As filed with the Securities and Exchange Commission on October 31, 2014
Registration No. 333-193890
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
AMENDMENT NO.
4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ADVANCED CANNABIS SOLUTIONS, INC
(Exact name of registrant as specified in its charter)
Colorado
(State or other jurisdiction of incorporation or organization)
6512
(Primary Standard Industrial Classification Code Number)
| | |
| | 4445 Northpark Drive, Suite 102
|
| | Colorado Springs, CO80907
|
20-8096131
| | (719) 590-1414
|
(IRS Employer I.D.
| | (Address, including zip code, and telephone number
|
Number)
| | including area of principal executive offices)
|
Robert L. Frichtel
4445 Northpark Drive, Suite 102
Colorado Springs, Colorado 80907
(719) 590-1414
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies of all communications, including all communications sent to the agent for service, should be sent to:
Gregory Sichenzia, Esq.
Arthur S. Marcus, Esq.
Sichenzia Ross Friedman Ference LLP
61 Broadway – 32nd Floor
New York, NY 10006
(212) 930-9700
As soon as practicable after the effective date of this Registration Statement
(Approximate date of commencement of proposed sale to the public)
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: þ
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b2 of the Exchange Act.
| | | | |
Large accelerated filer
| o
| | Accelerated filer
| o
|
Non-accelerated filer
| o
| | Smaller reporting company
| þ
|
(Do not check if a smaller reporting company)
| | |
CALCULATION OF REGISTRATION FEE
| | | | | | | | |
Title of each Class of
Securities to be Registered
| | Amount to
be Registered
| | Proposed
Maximum
Offering Price
Per Share (1)
| | Proposed
Maximum Aggregate
Offering Price
| | Amount of Registration Fee
*
|
Common stock (2)
| | | | | | | | |
Total
| |
3,764,700
| $
| 7.25
| $
| 24,394,075
| $
| 3,142
|
| |
(1)
| Offering price computed in accordance with Rule 457 (c).
|
(2)
| Shares of common stock offered by selling shareholders.
|
(*)
| Previously paid.
|
Pursuant to Rule 416, this Registration Statement includes such indeterminate number of additional securities as may be required for issuance as a result of any stock dividends, stock splits or similar transactions.
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of l933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
SUBJECT TO COMPLETION DATED OCTOBER 31, 2014
PRELIMINARY
PROSPECTUS
ADVANCED CANNABIS SOLUTIONS, INC.
Common Stock
By means of this prospectus a number of our shareholders are offering to sell up to 3,364,700 shares of our common stock which are issuable upon the exercise of outstanding warrants or the conversion of notes.
Our common stock trades under the symbol “CANN” on an unsolicited basis in the grey market. On
October ,
2014, the closing price of our common stock was
$ .
The shares owned by selling shareholders may be sold in the over-the-counter market, or otherwise, at prices and terms then prevailing or at prices related to the then current market price, or in negotiated transactions.
Although we will receive proceeds if any of our warrants are exercised, we will not receive any proceeds from the sale of the common stock by the selling stockholders.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. FOR A DESCRIPTION OF CERTAIN IMPORTANT FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
The date of this prospectus is
October ,
2014.
TABLE OF CONTENTS
| |
| Page
|
PROSPECTUS SUMMARY
| 1
|
THE OFFERING
| 3
|
SUMMARY FINANCIAL DATA
| 4
|
RISK FACTORS
| 4
|
CAPITALIZATION
| 8
|
MARKET FOR OUR COMMON STOCK
| 8
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
| 9
|
BUSINESS
| 16
|
MANAGEMENT
| 18
|
PRINCIPAL
STOCKHOLDERS
| 21
|
SELLING SHAREHOLDERS
| 22
|
DESCRIPTION OF SECURITIES
| 26
|
EXPERTS
| 28
|
LEGAL PROCEEDINGS
| 28
|
IMDEMNIFICATION
| 29
|
AVAILABLE INFORMATION
| 29
|
FINANCIAL STATEMENTS
| F-1
|
i
PROSPECTUS SUMMARY
Business Overview and Subsidiaries
Advanced Cannabis Solutions, Inc. (“the Company,” “ACS,” “we” or “us”) was
incorporated on November 12, 1987 in Colorado, under the name Promap Corporation
(“Promap”).
Until August 2013, our primary business involved the sale of maps to the oil and gas industry.
On August 14, 2013,
Promap
acquired 94% of Advanced Cannabis Solutions, Inc.,
(“ACSI”)
a private Colorado corporation. On October 1, 2013
Promap
changed
its
name to Advanced Cannabis Solutions, Inc.
On November 19, 2013, we acquired the remaining 973,000 outstanding shares of
ACSI
in exchange for the issuance of 973,000 shares of our common stock to the former shareholders of
ACSI.
In connection with the transaction, we issued 973,000 Series A warrants to the former
ACSI
shareholders in exchange for a like number of warrants held by the former
ACSI
shareholders. The Series A warrants we issued have the same terms as the warrants exchanged by the former
ACSI
shareholders.
As of the date of this prospectus, we have three wholly owned subsidiaries: ACS Colorado Corp, Advanced Cannabis Solutions Corporation and 6565 E. Evans Avenue LLC. Unless otherwise indicated all references to us include the operations of ACS Colorado Corp, Advanced Cannabis Solutions Corporation and 6565 E. Evans Avenue LLC. Advanced Cannabis Solutions Corporation has one wholly owned subsidiary: ACS Corp. All of these corporations are incorporated in Colorado.
We divide our business into three divisions: Real Estate, Wholesale, and Finance and Ancillary Services.
As of the date of this prospectus, all of our operations were conducted within the state of Colorado. The Company is exploring real estate and lending opportunities in Oregon, Washington, Florida and Illinois.
Real Estate
Our real estate business plan primarily includes plans to acquire and
lease growing space and related facilities to licensed marijuana growers and dispensary owners for their operations.
We expect these facilities will range in size from 5,000 to 50,000 square feet. These facilities will only be leased to tenants that possess the requisite state licenses to operate cultivation facilities. The leases with the tenants will provide certain requirements that permit the Company to continually evaluate its tenants’ compliance with applicable laws and regulations.
We plan to acquire commercial real estate and lease office space to non-regulated participants in the cannabis industry. These participants include media, Internet, packaging, lighting, cultivation supplies, and financial services. In exchange for certain services that may be provided to these tenants, we expect to receive cash rent. In certain cases, we may acquire equity interests or provide debt capital to these non-regulated businesses.
We have a credit facility to finance the acquisition of real estate as discussed below.
As of the date of this prospectus, we owned the following properties:
| | | | |
Property Name
| |
Location
| |
Description
|
Pueblo West
| |
152 Industrial Blvd.
Pueblo West, CO 81007
| |
Located in a suburb of Pueblo, CO, the property consists of approximately three acres of land, which includes a 5,000 square foot steel building, and parking lot. The property is zoned for growing marijuana and is leased to a medical marijuana grower until December 31, 2022. The Company also agreed with the tenant to begin construction of an 8,000 sq. ft. light deprivation greenhouse on the property at a cost not to exceed $400,000.
|
| | | | |
The “Greenhouse”
| |
6565 E. Evans Ave.
Denver, CO 80224
| |
The Company intends to re-purpose the former retail bank at this location into a multi-tenant office building that will, among other things, provide shared workspace environment purely dedicated to participants serving the cannabis industry. The building will be re-branded as "The Greenhouse" and will serve non-regulated ancillary businesses to the cannabis industry, as well as providing educational and networking opportunities for licensees.
|
1
Wholesale
Our wholesale business primarily serves as distributor of certain industry specific products used by manufacturers and dispensaries. Our wholesale business distributes products such as packaging products, nutrient solutions and irrigation technology. Our wholesale business partners with industry leaders and innovators to deliver high-quality products that are compliant with applicable regulations and which are made in the U.S.A.
Finance and Ancillary Services
Our finance strategy includes making direct term loans and providing revolving lines of credit to businesses involved in the cultivation and sale of cannabis and related products. These loans will generally be secured to the maximum extent permitted by law. The Company believes there is a significant demand for this financing.
We are pursuing ancillary business products and services including customized finance, capital formation, banking, regulatory compliance consulting and logistical support for participants in the cannabis industry.
Federal Regulation and Our Businesses
As of the date of this prospectus, the Company has provided products and services to state-approved marijuana growers and dispensary facilities. ACS does not grow or distribute marijuana, however, our providing of ancillary products and services to state-approved marijuana growers and dispensary facilities could be deemed to be aiding and abetting illegal activities, a violation of federal law. We intend to remain within the guidelines outlined in the Cole Memo (see the “Risk Factors” section of this prospectus below), which does not alter the Department of Justice's authority to enforce federal law, including federal laws relating to marijuana, but does recommend that U.S. Attorneys prioritize enforcement of federal law away from the marijuana industry operating as permitted under certain state laws, so long as certain conditions are met. Where the individual state framework fails to protect the public, the Justice Department has instructed federal prosecutors to enforce the Controlled Substances Act of 1970. However, we cannot provide assurance that the Company is in full compliance with the Cole Memo or any other federal laws or regulations.
The Company’s ongoing and future business plans rely on the Company’s ability to successfully establish and maintain effective controls that follow the United States Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) Guidance, “BSA Expectations Regarding Marijuana-Related Businesses,” in vetting and monitoring potential tenants, customers and clients of the Company. On February 14, 2014, FinCEN issued guidance to clarify Bank Secrecy Act (“BSA”) expectations for financial institutions seeking to provide services to marijuana-related businesses. FinCEN issued this guidance in light of certain state initiatives to legalize certain marijuana-related enforcement priorities. The FinCEN guidance clarifies how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations, and aligns the information provided by financial institutions in BSA reports with federal and state law enforcement priorities. This FinCEN guidance is intended to enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses.
While ACS is not currently subject to the BSA or FinCEN guidelines, we will institute policies and procedures that mirror the stated goals of the FinCEN guidelines and will provide a framework, by which the Company believes it can comply with the federal government’s stated objectives with respect to the potential conflict of law. The Company plans to use the FinCEN Guidelines, as may be amended, as the basis for assessing its relationships with potential tenants, clients and customers (See the “Risk Factors” section of this prospectus below).
State Regulation
Where applicable, we will apply for state licenses that are necessary to conduct our business in compliance with local laws.
As of the date of this prospectus, our subsidiary, ACS Corp., has registered with Colorado’s Marijuana Enforcement Division (the “MED”) as an approved vendor. On September 8, 2014, ACS was licensed as a MED approved vendor.
Competition
Currently, there are a number of other companies that are in the marijuana industry, many of which we consider to be our competition. Many of these companies provide similar products and/or services, such as leasing of real estate, warehouse sales, and consulting services. In the future the Company fully expects that other companies will recognize the value of ancillary businesses serving the marijuana industry and enter into the marketplace as competitors.
2
Where You Can Find Us
Our principal executive offices are located at: 4445 Northpark Drive, Suite 102
Colorado Springs, CO 80907
Our telephone number at this address is: (719) 590-1414
Our website is: www.advcannabis.com
THE OFFERING
By means of this prospectus, a number of our shareholders/warrant holders are offering to sell:
·
up to 973,000 shares of our common stock which they acquired in connection with our acquisition of
ACSI;
·
up to 973,000 shares of our common stock which they may receive upon the exercise of our Series A warrants;
·
up to 376,000 shares of our common stock which they may receive upon the conversion of notes;
·
up to 42,700 shares of our common stock issuable upon the exercise of Series B warrants we issued to the placement agent for our offering of convertible notes; and
·
up to 1,000,000 shares of common stock issuable upon the exercise of Series C warrants we sold to Full Circle Capital Corporation.
See the section of this prospectus entitled “Selling Shareholders” for more information.
The purchase of the securities offered by this prospectus involves a high degree of risk. Risk factors include the lack of any relevant operating history, losses since we were incorporated
and
the possible need for us to sell shares of our common stock or other securities to raise capital. In addition, our auditors, in their report on our financial statements for the period ended December 31, 2013, expressed substantial doubt as to our ability to continue in business. See the “Risk Factors” section of this prospectus below for additional Risk Factors.
Forward-Looking Statements
This prospectus contains or incorporates by reference forward-looking statements, concerning our financial condition, results of operations and business. These statements include, among others:
·
statements concerning the benefits that we expect will result from the business activities that we contemplate; and
·
statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts.
You can find many of these statements by looking for words such as
“believes,” “expects,” “anticipates,”
“estimates” or similar expressions used in this prospectus.
These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied in those statements. Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied. We caution you not to put undue reliance on these statements, which speak only as of the date of this prospectus.
To the extent, the information contained in this prospectus, changes in any material respect, we will amend this prospectus.
3
SUMMARY FINANCIAL DATA
The following tables set forth, for the periods and as of the dates indicated, our summary financial data. The statements of operations data for the period from June 5, 2013 (Inception) to December 31, 2013 is derived from our audited financial statements included elsewhere in this prospectus. The statements of operations data for the six months ended June 30, 2014 and the balance sheet data as of June 30, 2014 are derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited financial statements include, in the opinion of management, all adjustments consisting of only normal recurring adjustments, that management considers necessary for the fair presentation of the financial information set forth in those statements. You should read the following information together with the more detailed information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus. Our historical results are not indicative of the results to be expected in the future and results of interim periods are not necessarily indicative of results for the entire year.
| | | | |
| |
June 5, 2013
(Inception) to
December 31,
2013
| |
Six Months
Ended
June 30,
2014
|
Statement of Operations Data
| | | | |
Net revenues
|
$
|
-
|
$
|
111,565
|
Operating expenses
| |
711,254
| |
570,539
|
Loss from operations
| |
(711,254)
| |
(458,974)
|
Other (income) expense
| |
(1,665)
| |
969,755
|
Net loss
|
$
|
(710,962)
|
$
|
(1,428,729)
|
| | | | |
Net loss per common share
|
$
|
(0.05)
|
$
|
(0.11)
|
Shares used in computed loss per share
| |
14,026,127
| |
13,548,968
|
RISK FACTORS
This section of the prospectus discloses
We have a limited operating history and may never be profitable. Since we recently commenced operations under our new business plan, it is difficult for potential investors to evaluate our business. We will need to raise additional capital in order to fund our operations.
There can be no assurance that such additional capital will be available to us on favorable terms or at all.
There can be no assurance that we will be profitable or that the shares which may be sold in this offering will have any value.
A return on investment may be limited to the value of our common stock. We do not currently anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as the board of directors may consider relevant. Our current intention is to apply net earnings, if any, in the foreseeable future to increasing our capital base and development and marketing efforts. There can be no assurance that the Company will ever have sufficient earnings to declare and pay dividends to the holders of our common stock, and in any event, a decision to declare and pay dividends is at the sole discretion of our board of directors. If we do not pay dividends, our common stock may be less valuable because a return on your investment would only occur if the Company’s stock price appreciates.
There is substantial doubt about our ability to continue as a going concern. Our financial statements have been prepared on a going concern basis which assumes we will be able to realize
our
assets and discharge our liabilities in the normal course of business for the foreseeable future. We incurred a loss since Inception (June 5, 2013) resulting in an accumulated deficit of
$2,139,691
as of
June 30,
2014 and further losses are anticipated in the development of our business.
4
Our ability to continue as a going concern is dependent upon our becoming profitable in the future and, or, obtaining the necessary financing to meet our obligations and repay
our
liabilities arising from normal business operations when they come due. There is no guarantee that we will be successful in achieving these objectives.
Risks Relating to Our Products, Our Services and the Marijuana Industry
We may be unable to acquire the properties that are critical to our proposed business. Our business plan involves the acquisition of
real estate
properties, which will be leased to
participants in the
marijuana
industry. The zoning and operational restrictions on marijuana industry participants may limit the availability of properties suitable for this purpose.
There can be no assurance that we will be able to obtain the capital needed to purchase any properties.
Our suppliers could fail to fulfill our orders, which would disrupt our business, increase our costs, harm our reputation and potentially cause us to lose customers.
We depend on third party suppliers to produce and timely ship our orders. Products purchased from our suppliers are resold to our customers. These suppliers could fail to produce products to our specifications or in a workmanlike manner and may not deliver the units on a timely basis. Any changes in our suppliers to resolve production issues could disrupt our ability to fulfill orders. Any changes in our suppliers to resolve production issues could also disrupt our business due to delays in finding new suppliers.
We may be unable to expand into new markets. We intend to continue to pursue our aggressive growth strategy for the foreseeable future. Our continued growth and profitability depend on our ability to successfully realize our growth strategy by expanding both inside and outside the state of Colorado. We cannot assure that our efforts to expand into new markets, particularly in states where we do not currently operate, will succeed. In order to operate in new markets, we may need to modify our existing business model and cost structure to comply with local regulatory or other requirements, which may expose us to new operational, regulatory or legal risks. In addition, expanding into new states may subject us to unfamiliar or uncertain local regulations that may adversely affect our operations, for example, by applying, obtaining and/or maintaining appropriate licenses. Facilities we open in new markets may also take longer to reach expected revenue and profit levels on a consistent basis and may have higher construction, occupancy or operating costs than facilities we open in existing markets, thereby affecting our overall profitability. New markets may have competitive conditions, consumer preferences and spending patterns that are more difficult to predict or satisfy than our existing markets.
We may need to make greater investments than we originally planned in advertising and promotional activity in new markets to build brand awareness. We may find it more difficult in new markets to hire, motivate and keep qualified personnel. We may need to augment our labor model to meet regulatory requirements and the overall cost of labor may be higher. As a result, these new facilities may be less successful and may not achieve target facility level profit margins at the same rate or at all. If any steps taken to expand our existing business model into new markets are unsuccessful, we may not be able to achieve our growth strategy and our business, financial condition or results of operations could be adversely affected.
Our future success depends on our ability to grow and expand our customer base. Our success and the planned growth and expansion of our business depend on us achieving greater and broader acceptance of our products and services and expanding our customer base. There can be no assurance that customers will purchase our products and/or services or that we will continue to expand our customer base. If we are unable to effectively market or expand our product and/or service offerings, we will be unable to grow and expand our business or implement our business strategy, which could materially impair our ability to increase sales and revenue.
Our failure to obtain capital may significantly restrict our proposed operations. We need capital to operate and fund our business plan. We do not know what the terms of any future capital raising may be but any future sale of our equity securities will dilute the ownership of existing stockholders and could be at prices substantially below the price of the shares of common stock sold in this offering.
Our
failure
Our proposed business is dependent on
state
laws pertaining to the marijuana industry. Continued development of the marijuana industry is dependent upon continued legislative authorization of marijuana at the state level. Any number of factors could slow or halt progress in this area. Further, progress, while encouraging, is not assured. While there may be ample public support for legislative action, numerous factors impact the legislative process. Any one of these factors could slow or halt use of marijuana, which would negatively impact our proposed business.
As of
September 30,
2014,
23
states and the District of Columbia allow
their residents
to use medical marijuana. Additionally, voters in the states of Colorado and Washington approved
and implemented regulations
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
made numerous statements indicating
that it is not an
5
efficient use of resources to direct
Based upon guidance from the United States Department of Treasury’s Financial Crimes Enforcement Network which clarifies how financial institutions can provide services to marijuana-related businesses, it appears the federal government will not prosecute third parties for doing business with state licensed marijuana participants as long as they meet certain criteria. While the Company intends to implement policies and procedures to follow the FinCEN guidelines, there can be no assurance that these guidelines will not change and that any such changes will become excessively burdensome and, therefore, incompatible with profitable operations and, therefore, could have a material adverse effect on us.
The marijuana industry faces
significant
opposition. It is believed by many that large well-funded businesses may have a strong economic opposition to the marijuana industry.
Marijuana remains illegal under federal law.
Despite the development of a legal marijuana industry under the laws of certain states, these state laws legalizing medical and adult cannabis use are in conflict with the Federal Controlled Substances Act, which classifies marijuana as a schedule-I controlled substance and makes marijuana use and possession illegal on a national level. The United States Supreme Court has ruled that it is the federal government that has the right to regulate and criminalize marijuana, even for medical purposes, and thus federal law criminalizing the use of marijuana preempts state laws that legalize its use. However, the Obama Administration has stated that it is not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical and recreational marijuana. Yet, there is no guarantee that the Obama Administration will not change its stated policy regarding the low-priority enforcement of federal laws in states where marijuana has been legalized. Additionally, we face another presidential election cycle in 2016, and a new administration could introduce a less favorable policy or decide to enforce the federal laws stringently. Any such change in the federal government’s enforcement of federal laws could cause significant financial damage to us and our shareholders.
Potential
customers, clients and tenants
of
the Company
have difficulty accessing the service of banks, which may make it difficult for them to operate. Since the use of marijuana is illegal under federal law,
many
banks
will not
accept for deposit funds from businesses involved with marijuana. Consequently, businesses involved in the marijuana industry often have trouble finding a bank willing to accept their business. The inability to open bank accounts may make it difficult for potential
customers, clients and
tenants of
the Company
to operate.
Laws and regulations affecting the medical marijuana industry are constantly changing, which could detrimentally affect our proposed operations. Local, state and federal medical marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or alter
our
business plan. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on
our
operations.
Furthermore,
it is possible that regulations may be enacted in the future that will be directly applicable to our proposed business. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on
our
business.
We operate in a highly competitive industry and potential competitors could duplicate our business model. We are involved in a highly competitive industry where we compete with numerous other companies who offer products and services similar to those we offer. There is no aspect of our business which is protected by patents, copyrights, trademarks, or trade names. As a result, potential competitors could duplicate our business model with little effort. Some of our potential competitors may have significantly greater resources than we have, which may make it difficult for us to compete. There can be no assurance that we will be able to successfully compete against these other entities.
6
Risks Related to Management and Personnel
We are dependent on our management and members of our board of directors and the loss of any of our officers or directors could harm our business. Our future success depends largely upon the experience, skill, and contacts of our officers and directors. The loss of the services of these officers or directors may have a material adverse effect upon our business.
We will be required to attract and retain top quality talent to compete in the marketplace. We believe our future growth and success will depend in part on our ability to attract and retain highly skilled managerial, sales and marketing, and finance personnel. There can be no assurance of success in attracting and retaining such personnel. Shortages in qualified personnel could limit our ability to successfully build our real estate, wholesale and consulting businesses.
Risks Related to the Market for the Company’s Stock
A stockholder of the Company is being investigated for possible violations with securities laws. On March 27, 2014 the Securities and Exchange Commission (the “SEC”) issued a trading halt order on our stock, and issued a statement that it was investigating affiliated stockholders who may have made illegal sales of stock. The stock began trading in the grey market on April 10, 2014. Although the SEC’s order was not directed at the management of the Company and is considered a private investigation, the investigation is ongoing and the outcome of this order, or any potential order the SEC may direct at the Company or its management, are uncertain. Furthermore, the Company’s reputation may be negatively impacted. As a result, the potential impact to the Company’s business, if any, cannot be determined.
Since the market price for our common stock is volatile, investors may not be able to sell any of their shares at a profit. The market price of our common stock has been highly volatile and the market has from time to time experienced significant price and volume fluctuations that are unrelated to our operating performance. Between August 15, 2013, and
October 24,
2014 our stock price has ranged from a low of $1.50 per share to a high of $64.64 per share. Factors such as whether we are able to identify and purchase properties and government regulation may have a significant effect on the future market price of our common stock.
Shares of our common stock are currently subject to a restriction from active quotation.
Quotation of our stock on the OTC Bulletin Board was suspended on March 28, 2014 due to a suspension of trading order issued by the
SEC.
Since April 10, 2014, our common stock has traded under the symbol “CANN” on an unsolicited basis in the grey market and, as of the date hereof, the quotation of our common stock on the OTC Bulletin Board had not resumed. The market for securities traded on the grey market is generally less liquid and more volatile than securities traded on the OTC Bulletin Board or on the platform maintained by the OTC Markets Group. Fluctuations in market prices are not uncommon. No assurance can be given that the grey market for our common stock will continue.
Our stockholders may experience significant dilution. The Company has warrants and convertible debt outstanding, which could be dilutive to shareholders. In certain instances, the conversion prices and exercises prices are subject to adjustment if we issue or sell shares of our common stock for a consideration per share less than the conversion or exercise price then in effect, or issue options, warrants or other securities convertible or exchange for shares of our common stock at a conversion price less than the conversion price in the note or exercise price in the warrants then in effect. If either of these events should occur, the conversion or exercise price is reduced to the lowest price at which these securities were issued or are exercisable.
In addition, if our future operations or acquisitions are financed through the issuance of equity securities, our stockholders could experience significant dilution. In addition, securities issued in connection with future financing activities or potential acquisitions may have rights and preferences senior to the rights and preferences of our common stock. We may grant options to purchase shares of our common stock to our directors, employees and consultants. The issuance of shares of our common stock upon the exercise of these options may result in dilution to our stockholders.
Furthermore, investors purchasing common stock sold in this offering will experience immediate dilution because the price per share of common stock in this offering is greater than the net tangible book value per share of the Company’s shares of common stock at the time of this offering.
Disclosure requirements pertaining to penny stocks may reduce the level of trading activity in the market for our common stock and investors may find it difficult to sell their shares. Trades of our common stock will be subject to Rule 15g-9 of the
SEC
which rule imposes certain requirements on broker/dealers who sell securities subject to the rule to persons other than established customers and accredited investors. For transactions covered by the rule, brokers/dealers must make a special suitability determination for purchasers of the securities and receive the purchaser's written agreement to the transaction prior to sale.
The SEC
also has rules that regulate broker/dealer practices in connection with transactions in "penny stocks". Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information
7
with respect to transactions in that security is provided by the exchange or system). The penny stock rules require a broker/dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the
SEC
that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker/dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker/dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker/dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation.
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2014 and December 31, 2013. The table should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus:
| | | | |
Stockholders’ Equity
| |
As of
June 30, 2014
| |
As of
December 31,
2013
|
Preferred Stock, no par value, 5,000,000 shares authorized; 0 shares issued and outstanding
| |
—
| |
—
|
Common Stock, no par value, 100,000,000 shares authorized; 13,438,933 shares and 15,137,200 shares issued and outstanding, respectively
|
$
|
2,604,696
|
$
|
933,627
|
Accumulated deficit
| |
(2,139,691)
| |
(710,962)
|
| | | | |
Total Stockholders’ Equity
|
$
|
465,005
|
$
|
222,665
|
MARKET FOR OUR COMMON STOCK
Quotation of our stock on the OTC Bulletin Board began on August 15, 2013. Trading was suspended on March 28, 2014 due to a suspension of trading order issued by the
SEC.
Since April 10, 2014 our common stock has traded under the symbol “CANN” on an unsolicited basis in the grey market and the quotation of our common stock on the OTC Bulletin Board had not resumed as of the date hereof.
Shown below is the range of high and low
| | | | | | |
Quarter Ended
| | High
| | Low
|
| | | | |
September 30, 2013
| | $
| 5.75
| | $
| 1.60
|
December 31, 2013
| | $
| 4.10
| | $
| 1.91
|
March 31, 2014
| | $
| 48.38
| | $
| 4.10
|
June 30, 2014
| | $
| 22.40
| | $
| 8.44
|
September 30, 2014
| |
$
|
8.30
| |
$
|
3.75
|
As of
October ,
2014, the closing price of our common stock was
$ .
As of
October ,
2014, we had
13,709,933
outstanding shares of common stock and
86
shareholders of record.
Holders of our common stock are entitled to receive dividends as may be declared by
our
board of directors. Our board of directors is not restricted from paying any dividends, but is not obligated to declare a dividend. No cash dividends have ever been declared and it is not anticipated that cash dividends will ever be paid. We currently intend to retain any future earnings to finance future growth. Any future determination to pay dividends will be at the discretion of the board of directors and will depend on our financial condition, results of operations, capital requirements and other factors the board of directors considers relevant.
Our Articles of Incorporation authorize our board of directors to issue up to 5,000,000 shares of preferred stock. The provisions in the Articles of Incorporation relating to the preferred stock allow directors to issue preferred stock with multiple votes per share and dividend rights, which would have priority over any dividends paid with respect to the holders of common stock. The issuance of preferred stock with these rights may make the removal of management difficult even if the removal would be considered beneficial to shareholders, generally, and will have the effect of limiting shareholder participation in certain transactions such as mergers or tender offers if these transactions are not favored by management.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Advanced Cannabis Solutions, Inc. (“the Company,” “ACS,” “we” or “us”) was
incorporated on November 12, 1987 in Colorado, under the name Promap Corporation
(“Promap”).
Prior to December 2013, we made hard copy and digital format maps for the oil and gas industry. During that period of time, most of our sales were to a company controlled by our
former Chief Executive Officer.
On August 14, 2013, we acquired 94% of Advanced Cannabis Solutions Inc (“ACSI”), a private Colorado corporation. On November 19, 2013, we acquired the remaining shares of ACSI.
During the years ended December 31, 2012 and 2013,
Promap
provided hard copy and digital format oil and gas production to oil and gas companies in the United States and Canada. Our maps covered various geologic basins in numerous areas including: Denver Basin, Powder River Basin, Michigan Basin, Williston Basin, Arkoma Basin, Illinois Basin, Cincinnati Arch, Uintah - Piceance Basins and The Nevada Basin.
Promap
also provided maps of the North American Coal Basin and Coal Bed Methane Activity and North American Devonian - Mississippian Shale Map with detailed pipeline locations. On December 31, 2013,
the Company
sold
its
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.
Since August 2013,
the Company’s
core activity has been to provide
Our initial focus
has been
on opportunities within
the state of
Colorado, which has allowed its citizens to use medical marijuana since 2000.
In January 2014, the state of
Colorado
enacted laws
to legalize marijuana for recreational adult use.
The following discussion analyzes our financial condition and summarizes the results of operations for the period
from June 5, 2013 (Inception) to
December 31, 2013
and the three and six month periods ended June 30, 2014.
This discussion and analysis should be read in conjunction with our financial statements included as part of this prospectus.
The acquisition of
ACSI
was accounted for as a reverse acquisition and recapitalization using accounting principles applicable to reverse
acquisitions.
Under this type of accounting
ACSI
is considered to have acquired us. Consequently,
ACSI’s
financial results are disclosed for the period of inception (June 5, 2013) through December 31, 2013
and to date,
while our financial results have only been consolidated with those of
ACSI
from August 14, 2013, forward.
Results of Operations
Period
From
Inception (June 5, 2013) Through December 31, 2013
Revenues
The Company had no
revenues for the period from inception through December 31, 2013. This lack of revenue was primarily due to the development stage status of the Company.
Operating Expense
Our general and administrative expenses were $53,265 for the period from inception to December 31, 2013. The expenses were related to travel, conference fees, and memberships. Our payroll expenses were $108,588 for the period from inception to December 31, 2013. These expenses consisted of two officers’ salaries and wages for a part-time administrative employee. Our professional fees expenses were $391,132 for the period from inception to December 31, 2013. These
expenses included, among other minor expenses,
$86,854 of legal fees, $21,491 of accounting fees, and $256,175 of consulting fees related to the formation and start-up of the Company. The consulting fees consisted of $64,000 paid to a contractor, who provided capital formation advice, and the balance was used for professional assistance in the formation of the company. Our office expenses were $8,269 for the period from inception to December 31, 2013.These expenses paid for our monthly rent and miscellaneous office supplies. We had a loss on an option of $150,000 that we had acquired to purchase real estate in Boulder, Colorado. The option expired, unexercised, and consequently we wrote off the full cost of the option.
9
Other Expense
Other expense consists of amortization of debt discount and interest expense. For the period from inception to December 31, 2013, other expense was $1,665.
Net Loss and Per Share Data
For the period from inception to December 31, 2013, net loss was $710,962. Based on the weighted average number of common shares outstanding for the period from inception to December 31, 2013 of 14,026,159, basic and fully diluted net loss per share was $(0.05).
Three and Six-Month Periods Ended June 30, 2014
From June 3, 2013 (Inception) through June 30, 2013, the Company was initially capitalized but had not commenced operations. As such, the financial statements herein are presented without comparative periods for the three months and six months ended June 30, 2013, with the exception of the Statement of Cash Flows for the six month period ended June 30, 2013 to present the Company’s initial capital contributions.
Revenues
Revenues for the three and six month periods ended June 30, 2014 were $80,123 and $128,888, respectively. Net revenues for the three and six month periods ended June 30, 2014 were $62,800 and $111,565, respectively. Tenant rental revenue related to a real estate leasing transaction for our property near Pueblo, Colorado for the three and six month periods ended June 30, 2014 were $28,765 and $57,530, respectively. Consulting fee revenue, net of bad debt expense, pertaining to a consulting contract with a Canadian entity for the three and six month periods ended June 30, 2014 were $33,600 and $53,600, respectively. The Company’s Wholesale business commenced operations during the three months ended June 30, 2014. Revenues for the Wholesale operations for the three and six month periods ended June 30, 2014 were $17,758 and $17,758, respectively. Net revenues for the Wholesale operations for the three and six month periods months ended June 30, 2014 were $435 and $435, respectively, net of cost of goods sold of $17,323 and $17,323, respectively.
Operating Expense
Operating expenses, which consists of general and administrative expenses, payroll and related expenses, professional fees, office expense and depreciation expense, for the three and six month periods ended June 30, 2014 were $317,607 and $570,539, respectively. For the three and six month periods ended June 30, 2014, general and administrative expense, which is primarily comprised of corporate expenses, insurance premiums, travel and promotion, and website maintenance, were $43,055 and $97,531, respectively. For the three and six month periods ended June 30, 2014, payroll and related expense, which is primarily comprised of staff salaries and the Company’s share of health benefit premiums, were $131,443 and $236,578, respectively. For the three and six month periods ended June 30, 2014, professional fees, which is primarily comprised of legal, accounting and audit fees, and fees specifically related to our Form S-1, were $118,538 and $201,054, respectively. For the three and six month periods ended June 30, 2014 office expense, which is primarily comprised of rent expense and office supplies, was $21,455 and 29,144, respectively. Depreciation expense for the three and six month periods ended June 30, 2014 was $3,116 and $6,232, respectively.
Other Expense
Other expense consists of amortization of debt discount and deferred financing costs, interest expense, and gain (loss) on fair value adjustment of the warrant derivative liability. For the three and six month periods ended June 30, 2014 other (income) expense was income of $32,000 and expenses of $969,755, respectively. For the three and six month periods ended June 30, 2014, amortization expense of debt discount and deferred financing costs was $113,040 and $417,881, respectively. Interest expense for the three and six month periods ended June 30, 2014 was $78,836 and $128,110, respectively. Gain (loss) on fair value adjustment of the derivative warrant liability was a gain of $223,876 and a loss of $(423,764), respectively, for the three and six month periods ended June 30, 2014.
Net Loss and Per Share Data
For the three and six month periods ended June 30, 2014, net loss was $222,807 and $1,428,729, respectively. Based on the weighted average number of common shares outstanding for the three and six month periods June 30, 2014 of 13,439,159 and 13,548,968, respectively, net loss per share was $(0.02) and $(0.11), respectively.
10
Liquidity and Capital Resources
The Company has incurred a loss since Inception (June 5, 2013) resulting in an accumulated deficit of $2,139,691 as of June 30, 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.
Period From Inception (June 5, 2013) Through December 31, 2013
Our sources and (uses) of funds for the period from inception through December 31, 2013 are shown below:
| | |
Net cash
|
$
| (488,192)
|
Purchase and cancellation of common stock
| | (100,000)
|
Purchase of option to acquire real property
| | (150,000)
|
Purchase of property
| | (282,753)
|
Sale of common stock and warrants
| | 985,400
|
Sale of convertible notes
| | 530,000
|
Debt acquisition costs
| | (66,140)
|
Operating Activities
During the period from inception to December 31, 2013, cash flows used in operating activities were $488,192. During the period from inception to December 31, 2013, we incurred net loss of $710,962, of which $190,794 related to non-cash items. We added a net $40,968 through increases in prepaid expenses and increases in accounts payable and accruals, for the period ended December 31, 2013. As of December 31, 2013, we had working capital of $381,112.
Investing Activities
During the period from inception to December 31, 2013, cash flows used in investing activities were $432,753, of which $150,000 resulted from a loss on an option to acquire property. The remaining cash flows used in investing activities primarily relate to the purchasing and improving of our property in Pueblo County, Colorado.
Financing Activities
During the period from June 5, 2013 (Inception) to December 31, 2013, we raised net funding of $1,349,260 through the sale of common stock, warrants, and convertible notes. Of this amount, $100,000 was used to purchase 8,000,000 shares of our common stock from a former officer, $432,753 was used to purchase real estate and an option to acquire property, and $488,192 was used to cover our operating losses.
Six Month Period Ended June 30, 2014
Our sources and (uses) of funds for the
six
months ended
June 30,
2014 are shown below:
| | |
Net cash
| $
|
(689,620)
|
Purchase of property and equipment,
and increase in capitalized costs
| |
(31,449)
|
Sale of warrants
| |
400,000
|
Loan repayment
| |
(3,178)
|
Sale of convertible notes, net of debt issuance costs
| | 1,412,400
|
Deferred financing costs
| |
(15,000)
|
Operating Activities
During the six month period ended June 30, 2014, cash flows used in operating activities were $689,620.
During the
six month period ended June 30, 2014, we incurred a net loss of $1,428,229, of which $893,918 related to non-cash items. We used a further $154,809 in increases in accounts receivable, other receivables, inventory and prepayments and a reduction in accounts payable and accruals, for the six month period ended June 30, 2014. As of June 30, 2014, we had working capital of $595,763.
11
Investing Activities
During the six month period ended June 30, 2014, cash flows used in investing activities were $31,449. The funds were primarily used in purchasing leasehold improvements with respect to our property in Pueblo County, Colorado and $20,000 in other capitalized costs.
Financing Activities
During the six month period ended June 30, 2014, cash provided by financing activities was $1,794,222. During the period,
we generated $1,412,400, net of debt issuance costs, from the
sale
of convertible notes 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
$3,178
in principal repayments
relating to
our 8 1/2% convertible
note.
Convertible Debt
During August and September 2013, we sold 973,000 units at a price of $1.00 per unit. Each unit consisted of one share of our common stock and one Series A warrant. Each Series A warrant entitles the holder to purchase one share of our common stock at a price of $10.00 per share. On
June 30,
2014, four note holders with a combined note balance of $255,000 converted these notes into 51,733 shares of our common stock.
During December 2013 and January 2014, we sold convertible promissory notes in the principal amount of $2,135,000 to 34 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.
At September 30, 2014, principal amount of $1,550,000 was outstanding.
Credit Facility
On January 21, 2014, we signed
a Securities Purchase Agreement (the “SPA”)
with Full Circle Capital Corporation
(“Full Circle”),
a closed-end investment company. The SPA provided that Full Circle will initially provide $7.5 million to us in the form of Senior Secured Convertible Notes.
Full Circle will provide us with the $7.5 million when:
·
Full Circle agrees on the location of the property to be purchased;
·
The 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 to Full Circle.
According to the SPA, the initial $7.5 million loan was, at any time, able to be converted into shares of our common stock at a conversion price of $5.00 per share. It is contemplated that further advances will be convertible at 110% of the market price of our stock on the day of advance, or the ten-day volume-weighted average price prior to the day of advance, whichever is lower. On September 24, 2014, the Company and Full Circle entered into Amendment No. 1 to the SPA, which changed the conversion price of the initial $7,500,000 promissory note to $4.00 per share of the Company’s common stock.
At least 95% of any loan proceeds will be used to acquire properties which we will lease to licensed marijuana growers.
The six-year loan will be secured by real estate acquired with the loan proceeds and will require interest-only payments at a rate of 12% per year.
The funding of the loan is subject to the execution of additional documents between the parties.
We can borrow an additional $22.5 million with the mutual agreement of us and Full Circle.
Full Circle also purchased, for $500,000, warrants, which
allowed
Full Circle to purchase up to 1,000,000 shares of our common stock,
at a price of $5.50 per share,
at any time on or prior to January 21, 2017.
In connection with Amendment No.1 to the SPA, the Company and Full Circle entered into Amendment No. 1 to the Series C warrants, which changed the exercise price of these warrants to $4.00 per share of the Company’s common stock, and increased the amount of warrants issuable to 1,400,000 warrants to purchase shares of the Company’s common stock.
12
Description of Properties Owned
As discussed in the “Business” section of this prospectus, on December 31, 2013, we purchased a property in Pueblo County, Colorado
(the “Pueblo Property”)
for $450,000. The purchase price was paid with cash of $280,000 and a promissory note in the principal amount of $170,000. The promissory note is
being
amortized over 15 years with the balance
outstanding
repayable in full
in the form of a balloon payment
after 5 years. The note bears interest at 8.5% per year and is payable in monthly installments of principal and interest in the amount of $1,674. All unpaid principal and interest is due December 31, 2018. The note is convertible at any time on or before the maturity date at $5.00 per common share.
In connection with the purchase
of the Pueblo Property,
we agreed with the tenant of the property to begin construction of a 9,000 sq. ft. light deprivation greenhouse on the property. On June 19, 2014 we received final approval from the county of Pueblo to begin construction. Construction costs for the greenhouse are budgeted at $400,000. Foundation work and site security upgrades
would commence, at the earliest, during the first quarter of 2015.
We intend to fund the construction costs with our cash on hand (approximately
$1,100,000
as of
September
30, 2014). The construction costs will place a burden on our liquidity. Depending on the availability of additional capital, we may construct up to four additional greenhouses on this property.
On October 21, 2014. the Company purchased a retail bank property, located in Denver, Colorado. The Company intends to re-purpose the former retail bank into a multi-tenant office building that will, among other things, provide the largest shared workspace environment purely dedicated to participants serving the cannabis industry. The building will be re-branded as “The Greenhouse” and will serve non-regulated ancillary businesses to the cannabis industry, as well as providing educational and networking opportunities for tenants. The purchase price of the property was approximately $1,050,000. The property was purchased by a Colorado limited liability company, 6565 E. Evans Avenue LLC, which is a wholly-owned subsidiary of the Company. The Company paid approximately $500,000 in cash and assumed a note for $600,000, bearing interest at 14% per annum, due October 21, 2016, which was financed by Evans Street Lendco, LLC (“Evans Street”). The terms of the note provide for interest-only payments, and allow the Company an optional interest payment abatement until July 1, 2015. In connection with the purchase of the building, the Company issued 600,000 warrants to Evans Street. Each warrant allows Evans Street to purchase one share of our common stock at an exercise price of $4.40 per share at any time on or before October 21, 2016.
We plan to lease growing space and related facilities to licensed marijuana growers and dispensary owners for their operations. However, we must first acquire the properties which we plan to lease. The number of properties which will be able to acquire will be directly related to the amount of capital we are able to raise among other factors.
Trends
Other than as disclosed above, we do not know of any:
·
trends, events or uncertainties that have had, or are reasonably expected to have, a material impact on our revenues or expenses.
·
trends, demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, any material increase or decrease in liquidity; or
·
significant changes in expected sources and uses of cash.
