Warrants) to purchase shares of our common stock (together 2019 Units) in a registered direct offering for $1.00 per 2019 Unit.

The 2019 Warrants have an exercise price of $1.30 per share and are exercisable for five years from the date of issuance.

We received cash of $2,604,355, which is net of $395,645 of issuance costs.

During the second quarter this note was extended to be due June 1, 2019.

On June 6, 2019, we made payments of approximately $5.7 million, leaving approximately $1.1 million outstanding.

The proceeds were made available for general working capital purposes and acquisitions.

In May and June 2020, we received $2,185,000 in cash by issuing 5,485,814 shares of our common stock and 4,114,360 warrants to purchase common stock.

During January through March of 2020, we received $525,000 in cash in a private placement with certain accredited investors pursuant to the 15% Notes.

Sources and uses of cash

We had cash of approximately $600,000 and $8.0 million, respectively, as of September 30, 2019 and December 31, 2018.

We had cash of $775,289 and $224,994, respectively, as of March 31, 2020 and December 31, 2019.

Our cash flows from operating, investing and financing activities were as follows:

Nine months ended

September 30,

Three months ended March 31,

Net cash used in operating activities

Net cash used in investing activities

Net cash (used in) provided by financing activities

Net cash used in operating activities increased in 2019 by $447,466 compared to 2018, primarily due to additional cash-based expenses, such as salaries for additional personal.

Net cash used in investing activities in 2019 relates primarily to issuing notes receivable, along with purchasing fixed assets.

2018 expenditures were for fixed assets.

Net cash used in financing activities related to the payoff of the notes payable, offset by a capital raise in May 2019.

Net cash provided by financing activities in 2018 related to the exercise of warrants and options offset by paying off debt.

Net cash provided by (used in) investing activities

Net cash provided by financing activities

Net cash used in operating activities decreased in 2020 by $240,889 compared to 2019, primarily due to a reduction of cash-based expenses, such as salaries for reduced personnel.

Net cash provided by investing activities in 2020 relates primarily to the sale of our building in March 2020.

2019 related primarily to issuing notes receivable, along with purchasing fixed assets.

Net cash provided by financing activities in 2020 is in relation to exercises of warrants and new debt, offset by debt payments.

Capital Resources

We have no material commitments for capital expenditures as of September 30, 2019.

Part of our growth strategy, however, is to acquire businesses and real estate, and provide debt or equity capital to third parties.

We expect to fund such activity through cash on hand, the issuance of debt, common stock, warrants for our common stock or a combination thereof.

We have no material commitments for capital expenditures as of March 31, 2020.

Part of our growth strategy, however, is to acquire businesses.

We would fund such activity through cash on hand, the issuance of debt, common stock, warrants for our common stock or a combination thereof.

Non-GAAP Financial Measures

Adjusted EBITDA per share is a non-GAAP financial measure.

We define Adjusted EBITDA per share as (a) net income (loss) attributable to common stockholders calculated in accordance with GAAP, adjusted for the impact of share-based expense, depreciation and amortization, impairment of investments, amortization of debt discounts and equity issuance costs, interest expense, income taxes and certain other non-cash items;

We define Adjusted EBITDA per share as (a) net income (loss) calculated in accordance with GAAP, adjusted for the impact of share-based expense, depreciation and amortization, impairment of investments, amortization of debt discounts, and certain other non-cash items;

divided by (b) the weighted average shares outstanding, adjusted for the shares related to the calculation of Adjusted EBITDA.

7 unchanged sentences

Three months ended

September 30,

Nine months ended

September 30,

Net loss attributable to common stockholders

Adjustment for loss from discontinued operations

Loss from continuing operations attributable to common stockholders

Acquisition-related expense

Share-based expense

Depreciation and amortization

Amortization of debt discount and equity issuance costs

Loss on extinguishment of debt

Amortization of debt discount

Interest expense

Loss on extinguishment of debt

Gain on sale of building

Gain on warrant derivative liability

Loss on investment in Desert Created

Impairment of Desert Created investment

Total adjustments

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements