What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-17 compared with 2020-11-12 · 53 added, 110 removed, 81 unchanged (67% of the section changed)

1 unchanged sentence

This Management’s Discussion and Analysis (“MD&A”) is intended to provide an understanding of our financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year.

This discussion should be read in conjunction with the Condensed Consolidated Unaudited Financial Statements contained in this Quarterly Report on Form 10-Q and the Condensed Consolidated Financial Statements and related notes and MD&A appearing in our Annual Report on Form 10-K as of and for the year ended December 31, 2019, as amended.

This discussion should be read in conjunction with the Condensed Consolidated Unaudited Financial Statements contained in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and related notes and MD&A appearing in our Annual Report on Form 10-K as of and for the year ended December 31, 2020, as amended.

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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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 experienced 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.

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

Our Products, Services and Customers

Through our three reporting segments Operations Consulting and Products, Cultivation and Capital Investments, we provide products, services and capital to the regulated cannabis industry and non-cannabis customers, which include the following:

Through our two reporting segments Operations Consulting and Products, and Cultivation, we provide products and services to the regulated cannabis industry and non-cannabis customers, which include the following:

Operations Consulting and Products (“Operations Segment”)

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

During the three and nine months ended September 30, 2020, 60% and 76% of NBC’s revenue was with one and four customers, respectively.

During the three months ended March 31, 2021 and 2020, 69% and 73% of NBC’s revenue was with three customers, respectively.

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

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Cultivation (“Cultivation Segment”)

Through our new acquisition of SevenFive Farm (“SevenFive”), we operate a licensed light deprivation greenhouse cultivation facility.

Through our acquisition of SevenFive Farm (“SevenFive”), we operate a 17,000 square foot licensed light deprivation greenhouse cultivation facility.

We believe our production capability is sufficient to meet the diverse needs of our recreational consumers in Colorado, from cost-effective, high-yield inputs to sophisticated and dried cannabis flower.

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

Capital Investments (“Investments Segment”)

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

Accordingly, we may provide debt or equity capital through investing in businesses using cash or shares of our common stock.

During the three months ended March 31, 2021, 18% of SevenFive’s revenue was with one customer.

Results of Operations

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

Consolidated Results

Three months ended September 30,

Costs and expenses

Other income (expense)

Net loss from continuing operations

Gain (loss) from discontinued operations

Nine months ended September 30,

Three months ended March 31,

Costs and expenses

Other income (expense)

Other expense (income)

Net loss from continuing operations

Loss from discontinued operations

Revenue increased for both our Operations Consulting and Investments Segments.

The addition of our Cultivation Segment contributed to the increase in sales.

Revenue decreased for our Operations Consulting Segment.

The addition of our Cultivation Segment contributed to an increase in sales.

See Segment discussions below for further details.

Costs and expenses

Three months ended September 30,

Cost of sales

Selling, general and administrative

Stock-based compensation expense

Professional fees

Depreciation and amortization

Nine months ended September 30,

Cost of sales

Three months ended March 31,

Cost of revenues

Selling, general and administrative

Stock-based compensation expense

Stock-based compensation

Professional fees

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See Segment discussions below for further details.

Selling, general and administrative expense decreased for the three months ended September 30, 2020 as compared to September 30, 2019 due to a reduction in employees during the third quarter of 2020 and a concerted effort by management to reduce expenses.

Selling, general and administrative expense stayed relatively static for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.

Selling, general and administrative expense decreased for the three months ended March 31, 2021 as compared to March 31, 2020 due to a reduction in employees throughout 2020, a reduction in legal fees in the first quarter of 2021 and a concerted effort by management to reduce expenses.

Stock-based compensation expense 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

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 three and nine months ended September 30, 2020 as compared to September 30, 2019 is due to the restructuring of the Company in the first quarter of 2020 and the reduction in workforce.

Employee awards are issued under our 2020 Omnibus Incentive Plan, which was approved by shareholders on November 23, 2020 and 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 months ended March 31, 2021 as compared to March 31, 2020 is due to the reduction in workforce and the decrease in the amount of options we issue on a quarterly basis.

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 stock-based compensation pursuant to agreements with Michael Feinsod for serving as the Executive Chairman of our Board.

Professional fees consist primarily of accounting and legal expenses and increased for the three months and nine ended September 30, 2020 as compared to the three and nine months ended September 30, 2019 due to increased activity related to acquisitions, fund raisings and litigation.

Professional fees consist primarily of accounting and legal expenses and decreased for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 due to the hiring of internal counsel and switching outside counsel during the third quarter of 2020 to be more cost effective.

Other Expense

Three months ended September 30,

Amortization of debt discount and equity issuance costs

Interest expense

Debt extinguishment

Gain on derivative liability

Nine months ended September 30,

Amortization of debt discount and equity issuance costs

Three months ended March 31,

Amortization of debt discount

Interest expense

Debt extinguishment

Gain on derivative liability

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

Loss on extinguishment of debt

Loss (gain) on derivative liability

Other expense (income), net

Amortization of debt discount stayed consistent in 2021 compared to 2020.

Interest expense decreased in 2021 due to the new debt entered in the fourth quarter of 2020 and the payoff of the old debt.

The new debt has an interest rate of 10% compared to the prior notes in which the interest rate was 15%.