Contractual Obligations
The following shows our contractual obligations as of
June 30,
2014, which reflects the notes that were converted into shares of our common stock on
June 30,
2014.
| | | | | | | | | | | | | | | | | | | | |
| Amounts Due in
|
Description
| Total
| | 2014
| | 2015
| | 2016
| | 2017
| | 2018
|
| Thereafter
|
12% convertible notes
| $
| 1,880,000
| | -
| | -
| | -
| | -
| | $
| 1,880,000
| | $
| -
|
Mortgage on Pueblo
Property
| $
|
166,637
| | $
|
5,022
| | $
| 20,089
| | $
| 20,089
| | $
| 20,089
| | $
|
135,731
| | $
| -
|
Office rental
| $
|
103,295
| | $
|
9,150
| | $
|
39,552
| | $
|
42,638
| | $
|
11,956
| | $
| -
| | $
| -
|
Leasehold improvements
| $
| 400,000
| | | | |
$
|
400,000
| | | | | | | | | | | | |
13
Critical Accounting Policies
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would materially affect our consolidated results of operations, financial position or liquidity for the periods presented in this report. The Company’s critical accounting policies are as follows:
Revenue Recognition
Revenue is recognized on an accrual basis as earned under contract terms. Specifically, revenue from tenant rentals is recognized on a straight-line basis over the reasonably assured lease term, and collectability is reasonably assured. Consulting revenue is recognized based upon the payment terms within the contracts, and collectability is reasonably assured. Revenue relating to our wholesale business is recognized at the time goods are sold.
Conventional Convertible Debt
The Company records conventional convertible debt in accordance with Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) Topic No. (“Topic”) 470-20,
Debt with Conversion and Other Options.
Conventional convertible debt is a financial instrument in which the holder may only realize the value of the conversion option by exercising the option and receiving the entire proceeds in a fixed number of shares or the equivalent amount of cash. Conventional convertible debt with a non-detachable conversion feature that does not contain a cash settlement option, and is not accounted for as a derivative, is recorded as a debt instrument in its entirety. The Company has accounted for a December 2013 debt issuance and an 8 ½% Convertible Notes Payable as conventional convertible debt.
Derivatives Liabilities, Beneficial Conversion Features and Debt Discounts
The Company evaluates stock options, stock warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC Topic 815-40,
Derivative Instruments and Hedging: Contracts in Entity’s Own Equity
.. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.
The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants are recognized currently in earnings until such time as the warrants are exercised, expire or the related rights have been waived. These common stock purchase warrants do not trade in an active securities market. The Company estimates the fair value of these warrants using the binomial method. The Company has recorded a derivative liability related to the Series C Warrants.
If a conversion feature of conventional convertible debt is not accounted for as a derivative instrument and provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount. The convertible debt is recorded net of the discount related to the BCF. The Company amortizes the discount to interest expense over the life of the debt using the straight-line method, which approximates the effective interest rate method. The Company has recorded a BCF to the notes issued in January 2014.
14
Fair Value Measurements
ASC Topic 820,
Fair Value Measurements and Disclosures,
provides a comprehensive framework for measuring fair value and expands disclosures, which are required about fair value measurements. Specifically, ASC Topic 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 Topic 820 defines the hierarchy as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting 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 reporting 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.
The Company's derivative liability is a Level 3 estimated fair market value instrument.
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.
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 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. Management believes that actions presently being taken to further implement its business plan and generate additional revenues provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to generate additional revenues and its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate additional revenues.
The Company had an accumulated deficit of approximately $2,140,000 and $711,000 as of June 30, 2014 and December 31, 2013, respectively, 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 accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
15
BUSINESS
On August 14, 2013, we acquired approximately 94% of the outstanding common stock of Advanced Cannabis Solutions, Inc.
(“ACSI”), a private company
in exchange for 12,400,000 shares of our common stock.
In connection with the acquisition:
·
Robert Frichtel was appointed as a director and as our Principal Executive and Financial Officer;
·
Steven Tedesco and Robert Carrington, Jr., resigned as our officers and directors; and
·
we purchased 8,000,000 shares of common stock from a former officer and caused these shares to be returned to treasury and cancelled.
On October 1, 2013 we changed our name to Advanced Cannabis Solutions, Inc. On November 19, 2013 we acquired the remaining shares of
ACSI and ASCI was merged into the Company, with the surviving entity being the Company.
The Company’s
wholly owned
subsidiary,
Advanced Cannabis Solutions Corporation,
is
the
parent company formed in the state
of
We provide sophisticated services and solutions to the regulated cannabis industry throughout the United States by first acquiring, and then 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. We plan to provide a variety of other services to the cannabis industry.
Our initial focus
has been
on opportunities within
the state of
Colorado, which has allowed its citizens to use medical marijuana since 2000.
In January 2014, the state of
Colorado
enacted laws
to legalize marijuana for
recreational
adult use.
Pueblo Facility
In
December 31, 2013 we purchased a property in Pueblo County, Colorado for $450,000. The property, which is located in a suburb of Pueblo, Colorado, consists of approximately three acres of land, a 5,000 square foot steel building, and a parking lot.
The purchase price was paid with cash of $280,000 and a promissory note in the principal amount of $170,000. The note bears interest at 8.5% per year and is payable in monthly installments of principal and interest in the amount of $1,674. All unpaid principal and interest is due December 31, 2018. This note is amortized over 15 years with a
balloon payment due on and
maturity date of December 31, 2018. The note is convertible into shares of common stock at any time on or before the maturity date at a conversion price of $5.00 per common share.
The property is zoned for growing marijuana and is
partially
leased to a medical marijuana grower until December 31, 2022.
The monthly rent on this property is as follows:
| | |
Month (1)
| | Rent
|
1
| | -0-
|
2-6
| | $4,500
|
7-12
| | $15,492
|
13-18
| | $15,670
|
19-24
| | $9,031
|
25-36
| | $9,584
|
37-48
| | $9,396
|
49-60
| | $9,584
|
61-72
| | $9,775
|
73-84
| | $9,971
|
85-95
| | $10,170
|
96-___
| | $14,670
|
(1)
Beginning January 1, 2014.
16
In addition to the monthly rent, the tenant will pay all property taxes and insurance associated with the property.
We also agreed with the tenant to begin construction of
a
9,000 sq. ft. light deprivation greenhouse on the property. On June 19, 2014, we received final approval from the county of Pueblo to begin construction. Construction costs for the greenhouse are budgeted at $400,000 and
would
be funded from our existing cash on hand (approximately
$1,100,000
at
September
30, 2014. Foundation work and site security upgrades
would commence, at the earliest, during the first quarter of 2015.
Once construction is completed,
the monthly
rent will increase by
approximately $8,300 and (subject to annual increases)
for the duration of the lease. During the construction phase, the tenant will pay us a
discount of the
rent for the time required for the construction of the greenhouse. Normal rent payments will commence once a final Certificate of Occupancy is issued.
Depending on the availability of additional capital, we may construct up to four additional greenhouses on this property.
We have identified
numerous
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 in the range of $750,000 to $5 million for each project.
We are currently exploring investment opportunities in Oregon, Washington, Florida and Illinois.
Our future plans will be dependent upon our ability to raise the capital required to acquire properties.
Market Conditions
According to the Colorado Department of Revenue, Colorado’s marijuana industry reported
the following estimated monthly marijuana sales for each of the following months:
| | | | | | |
| | Estimated Sales
|
| | Medical
| | Recreational
| | Total
|
January
| $
| 31,500,655
| $
| 12,466,853
| $
| 43,967,508
|
February
| | 35,247,448
| | 12,783,248
| | 48,030,696
|
March
| | 34,479,310
| | 16,925,318
| | 51,404,628
|
April
| | 31,723,517
| | 19,415,171
| | 51,138,688
|
May
| | 31,976,897
| | 18,830,612
| | 50,807,509
|
June
| | 28,650,379
| | 21,602,752
| | 50,253,131
|
July
| | 28,921,069
| | 25,846,837
| | 54,767,906
|
Total
| $
| 222,499,276
| $
| 127,870,791
| $
| 350,370,067
|
In Colorado, the market was expanded in January 2014 to include adult use, including visitors from other states. Voters in Washington recently approved a ballot measure to legalize cannabis for adult use. Many experts predict that other states will follow Colorado and Washington in enacting legislation or approving ballot measures that expand the permitted use of cannabis.
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.
A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The Department of Justice defines Schedule 1 controlled substances as “the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence.” If the federal government decides to enforce the Controlled Substances Act in Colorado with respect to marijuana, persons that are charged with distributing, possessing with intent to distribute, or growing marijuana could be subject to fines and terms of imprisonment, the maximum being life imprisonment and a $50 million fine.
17
As of
September 30, 2014, 23
states and the District of Columbia allow
their residents
to use
medical marijuana.
Additionally, voters in the states of Colorado and Washington approved ballot measures
in
November
2013
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. However, there is no guarantee that the administration will not change its stated policy regarding the low-priority enforcement of federal laws. Additionally, any new administration that follows could change this policy and decide to enforce the federal laws strongly. Any such change in the federal government’s enforcement of current federal laws could cause significant financial damage to us. While we do not intend to harvest, distribute or sell cannabis, we may be irreparably harmed by a change in enforcement by the federal or state governments.
Despite the Obama administration’s statements, the Department of Justice has stated that it will continue to enforce the Controlled Substance Act with respect to marijuana in Colorado to prevent:
·
the distribution of marijuana to minors;
·
criminal enterprises, gangs and cartels receiving revenue from the sale of marijuana;
·
the diversion of marijuana from states where it is legal under state law to other states;
·
state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
·
violence and the use of firearms in the cultivation and distribution of marijuana;
·
driving while impaired and the exacerbation of other adverse public health consequences associated with marijuana use;
·
the growing of marijuana on public lands; and
·
marijuana possession or use on federal property.
General
Our offices are located at 4445 North Park Dr., Suite 102, Colorado Springs, CO 80907. We lease this space for $2,000 per month until April 2017.
As of
October 24,
2014, we had
six (6)
full-time employees and
no
part-time
employees.
MANAGEMENT
Our current officers and directors are listed below. Directors are generally elected at an annual shareholders’ meeting and hold office until the next annual shareholders’ meeting, or until their successors are elected and qualified. Executive officers are elected by directors and serve at the board’s discretion.
| | | | |
Name
| | Age
| | Position
|
Michael Feinsod
| |
44
| |
Chairman of Board and Director
|
Robert L. Frichtel
| |
51
| | Chief Executive Officer and Director
|
Brian J. Kozel
| |
38
| |
Vice President-Finance, Chief Financial and Accounting Officer
|
Christopher Taylor
| |
61
| |
Vice President
|
Information regarding our officers
and directors
is shown below.
Michael Feinsod was appointed a director, and elected Chairman of the board on August 4, 2014. Mr. Feinsod is the Managing Member of Infinity Capital, LLC, an investment management company he founded in 1999. Since January 2014, Mr. Feinsod has been an investor in the Colorado marijuana industry. From 2006 through 2013, he served in various executive positions at Ameritrans Capital Corporation (“Ameritrans”), a business development company. Mr. Feinsod served as a director of Ameritrans from December 2005 until July 2013 and served as a director of its subsidiary, Elk Associates Funding Corporation, from December 2005 until April 2013. In April 2013, in connection with a settlement agreement, the United States Small Business Administration, was appointed as the receiver of Elk Associates Funding Corporation. Mr. Feinsod served as an investment analyst and portfolio manager at Mark Boyar & Company, Inc., a broker-dealer. He is admitted to practice law in New York and served as an associate in the Corporate Law Department of Paul, Hastings, Janofsky & Walker LLP. Mr. Feinsod holds a J.D. from Fordham University School of Law and a B.A. from George Washington University. We believe that Mr. Feinsod’s corporate finance, legal and executive-level experience, as well as his service on the boards of other public companies, give him the qualifications and skills to serve as one of our directors.
18
Robert L. Frichtel, was appointed a director and as our Chief Executive Officer on August 14, 2013. Mr. Frichtel served as a managing partner of IBC Capital Group, a commercial real estate and finance company, since 2002. Between 1999 and 2001, Mr. Frichtel was the president and Chief Operating Officer of EOS Group, a division of Health Net, a NYSE listed healthcare company. Since 2001 Mr. Frichtel has consulted for numerous clients throughout the nation that are engaged in the medical marijuana business and has written articles for Bloomberg business regarding the cannabis industry. Mr. Frichtel received a Bachelor of Science degree in business administration from Colorado State University in 1985.
We believe that Mr. Frichtel is qualified to act as one of our directors due to his past experience in commercial real estate and the marijuana industry.
Brian J. Kozel was appointed to serve as the Company’s Vice President - Finance and Chief Financial Officer, pursuant to an independent contractor agreement, on October 24, 2014. Mr. Kozel is currently a private consultant providing SEC and financial advice to clients in a variety of industries, primarily, through his firm, Satellite Accounting Services, LLC. Since 2011, he has also been Compliance Director for Aspire XBRL, a start-up firm specializing in solutions-based XBRL and SEC/EDGAR servicing and reporting. From 2010 to 2011, Mr. Kozel was an XBRL subject matter expert with Rivet Software, a developer, provider and servicer of proprietary financial reporting solutions. From 1998 to 2008, Mr. Kozel was a staff accountant, director and senior manager with KPMG, LLP. Since 2011, Mr. Kozel, as a volunteer, has served as Treasurer and Finance Committee Chair of Aging Service of Boulder County, a charitable organization. Mr. Kozel, a certified public accountant, received a BS, Accounting degree from Bucknell University and was an MBA candidate at IUPUI, Kelly School of Business. In consideration for his services, Mr. Kozel will be (i) paid at an hourly rate approved by the Board and (ii) reimbursed for reasonable out-of-pocket expenses incurred by him in performing his services.
Mr. Taylor was appointed as our Chief Financial and Accounting Officer September 23, 2013. Mr. Taylor is a Certified Public Accountant and has operated his own public accounting practice since July of 2001. Since 2010 Mr. Taylor has provided accounting services to approximately 50 marijuana dispensary clients in Colorado and Washington.
On October 24, 2014, Mr. Taylor’s position was changed from that of Chief Financial and Accounting Officer to Vice President – Business Development.
The following table
sets forth all
compensation
paid in respect of the Company’s Chief Executive Officer (“CEO”) and the two (2) most highly compensated executive
officers
other than the CEO who received compensation in excess of $100,000 per year for each of
the years ended December 31, 2013 and 2012:
| | | | | | | | | | | | | | |
Name and Principal Position
| | Year
| | Salary
$
| | Bonus
$
| | Stock
Awards
$
| | Option
Awards
$
| | All Other
Compensation
$
| | Total
$
|
Robert Frichtel, Chief Executive Officer (1)
| | 2013
| | 49,118
| | --
| | --
| | --
| | --
| | 49,118
|
| | | | | | | | | | | | | | |
Roberto Lopesino Vice President (5)
| |
2013
| |
31,500
| |
--
| |
--
| |
--
| |
--
| |
31,500
|
| | | | | | | | | | | | | | |
Christopher Taylor Chief Financial Officer (2)
| | 2013
| | 15,398
| | --
| | --
| | --
| | --
| | 15,398
|
| | | | | | | | | | | | | | |
Steven Tedesco (3) President and Chief
| | 2013
| | --
| | --
| | --
| | --
| | --
| | --
|
Executive Officer
| | 2012
| | --
| | --
| | --
| | --
| | --
| | --
|
| | | | | | | | | | | | | | |
Robert W. Carington, Jr.
| | 2013
| | --
| | --
| | --
| | --
| | --
| | --
|
Chief Financial Officer (4)
| | 2012
| | --
| | --
| | --
| | --
| | --
| | --
|
(1) Mr. Frichtel
was
appointed
an officer
on August 14, 2013.
(2) Mr. Taylor was appointed an officer on September 23, 2013.
(3) Mr. Tedesco resigned as an officer and director on August 14, 2013.
(4) Mr. Carrington resigned as an officer and director on August 14, 2013.
(5) Mr. Lopesino resigned as an officer on October 29, 2014.
19
The following shows the amounts we expect to pay to our officers
| | | | | | |
Name
| | Projected Compensation
| | Percent of Time to be Devoted to the Our Business
|
Robert L. Frichtel
| | $
| 108,000
| | 100%
| |
Roberto Lopesino
| |
$
| 90,000(1)
| | 100%
|
|
Christopher Taylor
| | $
| 108,000
| | 100%
| |
(1) On October 29, 2014, Mr. Lopesino resigned from the Company.
We do not have employment agreements with any of our officers.
Stock Option and Stock Bonus Plans. We do not have any stock option plans, although we may adopt one or more of such plans in the future.
Long-Term Incentive Plans. We do not provide our officers or employees with pension, stock appreciation rights or long-term incentive plans.
Employee Pension, Profit Sharing or other Retirement Plans. We do not have a defined benefit, pension plan, profit sharing or other retirement plan, although we may adopt one or more of such plans in the future.
Compensation of Directors. During the two years ended December 31, 2013, we did not compensate our directors for acting as such.
Compensation Committee Interlocks and Insider Participation. Robert Frichtel,
historically
our only director,
acted
as our Compensation Committee. During the year ended December 31, 2013 none of our officers was a member of the Compensation Committee or a director of another entity, which other entity had one of its executive officers serving as one of our directors or as a member of our
Compensation Committee.
Code of Ethics Policy
We have not yet adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions.
Corporate Governance
There have been no changes in any state law or other procedures by which security holders may recommend nominees to our board of directors. In addition to having no nominating committee for this purpose, we currently have no specific audit committee and no audit committee financial expert. The Company is in the process of identifying an audit committee financial expert.
Related Party Transactions
During the two years ended December 31, 2013 and 2012,
there were
de minimis
related party transactions.
20
PRINCIPAL STOCKHOLDERS
The following table
sets forth certain information regarding
beneficial ownership of our common stock as of
October 24, 2014:
(i)
by
each of our directors,
(ii) by each of the Named Executive Officers, (iii) by
all
of our executive
officers and directors as a group,
and (iv) by each person
or
entity known by us to beneficially own more than five percent (5%) of any class of our outstanding shares. As of October 24, 2014, there were 13,709,933 shares of our common stock outstanding.
| | | | |
Name and Address
| | Number
of Shares
| | Percentage
of Class
|
| | | | |
Michael Feinsod (1)(4)
| |
200,000
| |
1.46%
|
| | | | |
Robert L. Frichtel
(1)(5)
| | 1,000,000
| |
7.29%
|
| | | | |
Roberto Lopesino
(1)(6)
| | 1,150,000
| |
8.39%
|
| | | | |
Christopher Taylor
(1)(7)
| | 100,000
| |
0.73%
|
| | | | |
All officers and directors as a group
(four
persons)
| |
2,450,000
| |
17.87%
|
| | | | |
Stephen Calandrella (2)
| | 1,200,000
| |
8.75%
|
7750 N. Union Blvd., # 201
| | | | |
Colorado Springs, CO 80920
| | | | |
| | | | |
BGBW, LLC (3)
| | 2,500,000
| |
18.23%
|
GTC House
| | | | |
18 Station Rd.
| | | | |
Chesham Bucks HP5 1DH
| | | | |
GB
| | | | |
(1) Address for this person is 4445 Northpark Drive, Suite 102, Colorado Springs, CO 80907.
(2) Includes 600,000 shares held by the Rockies Fund. Mr. Calandrella, as a significant stockholder and possibly officer or director of the Rockies Fund, may be deemed beneficial owner of such shares. Mr. Calandrella disclaims beneficial ownership of the shares owned by the Rockies Fund.
Derived from a share exchange agreement between the Company and Promap filed with the SEC on August 16, 2013.
(3) Derived from a share exchange agreement between the Company and Promap filed with the SEC on August 16, 2013. BGBW, LLC is controlled by Michael Kelsey.
(4) Includes 200,000 shares owned by Infinitity Capital, LLC. Michael Feinsod, as Managing Member of Infinity Capital, LLC, may be deemed to be the beneficial owner of such shares. Derived from a Form 4 filed with the SEC on August 5, 2014.
(5) Derived from a Form 13D filed with the SEC on September 2, 2014.
(6) Shares are held of record by The List Consulting LLC, an entity controlled by Mr. Lopesino. Derived from a share exchange agreement between the Company and Promap filed with the SEC on August 16, 2013 and Schedule 14f-1 filed with the SEC on August 16, 2013.
(7) Derived from a Form 4 filed with the SEC on September 24, 2013.
21
SELLING SHAREHOLDERS
The persons listed in the following table plan to offer the shares shown opposite their respective names by means of this prospectus.
On August 14, 2013,
Promap
acquired
94%
of Advanced Cannabis Solutions, Inc.,
(“ACSI”)
a private Colorado corporation.
On October 1, 2013 we changed
our
name to Advanced Cannabis Solutions, Inc. (“ACS”).
On November 19, 2013 we acquired the remaining 973,000 outstanding shares of
ACSI
in exchange for the issuance of 973,000 shares of our common stock to the former shareholders of
ACSI.
In connection with the transaction, we issued 973,000 Series A warrants to the former
ACSI
shareholders in exchange for a like number of warrants held by the former
ACSI
shareholders. The Series A warrants we issued have the same terms as the warrants exchanged by the former
ACSI
shareholders.
The selling shareholders named below acquired their shares and Series A warrants in connection with our November 19, 2013 acquisition of the remaining shares of
ACSI.
| | | | | | | | |
Name of Selling
Shareholder
| | Shares
Owned
| | Shares
Issuable
upon the
Exercise of
Series A Warrants
| | Shares to be
Sold in this
Offering
| | Ownership
After Offering
|
Tan, Erol Larson
| | 5,000
| | 5,000
| | 10,000
| | --
|
Orrick, Peter M.
| | 12,000
| | 12,000
| | 24,000
| | --
|
Michael, Edward A.
| | 25,000
| | 25,000
| | 50,000
| | --
|
Irons, Henry C. Jr.
| | 10,000
| | 10,000
| | 20,000
| | --
|
Jamieson, Raeleen B.
| | 5,000
| | 5,000
| | 10,000
| | --
|
Guest, Alexander M.
| | 15,000
| | 15,000
| | 30,000
| | --
|
Hynes, Gabriel W.
| | 10,000
| | 10,000
| | 20,000
| | --
|
Vaughn Family LLC
| | 50,000
| | 50,000
| | 100,000
| | --
|
Craig, Ann Robinette
| | 10,000
| | 10,000
| | 20,000
| | --
|
Jannelli, Gilbert G.
| | 25,000
| | 25,000
| | 50,000
| | --
|
Jannelli, Dominick G.
| | 25,000
| | 25,000
| | 50,000
| | --
|
Mackin, Mark
| | 20,000
| | 20,000
| | 40,000
| | --
|
Jensen, Michael S.
| | 25,000
| | 25,000
| | 50,000
| | --
|
Lackie, Hugh T.
| | 20,000
| | 20,000
| | 40,000
| | --
|
Blanchat, Kevin
| | 25,000
| | 25,000
| | 50,000
| | --
|
Summers, Jeremy
| | 25,000
| | 25,000
| | 50,000
| | --
|
Prazkik, Frank E. Jr.
| | 25,000
| | 25,000
| | 50,000
| | --
|
Reed, Amanda
| | 25,000
| | 25,000
| | 50,000
| | --
|
Verchick, Peter G.
| | 25,000
| | 25,000
| | 50,000
| | --
|
Ferro, Frank & Irene
| | 10,000
| | 10,000
| | 20,000
| | --
|
Topliff, James F.
| | 25,000
| | 25,000
| | 50,000
| | --
|
Cork Investments, Inc.
| | 5,000
| | 5,000
| | 10,000
| | --
|
Lenhart, Craig
| | 25,000
| | 25,000
| | 50,000
| | --
|
Chapman, Stephen R.
| | 10,000
| | 10,000
| | 20,000
| | --
|
Drozd, Hamilton Edward
| | 10,000
| | 10,000
| | 20,000
| | --
|
Vaughn, Cyrus
| | 50,000
| | 50,000
| | 100,000
| | --
|
Black, Thomas A.
| | 25,000
| | 25,000
| | 50,000
| | --
|
Carr, Douglas
| | 5,000
| | 5,000
| | 10,000
| | --
|
Meyers, Robert C.
| | 10,000
| | 10,000
| | 20,000
| | --
|
Smith, Laurence D.
| | 5,000
| | 5,000
| | 10,000
| | --
|
Culbertson, Jeffrey G.
| | 5,000
| | 5,000
| | 10,000
| | --
|
Emerald Barbajo
| | 5,000
| | 5,000
| | 10,000
| | --
|
GKG Investments LLC
| | 25,000
| | 25,000
| | 50,000
| | --
|
McKeown, Wendy Ruth
| | 15,000
| | 15,000
| | 30,000
| | --
|
22
| | | | | | | | |
Name of Selling
Shareholder
| | Shares
Owned
| | Shares
Issuable
upon the
Exercise of
Series A Warrants
| | Shares to be
Sold in this
Offering
| | Ownership
After Offering
|
Datsopoulos, Milton
| |
35,000
| |
35,000
| |
70,000
| |
--
|
Yakely, Heather
| |
5,000
| |
5,000
| |
10,000
| |
--
|
Doudney, Nathan
| | 25,000
| | 25,000
| | 50,000
| | --
|
Andres, Fabian
| | 10,000
| | 10,000
| | 20,000
| | --
|
Donato, Nicolo
| | 20,000
| | 20,000
| | 40,000
| | --
|
Mago, Anu
| | 5,000
| | 5,000
| | 10,000
| | --
|
Crowley, John & Patricia
| | 15,000
| | 15,000
| | 30,000
| | --
|
Cooper, David
| | 25,000
| | 25,000
| | 50,000
| | --
|
Shore, Cody
| | 3,000
| | 3,000
| | 6,000
| | --
|
Krull, Chad
| | 10,000
| | 10,000
| | 20,000
| | --
|
Miller, Perry
| | 25,000
| | 25,000
| | 50,000
| | --
|
Hansen Capital, LP
| | 25,000
| | 25,000
| | 50,000
| | --
|
Yelton III, Doran Dean
| | 10,000
| | 10,000
| | 20,000
| | --
|
Ben Savy Accounting, Inc.
| | 5,000
| | 5,000
| | 10,000
| | --
|
Fitterman, Yaffa
| | 15,000
| | 15,000
| | 30,000
| | --
|
DCHCI, LLC
| | 50,000
| | 50,000
| | 100,000
| | --
|
Shrira, Aaron
| | 25,000
| | 25,000
| | 50,000
| | --
|
Oyster, Matthew
| | 5,000
| | 5,000
| | 10,000
| | --
|
Tedesco, Steven
| | 4,000
| | 4,000
| | 8,000
| | --
|
Tedesco, Trevor
| | 1,000
| | 1,000
| | 2,000
| | --
|
Fitterman, Yaffa
| | 18,000
| | 18,000
| | 36,000
| | --
|
Attariwala, Joetey
| | 5,000
| | 5,000
| | 10,000
| | --
|
Carr, Douglas
| | 5,000
| | 5,000
| | 10,000
| | --
|
O'Brien, Bridgid M.
| | 5,000
| | 5,000
| | 10,000
| | --
|
Andersen, Sherry
| | 10,000
| | 10,000
| | 20,000
| | --
|
| |
973,000
| |
973,000
| |
1,946,000
| | |
The controlling persons of the non-individual selling shareholders listed above are:
| | |
Name of
Selling Shareholder
| | Controlling Person
|
Vaughn Family LLC
| |
Cyrus
Vaughn
|
Cork Investments, Inc.
| | Howard Crowley
|
GKG Investments LLC
| | D.J. Gregorek
|
Hansen Capital, LP
| | E.O. Hansen
|
Ben Savy Accounting, Inc.
| | Benjamin Savy
|
DCHCI, LLC
| | David R. Coombs
|
During December 2013 and January 2014 we sold convertible promissory notes in the principal amount of $2,135,000 to 34 accredited investors in connection with a private offering which began on October 28, 2013
(the “Note Offering.”)
The notes bear interest at
12.0%
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. During December 2013 and January 2014 the price of our common stock fluctuated from a low of $1.81 to a high of $23.03. The conversion price of the notes was determined in negotiations between us and the placement agent for the offering and was based upon a premium of approximately 25% to the closing price of our common stock ($3.90 per share) on October 28, 2013, the date the private offering began. In March 2014, four persons converted notes in the principal amount of $255,000, plus accrued interest of $3,669, into 51,733 shares of our common stock.
In September 2014, three persons converted notes in the principal amount of $330,000, into 66,000 shares of our common stock.
23
The Selling Shareholders named below are offering shares of our common stock which they may receive upon the conversion of their notes.
| | | | | | | | |
Name of Selling
Shareholder
| | Shares
Owned
| | Shares
Issuable
upon
Conversion
of Notes
| | Shares to be
Sold in this
Offering
| | Ownership
After Offering
|
Barnette, Sharon and Sherry
| | --
| | 8,000
| | 8,000
| | --
|
Black, Thomas A
| | --
| | 10,000
| | 10,000
| | --
|
Brooks, Daniel
| | --
| | 2,000
| | 2,000
| | --
|
Buehler, Jason
| | --
| | 4,000
| | 4,000
| | --
|
Clark, Edward
| | --
| | 10,000
| | 10,000
| | --
|
Datsopaulos, Mitton
| | --
| | 40,000
| | 40,000
| | --
|
Eison, Paul
| | --
| | 6,000
| | 6,000
| | --
|
Erickson, Dennis
| | --
| | 20,000
| | 20,000
| | --
|
Goodgoin, Michael
| | --
| | 10,000
| | 10,000
| | --
|
Gorden, Harold
| | --
| | 5,000
| | 5,000
| | --
|
Griffin, Dennis
| | --
| | 10,000
| | 10,000
| | --
|
Griffin, Lynn
| | --
| | 10,000
| | 10,000
| | --
|
Jensen, Michael
| | --
| | 5,000
| | 5,000
| | --
|
K&M Ag Construction
| | --
| | 4,000
| | 4,000
| | --
|
Kaszycki, Deborah
| | --
| | 2,000
| | 2,000
| | --
|
Lazarus, Shulamut
| | --
| | 20,000
| | 20,000
| | --
|
Miller, Perry L.
| | --
| | 20,000
| | 20,000
| | --
|
Moscariello, Michael
| | --
| | 4,000
| | 4,000
| | --
|
Negrin, Alan
| | --
| | 10,000
| | 10,000
| | --
|
Panayotou, Nickitas
| | --
| | 20,000
| | 20,000
| | --
|
Postman, Warren
| | --
| | 20,000
| | 20,000
| | --
|
Rodriguez, Daniel
| | --
| | 6,000
| | 6,000
| | --
|
Smith, Donald
| | --
| | 4,000
| | 4,000
| | --
|
Stinnett, Ken
| | --
| | 2,000
| | 2,000
| | --
|
Taglieri, Joseph
| | --
| | 2,000
| | 2,000
| | --
|
Tedesco, Eleanor H.
| | --
| | 2,000
| | 2,000
| | --
|
Tedesco, Steven
| | --
| | 6,000
| | 6,000
| | --
|
Van Dusen, Donna
| | --
| | 4,000
| | 4,000
| | --
|
VanderPloeg, Andrew
| | --
| | 60,000
| | 60,000
| | --
|
Vaughn, Cyrus
| | --
| | 40,000
| | 40,000
| | --
|
Young, Wayne
| | --
| | 10,000
| | 10,000
| | --
|
| | | | 376,000
| | 376,000
| | |
The controlling person of K&M Ag Construction is Mark Bjustrom.
We paid a commission of $213,500 and a non-accountable expense allowance of $32,100 to the placement agent for the convertible note offering described above. The placement agent also received 213.5 Series B warrants. Each Series B warrant allows the holder to purchase 200 shares of our common stock at a price of $5.00 per share, for a total of 42,700 shares. The exercise price of the Series B warrants was the same as the $3.90 conversion price of the notes we sold during December 2013 and January 2014, which was approximately 125% of the prevailing market price at the time the note offering was structured. The Series B warrants expire on October 31, 2018.
The Selling Shareholder named below is offering shares of our common stock which it may receive upon the exercise of the Series B warrants.
| | | | | | | | |
Name of Selling
Shareholder
| | Shares
Owned
| | Share Issuable
Upon the
Exercise of
Series B Warrants
| | Shares to be
Sold in this
Offering
| | Ownership
After Offering
|
Spencer Edwards, Inc.
| | --
| | 42,700
| | 42,700
| | --
|
24
The controlling person of the non-individual selling shareholder listed above is:
| | |
Name
| | Controlling Person
|
Spencer Edwards, Inc.
| | Donna Flemming
|
On January 21, 2014, we entered into an agreement with Full Circle Capital Corporation
(the “SPA”)
whereby Full Circle agreed to provide us with capital pursuant to certain conditions. As part of this transaction, we sold Full Circle 1,000,000 Series C warrants. Each Series C warrant allows Full Circle to purchase one share of our common stock at an exercise price of $5.50 per share at any time on or before January 20, 2017. Full Circle paid $500,000 for the Series C warrants. If Full Circle exercised its warrants on July 22, 2014, and sold all of the shares issuable upon the exercise of the warrants at the closing price of our common stock on July 22, 2014 ($5.00), Full Circle would not make any profit. However, if it sold the shares at a higher price it would make a profit. For example, if it sold the shares at
$6.50
per share, Full Circle would make a profit of
$1,000,000,
net of the amount paid for its warrants.
On September 24, 2014, the Company and Full Circle entered into Amendment No. 1 to the SPA, which changed the conversion price of the initial $7,500,000 promissory note to $4.00 per share of the Company's common stock. Also on September 24, 2014, and in connection with Amendment No.1 to the SPA, the Company and Full Circle entered into Amendment No. 1 to the Warrant, which changed the exercise price of the warrants issuable pursuant to the Warrant to $4.00 per share of the Company's common stock, and increased the amount of warrants issuable pursuant to the terms of the Warrant to 1,400,000 warrants to purchase shares of the Company's common stock. If Full Circle exercised its warrants on October 24, 2014, and sold all of the shares issuable upon the exercise of the warrants at the closing price of our common stock on October 24, 2014, which was $3.52 per share, Full Circle would not make any profit. However, if it sold the shares at a higher price it would make a profit. For example, if it sold the shares at $6.50 per share, Full Circle would make a profit of $3,000,000, net of the amount paid for its warrants.
The Selling Shareholder named below is offering shares of our common stock which it may receive upon the exercise of the Series C warrants.
| | | | | | | | |
Name of Selling
Shareholder
| | Shares
Owned
| | Share Issuable
Upon the
Exercise of
Series B Warrants
| | Shares to be
Sold in this
Offering
| | Ownership
After Offering
|
Full Circle Capital Corporation
| | --
| |
1,400,000
| |
1,400,000
| | --
|
The controlling person of the non-individual selling shareholder listed above is:
| | |
Name
| | Controlling Person
|
Full Circle Capital Corporation
| | Gregg J. Felton/John E. Stuart
|
The shares of common stock owned by the selling shareholders may be offered and sold by means of this prospectus from time to time as market conditions permit, in the over-the-counter market, or otherwise, at prices and terms then prevailing or at prices related to the then-current market price, or in negotiated transactions.
The shares of common stock may be sold by one or more of the following methods, without limitation:
·
a block trade in which a broker or dealer so engaged will attempt to sell the securities as agent but may position and resell a portion of the block as principal to facilitate the transaction;
·
purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this prospectus;
·
ordinary brokerage transactions and transactions in which the broker solicits purchasers; and
·
face-to-face transactions between sellers and purchasers without a broker/dealer.
In competing sales, brokers or dealers engaged by the selling shareholders may arrange for other brokers or dealers to participate. Brokers or dealers may receive commissions or discounts from selling shareholders in amounts to be negotiated. As to any particular broker-dealer, this compensation might be in excess of customary commissions. Neither we nor the selling stockholders can presently estimate the amount of such compensation. Notwithstanding the above, no FINRA member will charge commissions that exceed 8% of the total proceeds from the sale.
25
The selling shareholders and any broker/dealers who act in connection with the sale of their securities may be deemed to be "underwriters" within the meaning of §2(11) of the Securities Acts of 1933, and any commissions received by them and any profit on any resale of the securities as principal might be deemed to be underwriting discounts and commissions under the Securities Act.
If any selling shareholder enters into an agreement to sell his or her securities to a broker-dealer as principal, and the broker-dealer is acting as an underwriter, we will file a post-effective amendment to the registration statement, of which this prospectus is a part, identifying the broker-dealer, providing required information concerning the plan of distribution, and otherwise revising the disclosures in this prospectus as needed. We will also file the agreement between the selling shareholder and the broker-dealer as an exhibit to the post-effective amendment to the registration statement.
The selling stockholders may also sell their shares pursuant to Rule 144 under the Securities Act of 1933.
We have advised the selling shareholders that they, and any securities broker/dealers or others who sell the common stock or warrants on behalf of the selling shareholders, may be deemed to be statutory underwriters and will be subject to the prospectus delivery requirements under the Securities Act of 1933. We have also advised each selling shareholder that in the event of a "distribution" of the securities owned by the selling shareholder, the selling shareholder, any "affiliated purchasers", and any broker/dealer or other person who participates in the distribution may be subject to Rule 102 of Regulation M under the Securities Exchange Act of 1934 ("1934 Act") until their participation in that distribution is completed. Rule 102 makes it unlawful for any person who is participating in a distribution to bid for or purchase securities of the same class as is the subject of the distribution. A "distribution" is defined in Rule 102 as an offering of securities "that is distinguished from ordinary trading transactions by the magnitude of the offering and the presence of special selling efforts and selling methods". We have also advised the selling shareholders that Rule 101 of Regulation M under the 1934 Act prohibits any "stabilizing bid" or "stabilizing purchase" for the purpose of pegging, fixing or stabilizing the price of the common stock in connection with this offering.
DESCRIPTION OF SECURITIES
Common Stock
We are authorized to issue 100,000,000 shares of common stock. Holders of common stock are each entitled to cast one vote for each share held of record on all matters presented to shareholders. Cumulative voting is not allowed; hence, the holders of a majority of our outstanding shares of common stock can elect all directors.
Holders of common stock are entitled to receive such dividends as may be declared by
our board of directors
out of funds legally available and, in the event of liquidation, to share pro rata in any distribution of our assets after payment of liabilities. Our directors are not obligated to declare a dividend. It is
Holders of common stock do not have preemptive rights to subscribe for any additional shares which may be issued in the future. There are no conversion, redemption, sinking fund or similar provisions regarding the common stock. All outstanding shares of common stock are fully paid and non-assessable.
As of the date of this prospectus, we had 13,709,933 shares of common stock issued and outstanding.
Warrants
Series A Warrants
As of the date of this prospectus, we had 973,000 outstanding Series A warrants. 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. Our common stock is currently trading in the grey market and, as of the date of this prospectus, the quotation of our common stock on the OTC Bulletin Board has not resumed.
26
Series B Warrants
As of the date of this prospectus, we had 213.5 Series B warrants outstanding. Each Series B warrant allows the 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, for a total of 42,700 shares.
Series C Warrants
As of the date of this prospectus, we had 1,400,000
Series C warrants outstanding. Each Series C warrant allows the holder to purchase one share of our common stock at an exercise price of $4.00 per share at any time on or before January 20, 2017.
Evans Street Warrants
On October 21, 2014, 6565 E. Evans Owner, LLC (“6565”), a wholly-owned subsidiary of the Company, purchased a 15,734 square foot commercial real estate property located in Denver, Colorado for total consideration of $1,050,000.
6565’s purchase was financed in part by a 14% promissory note issued to Evans Street Lendco, LLC (“Evans Street”) with a principal balance of $600,000, which expires two years after its initial issuance date. In connection with the promissory note issued to Evans Street, the Company also issued Evans Street warrants (the “Warrants”) to purchase 600,000 shares of the Company’s common stock at a conversion price of $4.40 per share, subject to customary adjustments in the event of reclassification of the Company, consolidation of the Company, merger, subdivision of shares of the Company’s common stock, combination of shares of the Company’s common stock or payment of dividends in the form of the Company’s common stock. The Warrants expire two years after their initial issuance date.
The Warrants are not registered under the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any state and were issued in reliance on the exemption from registration afforded by Section 4(a)(2) of the Securities Act and corresponding provisions of state securities laws which exempt transactions by an issuer not involving any public offering.
Preferred Stock
We are authorized to issue 5,000,000 shares of preferred stock. Shares of preferred stock may be issued from time to time in one or more series as may be determined by
our
board of directors. The voting powers and preferences, the relative rights of each such series and the qualifications, limitations and restrictions of each series will be established by
our
board of directors. Our directors may issue preferred stock with multiple votes per share and dividend rights which would have priority over any dividends paid with respect to the holders of our common stock. The issuance of preferred stock with these rights may make the removal of management difficult even if the removal would be considered beneficial to shareholders, generally, and will have the effect of limiting shareholder participation in transactions such as mergers or tender offers if these transactions are not favored by management. As of the date of this prospectus we had not issued any shares of preferred stock.
As of the date of this prospectus, we had no shares of Preferred Stock outstanding.
Convertible Notes
As of the date of this prospectus, we had outstanding convertible promissory notes in the principal amount of $1,880,000. 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.
Transfer Agent and Registrar
Our transfer agent is:
Corporate Stock Transfer
3200 Cherry Creek South Drive, Suite 430
Denver, CO 80209
(303) 282-4800
27
EXPERTS
No expert or counsel named in this prospectus as having prepared or certified any part thereof or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of our common stock was employed on a contingency basis or had or is to receive, in connection with the offering, a substantial interest, directly or indirectly, in us. Additionally, no such expert or counsel was connected with us as a promoter, managing or principal underwriter, voting trustee, director, officer or employee.
Experts
Cutler & Co., LLC has audited our Financial Statements for the period June 5, 2013 (date of inception) through December 31, 2013 and to the extent set forth in its report, which are included herein in reliance upon the authority of said firm as experts in accounting and auditing.
Legal Matters
The law firm of Sichenzia Ross Friedman Ference LLP has rendered a legal opinion regarding the validity of the shares of common stock offered by the Selling Security Holders. It is Exhibit 23.1 to the registration statement of which this prospectus is a part.
LEGAL PROCEEDINGS
We are not involved in any legal proceedings and we do not know of any legal proceedings which are threatened or contemplated,
except as disclosed, below.
On September 25, 2014, the Company filed a lawsuit in the United States District Court for the District of Colorado against Stephen G. Calandrella for violation of federal securities laws. Mr. Calandrella is a principal stockholder of the Company, based on 600,000 shares held personally and 600,000 shares held by the Rockies Fund of which Mr. Calandrella may be deemed a beneficial owner (representing approximately 8.6% of common stock outstanding as of October 24, 2014).
The lawsuit alleges that Mr. Calandrella violated section 16(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §78p(b), which requires principal stockholders to disgorge profits obtained through “short-swing trading” (i.e., purchasing and selling the company’s stock within a six-month period). The lawsuit is captioned Advanced Cannabis Solutions, Inc. v. Stephen G. Calandrella, No. 14-cv-02649 (D. Colo).
According to the complaint, during the relevant time period, Mr. Calandrella was a principal stockholder of the Company and subject to section 16(b)’s prohibition against short-swing trading. While failing to report all of his share holdings to the Company, the complaint alleges that Mr. Calandrella engaged in a series of purchases and sales of ACS stock within a six-month period. The complaint demands that Mr. Calandrella return to the Company his profits on such trades with interest.
As announced on March 27, 2014, the SEC temporarily suspended trading in the Company’s common stock. The SEC’s order was pursuant to an investigation into whether certain undisclosed affiliates and shareholders of ACS common stock engaged in an unlawful public distribution of securities.
As a result of that suspension, ACS was delisted from the OTC markets. In attempting to get relisted on the OTC Bulletin Board, the Company learned that Mr. Calandrella’s conduct related to the SEC’s stop trading order, which led to the temporary suspension and subsequent delisting of ACS stock. The Company began an investigation into Mr. Calandrella’s activities. As a result of such investigation, the Company has filed suit against Mr. Calandrella, as described above.
