What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-04-01 compared with 2020-05-14 · 112 added, 113 removed, 88 unchanged (72% of the section changed)

MANAGEMENT'S 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 Consolidated Financial Statements and related notes in Item 8 of this Report.

Cautionary Statement Regarding Forward-looking Statements

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis (“MD&A”) should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 8 of this Annual Report on Form 10-K (annual report), which include additional information about our accounting policies, practices and the transactions underlying our financial results.

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S.

GAAP) requires us to make estimates and assumptions that affect the reported amounts in our consolidated financial statements and the accompanying notes, including various claims and contingencies related to lawsuits, taxes, environmental and other matters arising during the normal course of business.

We apply our best judgment, our knowledge of existing facts and circumstances and actions that we may undertake in the future in determining the estimates that affect our consolidated financial statements.

We evaluate our estimates on an ongoing basis using our historical experience, as well as other factors we believe appropriate under the circumstances, such as current economic conditions, and adjust or revise our estimates as circumstances change.

As future events and their effects cannot be determined with precision, actual results may differ from these estimates.

Our MD&A contains forward-looking statements that discuss, among other things, future expectations and projections regarding future developments, operations and financial condition.

All forward-looking statements are based on managements existing beliefs about present and future events outside of managements control and on assumptions that may prove to be incorrect.

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

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 Report is filed.

Going Concern

The consolidated financial statements included elsewhere in this Form 10-K, have been prepared on a going concern basis, which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future.

Our cash of approximately $224,994 as of December 31, 2019 is not sufficient to absorb our operating losses and retire our debt of $2,330,351 and other obligations as they come due.

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.

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

Management believes that (a) we will be successful obtaining additional capital and (b) actions presently being taken to further implement our business plan and generate additional revenues provide opportunity for the Company to continue as a going concern.

While we believe in the viability of our strategy to generate additional revenues and our ability to raise additional funds, there can be no assurances to that effect.

Accordingly, there is substantial doubt about our ability to continue as a going concern.

The accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

General Cannabis Corp and its subsidiaries are referred to collectively as “GCC” “the Company,” “we, “us” or “our” in the following discussion and analysis.

Results of Operations

As of December 31, 2019, we made the strategic decision to cease operations of Chiefton and STOA Wellness.

All operations were abandoned in January 2020.

Separately, we classified Iron Protection Group as held for sale as of December 31, 2019, in which the contracts of the Colorado division were sold in January 2020 and the remaining contracts in California have been abandoned.

The completed and planned divestiture of these non-core businesses has changed the way in which we evaluate performance and allocate resources.

As a result, during the year ended December 31, 2019, we revised our business segments, consistent with our management of the business and internal financial reporting structure.

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

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See Note 3 to the consolidated financial statements for information concerning discontinued operations.

Revenue increased for our Operations and Investments Segments, offset by a decrease in revenues in our Security and Marketing Segments.

Our acquisition of SevenFive Farm in May 2020 added approximately $2.3 million in revenues for the year ended December 31, 2020.

Our Operations Segment increased revenues by $1.6 million to $5.2 million for the year ended December 31, 2020, from $3.6 million for the year ended December 31, 2019, primarily driven by an increase in product sales.

See Segment discussions below for further details.

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Year ended December 31,

Cost of service revenues

Cost of goods sold

Cost of revenues

Selling, general and administrative

Share-based compensation

Stock-based compensation

Professional fees

Depreciation and amortization

Cost of service revenues typically fluctuates with the changes in revenue for our Operations Segments.

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

The increase in cost of revenues is primarily driven by our acquisition of SevenFive Farm in May 2020 and an increase of cost of sales in our Operations Segment directly correlated to the increase in product sales in the year ended December 31, 2020.

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.

Share-based compensation included the following:

Selling, general and administrative expense decreased by $0.7 million to $3.7 million for the year ended December 31, 2020 from $4.4 million for the year ended December 31, 2019 primarily due to management’s emphasis on cost controls and decreases in salary expense due to the discontinuation of certain business operations;

decreased marketing costs;

and decreased travel expenses due to COVID-19 pandemic.

Stock-based compensation included the following:

Year ended December 31,

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Consulting awards

Feinsod Agreement

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 year ended December 31, 2020 is due to the restructuring of the Company in the first quarter of 2020 and the reduction in workforce.

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 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 have increased slightly from 2018 due primarily to the cost of raising debt.

Depreciation and amortization expense increased due to normal depreciation expense for our ERP system.

Professional fees consist primarily of accounting and legal expenses and have increased from 2019 due to increased activity related to acquisitions and fund raising activities.

Depreciation and amortization expense increased in 2020 due to the acquisition of SevenFive Farm.

Other Expense

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Interest expense

Gain on derivative liability

Loss from Desert Created Investment

Impairment of Desert Created Investment

Gain/loss on extinguishment of debt

Amortization of debt discount costs generally varies with our debt balance and, in 2019, includes $318,681 of costs associated with derivative warrants from the 2019 Warrants (as defined below).

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 issuance costs in relation to the derivative warrants included in 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.

Loss on extinguishment of debt

(Gain) loss on derivative liability

Gain on sale of building

Loss on investment

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

The increase in the loss on extinguishment of debt in 2020 is primarily due to the conversion and extension of the SBI debt, the exchange of the 12% Notes into the 15% Notes, and the extension of a portion of the 15% Notes.

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

The gain on the sale of the building is from the sale of our building in March 2020.

Operations Consulting and Products

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Costs and expenses

Increased revenues in 2019 primarily related to revenue from license application consulting;

and an increase in product sales throughout 2019.

The higher margin is due to completed applications in the third and fourth quarters of 2019.

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

Segment operating (loss) income

The increase in revenues primarily related to an increase in product sales throughout 2020 with COVID-related decreases in services and application fees completed in 2020.

The increase in expenses is directly related to the increase in product sales.

Year ended December 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 2019.

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

The investment in Desert Created includes an $823,819 impairment charge and our share of their net loss of $182,136.

Segment operating income

This is a new segment in 2020, therefore all amounts are an increase from the prior year.

Year ended December 31,

Costs and expenses

Segment operating (loss) income

The increase in revenue in 2020 is due to a note that went into default during the second quarter of 2020, triggering a higher interest rate in 2020.

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

The increase in costs and expenses in 2020 is due to an allowance on our notes receivables due to the notes going into default.

In January 2021, we collected all the interest receivable on one of the notes in default.

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-basic and diluted excludes the impacts of interest expense, tax expense, depreciation and amortization, gain (loss) on its derivative liability, amortization of debt discount 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 Report.

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.

Adjusted EBITDA is a non-GAAP financial measure.

We define Adjusted EBITDA as net income (loss) attributable to common stockholders calculated in accordance with GAAP, adjusted for the impact of stock-based compensation expense, acquisition related expenses, non-recurring professional fees in relation to litigation and other non-recurring expenses, depreciation and amortization, amortization of debt discounts and equity issuance costs, loss on extinguishment of debt, interest expense, income taxes and certain other non-cash items.

Below we have provided a reconciliation of Adjusted EBITDA per share to the most directly comparable GAAP measure, which is net income (loss) per share.

We believe that the disclosure of Adjusted EBITDA provides investors with a better comparison of our period-to-period operating results.

We exclude the effects of certain items 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 comparable view of the underlying dynamics of our operations.

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 GAAP basis.

This supplemental financial information should be considered in addition to, not in lieu of, our consolidated financial statements.

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Adjustment for loss from discontinued operations

Loss from continuing operations attributable to

common stockholders

Share-based expense

Loss from continuing operations attributable to common stockholders

Deemed dividend

Stock-based compensation

Depreciation and amortization

Impairment of Desert Created investment

Amortization of debt discount and equity issuance costs

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Interest expense

Gain on warrant derivative liability

Loss on investment of Desert Created

Gain on sale of building

Loss on investment

(Gain) loss on derivative liability

Acquisition related expenses

Nonrecurring professional services

Total adjustments

Adjusted EBITDA

Per share basic and diluted:

Adjusted EBITDA

Weighted-average shares outstanding:

Adjusted EBITDA

Sources of liquidity

Our sources of liquidity include cash generated from operations, the cash exercise of common stock options and warrants, debt, and the issuance of common stock or other equity-based instruments.

