The Share Exchange Agreement has been accounted for as a reverse acquisition and recapitalization using accounting principles applicable to reverse acquisition. Under reverse acquisition accounting, ACS, the legal acquired entity, is treated as the accounting acquirer of the Company. Consequently, ACS’ financial results are disclosed for all periods presented, while the Company’s financial results have only been consolidated with those of the existing ACS business from August 14, 2013 onward. All outstanding shares have been restated to reflect the effect of the Agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the results of Advanced Cannabis Solutions, Inc. (“ACS’) and its two wholly owned subsidiary companies, ACS Colorado Corp. and Advanced Cannabis Solutions Corporation, from the dates of their incorporation and for Promap Corporation from August 14, 2013 onwards. All intercompany balances and transactions have been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the Inception to Date period ended December 31, 2013 (the “2013 Annual Report”), as amended, filed with the Commission on April 29, 2014. It is management’s opinion, however, that all material adjustments (consisting of normal recurring adjustments), have been made which are necessary for a fair financial statements presentation. The financial statements include all adjustments (consisting of normal recurring accruals) necessary to make the financial statements not misleading as required by Regulation S-X, Rule 10-01. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results of operations for the year ended December 31, 2014.
Development Stage Operations
The Company is a development stage company in accordance with Financial Accounting Standards Codification (“ASC”) 915 "Development Stage Entities". Among the disclosures required as a development stage company are that our financial statements are identified as those of a development stage company, and that the statements of operations, changes in stockholders' equity and cash flows disclose activity since the date of our Inception (June 5, 2013) as a development stage company.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the related notes at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less as cash equivalents. All cash is maintained with major financial institutions in the United States. Deposits may exceed the amount of insurance provided on such deposits.
Accounts Receivable
The Company reviews accounts receivable periodically for collectability and establishes an allowance for doubtful accounts and records bad debt expense when deemed necessary. Accounts receivable are primarily contract-based billings to tenants. No provision for doubt accounts had been made at March 31, 2014.
Other Receivables
The Company recognizes tenant rentals on a straight-line basis over the reasonably assured lease term. The Company's tenant rental agreements provide for scheduled monthly rentals to vary during the lease term. Tenant rentals that have been earned on straight line basis over the reasonably assured lease term but which have not been invoiced as yet under the terms of the tenant lease are recognized as other receivables. Tenant rental income that has been earned on a straight line basis but that will not be invoiced to tenants under the terms of the tenant rental agreement within twelve months of the balance sheet date have been classified in long term assets as other receivables. Tenant rental income earned but not invoiced at March 31, 2014 totaled $19,765.
Property and Equipment
Property and equipment are recorded at cost and depreciated under straight line methods over each item's estimated useful life.
We review our property and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.
Maintenance and repairs of property and equipment are charged to operations as incurred. Major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts and any gain or loss is included in operations.
Other Assets – Deferred Financing Costs
Costs with respect to the issue of common stock, warrants, stock options or debt instruments by the Company are initially deferred and ultimately offset against the proceeds from such equity transactions or amortized as debt discount over the term of any debt funding if successful or expensed if the proposed equity or debt transaction is unsuccessful.
As of March 31, 2014 we had recognized $115,000 of deferred financing costs. On January 10, 2014 the Company paid $15,000 to Full Circle Capital Corporation as a deposit for deal related expenses related to future financing transactions. On January 21, 2014 as part of the $500,000 proceeds from the warrant being issued to Full Circle Capital Corporation, $100,000 was retained by Full Circle Capital Corporation out of the total consideration of $500,000 to cover legal and deal related expenses of future financing transactions.
Long-Lived Assets
In accordance with ASC 350, the Company regularly reviews the carrying value of intangible and other long-lived assets for the existence of facts or circumstances, both internally and externally, that suggest impairment. If impairment testing indicates a lack of recoverability, an impairment loss is recognized by the Company if the carrying amount of a long-lived asset exceeds its fair value.
Common Stock Purchase Warrants
The Company accounts for common stock purchase warrants in accordance with ASC Topic 815, “Accounting for Derivative Instruments and Hedging Activities”. As is consistent with its accounting for stock compensation and embedded derivative instruments, the Company’s cost for warrants is estimated at the grant date based on each warrant’s fair-value as calculated by the Black-Scholes option-pricing model value method for valuing the impact of the expense associated with these warrants.
Revenue recognition
Revenue is recognized on an accrual basis as earned under contract terms. Specifically, revenue from leasing operations is recognized based upon the payment terms within lease contracts, and collectability is reasonably assured.
The Company recognizes tenant rentals on a straight-line basis over the reasonably assured lease term. The Company's tenant rental agreements provide for scheduled rent scheduled monthly rentals to vary during the lease term. Tenant rentals that have been earned on straight line basis over the reasonably assured lease term but which have not been invoiced as yet under the terms of the tenant lease are recognized as other receivables. Tenant rental income that has been earned on a straight line basis but that will not be invoiced to tenants under the terms of the tenant rental agreement within twelve months of the balance sheet date have been classified in long term assets as other receivables.
Advertising costs
Advertising costs are expensed as incurred. No advertising costs were incurred during the three month period ended March 31, 2014.
Income tax
The Company accounts for income taxes pursuant to ASC 740. Under ASC 740 deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Comprehensive Income (Loss)
Comprehensive income is defined as all changes in stockholders' equity (deficit), exclusive of transactions with owners, such as capital investments. Comprehensive income includes net income or loss, changes in certain assets and liabilities that are reported directly in equity such as translation adjustments on investments in foreign subsidiaries and unrealized gains (losses) on available-for-sale securities. From our Inception there have been no differences between our comprehensive loss and net loss.
Net income (loss) per share
The net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares of common outstanding in accordance with FASB ASC 260, “Earnings Per Share.” Dilutive earnings or loss per share is computed using the weighted average common shares and diluted potential common shares outstanding. Warrants and common stock issuable upon the conversion of the Company's convertible notes payable have not included in the computation as the effect would be anti-dilutive and would decrease the loss per share at the Company has incurred losses in all periods since Inception.
Fair Value Measurements
ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange.
Level 2 – Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts, or priced with models using highly observable inputs.
Level 3 – Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value of financial transmission rights.
Our financial instruments consist of cash, accounts receivable, other receivables, prepaid expenses, deferred financing costs, accounts payables and accrued expenses, notes payable and tenant deposits. The carrying values of these financial instruments approximate their fair value due to their short maturities.
Business Segments
Following the sale of its oil and gas mapping operations effective December 31, 2013, during the quarter ended March 31, 2014, the Company operated one reportable business segment – its real estate leasing business.
Recently Issued Accounting Standards
We have reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial statements.
Reclassifications
Certain reclassifications have been made to the prior period financial statements to conform to the 2014 presentation. The reclassifications had no effect on net loss, total assets, or total stockholders’ equity.
3. GOING CONCERN
The financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future.
The Company has incurred a loss since Inception (June 5, 2013) resulting in an accumulated deficit of $1,284,825 as of March 31, 2014 and further losses are anticipated in the development of its business. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern.
The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and, or, obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. There is no guarantee that the Company will be successful in achieving these objectives.
4. SHARE EXCHANGE AGREEMENT
On August 14, 2013, pursuant to a Share Exchange Agreement (the “The Share Exchange Agreement”), Promap Corporation (the “Predecessor Company” or “Promap”) acquired approximately 94% of the outstanding common stock of Advanced Cannabis Solutions, Inc. (“ACS”) in exchange for 12,400,000 shares of the Company’s common stock.
In connection with the Share Exchange Agreement:
|
●
|
Promap purchased 8,000,000 shares of its outstanding common stock from a former officer of the Company for $100,000. These shares were then cancelled and returned to the status of authorized but unissued shares;
|
|
●
|
Robert Frichtel was appointed as a director and the Principal Executive and Financial Officer of the Company;
|
|
●
|
Roberto Lopesino was appointed Vice President of the Company; and
|
|
●
|
Steven Tedesco and Robert Carrington, Jr., resigned as officers and directors of Pronap.
|
As a result of the acquisition, ACS is Promap’s 94% owned subsidiary and the former shareholders of ACS own approximately 88% of Promap’s common stock. On November 9, 2013, Promap acquired the remaining 6% of the share capital of Advanced Cannabis Solutions, Inc.
The Agreement has been accounted for as a reverse acquisition and recapitalization using accounting principles applicable to reverse acquisition. Under reverse acquisition accounting, ACS, the legal acquired entity, is treated as the accounting acquirer of the Predecessor Company. Consequently, ACS’ financial results are disclosed for all periods presented, while the Company’s financial results have only been consolidated with those of the existing ACS business from August 14, 2013 onward. All outstanding shares have been restated to reflect the effect of the Agreement.
The following table summarizes the estimated fair values of Promap’s assets acquired and liabilities assumed by the existing ASC business as on August 14, 2013:
|
Cash
|
|
$ |
1,790 |
|
|
Accounts receivable
|
|
|
8,370 |
|
|
Accounts payable
|
|
|
(20,823 |
) |
|
The fair value of Promap’s net liabilities at the August 14, 2013 recapitalization
|
|
$ |
(10,663 |
) |
5. DISCONTINUED OPERATIONS
Prior to December 31, 2013, the Company provided hard copy and digital format oil and gas production maps for the oil and gas industry. On December 31, 2013, the Company sold its oil and gas mapping business to its former Chief Executive Officer in consideration for his agreement to assume all liabilities associated with the mapping business. At the time of the transfer, the mapping business had assets of $2,729 and liabilities of $2,277. The Company recognized a loss on the transfer of $452 which was charged to equity.
The components of the discontinued operations are as follows:
| |
|
June 5, 2013
(Inception) to
March 31,
2014
|
|
|
|
|
$ |
455 |
|
|
Cost of services
|
|
|
183 |
|
|
Gross profit
|
|
|
272 |
|
|
Operating expenses (credits)
|
|
$ |
|
|
|
General administrative
|
|
|
(1,685 |
) |
|
Total operating expenses (credits)
|
|
|
(1,685 |
) |
|
Net income
|
|
|
1,957 |
|
The credit to general administrative expenses arose due the write back of a provision for doubtful debts recorded in a prior period.
6. ACCOUNTS RECEIVABLE
Accounts receivable consist of:
| |
|
March 31,
2014
|
|
|
December 31,
2013
|
|
| |
|
|
|
|
|
|
|
Contract based rent amounts invoiced to tenant
|
|
$ |
- |
|
|
$ |
- |
|
|
Contract based costs re-billed to tenant for facility improvements
|
|
|
47,454 |
|
|
|
1,595 |
|
| |
|
$ |
47,454 |
|
|
$ |
1,595 |
|
7. PROPERTY AND EQUIPMENT
On December 31, 2013 the Company purchased a property in Pueblo County, Colorado for $450,000. The property, which is located in a suburb of Pueblo, consists of approximately three acres of undeveloped land, a 5,000 square foot steel building, and a parking lot. The purchase price was allocated $12,340 for land and $437,660 for buildings and related equipment.
The purchase price was paid for cash of $280,000 and a promissory note in the principal of $170,000. The note bears interest at 8.5% interest per annum and is payable in monthly installments, including principal and interest, in the amount of $1,674. All unpaid principal and interest is due December 31, 2018. The promissory note is convertible at any time on or before the maturity date at $5 per common share
The property is zoned for growing marijuana and is leased to a licensed medical marijuana grower through December 31, 2022 on a triple net lease basis. The Company has agreed with the tenant to begin construction of a light deprivation greenhouse on the property at a cost not to exceed $400,000, with construction scheduled to begin in the second quarter of 2014.
The Company incurred $8,250 in leasehold improvements on the property during the three months ended March 31, 12014.
Depreciation on the Pueblo building facility began effective January 1, 2014. Depreciation is calculated on a straight line basis over 30 years. The depreciation expense of the three months ended March 31, 2014 was $3,116.
The following table summarizes Property and Equipment and Related Accumulated Depreciation :
| |
|
March 31,
2014
|
|
|
December 31,
2013
|
|
| |
|
(unaudited)
|
|
|
(audited)
|
|
| |
|
|
|
|
|
|
|
Land
|
|
$ |
12,340 |
|
|
$ |
12,340 |
|
|
Buildings and Equipment
|
|
|
448,663 |
|
|
|
440,413 |
|
| |
|
|
461,003 |
|
|
|
452,753 |
|
|
Less: Accumulated Depreciation
|
|
|
(3,116 |
) |
|
|
- |
|
|
Property and Equipment, net
|
|
$ |
457,887 |
|
|
$ |
452,753 |
|
8. OTHER RECIVABLES
The Company recognizes tenant rentals on a straight-line basis over the reasonably assured lease term. The Company's tenant rental agreements provide for scheduled rent increases during the lease term. Tenant rentals that have been earned on straight line basis over the reasonably assured lease term but which have not been invoiced as yet under the terms of the tenant lease are recognized as other receivables. Tenant rental income that has been earned on a straight line basis but that will not be invoiced to tenants under the terms of the tenant rental agreement within twelve months of the balance sheet date have been classified in long term assets as other receivables. Tenant rental income earned but not invoiced at March 31, 2014 totaled $19,765.
9. OTHER ASSETS – DEFERRED FINANCING COSTS
As of March 31, 2014 we had recognized $115,000 of deferred financing costs. On January 10, 2014 the Company paid $15,000 to Full Circle Capital Corporation as a deposit for deal related expenses related to future financing transactions. On January 21, 2014 as part of the $500,000 proceeds from the warrant being issued to Full Circle Capital Corporation, $100,000 was retained by Full Circle Capital Corporation out of the total consideration of $500,000 to cover legal and deal related expenses of future financing transactions.
10. CONVERTIBLE NOTES PAYABLE
12% Convertible notes
December 2013 Issuance
The Company issued $530,000 in convertible notes on December 27, 2013. These notes have an interest rate of 12%, payable quarterly, and mature on October 31, 2018. They are convertible at any time on or before the maturity date at $5 per common share. After November 1, 2015, the Company can force conversion of these notes if the trading stock price has exceeded $10 for 20 consecutive trading days. The loan issuance costs and the value of the convertible feature totaling $278,853 will be amortized over the life of the notes from December 27, 2013 through October 31, 2018 on a straight line basis that approximates the effective interest method.
January 2014 Issuance
On January 29, 2014, the Company issued a further $1,605,000 in convertible notes to a group of accredited investors. These notes have an interest rate of 12%, paid quarterly, and mature on October 31, 2018. They are convertible at any time on or before the maturity date at $5 per common share. The Company can force conversion of these notes if the trading stock price has exceeded $10 per share for 20 consecutive trading days. The Company paid cash commission of $160,500 and other debt issuance costs of $32,100 to the registered broker dealer who placed the issue. The Company further issued 32,100 warrants to the broker dealer as additional compensation with an exercise of $5 and an intrinsic value of $280,875. The intrinsic value of the convertible feature was $2,808,750, but the total debt discount on the issuance is limited to $1,605,000, the principal balance of the convertible notes issued. The loan issuance costs and the value of the convertible feature, limited to a total of $1,605,000, will be amortized over the life of the notes from January 29, 2014 through October 31, 2018 on a straight line basis that approximates the effective interest method.
Conversion of Notes Payable
On March 31, 2014, four note holders converted their loan notes with principal balances totaling $255,000 and accrued interest of $3,669 into 51,733 shares of the Company’s common stock at a conversion price of $5 per share. The unamortized debt discount relating these convertible notes payable was amortized in full at the date of the conversion.
8 1/2% Convertible Note Payable
The Company executed a mortgage on their Pueblo West property in the amount of $170,000 at 8 1/2% on December 31, 2013, amortizable over 15 years with a maturity date of December 31, 2018. The note is convertible at any time on or before the maturity date at $5 per common share. The value of the convertible feature, calculated at $77,104, was recognized as a debt discount and will be amortized over the life of the note from December 31, 2013 through December 31, 2018 on a straight line basis that approximates the effective interest method.
During the three months ended March 31, 2014 we repaid principal balances of $943 in respect of this convertible note.
Convertible notes payable:
| |
|
Principal
|
|
|
Debt
|
|
|
Accrued
|
|
|
|
|
| |
|
Balance
|
|
|
Discount
|
|
|
Interest
|
|
|
Total
|
|
|
Balance at December 31, 2013
|
|
$ |
700,000 |
|
|
$ |
(355,163 |
) |
|
$ |
871 |
|
|
$ |
345,708 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued in the period
|
|
|
1,605,000 |
|
|
|
(1,605,000 |
) |
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Converted into shares of common stock
|
|
|
(255,000 |
) |
|
|
- |
|
|
|
(3,669 |
) |
|
|
(258,669 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt discount
|
|
|
- |
|
|
|
320,422 |
|
|
|
- |
|
|
|
340,422 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of loan principal
|
|
|
(943 |
) |
|
|
- |
|
|
|
- |
|
|
|
(943 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest accrued during period
|
|
|
- |
|
|
|
- |
|
|
|
49,274 |
|
|
|
49,274 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid during period
|
|
|
- |
|
|
|
- |
|
|
|
(46,476 |
) |
|
|
(46,476 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2014
|
|
|
2,049,057 |
|
|
|
(1,640,535 |
) |
|
|
- |
|
|
|
408,522 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Current portion
|
|
|
(5,927 |
) (1) |
|
|
- |
|
|
|
- |
|
|
|
(5,927 |
) |
|
Long-term debt
|
|
$ |
2,043,130 |
|
|
$ |
(1,640,535 |
) |
|
$ |
- |
|
|
$ |
402,595 |
|
(1) The current portion represents the principal balance payable on the 81/2% convertible note payable in the twelve months following the balance sheet date.
11. COMMITMENTS AND CONTINGENCIES:
Long term financing commitment
On January 21, 2014, we signed an agreement with Full Circle Capital Corporation (“Full Circle”), a closed-end investment company. The agreement provides that Full Circle will initially provide $7.5 million to us in the form of Senior Secured Convertible Notes, subject to certain named conditions. We can borrow an additional $22.5 million with the mutual agreement of Full Circle and ourselves.
At least 95% of any loan proceeds will be used to acquire properties which we will lease to licensed marijuana growers.
Full Circle will provide us with the initial $7.5 million when:
● Full Circle agrees on the location of property to be purchased;
● The specified property’s appraised value is satisfactory to Full Circle;
● A Phase I environmental inspection is completed to the satisfaction of Full Circle; and
● We are able to provide a first priority lien on the property in favor of Full Circle.
We can borrow an additional $22.5 million on terms acceptable to Full Circle and ourselves.
The six-year loan(s) will be secured by real estate acquired with the loan proceeds and will require interest-only payments at a rate of 12% a year, payable monthly.
The initial loan can, at any time, be converted into shares of our common stock at a conversion price of $5 per common share. It is contemplated that further advances will be convertible at 110% of the market price of our stock on the day of any advance, or the ten-day volume-weighted average price prior to the day of advance, whichever is lower.
The funding of the loan(s) is subject to the execution of additional documents between the parties.
Full Circle also purchased, for $500,000, warrants which allow Full Circle to purchase up to 1,000,000 shares of our common stock at any time on or prior to January 21, 2017 at a price of $5.50 per share. Of the $500,000 proceeds from the warrant being issued to Full Circle Capital Corporation, $100,000 was retained by Full Circle Capital Corporation to cover legal and deal related expenses of future financing transactions.
Operating Leases
The Company rents office space for its corporate needs. The Company entered into a month-to-month lease agreement in July 2013 to lease 2,000 square feet for an annual rate of $12,000, paid monthly. This lease was terminated effective April 1, 2014. The Company entered into a new three-year lease agreement effective April 4, 2014 for its corporate offices. The facility leased is 3,000 square feet with total payments due of $82,600 through March 31, 2017.
We paid $3,000 for the lease of our corporate offices for the quarter ended March 31, 2014.
Leasehold Improvements
We also agreed with the tenant of the property we purchased in Pueblo County, Colorado on December 31, 2013 to begin construction of an 8,000 sq. ft. light deprivation greenhouse on the property at a cost not to exceed $400,000. Construction is to begin no later than June 25, 2014. Depending on the availability of capital, we may construct up to five additional greenhouses on this property.
Legal
To the best of the Company’s knowledge and belief, no legal proceedings are currently pending or threatened.
12. STOCKHOLDERS’ EQUITY:
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock, with no par value. No shares of preferred stock have been issued or are outstanding, and no rights, privileges or preferences have been determined and designated by the board of directors.
Common Stock
The Company is authorized to issue 100,000,000 shares of no-par value common stock.
On June 30, 2013, the Company issued 12,400,000 shares of common stock to its founders for cash consideration of $0.001 per share.
Between July 11, 2013 and August 8, 2013, the Company issued 707,000 shares of its common stock and 707,000 Series A Warrants for cash consideration of $1.00 per share. Each Series A warrants entitles the holder to purchase one share of our common stock at a price of $10.00 per share. The Series A Warrants expire on the earlier of August 1, 2016, or twenty days following written notification from us that our common stock had a closing bid price at or above $12.00 for any ten consecutive trading days. This condition has been met as of April 30, 2014; however, the Company has chosen not to force this conversion feature at this time.
On August 14, 2013, following the reverse merger of ACS with the Company, existing shareholders of the Company owned 9,724,200 shares of its common shares However, 8,000,000 of these shares were then immediately purchased by the Company for cash consideration of $100,000 and cancelled.
Between August 14, 2013 and September 19 2013, the Company issued a further 266,000 shares and 266,000 Series A Warrants of its common stock for cash consideration of $1.00 per share. The Series A Warrants expire on the earlier of August 1, 2016, or twenty days following written notification from us that our common stock had a closing bid price at or above $12.00 for any ten consecutive trading days. This condition has been met as of April 30, 2014; however, the Company has chosen not to force this conversion feature at this time.
On December 9, 2013 the Company issued 40,000 shares of stock in return for professional services.
On January 5, 2014 the Company re-acquired 1,750,000 shares of our common stock for no consideration from existing common stockholders. The re-acquired shares were returned to our authorized but unissued share account. The $1,750 gain on the return of these shares of common stock has been charged to shareholders’ equity.
On March 31, 2014, four note holders converted their loan notes with principal balances totaling $255,000 and accrued interest of $3,669 into 51,733 shares of the Company’s common stock at a conversion price of $5 per share.
At March 31, 2014, the Company had 13,438,933 shares of its common stock issued and outstanding.
Warrants
Series A warrants
Between July 11, 2013 and August 8, 2013, the Company issued 707,000 shares of its common stock and 707,000 Series A Warrants for cash consideration of $1.00 per share. Each Series A warrants entitles the holder to purchase one share of our common stock at a price of $10.00 per share. The Series A Warrants expire on the earlier of August 1, 2016, or twenty days following written notification from us that our common stock had a closing bid price at or above $12.00 for any ten consecutive trading days. This condition has been met as of April 30, 2014; however, the Company has chosen not to force this conversion feature at this time.
Between August 14, 2013 and September 19 2013, the Company issued a further 266,000 shares and 266,000 Series A Warrants of its common stock for cash consideration of $1.00 per share. The Series A Warrants expire on the earlier of August 1, 2016, or twenty days following written notification from us that our common stock had a closing bid price at or above $12.00 for any ten consecutive trading days. This condition has been met as of April 30, 2014; however, the Company has chosen not to force this conversion feature at this time.
As at March 31, 2014, there were 973,000 Series A warrants issued and outstanding.
Series B Warrants
On December 27, 2013, the Company issued 53 series B warrants, convertible to 10,600 shares of our common stock, to a broker dealer as compensation for placement of convertible notes payable totaling $530,000. Each Series B warrant allows holder to purchase 200 shares of our common stock at an exercise price of $5.00 per share at any time on or before October 31, 2018. The value of these warrants, calculated as $21,271, has been recognized as part of the debt discount related to this note issuance and will be amortized over the life of the notes from December 27, 2013 through October 31, 2018 on a straight line basis that approximates the effective interest method.
On January 29, 2014, the Company issued 106.5 series B warrants, convertible to 32,100 shares of our common stock, to a broker dealer as compensation for placement of convertible notes payable totaling $1,605,000. Each Series B warrant allows holder to purchase 200 shares of our common stock at an exercise price of $5.00 per share at any time on or before October 31, 2018. The intrinsic value of these warrants, calculated as $280,875, has been recognized as part of the debt discount related to this note issuance and will be amortized over the life of the notes from January 29, 2014through October 31, 2018 on a straight line basis that approximates the effective interest method.
As at March 31, 2014, there were 213.5 Series B warrants issued and outstanding in respect of 42,700 shares of our common stock.
Series C Warrants
On January 21, 2014, Full Circle Capital Corporation purchased, for $500,000, warrants which allow Full Circle to purchase up to 1,000,000 shares of our common stock at any time on or prior to January 21, 2017 at a price of $5.50 per share. As part of the $500,000 proceeds from the warrant being issued to Full Circle Capital Corporation, $100,000 was retained by Full Circle Capital Corporation to cover legal and deal related expenses of future financing transactions.
As at March 31, 2014, there were 1,000,000 Series C warrants issued and outstanding.
The following table summarizes information about warrants outstanding March 31, 2014:
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Weighted Average Life of
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|
|
| |
|
|
|
|
Warrants
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|
|
Outstanding Warrants in
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|
| |
|
Exercise Price
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|
|
Outstanding
|
|
|
Months
|
|
Date of Expiration
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Series A Warrants
|
|
$ |
10.00 |
|
|
|
973,000 |
|
|
|
28 |
|
7/31/2016
|
|
Series B Warrants
|
|
|
5.00 |
|
|
|
42,700 |
|
|
|
56 |
|
10/31/2018
|
|
Series C Warrants
|
|
|
5.50 |
|
|
|
1,000,000 |
|
|
|
34 |
|
1/21/2017
|
| |
|
$ |
7.77 |
|
|
|
2,015,700 |
|
|
|
32 |
|
|
Summary of Shares of Common Stock and Warrants Issued and Outstanding
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Common Stock
|
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|
Warrants
|
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Balance at June 5, 2013 (Inception)
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|
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-
|
|
|
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-
|
|
|
Issued for cash proceeds of $985,400 – Series A warrants
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13,373,000
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|
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|
973,000
|
|
|
Issued as part of share exchange agreement
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|
|
9,724,200
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|
|
-
|
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|
Terminated as part of share exchange agreement
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(8,000,000
|
)
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-
|
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|
Issued as compensation under a consulting agreement
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40,000
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|
|
|
-
|
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Warrants issued to placement agent – Series B Warrants
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|
|
-
|
|
|
|
10,600
|
|
|
Balance at December 31, 2013
|
|
|
15,137,200
|
|
|
|
983,600
|
|
|
Re-acquired shares of common stock
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|
(1,750,000)
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|
|
|
-
|
|
|
Warrants issued to Full Circle for $500,000 consideration – Series C Warrants
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|
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-
|
|
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1,000,000
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|
|
Warrants issued to placement agent – Series B Warrants
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|
|
-
|
|
|
|
32,100
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|
Issued in settlement of $255,000 convertible notes payable and accrued interest of $3,669
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51,733
|
|
|
|
-
|
|
|
Balance at March 31, 2014
|
|
|
13,438,933
|
|
|
|
2,015,700
|
|
13. INCOME TAXES
The Company accounts for income taxes in accordance with FASB ASC 740 “Income Taxes”. Deferred income taxes reflect the net effect of (a) temporary difference between carrying amounts of assets and liabilities for financial purposes and the amounts used for income tax reporting purposes, and (b) net operating loss carry-forwards. No net provision for refundable Federal income tax has been made in the accompanying statement of loss because no recoverable taxes were paid previously. If there were any unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
No provision was made for income taxes for the period March 31, 2014. The Company, from the date of inception, has incurred net operating losses for tax purposes of approximately $1,284,825. The net operating loss carry-forward may be used to reduce taxable income through the year 2033.
There was no significant difference between reportable income tax and statutory income tax. A 100% valuation allowance has been established against the deferred tax asset, as the utilization of the loss carry-forwards cannot be reasonably assured. A reconciliation between the income taxes computed in the United States is as follows:
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March 31,
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2014
|
|
| |
|
|
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Deferred tax asset
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|
$ |
436,841 |
|
|
Valuation allowance
|
|
|
(436,841 |
) |
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|
$ |
- |
|
| |
|
|
|
|
|
US federal income tax rate
|
|
|
34.00 |
% |
|
Valuation allowance
|
|
|
(34.00 |
)% |
|
Provision for income tax
|
|
|
0.00 |
% |
14. RELATED PARTY TRANSACTIONS
On June 30, 2013 ACS sold 1,000,000 shares of its common stock to Robert Frichtel and 1,150,000 shares of its common stock to Roberto Lopesino at a price of $0.001 per share. On June 30, 2013 ACS also sold 10,250,000 shares of its common stock to an unaffiliated group of private investors at a price of $0.001 per share. On August 14, 2013, the shareholders of ACS exchanged 12,400,000 shares of their ACS for 12,400,000 shares of our common stock.
Subsequently, one unaffiliated person which received 2,000,000 shares in August 2013 transferred 100,000 shares to Christopher Taylor and 150,000 to another non-affiliated shareholder. The remaining 1,750,000 shares held by this person were returned to treasury and cancelled on January 14, 2014.
During the period from June 5th, 2013 to December 31, 2013 and the period from January 1, 2014 to March 31, 2014, sales of $8,362 and $0 respectively, were made to Admiral Bay Resources and Running Foxes Petroleum, Inc., companies controlled by Steven Tedesco, our Chief Executive Officer at that time. During the two period June 5th, 2013 to December 31, 2013 and the period from January 1, 2014 to March 31, 2014, we we paid employees of Atoka Colabs, LLC, $762 and $0 respectively, for producing the maps we sold. Atoka is also controlled by Mr. Tedesco. Both the revenue and employees expenses are classified as discontinued operations in the attached financial statements.
15. SUBSEQUENT EVENTS
On April, 10, 2014 trading in our commons stock recommenced on the OTC having been suspended on March 27, 2014 by the SEC.
On April 21, 2014 the Company entered into a lease agreement as a tenant with a third party landlord to lease warehouse space for general corporate purposes for a period effective April 21, 2014 through April 30, 2017. The total payments called for during the lease period are $38,965 for rent payments. The lease is considered a “gross lease” and payments include estimated charges for property taxes, property insurance, and common area maintenance. The Company will be responsible for utilities under the terms of the agreement.
On May 12, 2014 the Company filed amendment number 1 to form S-1 registering up to 3,415,700 shares of its common stock which are issuable upon exercise of outstanding warrants or conversion of notes payable.
On May 15, 2014 the Company filed a form 10Q in respect of the three months ended March 31, 2014.On May 20, 2014 the Company filed is form 8k disclosing that the form 10Q filed in in respect of the three months ended March 31, 2014 had been filed without the consent of its independent public accountant who had not completed their review of the interim consolidated financial statements included in the quarterly report on Form 10-Q using professional standards and procedures conducted for such reviews, as established by generally accepted auditing standards. .
In accordance with ASC 855, Subsequent Events, the Company has evaluated events that occurred subsequent to the balance sheet date through May __, 2014, the date of available issuance of these audited financial statements. The Company determined that other than as disclosed above, there were no material reportable subsequent events to be disclosed.
PART I
Item 2. Management's discussion and analysis of financial condition and results of operations
This discussion should be read in conjunction with the Condensed Consolidated Unaudited Financial Statements contained in this quarterly report and the Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of operations appearing in our Annual Report on Form 10-K for the inception date (June 5, 2013) to December 31, 2013. The results of operations for an interim period may not give a true indication of results for future interim periods or the year. In the following discussion, there does not appear a comparison for the three months ended March 31, 2014 with the three months ended March 31, 2013, as the Company was not incorporated until June 5, 2013.
Overview
Advanced Cannabis Solutions, Inc. (“ACS,” “the Company”, “we” or “us”) is a Colorado corporation. We were incorporated in the State of Colorado on November 12, 1987 under the name Promap Corporation. Promap originally traded as an independent GIS and custom draft energy mapping company providing hard copy and digital format oil and gas production maps for the oil and gas industry in the United States and Canada. Prior to December, 2013 most of the Company’s sales were to a company controlled by our chief executive officer.
On August 14, 2013, Promap acquired 94% of the issued and outstanding share capital of ACS in exchange for 12,400,000 shares of its common stock (see note 4 Share Exchange Agreement in the attached financial statements for a more detailed explanation of the transaction). On November 9, 2013, we acquired the remaining 6% of the share capital of Advanced Cannabis Solutions, Inc. On October 1, 2013, we changed our name from Promap Corporation to Advanced Cannabis Solutions, Inc. The Company has completed a change in trading symbol to CANN (OTCBB).
On December 31, 2013, we sold our oil and gas mapping business to our former Chief Executive Officer in consideration for his agreement to assume all liabilities associated with the mapping business.
The acquisition of Advanced Cannabis Solutions, Inc. was accounted for as a reverse acquisition and recapitalization using accounting principles applicable to reverse acquisitions. Under this type of accounting ACS is considered to have acquired us. Consequently, ACS’ financial results are disclosed for the period inception (June 5, 2013) through March 31, 2014, while our financial results have only been consolidated with those of ACS from August 14, 2013 forward.
Since August 2013, our core activity has been to provide sophisticated services and solutions to the regulated cannabis industry throughout the United States by leasing growing space and related facilities to licensed marijuana growers and dispensary owners for their operations. Tenants will pay rent and other fees to us for the use of the properties, all in compliance with applicable local and state laws and regulations. Additionally, we plan to provide a variety of ancillary services to the marijuana industry.
Our initial focus will be on opportunities within Colorado, which has allowed its citizens to use medical marijuana since 2000. Voters in Colorado recently approved a ballot measure in November 2013 to legalize marijuana for adult use.
While we do not intend to grow, harvest, distribute or sell cannabis or any substances that violate United States law or the Controlled Substances Act, we may be irreparably harmed by a change in enforcement by the Federal or state governments.
We have two wholly-owned subsidiaries: ACS Colorado Corp. and Advanced Cannabis Solutions Corporation. Unless otherwise indicated, all references to “us” include the operations of Advanced Cannabis Solutions, Inc., ACS Colorado Corp. and Advanced Cannabis Solutions Corporation.
During the quarter ending March 31, 2014, we:
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-
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raised $1,605,000 in capital through a private placement offering,
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-
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entered into a financing agreement with Full Circle Capital Corporation The agreement provides that Full Circle Capital Corporation will initially provide $7.5 million to us in the form of Senior Secured Convertible Notes, subject to certain named conditions. We can borrow an additional $22.5 million with the mutual agreement of Full Circle Capital Corporation and ourselves, and
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-
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received cash proceeds of $400,000 from the sale of 1,000,000 series C warrants to Full Circle Capital Corporation.
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On March 27, 2014 the SEC issued a trading halt order on our stock, and issued a statement that they were investigating affiliated stockholders that may have made illegal sales of stock. The order was not directed at the management of the Company and is considered a private investigation. The stock began trading again on the OTC on April 10, 2014
Government Regulation
Marijuana is a Schedule-I controlled substance and is illegal under federal law. Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal laws.
As of June 3, 2014, 22 states and the District of Columbia allow its citizens to use Medical Marijuana. Additionally, voters in the states of Colorado and Washington approved ballot measures last November to legalize cannabis for adult use. The state laws are in conflict with the federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level. The Obama administration has effectively stated that it is not an efficient use of resources to direct law federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical marijuana
RESULTS OF OPERATION FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2014
As the Company was incorporated on June 5, 2013, no comparable results for the three month period ended March 31, 2013 are available for comparison and discussion.