28
INDEMNIFICATION
Our Bylaws authorize indemnification of a director, officer, employee or agent against expenses incurred by him in connection with any action, suit, or proceeding to which he is named a party by reason of his having acted or served in such capacity, except for liabilities arising from his own misconduct or negligence in performance of his duty. In addition, even a director, officer, employee, or agent found liable for misconduct or negligence in the performance of his duty may obtain such indemnification if, in view of all the circumstances in the case, a court of competent jurisdiction determines such person is fairly and reasonably entitled to indemnification. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to our directors, officers, or controlling persons pursuant to these provisions, we have been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is therefore unenforceable.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a Registration Statement on Form S-1 (together with all amendments and exhibits) under the Securities Act of 1933, as amended, with respect to the Securities offered by this prospectus. This prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Securities and Exchange Commission. For further information, reference is made to the Registration Statement which may be read and copied at the Commission’s Public Reference Room.
We are subject to the requirements of the Securities and Exchange Act of 1934, as amended, and are required to file reports and other information with the Securities and Exchange Commission. Copies of any such reports and other information filed by us can also be read and copied at the Commission’s Public Reference Room.
The Public Reference Room is located at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding public companies. The address of the site is http://www.sec.gov.
29
ADVANCED CANNABIS SOLUTIONS
Financial Statements
TABLE OF CONTENTS
| | |
| | Page
|
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2013
| | |
| | |
Report of Independent Registered Public Accounting Firm
| | F-3
|
| | |
Consolidated Balance
Sheet
| | F-4
|
| | |
Consolidated Statement of Operations
| | F-5
|
| | |
Consolidated Statements of Cash Flows
| | F-6
|
| | |
Statements of Changes in Shareholders’ Equity for the Period from June 5, 2013 (Inception)
to December 31, 2013
| | F-7
|
| | |
Notes to Consolidated Financial Statements for the Period from Inception (June 5, 2013)
to December 31, 2013
| | F-8 – F-17
|
| | |
| | Page
|
INTERIM FINANCIAL STATEMENTS FOR THE PERIOD ENDED
JUNE 30,
2014 (UNAUDITED)
| | |
| | |
Condensed Consolidated Balance Sheets
| | F-19
|
| | |
Condensed Consolidated Statements of
Operations
| | F-20
|
| | |
Condensed Consolidated Statements of Cash Flows
| | F-21
|
| | |
Notes to Condensed Consolidated Unaudited Financial Statements for the Three
and Six
Month
Periods
Ended June
30,
2014
| | F-22 – F-37
|
F-1
ADVANCED CANNABIS SOLUTIONS, INC.
YEAR END FINANCIAL STATEMENTS
DECEMBER 31, 2013
F-2
Cutler & Co., LLC
12191 W. 64th Street, Suite 205 B
Arvada, CO80004
Telephone (303) 968-3281
Fax (303)456-7488
www.cutlercpas.com
Board of Directors
Advanced Cannabis Solutions, Inc.
Colorado Springs, Colorado, 80907
We have audited the accompanying consolidated balance sheet of Advanced Cannabis Solutions, Inc. (a development stage company) as of December 31, 2013 and the related consolidated
statements
of operations, changes in stockholders' equity and cash flows for the period from June 5, 2013 (Inception) to December 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Advanced Cannabis Solutions, Inc. and its subsidiary companies as of December 31, 2013, and the results of their operations, changes in stockholders’ equity and cash flows for the period from June 5, 2013 (Inception) to December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 12, the consolidated financial statements for the period from June 5, 2013 (Inception) to December 31, 2013 have been restated to correct accounting errors related to the accounting for convertible notes payable and beneficial conversion features.
The accompanying financial statements have been prepared assuming that the Advanced Cannabis Solutions, Inc. and its subsidiary companies will continue as a going concern. As discussed in Note 3 to the financial statements the Company has suffered losses and negative cash flow from operations since Inception which raises substantial doubt about their ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| |
Arvada, Colorado
| /s/ Cutler & Co., LLC
|
April 15, 2014, except for the effects on the consolidated financial statements
of the restatement described in Note 12, as to which the date is August 19, 2014
| Cutler & Co., LLC
|
F-3
ADVANCED CANNABIS SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE
SHEET
| | | |
| | December 31,
2013
As Restated
|
ASSETS
| | |
Current assets
| | |
Cash
| | $
| 427,436
|
Prepaid expenses
| |
| 2,244
|
Total current assets
| |
| 429,680
|
| |
|
|
Property and equipment, net
| |
| 452,753
|
| |
|
|
Total assets
| | $
| 882,433
|
| |
|
|
LIABILITIES & STOCKHOLDERS’ EQUITY
| | | |
Current liabilities:
| |
|
|
Accounts payable and accrued expenses
| | $
| 43,212
|
Convertible notes payable (net of debt discount)– current portion
| |
| 5,356 |
Total current liabilities
| |
| 48,568
|
| |
|
|
Long term liabilities
| |
|
|
Tenant deposits
| |
| 1,250
|
Convertible notes payable (net of debt discount) less current portion
| |
| 609,950
|
Total long term liabilities
| |
| 611,200
|
| |
|
|
Total liabilities
| |
| 659,768
|
| |
|
|
Commitments and Contingencies
| |
|
|
| |
|
|
Stockholders’ Equity
| | | |
Preferred stock, no par value: 5,000,000 share authorized
No shares issued and outstanding at December 31, 2013
| | | -
|
Common stock, no par value; 100,000,000 share authorized;
15,137,200 shares issued and outstanding on December 31, 2013
| |
| 933,627
|
Deficit accumulated during development stage
| |
| (710,962)
|
Total stockholders’ equity
| |
| 222,665
|
| |
|
|
Total liabilities & stockholders’ equity
| | $
| 882,433
|
See Accompanying Notes to Financial Statements
F-4
ADVANCED CANNABIS SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
| | | |
| | From Inception (June 5, 2013)
to
December 31
2013
|
Revenues
| | $
| -
|
Cost of goods sold
| | | -
|
Gross Revenues
| | | -
|
| | | |
Operating expenses
| | | |
General and administrative
| | | 53,265
|
Payroll
| | | 108,588
|
Professional fees
| | | 391,132
|
Office expense
| | | 8,269
|
Loss on expired option to acquire real estate
| | | 150,000
|
Total operating expenses
| | | (711,254)
|
Net loss from continuing operations
| | | |
| | | |
Discontinued operations
| | | |
Income from discontinued operations (including $0 gain on disposal)
| | | 1,957
|
| | | |
Other income (expense)
| | | |
Interest expense
| | | (871)
|
Amortization of debt discount
| | | (794)
|
Total other income (expense)
| | | (1,665)
|
| | | |
Net loss
| | $
| (710,962)
|
| | | |
Weighted average number of common shares outstanding – basic and fully diluted
| | | 14,026,127
|
| | | |
Net loss per share – basic and fully diluted
| | | |
From continuing operations
| | $
| (0.05)
|
From discontinued operations
| | | 0.00
*
|
Net loss per share – basic and fully diluted
| | $
| (0.05)
|
* Denotes less than $0.01 per share.
See Accompanying Notes to Financial Statements.
F-5
ADVANCED CANNABIS SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | |
| | From
Inception
(June 5, 2013) to
December 31,
2013
|
Cash flows from operating activities
| | |
Net loss
| $
| (710,962)
|
Adjustments to reconcile net loss to net cash used in operating activities:
| | |
Loss on expired option to acquire property
| | 150,000
|
Issuance of stock for services
| | 40,000
|
Amortization of debt discount
| | 794
|
Changes in operating assets and liabilities
| | |
Accounts receivable and prepaid expenses
| | (2,244)
|
Accounts payable and accrued expenses
| | 43,212
|
Net cash used in operating activities – continuing operations
| | (479,200)
|
Net cash used in operating activities – discontinued operation
| | (9,871
|
Net cash used in operating activities
| | (488,192)
|
| | |
Cash flows from investing activities
| | |
Net cash used in the purchase of property
| | (282,753)
|
Option to acquire property
| | (150,000)
|
Net cash used in investing activities
| | (432,753)
|
| | |
Cash flows from financing activities
| | |
Purchase and cancellation of shares of common stock
| | (100,000)
|
Proceeds from issuance of common stock
| | 985,400
|
Proceeds from loan payable
| | 530,000
|
Debt acquisition costs paid
| | (66,140)
|
Net cash provided by financing activities
| | 1,349,260
|
| | |
Net increase in cash
| | 427,436
|
| | |
Cash at the beginning of the period
| | -
|
| | |
Cash at the end of the period
| $
| 427,436
|
| | |
Supplemental disclosure of cash flow information:
| | |
Income taxes paid
| $
| -
|
Interest Paid
| $
| -
|
| | |
Supplementary disclosure of noncash financing activities
| | |
Net liabilities on transfer of subsidiary
| $
| 10,663
|
Cancellation of shares of common stock
| $
| 100,000
|
Issuance of common stock for services
| $
| 40,000
|
Net assets transferred on disposal of mapping division
| $
| 452
|
Purchase of property with mortgage
| $
| 170,000
|
See Accompanying Notes to Financial Statements.
F-6
ADVANCED CANNABIS SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM JUNE 5, 2013 (INCEPTION)TO DECEMBER 31, 2013
| | | | | | | | | | | | | |
| | | | | | | | | | Deficit
| | |
| | | | | | | | | | Accumulated
| | |
| | | | | | | | | | During
| | Total
|
| | Preferred Stock
| | Common Stock
| | Development
| | Shareholders’
|
| | Shares
| | Amount
| | Shares
| | Amount
| | Stage
| | Equity
|
Balance, June 30, 2013
(unaudited)
| | -
| $
| -
| | -
| $
| -
| $
| -
| $
| -
|
Common stock issued for cash at $0.0001 per share, June 30, 2013
| | -
| | -
| | 12,400,000
| $
| 12,400
| | -
| | 12,400
|
Common stock issued for cash at $1.00 per share, July 11 through August 8, 2013
| | -
| | -
| | 707,000
| $
| 707,000
| | -
| | 707,000
|
Recapitalization on August 14, 2013
| | -
| | -
| | 9,724,200
| $
| (10,663)
| | -
| | (10,663)
|
Purchase and cancellation of shares of common stock on August 14, 2013
| | -
| | -
| | (8,000,000)
| $
| (100,000)
| | -
| | (100,000)
|
Common stock issued for cash at $1.00 per share, August 14 through September 19, 2013
| | -
| | -
| | 266,000
| $
| 266,000
| | -
| | 266,000
|
Common stock issued for services December 9, 2013
| | -
| | -
| | 40,000
| $
| 40,000
| | -
| | 40,000
|
Discount on convertible notes
December 27,2013
– as restated
| | -
| | -
| | -
| $
|
19,342
| | -
| |
19,342
|
Loss on sale of mapping business to related party
| | | | | | | | (452)
| | | | (452)
|
Net loss for the year ended
December 31, 2013
| | -
| | -
| | -
| | -
| | (710,962)
| | (710,962)
|
| | | | | | | | | | | | |
Balance, December 31, 2013
-
as restated
| | -
| $
| -
| | 15,137,200
| $
|
933,627
| $
| (710,962)
| $
|
222,665
|
See Accompanying Notes to Financial Statements.
F-7
ADVANCED CANNABIS SOLUTIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION (JUNE 5, 2013) TO DECEMBER 31, 2013
1. NATURE OF OPERATIONS, HISTORY AND PRESENTATION
Nature of Operations
Promap Corporation (“Promap”, “the Company” “we” or “us”) was incorporated in the State of Colorado on November 12, 1987. Prior to December 31, 2013,the Company was an independent GIS and custom draft energy mapping company for the oil and gas industry in the United States and Canada. The Company provided hard copy and digital format oil and gas production maps which cover various geologic basins in numerous areas including: Denver Basin, Powder River Basin, Michigan Basin, Williston Basin, Arkoma Basin, Illinois Basin, Cincinnati Arch, Uintah - Piceance Basins and The Nevada Basin. The Company also provided maps of the North American Coal Basin and Coal Bed Methane Activity and North American Devonian - Mississippian Shale Map with detailed pipeline locations.
On August 14, 2013, the Company acquired 94% of the issued and outstanding share capital of Advanced Cannabis Solutions (“ACS”) (“the Share Exchange Agreement”), a development-stage company, planning to provide real estate leasing services to the regulated cannabis industry throughout the United States. While the Company will continue to provide energy mapping services on an ongoing basis as a non-core activity, it is planned that the combined companies will focus on ACS’ business plan as its core activity and operate under the name Advanced Cannabis Solutions, Inc. The Company
has completed a change in trading symbol to CANN (OTCBB) and has
completed its official name change.
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 acquiree, 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.
ACS was incorporated in the State of Colorado on June 5, 2013. As a development-stage company, ACS plans to provide real estate leasing services to the regulated cannabis industry throughout the United States by purchasing real estate assets and leasing growing space and related facilities to licensed marijuana growers and dispensary owners for their operations. In addition, ACS plans to provide a variety of ancillary services to the industry, including the development of a proprietary line of grow mediums and plant nutrient lines, product tracking technology, and comprehensive consulting services to current and future cannabis entrepreneurs.
In the period from July through September, 2013, the Company raised $973,000 in capital by issuing 973,000 shares of common stock at $1.00 per share through a private placement. These funds allowed us to rent offices, hire our executive team, and fund the initial operation of the Company. In addition, we raised $530,000 in debt through the issuance of 12% convertible notes in December, 2013.We also purchased our first commercial property on December 31, 2013, consisting of a 5,000 square foot facility located in Pueblo West, Colorado. This property was leased on the same day to an established grower under an eight year lease averaging $9,588 per month. The Company is currently in the process of negotiating several additional real estate purchases.
Our initial focus will be on opportunities within Colorado, which has allowed its citizens to use medical marijuana since 2000. Voters in Colorado approved a ballot measure in November 2012 to legalize marijuana for adult use. Starting Jan 1, 2014, adult Colorado citizens and visiting adults became able to purchase marijuana without any medical licenses. Several studies have predicted that the retail cannabis market in Colorado will increase from $200 million annually to over $900 million after the new law takes effect. While the national regulated cannabis market is estimated to be $1.5 billion annually, many experts expect it to reach $30 billion by 2018 as additional states approve cannabis use for its citizens.
ACS will not grow, harvest, distribute or sell cannabis or any substances that violate United States law or the Controlled Substances Act, nor does it intend to do so in the future.
F-8
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the results of 1) the parent company, Advanced Cannabis Solutions Corporation, formed in the state of Colorado on June 5, 2013, 2) Advanced Cannabis Solutions Corporation’s wholly owned subsidiary company, ACS Corp., formed in the state of Colorado on June 6, 2013, and 3) ACS Corp.’s wholly owned subsidiary company, ACS Colorado Corp., formed in the state of Colorado on October 21, 2013.All intercompany balances and transactions have been eliminated in consolidation.
Basis of Presentation
The accompanying financial statements have been prepared, under accounting principles generally accepted in the United States, assuming that the Company will continue as a going concern that contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, the ability of the Company to continue as a going concern on a longer-term basis will be dependent upon the ability to generate sufficient cash flow from operations to meet its obligations on a timely basis, the ability to successfully raise additional financing, and the ability to ultimately attain profitability.
Development Stage Company
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 the Company's financial statements are identified as those of a development stage company, and that the statements of operations, stockholders' deficit 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 that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities 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. These deposits are insured up to $250,000 by the FDIC. None of our bank accounts, as of December 31, 2013, exceeded this threshold and therefore were all covered by FDIC insurance.
Accounts receivable
The Company reviews accounts receivables periodically for collectability and establishes an allowance for doubtful accounts and records bad debt expense when deemed necessary.
Property and equipment
Property and equipment are recorded at cost and depreciated under accelerated or straight line methods over each
asset'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. 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.
F-9
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.
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 instruments.
Our financial instruments consist of prepaid expenses, accounts payable and accrued liabilities and convertible notes payable and approximate their fair value because of the short-term maturities of these instruments or bear market rates of interest.
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.
Conventional Convertible Debt
The Company records conventional convertible debt in accordance with ASC Topic 470-20, “
Debt with Conversion and Other Options
..” Conventional convertible debt is a financial instrument in which the holder may only realize the value of the conversion option by exercising the option and receiving the entire proceeds in a fixed number of shares or the equivalent amount of cash. Conventional convertible debt with a non-detachable conversion feature that does not contain a cash settlement option, and is not accounted for as a derivative, is recorded as a debt instrument in its entirety. The Company has accounted for the December 2013 issuance and the 8 1/2 % Convertible Note Payable as conventional convertible debt (see Note 10).
Revenue recognition
The Company will recognize revenue in accordance with ASC. 605, “Revenue Recognition”. ASC-605 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company will defer any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.
F-10
Advertising costs
Advertising costs are expensed as incurred. No advertising costs were incurred during the period of inception through December 31, 2013.
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. Warrants, stock options, and common stock issuable upon the conversion of the Company's preferred stock (if any), are not included in the computation if the effect would be anti-dilutive and would increase the earnings or decrease loss per share.
Business Segments
During 2013, the Company operated two reportable business segments – a petroleum mapping business and a real estate leasing business. On December 31, 2013 the petroleum mapping business was transferred to an unaffiliated shareholder in return for the assumption of liabilities of the 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 condition or the results of our operations.
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 $710,962 as of December 31, 2013 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 “Company”) 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:
·
The Company 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 the Company.
F-11
As a result of the acquisition, ACS is the Company’s 94% owned subsidiary and the former shareholders of ACS own approximately 88% of the Company’s common stock. The Company plans to acquire the remaining outstanding shares of ACS at a later date (see Note
11
Subsequent Events below).
The acquisition has been accounted for as a reverse acquisition and recapitalization using accounting principles applicable to reverse acquisition. Under reverse acquisition accounting, ACS, the legal acquiree, is treated as the accounting acquirer of the Company. Consequently, CSA 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 the Company’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 the company’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
December 31,
2013
|
Revenues
| | $
| 455
|
Cost of services
| | | 183
|
Gross profit
| | | 272
|
Operating expenses
| | | |
General administrative
| | | (1,685)
|
Total operating expenses
| | | (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. FIXED ASSETS
On December 31, 2013, the Company acquired a 5,000 square foot commercial building in Pueblo West for the purchase price of $452,753.We did not book any depreciation expense for the asset in 2013.In future years, the building will be depreciated using straight-line depreciation and an estimated useful life of 25 years.
7. CONVERTIBLE NOTES PAYABLE
12% Convertible notes
The Company issued $530,000 in convertible notes on December 27, 2013.These notes have an interest rate of 12%, paid quarterly, and mature on October 31, 2018.They are convertible at any time to shares of stock at $5.00 per 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.
F-12
The Company paid commission of $63,600 and incurred other debit issuance costs of $2,540. The Company also issued 10,600 warrants with an exercise price of $5.00 per share as further compensation to the broker dealer who raised this funding for us.
We valued the convertible feature of the 12% convertible notes and the warrants issued to the broker dealer using the Black Scholes valuation model, assuming an expected life of 4.8 years, an annual volatility factor of 127%, a risk free interest rate of 1.65%, and $0 dividends. The debt discount on these convertible notes payable 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 rate method.
8 ½% Convertible Note Payable
The Company executed a mortgage on their Pueblo West property in the amount of $170,000 at 8 ½% interest amortized over15years with a maturity date of December 31, 2018.This note is convertible at any time at $5.00 per share.
We valued the convertible feature of the 8 ½% Convertible note payable using the Black Scholes valuation model, assuming an expected life of 4.8 years, an annual volatility factor of 104%, a risk free interest rate of 1.65%, and $0 dividends. The debt discount on this convertible note payable will be amortized over the life of the note from January 1, 2014 through January 2019 on a straight line basis that approximates the effective interest rate method.
12% Convertible notes
The Company has entered into various unsecured convertible promissory notes with various third parties totaling $530,000, of which the entire amount was outstanding at December 31, 2013. The principal amounts of these notes are between $10,000 and $300,000. Under the terms of these notes, they mature on October 31, 2018, accrue interest at 12.0% per annum, and are convertible into shares of our common stock at a conversion rate of $5.00 per share, with standard dilution clauses (i.e. dividends, stock splits).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 Company paid $63,600 to a placement agent for finders fees which the Company recorded as a debt discount as of December 31, 2013.In addition, the Company granted the placement agent warrants to purchase 10,600 shares at a price of $5.00 per share, (with standard dilution clause for dividend, stock splits) vests immediately, and expires October 31, 2018. The value of the warrants was $21,271 based on the black-scholes pricing model. The Company recorded the value of warrants as additional debt discount at December 31, 2013. The debt discount will be amortized to interest expense over the life of the notes. As of December 31, 2013, no amounts have been amortized to interest expense.
8 ½%
Convertible Note Payable
The Company executed a mortgage on their Pueblo West property in the amount of $170,000 at 8 ½% interest amortized over15 years with a maturity date of December 31, 2018.This note is convertible at any time at $5.00 per share.
The table below summarizes our Convertible Notes activity during the year ended December 31, 2013:
| | | | | | | | | |
| | Convertible
Notes Payable
| | Debt
Discount
| | Convertible Notes Payable, Net
|
June 5, 2013 (Inception)
|
| $
| -
| | $
| -
| | $
| -
|
Proceeds from issuance of convertible debt
|
| | | | | | | | |
12% convertible notes issued December 27,2013
|
| | 530,000
| | | (85,488)
| | | 444,512
|
8% convertible notes issued December 31,2013
|
| | 170,000
| | | -
| | | 170,000 |
Amortization of debt discount
|
| | -
| | | 794
| | | 794
|
Total
|
| | 700,000
| | | (84,694)
| | |
615,306
|
Current portion of debt
|
| | (5,356)
| | | -
| | | (5,356) |
Long term portion at December 31, 2013
|
| $
| 694,644
| | $
| (84,694)
| | $
|
609,950
|
To properly account for certain Convertible Notes Payable, the Company performed a detailed analysis to obtain a thorough understanding of the transactions, including understanding the terms of each instrument issued, and any related derivatives entered into. The Company reviewed ASC Topic 815, to identify whether any equity-linked features in the Notes are freestanding or embedded. The Company determined that there were no free standing features. The Notes were then analyzed in accordance with Topic 815 to determine if the embedded conversion feature should be bifurcated and accounted for at fair value and remeasured at fair value in income. The Company determined that the embedded conversion feature did not meet
F-13
the requirements for bifurcation pursuant to Topic 815 and therefore accounted for the Notes as conventional debt. The Company then reviewed ASC Topic 470-20, and determined that the Notes met the criteria of a conventional convertible note and that none of the Notes had a beneficial conversion feature As a result, pursuant to ASC Topic 470-20, the Company recorded the Conventional Convertible note as a debt instrument in its entirety.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases and Long term Contracts
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. We paid $6,000 for the lease of our corporate offices for the period ended December 31, 2013.