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

In September 2019, we completed a $1,506,000 private placement with certain accredited investors pursuant to the 2019 12% Notes and the 2019 12% Warrants).

In July 2019, we completed a $855,000 private placement pursuant to the SBI Note.

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.

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.

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

We anticipate our more significant uses of resources will include funding operations, developing infrastructure, and business acquisitions.

In December 2020, we received $1,940,000 in cash in a private placement with certain accredited investors pursuant to which we issued and sold 10% senior convertible promissory notes.

In July 2020, we received $815,000 in cash by issuing 2,046,196 shares of our common stock and 1,534,647 warrants to purchase common stock.

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.

In May 2020, we received $1,421,934 from the sale of our corporate office building.

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 $224,994 and $8.0 million, respectively, as of and December 31, 2019 and 2018.

We had cash of approximately $750,218 and $122,390, respectively, at December 31, 2020 and 2019.

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

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Net cash used in operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activitie

Net cash used in operating activities decreased in 2019 by $397,546 compared to 2018, primarily due to reduction of expenses and personnel.

Where possible, we continue to use non-cash equity-based instruments to obtain consulting services and compensate employees.

Net cash used in investing activities in 2019 relates primarily to purchasing fixed assets, including the opening of STOA Wellness retail location.

In the 2018, we purchased fixed assets and invested in the Flowhub SAFE.

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 (used in) financing activities

Net cash used in operating activities decreased slightly in 2020 due to an increase in revenue as well as the acquisition of SevenFive Farm which provides positive operating cash flows.

Net cash provided by investing activities for the year ended December 31, 2020 consisted of $1,421,934 from the sale of the office building in Denver, CO and purchase of equipment of $314,771.

Net cash provided by financing activities are primarily related to the sale of common stock and warrants and proceeds from notes payable.

This is offset by paying off debt.

Capital Resources

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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.

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

Off-Balance Sheet Arrangements

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These estimates are subject to an inherent degree of uncertainty.

Purchase Accounting for Acquisitions

Acquisition of a business requires companies to record assets acquired and liabilities assumed at their respective fair market values at the date of acquisition.

Any amount of the purchase price paid that is in excess of the estimated fair value of the net assets acquired is recorded as goodwill.

We determine fair value using widely accepted valuation techniques, primarily discounted cash flows and market multiple analyses.

These types of analyses require us to make assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, discount rates and cash flow.

If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future.

Accounting for Discontinued Operations

We regularly review underperforming assets to determine if a sale or disposal might be a better way to monetize the assets.

When an asset group is considered for sale or disposal, we review the transaction to determine if or when the entity qualifies as a discontinued operation in accordance with the criteria of FASB ASC Topic 205-20 Discontinued Operations. The FASB has issued authoritative guidance that raises the threshold for disposals to qualify as discontinued operations.

Under this guidance, a discontinued operation is (1) a component of an entity or group of components that have been disposed of or are classified as held for sale and represent a strategic shift that has or will have a major effect on an entitys operations and financial results, or (2) an acquired business that is classified as held for sale on the acquisition date.

Business Combinations

Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition.

The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions provided by management, including expected future cash flows.

We allocate any excess purchase price over the fair value of the net assets and liabilities acquired to goodwill.

Identifiable intangible assets with finite lives are amortized over their useful lives.

Acquisition-related costs, including advisory, legal, accounting,

valuation and other costs, are expensed in the periods in which the costs are incurred.

The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.

Goodwill and Intangibles

Goodwill represents the excess of purchase price over the fair value of identifiable net assets acquired in a business combination.

Goodwill and long-lived intangible assets are tested for impairment at least annually in accordance with the provisions of ASC No.

350, Intangibles-Goodwill and Other (“ASC No.