Revenues
Revenues for three month period ending March 31, 2014 were $48,765. Tenant rental income related to a real estate leasing transaction for our property near Pueblo, Colorado was $28,765 and we recognized $20,000 from a consulting contract with a Canadian entity. .
Operating expense
Operating expenses for the three month period presented in these financial statements consisted of (1) general and administrative expenses of $54,476, primarily for corporate expenses including insurance premiums, travel and promotion, and website maintenance; (2) payroll and related expenses of $105,135 for staff salaries and employer share of health benefit premiums; (3) professional fees of $82,516, primarily legal and accounting and audit fees,(4) office expenses of $7,689 and (5) depreciation expense of $3,116.
Other Income and Expense
During the three months ended March 31, 2014 we incurred other expenses of $369,696. We amortized debt discount of $320,422 and accrued interest expense of $49,274 on our convertible notes payable.
Net loss
The net loss for the three month period ended March 31, 2014 was $573,863 due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As at March 31, 2014, we had working capital of $1,901,533. However, the Company has incurred a loss since Inception (June 5, 2013) resulting in an accumulated deficit of $1,284,825 as of March 31, 2014 and further losses are anticipated in the development of its business. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern.
The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and, or, obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. There is no guarantee that the Company will be successful in achieving these objectives.
Operating activities
We used funds totaling $330,777 in operating activities during the three month period ended March 31, 2014. We incurred a loss of $573,863 of which $327,207 related to non-cash items. We used a further $84,121 in increases in accounts receivable, other receivables and prepayments and a reduction in accounts payable and accruals.
Investing activities
We used funds totaling $8,250 in investing activities during the three month period ended March 31, 2014. The funds were used in purchasing leasehold improvements with respect to our property in Pueblo County, Colorado.
Financing activities
During the three months ended March 31, 2014 we generated $1,796,457 from financing activities. We generated $1,412,400, net of debt issuance costs, from the issuance of convertible notes payable and $400,000 from the sale of 1,000,000 Series C warrants. We used $15,000 in the payment of deferred financing costs and $943 in principal repayments relating to our 81/2% convertible note payable.
CONTRACTUAL OBLIGATIONS
The Company had the following contractual obligations as of March 31, 2014:
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Amounts Due in |
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Description
|
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Total
|
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|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
Thereafter
|
|
|
12% Convertible notes issued December 27,2013
|
|
$ |
530,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
530,000 |
|
|
|
- |
|
|
12% Convertible notes issued January 29, 2014
|
|
$ |
1,350,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,350,000 |
|
|
|
- |
|
|
Mortgage on Pueblo Building
|
|
$ |
169,057 |
|
|
|
15,067 |
|
|
|
20,089 |
|
|
|
20,089 |
|
|
|
20,089 |
|
|
|
95,723 |
|
|
|
|
|
|
Office Rental
|
|
$ |
82,600 |
|
|
|
19,000 |
|
|
|
26,700 |
|
|
|
29,400 |
|
|
|
7,500 |
|
|
|
- |
|
|
|
- |
|
|
Leasehold improvements
|
|
$ |
400,000 |
|
|
|
400,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
PLAN OF OPERATIONS
Since August 2013, our core activity has been to provide sophisticated services and solutions to the regulated cannabis industry throughout the United States by leasing growing space and related facilities to licensed marijuana growers and dispensary owners for their operations. Tenants will pay rent and other fees to us for the use of the properties, all in compliance with applicable local and state laws and regulations. Additionally, we plan to provide a variety of ancillary services to the marijuana industry.
Our initial focus will be on opportunities within Colorado, which has allowed its citizens to use medical marijuana since 2000. Voters in Colorado recently approved a ballot measure in November 2013 to legalize marijuana for adult use.
While we do not intend to grow, harvest, distribute or sell cannabis or any substances that violate United States law or the Controlled Substances Act, we may be irreparably harmed by a change in enforcement by the Federal or state governments.
On January 21, 2014, we signed an agreement with Full Circle Capital Corporation (Full Circle), a closed-end investment company. The agreement provides that Full Circle will initially provide $7.5 million to us in the form of Senior Secured Convertible Notes, subject to certain named conditions. We can borrow an additional $22.5 million with the mutual agreement of Full Circle and ourselves.
At least 95% of any loan proceeds will be used to acquire properties which we will lease to licensed marijuana growers.
Full Circle will provide us with the initial $7.5 million when:
● Full Circle agrees on the location of property to be purchased;
● The specified property’s appraised value is satisfactory to Full Circle;
● A Phase I environmental inspection is completed to the satisfaction of Full Circle; and
● We are able to provide a first priority lien on the property in favor of Full Circle.
We can borrow an additional $22.5 million on terms acceptable to Full Circle and ourselves.
The six-year loan(s) will be secured by real estate acquired with the loan proceeds and will require interest-only payments at a rate of 12% a year, payable monthly.
The initial loan can, at any time, be converted into shares of our common stock at a conversion price of $5 per common share. It is contemplated that further advances will be convertible at 110% of the market price of our stock on the day of any advance, or the ten-day volume-weighted average price prior to the day of advance, whichever is lower.
The funding of the loan(s) is subject to the execution of additional documents between the parties.
Full Circle also purchased, for $500,000, warrants which allow Full Circle to purchase up to 1,000,000 shares of our common stock at any time on or prior to January 21, 2017 at a price of $5.50 per share. As part of the $500,000 proceeds from the warrant being issued to Full Circle Capital Corporation, $100,000 was retained by Full Circle Capital Corporation to cover legal and deal related expenses of future financing transactions.
We have identified 4 properties that are currently under review for purchase and leaseback to licensed marijuana growers in Colorado. These projects include the purchase and leaseback of existing, currently operating facilities, as well as proposed new construction projects. These opportunities are in Denver and Pueblo counties, Colorado and can be purchased/constructed for amounts in the range of $750,000 to $5 million for each project. There can be no assurance that we will be able to complete any of these transactions,
OFF-BALANCE SHEET ARRANGEMENTS
The Company did not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.