In addition, the Company has a second mortgage on its Pueblo property in the amount of $170,000, with an interest rate of 8 1/2 %, a 15 year amortization, and a maturity date of December 31, 2018.
Legal
To the best of the Company’s knowledge and belief, no legal proceedings are currently pending or threatened.
9. STOCK HOLDERS’ 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 sold 707,000 shares of its common stock for cash consideration of $1.00 per share. Each of these shares has a Series A warrant attached with an exercise price of $10.00.The company may force this exercise at any time, as the requirement for 10 days of consecutive trading at a price at or greater than $10 has already been met.
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 sold a further 266,000 shares of its common stock for cash consideration of $1.00 per share. Each of these shares has a Series A warrant attached with an exercise price of $10.00.The company may force this exercise at any time, as the requirement for 10 days of consecutive trading at a price at or greater than $10 has already been met.
On December 9, 2014, the Company issued 40,000 shares of stock in return for professional services.
On December 27, 2014, the Company issued 10,600 warrants to the placement agent for our convertible note offering. Each warrant entitles the agent to purchase a one share of our common stock at a price of$5 per share.
F-14
At December 31, 2013, the Company had 15,137,200 shares of its common stock issued and outstanding.
| | | | |
| | Common Stock
| | Warrants
|
June 5, 2013 (Inception)
| | -
| | -
|
Issued for cash proceeds of $985,400
| | 13,373,000
| | 973,000
|
Issued as part of exchange agreement
| | 9,724,200
| | |
Terminated as part of exchange agreement
| | (8,000,000)
| | |
Issued as compensation under a consulting agreement
| | 40,000
| | -
|
Warrants issued to placement agent
| | -
| | 10,600
|
December 31, 2013
| | 15,137,200
| | 983,600
|
The following table summarizes information about warrants outstanding December 31, 2013:
| | | | | | |
Exercise Price
| | Warrants Outstanding
| | Weighted Average Life of Outstanding Warrants In Months
| | Date of Expiration
|
$5.00
| | 10,600
| | 58
| | 10/31/2018
|
$1.00
| | 973,000
| | 31
| | 7/31/2016
|
$1.04
| | 983,600
| | 31.3
| |
|
10. 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. Similarly, no deferred tax asset attributable to the net operating loss carry-forward has been recognized, as it is not deemed likely to be realized.
The cumulative tax effect at the expected rate of 34% of significant items comprising our net deferred tax amount is as follows:
| | | |
| | Inception
(June 5, 2013) to
December 31,
2013
|
Deferred tax attributed:
| | |
Net operating loss carryover
| | $
| (241,727)
|
Less: change in valuation allowance
| | $
| (241,727)
|
Net deferred tax asset
| | $
| -
|
At December 31, 2013 the Company had an unused net operating loss carry-forward approximating ($710,962) that is available to offset future taxable income; the loss carry-forward will expire in 2033.
11. SUBSEQUENT EVENTS
On January 5, 2014, we acquired 1,750,000 shares of our common stock for no consideration and returned these shares to the status of authorized but unissued shares.
On January 21, 2014 we signed an agreement with Full Circle Capital Corporation, 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 conditions. We can borrow an additional $22.5 million with the mutual agreement of us and Full Circle.
At least 95% of the loan proceeds will be used to acquire properties which
F-15
Full Circle will provide us with the $7.5 million when:
·
Full Circle agrees on the location of property to be purchased;
·
The 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 to Full Circle.
We can borrow an additional $22.5 million on terms acceptable to us and Full Circle.
The six-year loan will be secured by real estate acquired with the loan proceeds and will require interest-only payments at a rate of 12% per year.
The initial loan can, at any time, be converted into shares of our common stock at a conversion price of $5.00 per share. It is contemplated that further advances will be convertible at 110% of the market price of our stock on the day of advance, or the ten-day volume-weighted average price prior to the day of advance, whichever is lower.
The funding of the loan 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.
On January 29, 2014, the Company sold $1,605,000 worth of 12% convertible notes, convertible at $5 per share. These notes mature on October 31, 2018.The note holder may convert at any time and the Company has the right to force conversion any time after December 31, 2015 provided the stock price trades above $10 per share for 20 consecutive trading days.
Except for our agreement with Full Circle, we do not have any commitments or arrangements from any person to provide us with any additional capital. We may not be successful in raising the capital we will need.
On March 27, 2014 the SEC issued a trading halt order on
our
stock, and issued a statement that they were investigating affiliated shareholders 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 unlisted
on the
OTC
on April 10, 2014.
On April 4, 2014, the Company entered into a three year lease agreement to lease 3,000 square feet for an
The Company has evaluated all subsequent events through the date these financial statements were issued. Other than those set out above, there have been no subsequent events after December 31, 2013.
12. RESTATEMENT OF PRIOR PERIOD FINANCIALS
Conventional Convertible Debt
In connection with the Company’s second quarter 2014 review procedures and internal control analysis, management conducted an analysis of the Company’s various financial instruments and agreements involving its convertible debt, and in particular, the $530,000 in unsecured convertible notes issued in December 2013 (the “12% December 2013 Notes”), and the $170,000 convertible debt mortgage relating to the Company’s property in Pueblo (the “Pueblo Mortgage”) (collectively, the “Convertible Debt”).Management’s analysis was particularly focused on the accounting treatment of derivative financial instruments and debt under Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 815, “Derivatives and Hedging” (“ASC 815”) and ASC Topic 470, “Debt” (“ASC 470”), respectively.
Management’s analyses included reviewing its previous analysis and accounting of the convertible debt noted above to see if any events may have occurred subsequent to the original issuance which would cause the Company’s original accounting and classification to change. Through the Company’s reevaluation process which included the Company obtaining a thorough understanding of the transactions, including gaining a thorough understanding of the terms of each instrument issued, and any potential derivative features. The Company reevaluated the debt instruments pursuant to ASC 815, to identify whether any equity-linked features in the Convertible Debt are freestanding or embedded. The Convertible Debt was issued availing the option for note holders to convert debt to common stock at fixed conversion price of $5.00 per share. The Company determined that conversion feature was embedded in the debt instrument and was therefore not a free standing features. The Convertible Debt were then analyzed in accordance with ASC 815 to determine if the embedded conversion feature should be
F-16
bifurcated and accounted for at fair value and remeasured at fair value in income. The Company determined that the embedded conversion feature did not meet the definition of a derivative pursuant to ASC Topic 815 and therefore should not be bifurcated pursuant to ASC 815 and therefore should be evaluated and accounted for as conventional convertible debt. The Company then reviewed ASC 470-20, and determined that the Convertible Debt met the criteria of conventional convertible notes and that none of the Convertible Debt instruments had a beneficial conversion feature as the conversion price was greater than the market price of the Company’s common stock on the date of issuance(s). As a result, pursuant to ASC 470-20, the Company concluded that the Convertible Debt should have been recorded as a conventional convertible debt instrument in its entirety.
The Company had originally accounted for embedded conversion feature associated with the Convertible Debt as beneficial conversion features in the previously issued consolidated financial statements. In addition, the Company originally valued the conversion features using the black-scholes option pricing model as the Company originally identified that the Conversion price of the debt was greater than then value of the Company’s common stock on the date of issuance. Based on our reevaluation analyses performed during the second quarter 2014, we concluded that our original accounting for the embedded conversion feature as a debt discount on the Convertible Debt was incorrect, as the embedded conversion features did not meet the definition of a derivative and therefore should not have been bifurcated and the embedded conversion feature did not have a beneficial conversion, therefore the Company should not have accounted for the embedded conversion feature as a debt discount.
On August 15, 2014, as a result of this analysis, management, along with Company’s Board of Directors, concluded that it was necessary to restate its previously filed consolidated financial statements for the period from June 5, 2013 (Inception) to December 31, 2013 filed on Form 10-K.
As a result of the restatement, the table below sets forth the changes to be made in the consolidated financial statements included in the Reports noted above. The effect on the consolidated balance sheets for the periods described in the Reports noted above is due to the reclassification of debt discount from Common stock to Convertible notes payable. Accordingly, the consolidated balance sheet and statement of shareholders’ equity for the period from June 5, 2013 (Inception) to December 31, 2013 have been retroactively adjusted as summarized below:
| | | | | | |
Effect of Correction
| |
As Previously
| |
|
|
As
|
| |
Reported
| |
Adjustments
|
|
Restated
|
Balance Sheet as of December 31, 2013
| |
| |
|
| |
Convertible notes payable (net of debt discount) –
current portion
|
$
|
2,930
|
$
|
2,426
|
$
|
5,356
|
Total current liabilities
| |
46,142
| |
2,426
|
|
48,568
|
Convertible notes payable (net of debt discount), less current portion
| |
341,907
| |
268,043
|
|
609,950
|
Total long term liabilities
| |
343,157
| |
268,043
|
|
611,200
|
Common stock
| |
1,204,096
| |
(270,469)
|
|
933,627
|
Total stockholders’ equity
| |
493,134
| |
(270,469)
|
|
222,665
|
Statement of Changes in Shareholders’ Equity for the Period from June 5, 2013 (Inception) to December 31, 2013
| |
| |
|
|
|
Discount on convertible notes December 27, 2013
| |
289,811
| |
(270,469)
|
|
19,342
|
Common stock
| |
1,204,096
| |
(270,469)
|
|
933,627
|
Total stockholders’ equity
| |
493,134
| |
(270,469)
|
|
222,665
|
(1)
To reclassify debt discount previously recognized as a beneficial conversion feature to current and noncurrent convertible notes payable from discount on convertible notes and common stock.
(2)
To reclassify debt discount previously recognized as a beneficial conversion feature from discount on convertible notes and common stock to current and noncurrent convertible notes payable.
F-17
ADVANCED CANNABIS SOLUTIONS, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
F-18
ADVANCED CANNABIS SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | |
| |
June 30,
2014
| |
December 31,
2013
|
| |
(unaudited)
| |
(audited)
|
ASSETS
| | | |
As Restated
|
Current Assets
| | | | |
Cash
| |
$
|
1,500,589
| |
$
|
427,436
|
Tenant receivables
| | |
46,893
| | |
-
|
Prepaid expenses and other current assets
| | |
6,249
| | |
2,244
|
Inventory
| | |
26,427
| | |
-
|
Total current assets
| | |
1,580,158
| | |
429,680
|
| | | | | | |
Property and equipment, net
| | |
457,970
| | |
452,753
|
Deferred financing costs, net
| | |
99,028
| | |
-
|
Tenant receivables
| | |
35,029
| | |
-
|
Other receivables, net
| | |
27,547
| | |
-
|
Other capitalized costs
| | |
20,000
| | |
-
|
Total Assets
| |
$
|
2,219,732
| |
$
|
882,433
|
| | | | | | |
LIABILITIES & STOCKHOLDERS' EQUITY
| | | | | | |
| | | | | | |
Current Liabilities
| | | | | | |
Accounts payable and accrued expenses
| |
$
|
52,840
| |
$
|
43,212
|
Accrued interest payable
| | |
1,864
| | |
-
|
Derivative liability
| | |
923,764
| | |
-
|
Convertible notes payable (net of debt discount), current portion
| | |
5,927
| | |
5,356
|
Total current liabilities
| | |
984,395
| | |
48,568
|
| | | | | | |
Long-Term
Liabilities
| | | | | | |
Convertible notes payable (net of debt discount), less current portion
| | |
769,082
| | |
609,950
|
Tenant deposits
| | |
1,250
| | |
1,250
|
Total long term liabilities
| | |
770,332
| | |
611,200
|
| | | | | | |
Total Liabilities
| | |
1,754,727
| | |
659,768
|
Commitments and Contingencies
| | |
-
| | |
-
|
Stockholders' Equity
| | | | | | |
Preferred stock, no par value; 5,000,000 share authorized; no shares issued and outstanding at June 30, 2014 and December 31, 2013
| | |
-
| | |
-
|
Common Stock, no par value; 100,000,000 shares authorized; 13,438,933 shares and 15,137,200 shares issued and outstanding on June 30, 2014 and December 31, 2013, respectively
| | |
2,604,696
| | |
933,627
|
Accumulated deficit
| | |
(2,139,691)
| | |
(710,962)
|
Total Stockholders' Equity
| | |
465,005
| | |
222,665
|
| | | | | | |
Total Liabilities & Stockholders' Equity
| |
$
|
2,219,732
| |
$
|
882,433
|
See Accompanying Notes to Condensed Consolidated Unaudited Financial Statements
F-19
ADVANCED CANNABIS SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | |
| |
Three Months Ended
June 30,
2014
| |
Six Months Ended
June 30,
2014
|
| |
(unaudited)
| |
(unaudited)
|
Revenues:
| | | | |
Wholesale sales
| |
$
|
17,758
| |
$
|
17,758
|
Cost of wholesale goods sold
| | |
(17,323)
| | |
(17,323)
|
Net wholesale sales
| | |
435
| | |
435
|
Tenant rental
| | |
28,765
| | |
57,530
|
Consulting fees, net
| | |
33,600
| | |
53,600
|
Net revenues
| | |
62,800
| | |
111,565
|
| | | | | | |
Operating expenses:
| | | | | | |
General and administrative
| | |
43,055
| | |
97,531
|
Payroll and related expenses
| | |
131,443
| | |
236,578
|
Professional fees
| | |
118,538
| | |
201,054
|
Office expense
| | |
21,455
| | |
29,144
|
Depreciation
| | |
3,116
| | |
6,232
|
Total operating expenses
| | |
317,607
| | |
570,539
|
| | | | | | |
Operating loss from operations
| | |
(254,807)
| | |
(458,974)
|
| | | | | | |
Other income (expense):
| | | | | | |
Gain (loss) on derivative liability, net
| | |
223,876
| | |
(423,764)
|
Amortization of debt discount
| | |
(113,040)
| | |
(417,881)
|
Interest expense
| | |
(78,836)
| | |
(128,110)
|
Total other income (expense)
| | |
32,000
| | |
(969,755)
|
| | | | | | |
Net loss
| |
$
|
(222,807)
| |
$
|
(1,428,729)
|
| | | | | | |
Net loss per share-basic and diluted
| |
$
|
(0.02)
| |
$
|
(0.11)
|
| | | | | | |
Weighted average number of common shares outstanding –
basic and fully diluted
| | |
13,439,159
| | |
13,548,968
|
See Accompanying Notes to Condensed Consolidated Unaudited Financial Statements
F-20
ADVANCED CANNABIS SOLUTIONS. INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | |
| |
Six Months Ended
June 30,
2014
| |
Six Months Ended
June 30,
2013
|
| |
(unaudited)
| |
(unaudited)
|
Cash Flows Provided By (Used In) Operating Activities:
| | | | |
Net loss
|
$
|
(1,428,729)
| | |
| | | | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
| | | | |
Amortization of debt discount
| |
417,881
| | |
Amortization of deferred financing cost
| |
15,972
| | |
Bad debt expense
| |
26,400
| | |
Depreciation
| |
6,232
| | |
Issuance of stock to pay interest expense
| |
3,669
| | |
Change in fair value of derivative liability, net
| |
423,764
| | |
Changes in operating assets and liabilities:
| | | | |
Increase in receivables
| |
(135,869)
| | |
Increase in inventory
| |
(26,427)
| | |
Increase in prepaid expenses and other current assets
| |
(4,005)
| | |
Increase in accounts payable and accrued expenses
| |
11,492
| | |
Net cash used in operating activities
| |
(689,620)
| | |
| | | | |
Cash Flows Used In Investing Activities:
| | | | |
Purchase of property and equipment
| |
(11,449)
| | |
Increase in capitalized costs
| |
(20,000)
| | |
Net cash used in investing activities
| |
(31,449)
| | |
| | | | |
Cash Flows Provided By (Used In) Financing Activities:
| | | | |
Proceeds from sale of common stock
| |
-
|
$
|
12,400
|
Proceeds from sale of warrants
| |
400,000
| | |
Principal repayment on convertible notes payable
| |
(3,178)
| | |
Proceeds from issuance of convertible notes payable, net of cash expenses
| |
1,412,400
| | |
Increase in deferred financing costs
| |
(15,000)
| | |
Net cash provided by financing activities
| |
1,794,222
| |
12,400
|
| | | | |
Net Increase In Cash
| |
1,073,153
| |
12,400
|
| | | | |
Cash At The Beginning Of The Period
| |
427,436
| |
--
|
| | | | |
Cash At The End Of The Period
|
$
|
1,500,589
|
$
|
12,400
|
| | | | |
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
| | | | |
Cash paid for interest
|
$
|
123,448
|
$
|
---
|
| | | | |
Supplemental Disclosure on non-cash financing activities:
| | | | |
Non-cash financing costs
|
$
|
100,000
|
$
|
-
|
Convertible notes payable settled in stock
| |
255,000
| |
-
|
Interest on convertible notes payable settled in stock
| |
3,669
| |
-
|
See Accompanying Notes to Condensed Consolidated Unaudited Financial Statements.
F-21
ADVANCED CANNABIS SOLUTIONS, INC.
NOTES TO CONDENSED CONDOLIDATED UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2014
1. NATURE OF OPERATIONS, HISTORY AND PRESENTATION
Nature of Operations
Advanced Cannabis Solutions, Inc. (“ACS,” “the Company,” “we” or “us”) was incorporated in the State of Colorado on June 5, 2013 (“Inception”). ACS provides real estate leasing services to the regulated cannabis industry throughout the United States by purchasing real estate assets and leasing growing space and related facilities to licensed marijuana growers and dispensary owners for their operations. In addition, ACS provides a variety of ancillary services to the industry, including the development of a proprietary line of grow mediums and plant nutrient lines, product tracking technology, and comprehensive consulting services to current and future cannabis entrepreneurs.
While ACS does not grow, harvest, distribute or sell cannabis or any substances that violate United States law or the Controlled Substances Act, nor does it intend to do so in the future, ACS may be irreparably harmed by a change in enforcement by the federal or state governments.
Reverse Merger
Promap Corporation (“Promap”or “the Predecessor Company”) was incorporated in the State of Colorado on November 12, 1987. Prtomap was an independent GIS and custom draft energy mapping company for the oil and gas industry in the United States and Canada.
On August 14, 2013, Promap, in a share exchange agreement (“the Share Exchange Agreement”), acquired 94% of the issued and outstanding share capital of Advanced Cannabis Solutions, Inc. (“ACSI”), a private Colorado corporation. On November 9, 2013, Promap acquired the remaining 6% of the share capital of ACSI. It was planned that the ongoing operations would focus on ACSI’s business plan as its core activity and operate under the name ACS. On March 27, 2014 the SEC issued a trading halt order on our common stock, and issued a statement that they were investigating affiliated shareholders who may have made illegal sales of common stock. The order was not directed at the management of the Company and is considered a private investigation. The common stock began trading again, unlisted, on the OTC on April 10, 2014.The Company has completed a change in trading symbol to CANN (OTC) and has completed its official name change. In December, 2013 the previous oil and gas mapping operations of Promap, as described above, were sold to the former Chief Executive Officer of Promap.
The Share Exchange Agreement has been accounted for as a reverse acquisition and recapitalization using accounting principles applicable to reverse acquisitions. Under reverse acquisition accounting, ACS, the acquired entity, is treated as the accounting acquirer of Promap. Consequently, the accompanying condensed consolidated financial statements reflect only the operations of ACS for all periods presented, as they replace the historical financial statements of Promap, the legal acquirer.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist the reader in understanding and evaluating the Company’s financial statements. The condensed consolidated financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements
Principles of Consolidation
The consolidated financial statements include the results of 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.
F-22
Basis of Presentation
The accompanying (a) condensed balance sheet at December 31, 2013 has been derived from audited financial statements and (b) the unaudited condensed consolidated financial statements, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form10-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 year ended December 31, 2013 (the “2013 Annual Report”), as amended, filed with the Commission on August 20, 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 and six months period ended June 30, 2014 are not necessarily indicative of the results of operations for the year ending December 31, 2014. From June 3, 2013 (Inception) through June 30, 2013, there were no transactions which would require accrual or disclosure in the Company’s financial statements. As such, the financial statements herein are presented without comparative periods for the three and six months period ended June 30, 2013 for the Consolidated Statement of Operations, as such balances would be reported as zero.
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.
Receivables
The Company reviews receivables periodically for collectability and establishes an allowance for doubtful accounts and records bad debt expense when deemed necessary. Receivables are primarily contract-based billings to tenants and consulting engagement receivables.
Inventory
Inventory consisting of wholesale items purchased for retail sale is stated at lower of cost or market, with cost being determined on average cost basis. At June 30, 2014, the inventory balance was primarily comprised of packaging products for retailers. There was no reserve for inventory as of June 30, 2014.
Amounts paid to suppliers for inventory not yet received is classified as prepaid inventory. Once received, the cost of inventory is reclassified into inventory.
Deferred Financing Costs, net
Costs with respect to the issuance 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.