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, the exchange of the 12% Notes into the 15% Notes and the extension of a portion of 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.

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 that occurred during the first quarter of 2020.

The other expense (income) in 2020 relates to the gain on the sale of the building we recognized as a result of the sale of our corporate office building in March 2020.

Operations Consulting and Products

Three months ended September 30,

Costs and expenses

Nine months ended September 30,

Three months ended March 31,

Costs and expenses

The decrease in NBC revenues for the three months ended September 30, 2020 as compared to September 30, 2019 is due to a decrease in both service and product revenues due to COVID-19.

The increase in NBC revenues for the nine months ended September 30, 2020 is primarily related to an increase in product sales throughout 2020 with COVID-related decreases in services and application fees completed in 2020.

Segment operating income

The decrease in NBC revenues for the three months ended March 31, 2021 as compared to March 31, 2020 is due to a decrease in both service and product revenues.

Ongoing management revenue remained consistent with prior year.

The lower margin is due to increased product sales and a decrease in applications.

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

Three months ended September 30,

Costs and expenses

Nine months ended September 30,

Costs and expenses

This is a new segment as of September 30, 2020;

therefore, all amounts are an increase from the prior year.

Three months ended September 30,

Costs and expenses

Nine months ended September 30,

The decrease in expenses is in direct relation to the decrease in revenues.

The segment operating income remained consistent with prior year due to the decrease in product sales which has a lower margin.

Three months ended March 31,

Costs and expenses

The decrease in investments revenue for the three months ended September 30, 2020 as compared to September 30, 2019 is due to one of the three notes being paid off in December 2019.

The increase in revenues for the nine months ended September 30, 2020 as compared to September 30, 2019 is related to three new notes receivables that were executed in the first quarter of 2019.

The increase in 2020 is due to a note that went into default during the second quarter of 2020, resulting in 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 one of our note receivables due to the note going into default in the second quarter of 2020.

This is a new segment as of the second quarter of 2020;

therefore, all amounts are an increase from the prior quarter.

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 and developing infrastructure.

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.

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.

We anticipate our significant uses of resources will include funding operations and developing infrastructure.

In April 2021, we received $2,300,000 in cash in a private placement with certain accredited investors pursuant to the 10% Notes to be used for the acquisition of dispensaries (See Note 13 of the accompanying condensed consolidated financial statements).

In February 2021, we received $1,660,000 in cash in a private placement with certain accredited investors pursuant to the 10% Notes.

Sources and uses of cash

We had cash of $734,305 and $122,390 as of September 30, 2020 and December 31, 2019, respectively.

We had cash of $840,092 and $750,218 as of March 31, 2021 and December 31, 2020, respectively.

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 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 nine months ended September 30, 2020 consisted of proceeds of $1,421,134 from the sale of the office building in Denver, CO and purchases of equipment of $156,344.

Net cash used in investing activities for the nine months ended September 30, 2019 consisted of issuing notes receivable of $705,000 as well as the purchase of equipment of $296,091.

Net cash provided by financing activities for the nine months ended September 30, 2020 related to proceeds of $1,500,000 from a notes payable offset by payment on a notes payable of $975,000.

We also received $3,000,000 in proceeds related to the sale of our common stock and $90,000 from the exercise of warrants.

Net cash used in financing activities for the nine months ended September 30, 2019 related to the payment on notes payable of $5,743,000, proceeds from the sale of common stock and warrants of $2,604,355, proceeds from notes payable of $1,155,000 and proceeds from the exercise of stock options of $188,770.

Net cash (used in) provided by investing activities

Net cash provided by financing activities

Net cash used in operating activities decreased slightly in 2021 due to the acquisition of SevenFive Farm which provides positive operating cash flows.

Net cash (used in) provided by investing activities for the three months ended March 31, 2021 decreased from March 31, 2020 due to the sale of the building in the first quarter of 2020.

Net cash used in investing activities for the three months ended March 31, 2021 consisted of purchase of property and equipment for SevenFive Farms, offset by the sale of our investment during the first quarter.

Net cash used in financing activities for the three months ended March 31, 2021 related to the payment on notes payable of $200,000, proceeds from notes payable of $1,660,000, and proceeds from the exercise of stock options of $135,002.

Capital Resources

We had no material commitments for capital expenditures as of September 30, 2020.

We had no material commitments for capital expenditures as of March 31, 2021.

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

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The following table reconciles Adjusted EBITDA to the most directly comparable GAAP measure, which is net loss.

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

Net loss attributable to common stockholders

Adjustment for (gain) loss from discontinued operations

Adjustment for loss from discontinued operations

Loss from continuing operations attributable to common stockholders

Stock-based compensation

Acquisition related expenses

Non-recurring professional services

Depreciation and amortization

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Gain on sale of building

Gain on warrant derivative liability

Provision for income taxes

Loss (gain) on derivative liability

Acquisition related expenses

Total adjustments

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Actual amounts and results could differ from these estimates made by management.

Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, as amended, and Note 1 to the Condensed Consolidated Financial Statements in this Form 10-Q.

Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended December 31, 2020, and Note 1 to the Condensed Consolidated Financial Statements in this Form 10-Q.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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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 2. Management’s Discussion and Analysis