Item 4. Controls and procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act. As a result of this evaluation, we identified certain material weaknesses in our internal control over financial reporting as of March 31, 2014. Accordingly, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of March 31, 2014.
Management’s Annual Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-(f) under the Exchange Act. Our internal control over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U. S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
i. pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
ii. provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our consolidated financial statements in accordance with U. S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
iii. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision of our management, including our Chief Executive Officer and Chief Financial Officer (principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that, as of March 31, 2014, our disclosure controls and procedures were not effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms due to certain material weaknesses in our internal controls described below.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f). Our internal control system is intended to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements and that we have controls and procedures designed to ensure that the information required to be disclosed by us in our reports that we will be required to file under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely and informed decisions regarding financial disclosure.
Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2014. Based on this assessment, management believes that as of March 31, 2014, our internal control over financial reporting was not effective based on those criteria.
Management’s assessment identified certain material weaknesses in our internal control over financial reporting. These weaknesses include the following:
Limited capability to interpret and apply accounting principles generally accepted in the United States which resulted in the failure to properly calculate debt discount on the issuance of convertible notes payable during the period, incorrectly including certain non-cash items in the statement of cash flows and incorrect or inadequate disclosure relating to discontinued operations, deferred financing costs, warrant issuances and other matters in the Form 10Q for the quarter ended March 31, 2014.
Lack of formal accounting policies and procedures that include multiple levels of review, which led the Company to file its 10-Q for the quarter ended March 31, 2014 without correcting errors and deficiencies that had been identified in the financial statements or allowing its auditors to complete their review of the 10-Q and consequently it has been necessary for the Company to amend its previously filed 10-Q for the quarter ended March 31, 2014.
Limitations on Effectiveness of Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Our control systems are designed to provide such reasonable assurance of achieving their objectives. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
This report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Identified in connection with the evaluation required by paragraph (d) of Rule 240.13a-15 or Rule 240.15d-15 of this chapter that occurred during the registrant’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Inherent Limitations over Internal Controls
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error and circumvention by collusion or overriding of controls. Accordingly, even an effective internal control system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting.
The Company retained the services of a consultant to assist in the preparation of the Company’s Form 10Q for the quarter ended March 31, 2014. While the Company benefited from this additional assistance, we have determined we still lacked sufficient accounting resources. Going forward, the Company’s Chief Financial Officer intends to attend certain accounting seminars dealing with complex accounting issues that the Company may face and retain the necessary qualified and experienced support as may be required in order to better deal with such issues when they arise. In addition, the Company intends to establish a formal timetable for providing its internally prepared financial statements to its auditors with the necessary time allowed so that we can assure that the required filings can be properly reviewed and filed within the requisite time period.
Attestation Report of the Registered Public Accounting Firm.
This quarterly report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management's report in this quarterly report on Form 10-Q.
PART II
Item 1. Legal Proceedings.
To the best of our knowledge and belief, no legal proceedings are currently pending or threatened.
Item 1A. Risk Factors.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required regarding market risk factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During January 2014 we sold convertible promissory notes in the principal amount of $1,605,000 to 29 accredited investors. The notes bear interest at 12% per year, payable quarterly, mature on October 31, 2018 and are convertible into shares of our common stock, initially at a conversion price of $5.00 per share.
The convertible notes were not registered under the Securities Act of 1933 and are restricted securities. We relied upon the exemption provided by Rule 506 of the Securities and Exchange Commission in connection with the sale of these securities. The persons who acquired these securities were sophisticated investors and were provided full information regarding the Company’s business and operations. There was no general solicitation in connection with the offer or sale of these securities. The persons who acquired the convertible notes acquired them for their own accounts. The convertible notes cannot be sold except pursuant to an effective registration statement or an exemption from registration. .
The placement agent for our convertible note offering also received 160 Series B warrants in respect of 32,100 shares of our common stock. Each Series B warrant allows the holder to purchase 200 shares of our common stock at a price of $5.00 per share. The Series B warrants expire on October 31, 2018.
On January 21, 2014 we signed an agreement with Full Circle Capital Corporation. The agreement provides that Full Circle will initially provide $7.5 million to us in the form of Senior Secured Convertible Notes, subject to certain conditions. Full Circle also purchased, for $500,000, Series C warrants which allow Full Circle to purchase up to 1,000,000 shares of our common stock at any time on or prior to January 21, 2017 at a price of $5.50 per share. As part of the $500,000 proceeds from the warrant being issued to Full Circle Capital Corporation, $100,000 was retained by Full Circle Capital Corporation to cover legal and deal related expenses of future financing transactions.
The Series B and Series C warrants were not registered under the Securities Act of 1933 and are restricted securities. We relied upon the exemption provided by Rule 506 of the Securities and Exchange Commission in connection with the sale of these warrants. The persons who acquired these warrants were sophisticated investors and were provided full information regarding our business and operations. There was no general solicitation in connection with the offer or sale of the warrants. The persons who acquired the warrants acquired them for their own accounts. The warrants cannot be sold except pursuant to an effective registration statement or an exemption from registration.
During the three month period, we issued 51,733 shares of our common stock to holders of our 12% convertible promissory notes in exchange for $255,000 face value of those 12% notes issued January 29, 2014 and related accrued interest of $3,669 converted at a price of $5 per common share.
The shares issued in these transactions were to existing convertible note holders who are considered to be accredited investors and had access to sufficient information concerning the Company. The shares are restricted.
Item 3. Defaults Upon Senior Securities.
We were not in default under any of our securities issued and outstanding during the three months end March 31, 2014.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable
Item 6. Exhibits
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| 31.1 |
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| 31.2 |
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| 32 |
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Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| 101.INS |
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XBRL Instance |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ADVANCED CANNABIS SOLUTIONS, INC.
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By:
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/s/ Robert Frichtel |
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Robert Frichtel, Chief Executive Officer
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By: |
/s/ Christopher Taylor |
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Christopher Taylor, Principal Financial and Accounting Officer
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