Conventional Convertible Debt
The Company records conventional convertible debt in accordance with Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) Topic 470-20, “
Debt with Conversion and Other Options
..” Conventional convertible debt is a financial instrument in which the holder may only realize the value of the conversion option by exercising the option and receiving the entire proceeds in a fixed number of shares or the equivalent amount of cash. Conventional convertible debt with a non-detachable conversion feature that does not contain a cash settlement option, and is not accounted for as a derivative, is recorded as a debt instrument in its entirety. The Company has accounted for the December 2013 issuance and the 8 1/2 % Convertible Note Payable as conventional convertible debt (see Note 10).
F-23
Derivatives Liabilities, Beneficial Conversion Features and Debt Discounts
The Company evaluates stock options, stock warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC Topic 815-40,
Derivative Instruments and Hedging: Contracts in Entity’s Own Equity.
The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.
The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants are recognized currently in earnings until such time as the warrants are exercised, expire or the related rights have been waived. These common stock purchase warrants do not trade in an active securities market. The Company estimates the fair value of these warrants using the binomial method. The Company recorded a derivative liability related to the Series C warrants (see Note 12).
If a conversion feature of conventional convertible debt is not accounted for as a derivative instrument and provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount. The convertible debt is recorded net of the discount related to the BCF. The Company amortizes the discount to interest expense over the life of the debt using the straight-line method, which approximates the effective interest rate method. The Company has recorded a beneficial conversion feature related to the January 2014 convertible note issuance (see Note 10).
Fair Value Measurements
ASC Topic 820,
Fair Value Measurements and Disclosures
, provides a comprehensive framework for measuring fair value and expands disclosures, which are required about fair value measurements. Specifically, ASC Topic 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 Topic 820 defines the hierarchy as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting 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 reporting 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.
The Company's derivative liability is a Level3 estimated fair market value instrument (see Note 12).
Revenue Recognition
Revenue is recognized on an accrual basis as earned under contract terms. Specifically, revenue from tenant rentals is recognized on a straight-line basis over the reasonably assured lease term, and collectability is reasonably assured. Consulting revenue is recognized based upon the payment terms within the contracts, and collectability is reasonably assured. Revenue relating to our wholesale business is recognized at the time goods are sold.
F-24
Income Tax
The Company accounts for income taxes pursuant to ASC Topic 740,
Income Taxes.
Under ASC Topic 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.
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 ASC Topic 260,
“Earnings Per Share.”
Diluted 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 been included in the computation as the effect would be anti-dilutive and would decrease the loss per share as the Company has incurred losses in all periods reported.
Business Segments
Following the sale of its oil and gas mapping operations effective December 31, 2013, the Company operates in three segments in accordance with ASC Topic 280,
Segment Reporting.
The Company’s three segments are Real Estate Leasing, Wholesale Supply, and Consulting Services. Our Chief Executive Officer has been identified as the Chief Operating decision maker as derived by ASC Topic 280.
Recently Issued Accounting Standards
In June 2014 the FASB issued ASU 2014-10 regarding development stage entities. The ASU removes the definition of development stage entity, as was previously defined under generally accepted accounting principles in the United States (U.S. GAAP), from the accounting standards codification, thereby removing the financial reporting distinction between development stage entities and other reporting entities from U.S. GAAP.
In addition, the ASU eliminates the requirements for development stage entities to (i) present inception-to-date information in the statement of income, cash flow and stockholders' equity, (ii) label the financial statements as those of a development stage entity, (iii) disclose a description of the development stage activities in which the entity is engaged, and (iv) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage.
The Company has chosen to early adopt the ASU for the Company’s financial statements as of June 30, 2014.The adoption of this ASU impacted the Company’s reporting by eliminating the requirement to report inception to date financial information and describe the Company as a development stage company as previously required.
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 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. Management believes that actions presently being taken to further implement its business plan and generate additional revenues provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to generate additional revenues and its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate additional revenues.
F-25
The Company had an accumulated deficit of approximately $2,140,000 and $711,000 as of June 30, 2014 and December 31, 2013, respectively, 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 accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
On April, 10, 2014 trading in the Company’s commons stock recommenced on the OTC after having been suspended by the SEC on March 27, 2014.
4. SHARE EXCHANGE AGREEMENT
On August 14, 2013, pursuant to the Share Exchange Agreement, Promap acquired approximately 94% of the outstanding common stock of 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 Promap 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 Promap.
As a result of the acquisition, ACS was Promap’s 94% owned subsidiary and the former shareholders of ACS owned approximately 88% of Promap’s common stock. On November 9, 2013, Promap acquired the remaining 6% of the share capital of ACS. After completion of the reverse merger, 15,097,200 of common shares were outstanding.
The Share Exchange Agreement has been accounted for as a reverse acquisition and recapitalization using accounting principles applicable to reverse acquisitions. Under reverse acquisition accounting, ACS, the legal acquired entity, is treated as the accounting acquirer of the Predecessor Company. Consequently, the historical consolidated financial statements include the operations of the accounting acquirer for all periods presented. All outstanding shares have been restated to reflect the effect of the Share Exchange Agreement.
5. PROPERTY AND EQUIPMENT
On December 31, 2013 the Company purchased property in Pueblo County, Colorado (the "Pueblo West Property") 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, based on estimated fair values.
The purchase price was paid in 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 into shares of the Company’s common stock at any time on or before the maturity date at $5 per common share (see note 10).
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 an estimated cost not to exceed $400,000, with construction scheduled to begin, at earliest, in the first quarter of 2015.
Depreciation on the Pueblo West Property building facility began effective January 1, 2014.Depreciation is calculated on a straight-line basis over 30 years. Depreciation expense for the three months and six months ended June 30, 2014 was $3,116 and $6,232, respectively.
F-26
The following table summarizes property and equipment and related accumulated depreciation:
| | | | | | |
|
|
June 30, 2014
|
|
December 31, 2013
|
|
|
(unaudited)
|
|
(audited)
|
Land
|
|
$
|
12,340
|
|
$
|
12,340
|
Buildings and Equipment
|
|
|
448,663
|
|
|
440,413
|
Furniture, Fixtures and Equipment
|
|
|
3,199
|
|
|
-
|
Property and Equipment
|
|
|
464,202
|
|
|
452,753
|
Less: Accumulated Depreciation
|
|
|
(6,232)
|
|
|
-
|
Property and Equipment, net
|
|
$
|
457,970
|
|
$
|
452,753
|
6. OTHER CAPITALIZED COSTS
Other capitalized costs were $20,000 and $0 at June 30, 2014 and December 31, 2013, respectively. Other capitalized costs consisted of costs capitalized for the development of educational and marketing webinars on various industry topics surrounding marijuana. Upon completion of the webinars, management anticipates reclassifying the capitalized costs to intangible assets. Management estimates that the reclassification to intangible asset will occur by December 31, 2014 and that the intangible asset will have an anticipated useful life of up to two years. There has been no amortization recognized on the intangible assets for the periods presented.
7. 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 rent increases during the lease term. Tenant rental revenue that has been earned on straight-line basis over the reasonably assured rental term, but has not been invoiced as yet under the terms of the tenant rental agreement, has either been classified as current or non-current under tenant receivable. Tenant rental revenue 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, has been classified as non-current under tenant receivable.
Receivables consist of the following:
| | | |
|
|
June 30, 2014
|
Tenant receivable, current
|
|
$
|
46,893
|
Tenant receivable, non-current
|
|
|
35,029
|
Consulting services receivables
|
|
|
40,000
|
Other receivables
|
|
|
13,947
|
Receivables
|
|
|
135,869
|
Less: Allowance for doubtful accounts
|
|
|
(26,400)
|
Receivables, net
|
|
$
|
109,469
|
Tenant rental income earned but not invoiced for the three and six month periods ended June 30, 2014 was $15,264 and $35,029, respectively. The allowance for doubtful accounts at June 30, 2014 is $26,400.
The following discloses scheduled tenant receipts for the remainder of 2014, the next five fiscal years, and thereafter:
| | | |
| |
Scheduled
Tenant Receipts
|
Remainder of 2014
| |
$
|
92,955
|
2015
| | |
148,205
|
2016
| | |
110,536
|
2017
| | |
112,753
|
2018
| | |
115,008
|
2019
| | |
117,308
|
Thereafter
| | |
246,202
|
Total scheduled rental receipts
| |
$
|
942,967
|
F-27
Consulting receivable, net at June 30, 2014 was $13,600 and consisted of gross receivable of $40,000, net of allowance for doubtful accounts of $26,400.The balance is comprised of receivables owed to the Company by a Canadian company operating in the cannabis industry. Other receivables is primarily comprised of various miscellaneous receivables
8. DEFERRED FINANCING COSTS, NET
As of June 30, 2014 we had recognized $115,000 of deferred financing costs. On January 10, 2014 the Company paid $15,000 to Full Circle Capital Corporation (“Full Circle”) as a deposit for deal-related expenses related to the long-term financing commitment. On January 21, 2014 as part of the $500,000 proceeds from the warrant being issued to Full Circle, $100,000 was retained by Full Circle out of the total consideration of $500,000 to cover legal and deal-related expenses in connection with the long-term financing commitment from Full Circle (see Note 11).
The deferred financing costs of $115,000 are being amortized over the estimated term of the long-term financing agreement of 3 years (see Note 11). For the three and six month periods ended June 30, 2014, amortization expense was approximately $10,000 and $16,000, respectively. The unamortized deferred financing balance at June 30, 2014 was approximately $99,000.
9. BUSINESS SEGMENTS
The Company operates three reportable business segments: Real Estate Leasing, Wholesale Supply, and Consulting Services. Real Estate Leasing owns, operates, and leases warehouses to third parties for the purpose of growing marijuana. The Company’s Wholesale Supply segment primarily serves as distributor of certain industry specific products used by manufacturers and dispensaries. Income (loss) from the Company’s Consulting Services business provides its services based on the Company’s extensive knowledge of the cannabis industry and the abilities of employees to assist entrepreneurs succeed in the marijuana industry.
For the three months ended June 30, 2014:
| | | | | | | | | | | |
|
Wholesale Supply
| |
Real Estate Leasing
| |
Consulting Services
| |
Total
|
Net revenue
|
$
|
435
| |
$
|
28,765
| |
$
|
33,600
| |
$
|
62,800
|
Operating expenses and other
| |
4,888
| | |
4,101
| | |
276,618
| | |
285,607
|
Income (loss)
|
$
|
(4,453)
| |
$
|
24,664
| |
$
|
(243,018)
| |
$
|
(222,807)
|
For the six months ended June 30, 2014:
| | | | | | | | | | | |
|
Wholesale Supply
| |
Real Estate Leasing
| |
Consulting Services
| |
Total
|
Net revenue
|
$
|
435
| |
$
|
57,530
| |
$
|
53,600
| |
$
|
111,565
|
Operating expenses and other
| |
4,888
| | |
359,722
| | |
1,175,684
| | |
1,540,294
|
Income (loss)
|
$
|
(4,453)
| |
$
|
(302,192)
| |
$
|
(1,122,084)
| |
$
|
(1,428,729)
|
Property and equipment, net
|
$
|
454,771
| |
$
|
1,132
| |
$
|
2,067
| |
$
|
457,970
|
Receivables, net
|
$
|
--
| |
$
|
81,922
| |
$
|
27,547
| |
$
|
109,469
|
Inventory
|
$
|
26,247
| |
$
|
--
| |
$
|
--
| |
$
|
26,247
|
10. CONVERTIBLE NOTES PAYABLE
12% Convertible Notes
December 2013 Issuance
In December 2013, the Company entered into various unsecured convertible promissory notes with various third parties totaling $530,000 (the "December 2013 Issuance"), of which the entire amount was outstanding at June 30, 2014 and December 31, 2013. The principal amounts of these notes are between $10,000 and $300,000. Under the terms of these notes, they mature on October 31, 2018, accrue interest at 12.0% per annum, and are convertible into shares of our common stock at a conversion rate of $5.00 per share, with standard dilution clauses (i.e. dividends, stock splits).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 Company paid $63,600 to a placement agent for finder’s fees which the Company recorded as a debt discount as of June 30, 2014 and December 31, 2013.In addition, the Company granted the placement agent warrants to purchase 10,600 shares at a
F-28
price of $5.00 per share, (with standard dilution clause for dividend, stock splits) which vest immediately, and expire October 31, 2018. The value of the warrants was $21,271 based on the Black-Scholes pricing model. The Company recorded the value of warrants as additional debt discount at June 30, 2014 and December 31, 2013. The debt discount is being amortized to interest expense over the life of the notes. For the three and six month periods ended June 30, 2014, $3,272 and $6,525 has been amortized to interest expense, respectively, and the unamortized debt discount balance at June 30, 2014 was approximately $78,000.
To properly account for the December 2013 Issuance, the Company performed a detailed analysis to obtain a thorough understanding of the transaction. The Company reviewed ASC Topic 815, to identify whether any equity-linked features in the December 2013 Issuance are freestanding or embedded. The Company determined that there were no free standing features. The December 2013 Issuance was then analyzed in accordance with Topic 815 to determine if the embedded conversion feature should be bifurcated and accounted for at fair value and remeasured at fair value in income. The Company determined that the embedded conversion feature did not meet the requirements for bifurcation pursuant to Topic 815 and therefore accounted for the December 2013 Issuance as conventional debt. The Company then reviewed ASC Topic 470-20, and determined that the December 2013 Issuance met the criteria of a conventional convertible note and that none of the December 2013 Issuance had a beneficial conversion feature As a result, pursuant to ASC Topic 470-20, the Company recorded the conventional convertible note as a debt instrument in its entirety.
January 2014 Issuance
In January 2014, the Company entered into various unsecured convertible promissory notes with various third parties totaling $1,605,000 (the "January 2014 Issuance"), of which $1,350,000 was outstanding at June 30, 2014. The principal amounts of these notes are between $10,000 and $200,000. Under the terms of these notes, they mature on October 31, 2018, accrue interest at 12.0% per annum, and are convertible into shares of our common stock at a conversion rate of $5.00 per share, with standard dilution clauses (i.e. dividends, stock splits).They are convertible at any time on or before maturity date at $5.00 per common share. The Company paid $160,500 in debt issuance costs and $32,100 to a placement agent for finder’s fees which the Company recorded as a debt discount as of June 30, 2014.In addition, the Company granted the placement agent warrants to purchase 32,100 shares at a price of $5.00 per share, (with standard dilution clause for dividend, stock splits) which vest immediately, and expire October 31, 2018. The value of the warrants was $83,452 based on the Black-Scholes pricing model. The Company recorded the value of warrants as additional debt discount at June 30, 2014.
To properly account for the January 2014 Issuance, The Company reevaluated the debt instruments pursuant to ASC 815, to identify whether any equity-linked features in the Convertible Debt are freestanding or embedded. The January 2014 Issuance was issued availing the option for note holders to convert debt to common stock at fixed conversion price of $5.00 per share. The Company determined that conversion feature was embedded in the January 2014 issuance but did not meet the definition of a derivative pursuant to ASC 815 and therefore should not be bifurcated. The Company concluded that the January 2014 Issuance was conventional debt and assessed under ASC 470-20 whether the January 2014 Issuance had a beneficial conversion feature. Since the initial conversion price of the security was less than the market value of the common stock at the time of issuance, it was determined that a beneficial conversion feature existed. The Company calculated the value of the beneficial conversion feature using the intrinsic value method. The stock price on the date of issuance was $13.75 and the conversion price was $5.
The calculated value of the beneficial conversion feature and the value of the debt discount resulted in a value greater than the value of the debt and as such, the total discount was limited to the value of the debt balance of $1,605,000.
The debt discount is being amortized to interest expense over the life of the notes. For three and six month periods ended June 30, 2014, approximately $110,000 and $412,000 has been amortized to interest expense (including amounts related to debt conversions of approximately $252,000 dating March 31, 2014), respectively, and the unamortized discount balance at June 30, 2014 was approximately $1,193,000.
Conversion of 12% Convertible Notes
On March 31, 2014, four of the January 2014 issuance 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 $5.00 per share.
F-29
8 ½%
Convertible Note Payable
The Company executed a mortgage on its Pueblo West Property in the amount of $170,000 at 8 ½% interest amortized over15 years with a maturity date of December 31, 2018 (the “Pueblo Mortgage”). This note is convertible at any time at $5.00 per share.
To properly account for the Pueblo Mortgage, the Company performed a detailed analysis to obtain a thorough understanding of the transaction. The Company reviewed ASC Topic 815, to identify whether any equity-linked features in the Pueblo Mortgage are freestanding or embedded. The Company determined that there were no free standing features. The Pueblo Mortgage was then analyzed in accordance with Topic 815 to determine if the embedded conversion feature should be bifurcated and accounted for at fair value and remeasured at fair value in income. The Company determined that the embedded conversion feature did not meet the requirements for bifurcation pursuant to Topic 815 and therefore accounted for the Pueblo Mortgage as conventional debt. The Company then reviewed ASC Topic 470-20, and determined that the Pueblo Mortgage met the criteria of a conventional convertible note and that none of the Pueblo Mortgage had a beneficial conversion feature As a result, pursuant to ASC Topic 470-20, the Company recorded the conventional convertible note as a debt instrument in its entirety.
The table below summarizes our convertible notes activity during the six months ended June 30, 2014:
| | | | | | | | | | | | |
| |
Principal
| |
Debt
| |
Accrued
| | |
| |
Balance
| |
Discount
| |
Interest
| |
Total
|
Balance at December 31, 2013
| |
$
|
700,000
| |
$
|
(84,694)
| |
$
|
871
| |
$
|
616,177
|
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
| | |
-
| | |
417,881
| | |
-
| | |
417,881
|
Payment of loan principal
| | |
(3,178)
| | |
-
| | |
-
| | |
(3,178
|
Interest accrued during period
| | |
-
| | |
-
| | |
49,274
| | |
49,274
|
Interest paid during period
| | |
-
| | |
-
| | |
(44,612)
| | |
(44,612)
|
Balance at June 30, 2014
| | |
2,046,822
| | |
(1,271,813)
| | |
-
| | |
775,009
|
Less: Current portion
| | |
(5,927)
|
(1)
| |
-
| | |
-
| | |
(5,927)
|
Long-term debt
| |
$
|
2,040,895
|
|
$
|
(1,271,813)
| |
$
|
1,864
| |
$
|
770,946
|
(1)
The current portion represents the principal balance payable on the 8 ½% convertible note payable in the twelve months following the balance sheet date
11. COMMITMENTS AND CONTINGENCIES
Long-term financing commitment
On January 21, 2014, the Company signed an agreement (the “SPA”) with Full Circle. There is no expiration date set forth in the SPA. The SPA provides that Full Circle will initially provide $7.5 million to the Company in the form of Senior Secured Convertible Notes, subject to certain named conditions. The Company can borrow an additional $22.5 million with the mutual agreement of Full Circle and the Company.
At least 95% of any loan proceeds will be used to acquire properties, which the Company will lease to licensed marijuana growers.
Full Circle will provide the Company 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
·
The Company is able to provide a first priority lien on the property in favor of Full Circle.
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. As of June 30, 2014, no amounts have been funded to the Company by Full Circle.
F-30
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 the Company’s 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, $100,000 was retained by Full Circle to cover legal and financing related expenses of future financing transactions.
On September 24, 2014, the Company and Full Circle entered into Amendment No. 1 to the SPA, which changed the conversion price of the initial $7,500,000 promissory note to $4.00 per share of the Company’s common stock. Also on September 24, 2014, and in connection with Amendment No.1 to the SPA, the Company and Full Circle entered into Amendment No. 1 to the Series C warrants, which changed the exercise price of these warrants to $4.00 per share of the Company’s common stock, and increased the amount of warrants issuable to 1,400,000 warrants to purchase shares of the Company’s common stock.
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 2, 2014 for its corporate offices. The facility leased is 3,000 square feet and expires March 31, 2017.The Company entered into a three-year agreement effective April 21, 2014 for a warehouse supply and distribution facility. The facility leased is 1,800 square feet and expires April 30, 2017.For the three and six months periods ended June 30, 2014, lease payments were $10,197 and $13,197, respectively.
Future operating lease payments for the remainder of 2014 and following years is as follows:
| | | | | | |
|
|
June 30,
2014
|
|
December 31,
2013
|
|
|
(unaudited)
|
|
(audited)
|
|
| |
| |
|
Remainder of 2014
|
|
$
|
18,300
|
|
$
|
-
|
2015
|
|
|
39,552
|
|
|
-
|
2016
|
|
|
42,638
|
|
|
-
|
2017
|
|
|
11,956
|
|
|
-
|
Thereafter
|
|
|
-
|
|
|
-
|
Total
|
|
|
112,446
|
|
|
-
|
Legal
To the best of the Company’s knowledge and belief, no legal proceedings are currently pending or threatened, except as disclosed in Note 17. SUBSEQUENT EVENTS.
12. STOCKHOLDERS’ EQUITY:
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.
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 the Company’s authorized but unissued share account. The $1,750 gain on the return of these shares of common stock has been charged to stockholders’ equity.
F-31
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 June 30, 2014, there were 973,000 Series A warrants issued and outstanding.
Series B Warrants
On January 29, 2014, the Company issued 1065 series B warrants, convertible to 32,100 shares of its common stock, to a broker-dealer as compensation for placement of convertible notes payable totaling $1,605,000.Each Series B warrant allows the holder to purchase 200 shares of the Company’s common stock at an exercise price of $5.00 per share at any time on or before October 31, 2018.At the time the warrants were issued, they had an estimated fair market value of$83,452, based on the Black-Scholes pricing model, which has been recognized as part of the debt discount related to this note issuance and is being 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.
The following assumptions were used to derive the value of the warrants using the Black-Scholes pricing model:
| | | | |
| |
June 30, 2014
|
Stock price
| | |
13.75
| |
Risk-free interest rate
| | |
1.81
|
%
|
Expected dividend yield
| | |
0.00
|
%
|
Expected term (in years)
| | |
4.8
| |
Expected volatility
| | |
171
|
%
|
At June 30, 2014, there were 213.5 Series B warrants issued and outstanding in respect of 42,700 shares of the Company’s common stock.