350 requires that goodwill be tested for impairment at the reporting unit level (operating segment or on level below an operating segment) on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carry value.

Application of the goodwill impairment test requires judgement, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit.

We test goodwill annually in April, unless an event occurs that would cause the us to believe the value is impaired at an interim date.

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

Impairment of Long-lived Assets

We periodically evaluate whether the carrying value of long-lived assets has been impaired when circumstances indicate the carrying value of those assets may not be recoverable.

We periodically evaluate whether the carrying value of property and equipment has been impaired when circumstances indicate the carrying value of those assets may not be recoverable.

The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.

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Our impairment analyses require management to apply judgment in estimating future cash flows as well as asset fair values, including forecasting useful lives of the assets, assessing the probability of different outcomes, and selecting the discount rate that reflects the risk inherent in future cash flows.

If the carrying value is not recoverable, we assess the fair value of long-lived assets using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third party comparable sales and discounted cash flow models.

If the carrying value is not recoverable, we assess the fair value of long-lived assets using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third-party comparable sales and undiscounted cash flow models.

If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future.

Accounting for Discontinued Operations

We regularly review underperforming assets to determine if a sale or disposal might be a better way to monetize the assets.

The FASB has issued authoritative guidance that raises the threshold for disposals to qualify as discontinued operations.

Under this guidance, a discontinued operation is (1) a component of an entity or group of components that have been disposed of or are classified as held for sale and represent a strategic shift that has or will have a major effect on an entity’s operations and financial results, or (2) an acquired business that is classified as held for sale on the acquisition date.

Debt with Equity-linked Features

We may issue debt that has separate warrants, conversion features, or no equity-linked attributes.

When we issue debt with warrants, we determine the value of the warrants using the Black-Scholes Option Pricing Model (Black-Scholes) or the Binomial Model, using the stock price on the date of issuance, the risk-free interest rate associated with the life of the debt, and the estimated volatility of our stock.

When we issue debt with a conversion feature, we must first assess whether the conversion feature meets the requirements to be treated as a derivative.

Debt with warrants – When we issue debt with warrants, we treat the warrants as a debt discount, record as a contra-liability against the debt, and amortize the balance over the life of the underlying debt as amortization of debt discount expense in the consolidated statements of operations.

The offset to the contra-liability is recorded as additional paid in capital in our consolidated balance sheets.

If the debt is retired early, the associated debt discount is then recognized

immediately as amortization of debt discount expense in the consolidated statement of operations.

The debt is treated as conventional debt.

We determine the value of the non-complex warrants using the Black-Scholes Option Pricing Model (“Black-Scholes”) using the stock price on the date of issuance, the risk-free interest rate associated with the life of the debt, and the volatility of our stock.

For warrants with complex terms, we use the binomial lattice model to estimate their fair value.

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

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.

Convertible Debt - When we issue debt with a conversion feature, we must first assess whether the conversion feature meets the requirements to be treated as a derivative.

If the conversion feature within convertible debt meets the requirements to be treated as a derivative, we estimate the fair value of the convertible debt derivative using Black-Scholes upon the date of issuance, using the stock price on the date of issuance, the risk free interest rate associated with the life of the debt, and the estimated volatility of our stock.

If the conversion feature is not treated as a derivative, we assess whether it is a beneficial conversion feature (“BCF”).

A BCF exists if the conversion price of the convertible debt instrument is less than the stock price on the commitment date.

This typically occurs when the conversion price is less than the fair value of the stock on the date the instrument was issued.

The value of a BCF is equal to the intrinsic value of the feature, the difference between the conversion price and the common stock into which it is convertible.

A BCF exists if the effective conversion price of the convertible debt instrument is less than the stock price on the commitment date.

This typically occurs when the effective conversion price is less than the fair value of the stock on the date the instrument was issued.

The value of a BCF is equal to the intrinsic value of the feature, the difference between the effective conversion price and the fair value of the common stock into which it is convertible.

Equity-based Payments

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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

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.

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.

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-K

Item 7. Management’s Discussion and Analysis