Series C Warrants
On January 21, 2014, the Company issued to Full Circle, for $500,000, warrants which allow Full Circle to purchase up to 1,000,000 shares of the Company’s 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, $100,000 was retained by Full Circle to cover legal and deal related expenses of future financing transactions. As at June 30, 2014, there were 1,000,000 Series C warrants issued and outstanding (see Note 8). On September 24, 2014, the Company and Full Circle entered into Amendment No. 1 to the SPA, which changed the exercise price of the warrants issuable to $4.00 per share of the Company’s common stock, and increased the amount of warrants issuable to 1,400,000 warrants to purchase shares of the Company’s common stock.
F-32
The following table summarizes information about warrants outstanding as of June 30, 2014:
| | | | | | | | | |
| | | | | |
Weighted
| | |
| | | | | |
Average
| | |
| | | | | |
Life of
| |
|
| | | | | |
Outstanding
| | |
| |
Exercise
| |
Warrants
| |
Warrants in
| |
Date of
|
| |
Price
| |
Outstanding
| |
Months
| |
Expiration
|
Series A Warrants
|
|
$
|
10.00
|
|
973,000
| |
25
| |
7/31/2016
|
Series B Warrants
|
|
|
5.00
|
|
42,700
| |
53
| |
10/31/2018
|
Series C Warrants
|
|
|
5.50
|
|
1,000,000
| |
31
| |
1/21/2017
|
|
|
$
|
7.77
|
|
2,015,700
| |
29
| |
|
As of June 30, 2014, approximately$1,210,000 remained to be amortized to expense for the warrants.
The following table summarizes shares of common stock and warrants issued and outstanding for the six months ended June 30, 2014:
| | | | |
| |
Common Stock
|
|
Warrants
|
Balance at December 31, 2013
| |
15,137,200
| |
983,600
|
Re-acquired shares of common stock
| |
(1,750,000)
| |
-
|
Warrants issued to Full Circle for $500,000 consideration – Series C Warrants
| |
-
| |
1,000,000
|
Warrants issued to placement agent – Series B Warrants
| |
-
| |
32,100
|
Issued in settlement of $355,000 convertible notes payable and
accrued interest of $6,308
| |
72,140
| |
-
|
Balance at June 30, 2014
| |
13,459,340
| |
2,015,700
|
13. DERIVATIVE WARRANT LIABILITY
The Series C Warrants issued in connection with our agreement with the Full Circle private placement offering initially provided Full Circle with the opportunity to purchase 1,000,000 shares of the Common Stock at the original exercise price of $5.50 per share. The Series C Warrants have anti-dilution protection provisions and, under certain conditions, grant the right to the holder to require the Company to adjust the warrant’s exercise price to a lower price. Accordingly, through June 30,2014, these warrants were accounted for as derivative liabilities. On January 21, 2014, the value of the initial warrant derivative liability was calculated to be $1,368,908.The Company received $500,000 in cash of which $100,000 was identified as deferred financing costs, resulting in an initial loss on the fair value of the derivative liability of $868,908. The price of $5.00 per share of the Series A and Series B warrants granted in conjunction with the January 2014 issuance resulted in the revaluation of the Series C warrants granted to Full Circle and an increase to the derivative liability of $153,994.
The Company used the binomial pricing model and assumptions that consider, among other factors, the fair value of the underlying stock, risk-free interest rate, volatility, expected life and dividend rates in estimating fair value for the warrants considered to be derivative instruments. The Company’s stock has been thinly traded since being delisted in the first quarter 2014, and all conversions of debt from the January 2014 Issuance during the first and second quarters of 2014 were converted using a stock price of $5.00 per share. Using the binomial pricing model and a stock price of $5.00 per share, management utilized initial scenario stock prices of $3.00, $4.00, $6.00, and $7.00.Assuming a three-year expected term, management assessed the probabilities of the stock prices for each year, with probabilities more heavily weighted toward lower stock prices, in light of the Company’s delisted status, changes in leadership, and the Company’s current inability to execute its initial financing with Full Circle. The underlying assumptions used for the six months ended June 30, 2014 were:
| | | | |
| |
June 30,
2014
|
Risk-free interest rate
| | |
0.03
|
%
|
Expected dividend yield
| | |
0.00
|
%
|
Expected term (in years)
| | |
3
| |
Expected volatility
| | |
33
|
%
|
F-33
Changes in fair value of the derivative financial instruments are recognized in the Company’s consolidated statement of operations as a derivative gain or loss and are included in other income (expense). The warrant derivative gains (losses) are non-cash income (expenses); and for the three month and six month periods ended June 30, 2014, related derivative gain or loss is included in other income (expense) in the Company’s consolidated statement of operations. The primary underlying risk exposure pertaining to the warrants is the change in fair value of the underlying Common Stock for each reporting period.
Changes in the derivative warrant liability for the three and six month periods June 30, 2014 are as follows:
| | | | | | |
| |
Three Months
Ended
June 30, 2014
| |
Six Months
Ended
June 30, 2014
|
Balance at beginning period
| |
$
|
1,147,640
| |
$
|
—
|
Fair value of warrants issued
| | |
—
| | |
1,368,908
|
Increase in derivative liability resulting from anti-dilution provision in agreement with Full Circle
| | |
—
| | |
153,994
|
Increase (decrease) in the fair value of warrant liability
| | |
(223,876)
| | |
(599,138)
|
Balance at end of period
| |
$
|
923,764
| |
$
|
923,764
|
| | | | | |
Change in Gain (loss) on derivative liability
| | | | | |
Balance at January 1, 2014 and March 31, 2014
| |
—
| | |
647,640
|
Original recognition on derivative liability
| |
868,908
| | |
—
|
Changes in estimated fair market liability
| |
445,144
| | |
223,876
|
Loss on derivative liability as of June 30, 2014
|
$
|
423,764
| |
$
|
423,764
|
14. 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 three months and six months ended June 30, 2014.The Company, from the date of inception, has incurred net operating losses for tax purposes of approximately $2,229,691. 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:
| | | |
| |
June 30,
|
| |
2014
|
Deferred tax asset
| |
$
|
758,095
|
Valuation allowance
| |
|
(758,095)
|
US federal income tax rate
| |
|
34.00%
|
Valuation allowance
| |
|
(34.00%)
|
Provision for income tax
| |
|
0.00%
|
15. 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 the Company’s common stock.
F-34
Subsequently, one unaffiliated person, who 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 5, 2013 to December 31, 2013, sales of $8,362 were made to Admiral Bay Resources and Running Foxes Petroleum, Inc., companies controlled by Steven Tedesco, the Company’s Chief Executive Officer at that time. During the period from June 5, 2013 to December 31, 2013, the Company paid employees of Atoka Colabs, LLC (“Atoka”), $762 for producing the maps it sold. Atoka is also controlled by Mr. Tedesco.
16. RESTATEMENT OF PRIOR PERIOD FINANCIALS
Conventional Convertible Debt
In connection with the Company’s second quarter 2014 review procedures and internal control analysis, management conducted an analysis of the Company’s various financial instruments and agreements involving its convertible debt, and in particular, the December 2013 Issuance of $530,000 unsecured convertible notes, and the $170,000 convertible Pueblo Mortgage (collectively, the “Convertible Debt”).See Note 10. Management’s analysis was particularly focused on the accounting treatment of derivative financial instruments and debt under ASC Topic 815, “
Derivatives and Hedging ” and ASC Topic 470, “Debt,” respectively.
Management’s analyses included reviewing its previous analysis and accounting of the Convertible Debt noted above to see if any events may have occurred subsequent to the original issuance which would cause the Company’s original accounting and classification to change. Through the Company’s reevaluation process which included the Company obtaining a thorough understanding of the transactions, including gaining a thorough understanding of the terms of each instrument issued, and any potential derivative features. The Company reevaluated the debt instruments pursuant to ASC 815, to identify whether any equity-linked features in the Convertible Debt are freestanding or embedded. The Convertible Debt was issued availing the option for note holders to convert debt to common stock at fixed conversion price of $5.00 per share. The Company determined that conversion feature was embedded in the debt instrument and was therefore not a free standing features. The Convertible Debt were then analyzed in accordance with ASC 815 to determine if the embedded conversion feature should be bifurcated and accounted for at fair value and remeasured at fair value in income. The Company determined that the embedded conversion feature did not meet the definition of a derivative pursuant to ASC Topic 815 and therefore should not be bifurcated pursuant to ASC 815 and therefore should be evaluated and accounted for as conventional convertible debt. The Company then reviewed ASC 470-20, and determined that the Convertible Debt met the criteria of conventional convertible notes and that none of the Convertible Debt instruments had a beneficial conversion feature as the conversion price was greater than the market price of the Company’s common stock on the date of issuance(s). As a result, pursuant to ASC 470-20, the Company concluded that the Convertible Debt should have been recorded as a conventional convertible debt instrument in its entirety.
The Company had originally accounted for embedded conversion feature associated with the Convertible Debt as beneficial conversion features in the previously issued consolidated financial statements. In addition, the Company originally valued the conversion features using the Black-Scholes option pricing model as the Company originally identified that the Conversion price of the debt was greater than then value of the Company’s common stock on the date of issuance. Based on the Company’s reevaluation analyses performed during the second quarter 2014, the Company concluded that its original accounting for the embedded conversion feature as a debt discount on the Convertible Debt was incorrect, as the embedded conversion features did not meet the definition of a derivative and therefore should not have been bifurcated and the embedded conversion feature did not have a beneficial conversion and, therefore, the Company should not have accounted for the embedded conversion feature as a debt discount.
On August 15, 2014, as a result of this analysis, management, along with Company’s Board, concluded that it was necessary to restate the Company’s previously filed consolidated financial statements for the period from June 5, 2013 (Inception) to December 31, 2013 as filed on Form 10-K.
F-35
Restatement Impact
As a result of the restatement, the table below sets forth the changes to be made in the consolidated financial statements for the restated periods:
| | | | | | | | | |
Effect of Corrections
| |
As Previously
|
| |
|
As
|
| |
Reported
|
|
Adjustments
|
|
Restated
|
Balance Sheet as of December 31, 2013
| | |
| |
|
|
Convertible notes payable (net of debt discount) – current portion
| |
$
|
2,930
|
|
$
|
2,426
|
(1)
|
$
|
5,356
|
Total current liabilities
| | |
46,142
|
|
|
2,426
|
(1)
| |
48,568
|
Convertible notes payable (net of debt discount), less current portion
| | |
341,907
|
|
|
268,043
|
(1)
| |
609,950
|
Total long-term liabilities
| | |
343,157
|
|
|
268,043
|
(1)
| |
611,200
|
Common stock
| | |
1,204,096
|
|
|
(270,469)
|
(2)
| |
933,627
|
Total stockholders’ equity
| | |
493,134
|
|
|
(270,469)
|
(2)
| |
222,665
|
| |
(1)
|
To reclassify debt discount previously recognized as a beneficial conversion feature to current and noncurrent convertible notes payable from discount on convertible notes and common stock.
|
(2)
|
To reclassify debt discount previously recognized as a beneficial conversion feature from discount on convertible notes and common stock to current and noncurrent convertible notes payable.
|
17. SUBSEQUENT EVENTS
On August 4, 2014 the Company appointed Michael Feinsod as a member of the Company’s board of directors (the “Board”) and Executive Chairman of the Board. Mr. Feinsod is the Managing Member and holds controlling interest of Infinity Capital, LLC (“Infinity”), an investment management company he founded in 1999.The Board approved the issuance of 200,000 shares of the Company’s common stock, with a par value of $0.01 per share to Infinity. The Board also approved terms that may result in the issuance of additional common stock to Infinity, provided Mr. Feinsod meets specific performance criteria, which could include:(i) the issuance of 1,000,000 shares of the Company’s common stock to Infinity upon the uplisting of the Company’s common stock, (ii) the issuance of 150,000 shares of common stock to Infinity on August 4, 2015, provided that Mr. Feinsod remains a member of the Board on that date, and (iii) the issuance of 150,000 shares of Common Stock to Infinity on August 4, 2016, provided that Mr. Feinsod remains a member of the Board on that date. The agreement with Mr. Feinsod requires the issuance of a number of shares of common stock to Infinity equal to 10% of any new issuance not to exceed 600,000 shares of common stock in the aggregate during the time that Mr. Feinsod remains a member of the Board, which will not be triggered upon issuances relating to convertible securities existing as of the date hereof.
On September 25, 2014, the Company filed a lawsuit in the United States District Court for the District of Colorado against Stephen G. Calandrella for violation of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §78p(b). Mr. Calandrella is a principal stockholder of the Company, based on 600,000 shares held personally and 600,000 shares held by the Rockies Fund of which Mr. Calandrella may be deemed a beneficial owner (representing approximately 8.6% of common stock outstanding as of October 24, 2014). ACS brought the action under Section 16(b) of the Exchange Act, which requires principal stockholders to disgorge profits obtained through short-swing trading. According to the complaint, during the relevant time period, Mr. Calandrella was an affiliate of the Company and subject to section 16(b)’s prohibition against short-swing trading. While failing to report all of his share holdings to the Company, the complaint alleges that Mr. Calandrella engaged in a series of purchases and sales of ACS stock within a six-month period in violation of Section 16(b). The complaint demands that Mr. Calandrella return to the Company his profits on such trades with interest. The lawsuit is captioned Advanced Cannabis Solutions, Inc. v. Stephen G. Calandrella, No. 14-cv-02649 (D. Colo).
On October 24, 2014, the Board approved, and the Company and Brian J. Kozel entered into, an independent contractor agreement (the “Independent Contractor Agreement”), pursuant to which Mr. Kozel has been appointed to serve as the Company’s Vice President - Finance and Chief Financial Officer, as an independent contractor, effective immediately. Mr. Kozel replaces Christopher Taylor, who moved to a non-executive position with the Company. Pursuant to the terms of the Independent Contractor Agreement, in consideration for his services, Mr. Kozel will be (i) paid at an hourly rate approved by the Board and (ii) reimbursed for reasonable out-of-pocket expenses incurred by him in performing his services.
F-36
On October 21, 2014, the Company purchased a retail bank property, located in Denver, Colorado. The Company intends to re-purpose the former retail bank into a multi-tenant office building that will, among other things, provide the largest shared workspace environment purely dedicated to participants serving the cannabis industry. The building will be re-branded as “The Greenhouse” and will serve non-regulated ancillary businesses to the cannabis industry, as well as providing educational and networking opportunities for licensees. The purchase price of the property is currently estimated to be approximately $1.1 million. The property was purchased by a Colorado limited liability company, 6565 E. Evans Avenue LLC, which is a wholly-owned subsidiary of the Company. The Company paid approximately $500,000 in cash and assumed a note for $600,000 bearing interest at 14% per annum due October 21, 2016, which was financed by Evans Street Lendco, LLC (“Evans Street”). The terms of the note provide for interest-only payments, and allow the Company an optional interest payment abatement until July 1, 2015. In connection with the purchase of the building, the Company issued 600,000 warrants to Evans Street. Each warrant allows Evans Street to purchase one share of our common stock at an exercise price of $4.40 per share at any time on or before October 21, 2016.
In accordance with ASC 855,
Subsequent Events,
the Company has evaluated events that occurred subsequent to the balance sheet date through October 24, 2014, the date of available issuance of these unaudited financial statements. The Company determined that other than as disclosed above, there were no material reportable subsequent events to be disclosed.
F-37
PART II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses payable by us in connection with the issuance and distribution of the securities being registered.
| | |
SEC Filing Fee
| $
| 5,499
|
Blue Sky Fees and Expenses
| | 1,000
|
Legal Fees and Expenses
| | 50,000
|
Accounting Fees and Expenses
| | 10,000
|
Miscellaneous
| | 3,501
|
TOTAL
| $
| 70,000
|
All expenses other than the SEC filing fee are estimated.
Item 14. Indemnification of Officers and Directors
Our Articles of Incorporation provide that we may indemnify any and all of our officers, directors, employees or agents or former officers, directors, employees or agents, against expenses actually and necessarily incurred by them, in connection with the defense of any legal proceeding or threatened legal proceeding, except as to matters in which such persons shall be determined to not have acted in good faith and in our best interest.
Item 15. Recent Sales of Unregistered Securities.
On August 14, 2013, we acquired 12,400,000 shares of Advanced Cannabis Solutions, Inc., (“ACSI”) a private Colorado corporation, in exchange for 12,400,000 shares of our common stock. The 12,400,000 shares were owned by 18 persons, ten of whom were accredited investors.
On November 19, 2013 we acquired the remaining 973,000 outstanding shares of ACSI in exchange for the issuance of 973,000 shares of our common stock to the former shareholders of ACSI. In connection with the transaction, we issued 973,000 Series A warrants to the former ACSI shareholders in exchange for a like number of warrants held by the former ACSI shareholders. The Series A warrants we issued have the same terms as the warrants exchanged by the former ACSI shareholders. The 973,000 shares were owned by 59 persons, all of whom were accredited investors.
We relied upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933 with respect to the sale and issuance of the shares and warrants described above. The purchasers of these securities were sophisticated investors who were provided full information regarding our business and operations. There was no general solicitation in connection with the offer or sale of these securities. The purchasers acquired the securities for their own accounts. The securities cannot be sold unless pursuant to an effective registration statement or an exemption from registration.
During December 2013 and January 2014 we sold convertible promissory notes in the principal amount of $2,135,000 to 34 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 and are restricted securities. We relied upon the exemption provided by Rule 506
as promulgated by
the SEC 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. We paid a commission of $213,500 and a non-accountable expense allowance of $32,100 to the placement agents for this offering. We paid a commission of $213,500 and a non-accountable expense allowance of $32,100 to the placement agent for the convertible note offering described above.
The placement agent for our convertible note offering also received 213.5 Series B warrants. 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.
II-1
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.
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.
On March 31, 2014, four persons who purchased convertible notes in the principal amount of $255,000 converted their notes, plus accrued interest of $3,669, into 51,733 shares of our common stock. We relied upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933 with respect to issuance of the shares described above. The purchasers of these securities were sophisticated investors who were provided full information regarding our business and operations. There was no general solicitation in connection with the offer or sale of these securities. The purchasers acquired the securities for their own accounts. The securities cannot be sold unless pursuant to an effective registration statement or an exemption from registration.
Item 16. Exhibits
The following Exhibits are filed with this Registration Statement:
| | |
Exhibit Number
| | Exhibit Name
|
2
| | Articles of Merger (Acquisition of shares in Advanced Cannabis Solutions) (1)
|
3.1
| | Articles of Incorporation (1)
|
3.2
| | Articles of Amendment (1)
|
3.3
| | Amended and Restated Articles of Incorporation (1)
|
3.4
| | Bylaws (1)
|
3.5
| | Articles of Amendment (name change) (4)
|
5
| | Opinion of Sichenzia Ross Friedman Ference, LLP (4)
|
10
| | Share Exchange Agreement (2)
|
10.1
| | Securities Purchase Agreement (3)
|
10.2
| | Warrant (Series C) (3)
|
10.3
| | Registration Rights Agreement (3)
|
10.4
| | Form of Convertible Note (3)
|
10.5
| | Form of Guarantee (3)
|
10.6
| | Form of Security Agreement (3)
|
10.7
| | Agreement Regarding Sale of Oil and Gas Mapping Business (4)
|
10.8
| | Note and Deed of Trust (Pueblo County, Colorado purchase) (4)
|
10.9
| | Form of Convertible Note (4)
|
10.1
| | Form of Series A Warrant (4)
|
10.11
| | Form of Series B Warrant *
|
10.12
| | Lease Agreement (Pueblo Property) (4)
|
10.13
| | Promissory Note (the “Greenhouse”) *
|
10.14
| |
Common Stock Warrant dated October 21, 2014 *
|
23.1
| | Consent of Attorneys (4)
|
23.2
| | Consent of Accountants *
|
(1) Incorporated by reference to the same exhibit file with our registration statement on Form S-1, File No. 333-163342.
(2) Incorporated by reference to the same exhibit filed with our 8-K report dated August 14, 2013.
(3) Incorporated by reference to the same exhibit filed with our 8-K/A report dated January 21, 2014.
(4) Filed previously with Registration Statement.
(*) Filed herein.
II-2
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i)
To include any prospectus required by Section l0 (a)(3) of the Securities Act:
(ii)
To reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(ii)
To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
(2)
That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3)
To remove from registration by means of a post-effective amendment any of the securities that remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act of l933 (the “Act”) may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(4)
That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
(i)
If the registrant is relying on Rule 430B:
(A)
Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and
(B)
Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or
II-3
(ii)
If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(5)
That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:
The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i)
Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii)
Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii)
The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv)
Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
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SIGNATURES
Pursuant to the requirements of the Securities Act of l933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Colorado Springs, Colorado on
October 31,
2014.
| | |
| ADVANCED CANNABIS SOLUTIONS, INC.
|
| | |
| By:
| /s/ Robert L. Frichtel
|
| | Robert L. Frichtel, Chief Executive Officer
|
In accordance with the requirements of the Securities Act of l933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:
| | | | |
Signature
| | Title
| | Date
|
| | | | |
/s/ Robert L. Frichtel
| | Principal Executive Officer, and a Director
| |
October 31,
2014
|
Robert L. Frichtel
| | | | |
| | | | |
/s/
Brian J. Kozel
| | Principal Financial and Accounting Officer
| |
October 31,
2014
|
Brian J. Kozel
| | | | |
II-5
INDEX TO EXHIBITS
| | |
Exhibit Number
| |
Exhibit Name
|
10.11
| |
Form of Series B Warrant
|
10.13
| |
Promissory Note (the “Greenhouse”)
|
10.14
| |
Common Stock Warrant dated October 21, 2014
|
23.2
| |
Consent of Accountants
|
![[exh23_02001.jpg]](exh23_02001.jpg)
![[exh23_02002.jpg]](exh23_02002.jpg)
![[exh23_02003.jpg]](exh23_02003.jpg)